Akers Biosciences, Inc. (10-Q) — Quarter ended September 30, 2018
Akers develops and sells rapid diagnostic tests. Its principal commercial focus is its PIFA Heparin/PF4 assays; it also sells breath alcohol and cholesterol products. The filing reports unaudited results for the three and nine months ended September 30, 2018, compared with the same periods in 2017. Financial statement share and per-share amounts reflect the subsequent 1-for-8 reverse split.
Financial results and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $557,089 | $675,831 | $1,386,165 | $2,415,941 |
| Gross income | $80,636 | $352,304 | $309,386 | $1,543,094 |
| Gross margin | 14% | 52% | 22% | 64% |
| Operating loss | $(3,124,300) | $(1,177,576) | $(7,130,954) | $(3,360,400) |
| Net loss | $(3,083,949) | $(1,177,644) | $(7,011,394) | $(3,344,932) |
| Basic and diluted loss per share | $(0.26) | $(1.04) | $(0.65) | $(3.20) |
- Revenue declined 18% in Q3 and 43% in the first nine months year over year. PIFA revenue rose 16% in Q3 to $567,262, partly as backorders were filled, but fell 20% for the nine-month period to $1,183,327.
- Q3 cost of sales included a $218,799 OxiChek inventory charge. The nine-month gross-margin decline also reflected lower revenue against fixed manufacturing costs.
- Q3 operating costs rose sharply: general and administrative expense was $2.64 million, up 222%, including a $930,000 Pulse settlement charge, director payments, and higher legal, accounting and audit costs. The settlement charge is included in the reported loss.
- At September 30, cash was $1.30 million, marketable securities $4.87 million, and restricted cash $0.50 million. Cash plus marketable securities, excluding restricted cash, totaled $6.17 million. Working capital was $5.61 million; total liabilities were $2.30 million, with no debt reported on the balance sheet.
- Operating cash use was $5.87 million for the nine months, versus $3.65 million in 2017. Financing provided $7.16 million, principally from warrant exercises; investing provided $82,450. Cash and restricted cash at period end totaled $1.80 million.
- Shareholders’ equity was $7.72 million and accumulated deficit was $111.86 million. Warrants exercised during the period generated $7.16 million and increased common shares outstanding.
Material changes, outlook and risks
- Management says it expects near-term operating losses and is pursuing PIFA commercialization, distribution relationships, cost controls, and strategic alternatives, including possible business combinations. It stated that working capital, including subsequent financing, should cover estimated cash needs for at least 12 months. This outlook is qualified by recurring losses, negative operating cash flow, and the filing’s risk-factor discussion that additional financing may be necessary and raises substantial doubt about continuing as a going concern.
- On November 2, 2018, the company agreed to raise $2.0 million gross through a sale of 694,445 shares and warrants for approximately the same number of shares. Warrants have a $3.76 exercise price. Management reported approximately $6.2 million of cash and marketable securities and working capital as of November 7.
- After the reporting date, the company completed an 8-for-1 reverse stock split, partly in response to Nasdaq’s minimum-bid-price requirement. The filing reported a November 13 stock price of $2.46 and said Nasdaq compliance remained subject to the price staying above $1.00 through November 21. The company also faced a separate Nasdaq shareholder-approval compliance matter, with a stated deadline of December 10, 2018.
- A Pulse Health settlement required a $930,000 payment, made October 9, and a permanent injunction barring OxiChek and specified related products. The company said withdrawal was not expected to materially affect revenue. The settlement included no admission of liability.
- Two securities class actions allege misleading statements concerning revenue recognition and internal controls; outcomes and potential losses were not estimable, and no accrual was recorded as of September 30. A former executive also threatened a CEPA-related claim. The company says it intends to defend these matters.
- Management disclosed that prior 2017 financial statements required restatement for revenue-recognition errors, delayed expense recognition and inventory valuation. Disclosure controls were ineffective as of September 30, and material weaknesses in internal control were identified. Remediation includes additional financial expertise, enhanced transaction reviews, and employee training.
- Product supply remains a risk: lower antigen yields had constrained PIFA production and caused backorders. Yields improved and backorders were filled by the end of Q3, but supplier/process fixes and validation testing were ongoing.
- Other significant events included a six-position workforce reduction, CEO departure and appointment of a new CEO/interim CFO, and notice that the company’s AIM nominated adviser would resign unless replaced.
Investor verification points
- Verify the sustainability of PIFA sales growth and whether production yields and supply arrangements remain adequate.
- Track cash burn, the use of the November financing, and whether the company can fund operations without further dilution or financing.
- Review the status and potential cost of the securities litigation and threatened former-executive claim, as well as the effects of the Pulse injunction.
- Confirm remediation of the disclosed material weaknesses and whether subsequent filings report effective disclosure controls and reliable financial reporting.
- Check Nasdaq bid-price and equity-plan compliance, the replacement of the AIM adviser, and any outcome of the strategic-alternatives review.