Akers Biosciences, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; financial statements are unaudited. Akers develops and sells rapid diagnostic tests, including PIFA assays and breath-based products.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $1.198 million | $956,486 | $1.865 million | $1.695 million |
| Gross profit | $933,631 | $679,638 | $1.342 million | $1.218 million |
| Gross margin | 78% | 71% | 72% | 72% |
| Operating loss | $(669,301) | $(1.015) million | $(2.031) million | $(2.532) million |
| Net loss | $(666,647) | $(1.009) million | $(2.016) million | $(2.518) million |
| Loss per share, basic and diluted | $(0.08) | $(0.19) | $(0.25) | $(0.46) |
- At June 30, cash was $197,175 and marketable securities were $1.012 million. Working capital was $3.459 million; total liabilities were $1.447 million, consisting of current payables and related-party payables. The filing reports no borrowings or debt balance.
- Operating cash use was $2.593 million for the first half, versus $2.416 million in the prior-year period. Financing provided $3.715 million, principally from common-stock offerings and warrant exercises. Cash increased by $124,475 during the half.
- At August 10, management reported approximately $734,000 in cash and marketable securities and $3.25 million in working capital.
Changes and business drivers
- Q2 revenue increased 25%; first-half revenue increased 10%. Q2 PIFA revenue fell 51% year over year, while MPC revenue increased 327%. For the half, PIFA declined 35% and MPC rose 153%.
- “Other” revenue increased sharply, largely due to a $500,000 initial order of PIFA manufacturing components from NovoTek. The company said the components are for assembly of PIFA products in China or Poland.
- Management attributed lower PIFA revenue in part to a Chinese distributor awaiting provincial reimbursement rates. It reported growth in breath-alcohol products and renewed interest in PIFA products in certain international markets.
- Q2 gross margin benefited partly from selling raw materials from a discontinued product that had no book value. Management expects near-term gross margins to return to 65%–68%.
- First-half operating expenses declined overall: administrative expenses fell 7%, sales and marketing fell 19%, and R&D fell 3%. The sales and marketing team had decreased from 10 staff to four by June 30, 2017.
Outlook, risks and unusual items
- Management said it expects to achieve a cash-flow-positive position within the next 12 months, based on strategic-plan revenue targets, the March 2017 private placement and potential shareholder support. It also reported discussions with its bank about a credit line. This is an expectation, not a guarantee.
- Management said weekly operating cash requirements averaged $99,740 in the first half, above its prior-year average of $89,472, partly because of deferred vendor, royalty and contractual payments. It expects weekly requirements to fall to $80,000–$85,000 by year-end 2017; its plan had assumed a decline from the prior-year level.
- The company has recurring operating losses and negative operating cash flow and says it expects near-term operating losses to continue. Product commercialization, clinical trials, regulatory clearances and sufficient sales remain important execution and funding risks.
- Revenue is concentrated: two customers represented 66% of Q2 revenue; three customers represented 68% of first-half revenue. At June 30, $500,000 of customer receivables had extended 180-day terms.
- A lawsuit by Pulse Health seeks at least $500,000 and an injunction affecting OxiChek. Unfair-competition claims were dismissed with prejudice, but other claims continue; trial was scheduled for July 2018. Akers says it cannot assess the outcome and recorded no loss accrual.
- A settlement requires a 5% royalty to major shareholder ChubeWorkx on adjusted gross sales until cumulative royalties reach $5 million. Certain company assets secure obligations under the settlement. Q2 royalty expense was $61,502.
- Equity offerings and warrant exercises raised capital but increased shares outstanding from 5.45 million at year-end 2016 to 8.90 million at June 30, 2017. An additional 1.49 million warrants were outstanding at June 30.
Important facts for investors to verify
- Whether the cash-flow-positive outlook is achievable given first-half operating cash use and the lower cash and securities reported as of August 10.
- Timing and collection of the $500,000 extended-term receivable, and the company’s exposure to its largest customers.
- Whether Chinese reimbursement rates are finalized and whether NovoTek’s component order translates into subsequent product sales.
- Potential outcome and financial effect of the Pulse litigation, including the requested injunction and damages.
- Cash demands and asset encumbrances associated with the ChubeWorkx royalty settlement, alongside further equity or credit financing needs.