Akers Biosciences, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. The company develops and sells rapid point-of-care diagnostic tests, including breath tests and PIFA assays. This unaudited report covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless otherwise noted.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $1.353 million | $1.076 million | $2.527 million | $2.662 million |
| Gross profit | $1.212 million | $443,343 | $1.781 million | $1.252 million |
| Gross margin | 89% | 41% | 70% | 47% |
| Loss from operations | $515,502 | $452,828 | $1.129 million | $484,830 |
| Net loss attributable to common stockholders | $510,788 | $261,213 | $1.106 million | $200,962 |
| Cash used in operating activities | Not separately stated for the quarter | $1.795 million | $1.025 million |
- Balance sheet at June 30: cash $402,282; marketable securities $11.445 million; current assets $15.239 million; current liabilities $971,548; working capital $14.268 million; total assets $17.774 million; total liabilities $1.110 million; and stockholders’ equity $16.663 million.
- The company reported no outstanding short-term related-party notes at quarter-end; a $307,500 related-party bridge loan was repaid in January 2014. Liabilities included $472,222 of deferred related-party revenue.
- Financing provided $13.101 million net from the January IPO. During the six months, the company purchased $12.514 million of marketable securities and sold $1.081 million. Ending cash was $402,282, compared with $103,634 at year-end 2013.
Material changes and operating developments
- Quarterly revenue rose 26%, while six-month revenue fell 5%. The six-month decline reflected a 49% reduction in MPC product revenue and the absence of a $200,000 one-time license fee recognized in 2013; PIFA growth and new REA sales partly offset those declines.
- Q2 included $864,000 of REA product revenue from new distributor 36S. The company recognized the sale while Australian TGA approval was pending, despite a contractual return right if approval is denied.
- MPC sales to ChubeWorkx, the alcohol-breathalyzer distributor and a major shareholder, declined amid France’s indefinite postponement of fines for drivers without breathalyzers. Management said the duration of the demand interruption was unknown.
- Reported gross margin increased substantially, but management cautioned that REA sales carried no significant cost of sales because of prior inventory write-downs; the resulting margin should not be assumed to continue.
- Operating expenses increased: six-month administrative expense rose to $1.671 million, sales and marketing to $607,707, and R&D was $502,489. Expenses included $549,600 of non-cash stock-based compensation. Operating loss and net loss widened year over year.
- The IPO issued 2,727,000 shares for $14.999 million gross proceeds and $13.101 million net proceeds. Shares outstanding were 4,894,837 at June 30 and August 12, 2014.
Outlook, risks, contingencies, and unusual items
- Management expects near-term operating losses, potentially significant, due to commercialization, product development, clinical and regulatory work, and sales and marketing costs. It believes working capital will fund estimated needs for at least 36 months; this is management’s estimate, not a guarantee.
- Planned spending includes development and commercialization of PIFA PLUSS, Breath Ketone Check, Breath PulmoHealth Check, METRON and VIVO, regulatory submissions and clinical studies. 2014 capital expenditures were estimated at approximately $150,000. No quantitative revenue or earnings guidance was provided.
- Customer concentration is substantial: three customers generated 87% of six-month revenue and represented 97% of trade receivables at June 30. Receivables included $1.476 million due from related-party customer ChubeWorkx; the company said it was discussing revised terms. Management recorded no doubtful-account allowance.
- Management identified disclosure controls and procedures as ineffective at June 30 because controls were outdated and primarily designed for IFRS rather than U.S. GAAP SEC reporting. An accounting firm was engaged to update controls, with full implementation scheduled by year-end; no material quarterly change in internal control over financial reporting was reported.
- A dispute with Rapid Breath Diagnostics alleging contract and intellectual-property violations, including claimed damages of $250,000, was settled July 22, 2014 for a nominal one-time payment, paid July 23. The company also announced on July 17 that the USPTO granted a patent covering its Breath Ketone detection device.
- Other risks include dependence on distributor ordering patterns, regulatory approvals and product performance, customer concentration, and the possibility that patent costs could be impaired if products fail to reach commercialization. The filing reports no material off-balance-sheet arrangements and no litigation believed likely to have a material adverse effect.
Important facts for investors to verify
- Whether 36S obtains TGA approval and whether the $864,000 sale is collected without return or adjustment.
- Collection and revised payment terms for ChubeWorkx and other concentrated customer receivables.
- Whether distributor demand—particularly for breathalyzers—recovers, and whether new U.S. distribution relationships generate sustained PIFA sales.
- Actual cash burn, commercialization and regulatory costs, and the assumptions supporting management’s 36-month working-capital estimate.
- Completion and effectiveness of the promised U.S. GAAP disclosure-control remediation by year-end.