Akers Biosciences, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing describes Akers as a developer and manufacturer of rapid point-of-care diagnostic and wellness tests. This is an annual report, not a fourth-quarter-only report.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $2.115 million | $4.427 million |
| Gross profit / gross margin | $1.164 million / 55% | $3.252 million / 73% |
| Operating loss | $9.682 million | $3.204 million |
| Net loss attributable to common stockholders | $9.312 million; $1.81 per share | $3.143 million; $0.66 per share |
| Cash used in operating activities | $5.132 million | $3.884 million |
| Cash and marketable securities at year-end | $4.427 million | $9.721 million |
| Working capital | $4.812 million | Not clearly stated |
| Total liabilities | $1.669 million | $1.844 million |
Revenue fell 52%, principally because several significant 2014 transactions did not recur, including sales or licensing-related activity involving ChubeWorkx, Novotek and 36 Strategies. The PIFA Heparin/PF4 business showed a more positive domestic trend: domestic sales increased 12% to $1.391 million. The filing reports no debt balance on the year-end balance sheet; liabilities consisted principally of trade and other payables. Cash and marketable securities declined substantially, while management reported recurring operating losses and negative operating cash flows.
Expenses included $2.164 million of related-party bad-debt allowances: $864,000 against a 36 Strategies receivable and $1.300 million against a ChubeWorkx note receivable. The company also recorded $466,476 of impairment of non-current assets. Research and development expense was $1.407 million, up 54%.
Material changes and unusual items
- Total revenue and gross margin declined sharply year over year. Product revenue fell as 2014 one-time and initial stocking transactions were not repeated; the 2014 $864,000 Tri-Cholesterol sale to 36 Strategies generated no comparable 2015 sales.
- Sales and marketing expense increased 95% to $2.543 million, and general and administrative expense increased 56% to $6.193 million, including the related-party bad-debt charges.
- The ChubeWorkx exclusive breathalyzer license and supply agreement was mutually terminated in May 2015. Akers recognized $166,667 of remaining deferred revenue and said it could again solicit business outside North America.
- In 2015, Akers invested $64,091 for a 19.9% interest in a China joint venture. It said Chinese market clearance for a PIFA product had been obtained and anticipated minimum purchases beginning in 2016.
- Akers agreed to indemnify Executive Chairman Raymond Akers for a $255,000 personal-guarantee settlement related to a loan made for the company’s benefit; the company recorded the expense in FY2015.
Outlook, risks and contingencies
Management expects operating losses to continue in the near term while it develops products, funds clinical and regulatory work, and builds commercialization and distribution. It estimated FY2016 research and development expense at $1.2 million and stated that available working capital should cover estimated cash needs for at least 12 months. It also warned that additional capital may be needed and that insufficient funding could force reductions or delays in development. No revenue or earnings guidance was provided.
- Customer concentration: Cardinal Health and Fisher Healthcare accounted for approximately 65% of FY2015 revenue; two customers represented 28% of year-end trade receivables. Three suppliers represented 41% of purchases.
- Related-party litigation and collectability: Akers is pursuing ChubeWorkx over amounts owed under a note; ChubeWorkx separately alleges breach of contract in a UK proceeding. Settlement discussions ended March 24, 2016. The company planned to pursue its claim and defend the UK action; it recorded no litigation loss accrual because a loss estimate was not possible.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. It identified a material weakness in segregation of duties and additional, non-material data-management and documentation weaknesses. The filing says remediation efforts were underway.
- Regulatory and execution risks: Several pipeline products require clinical work and regulatory clearance or certification. The filing highlights competition from larger diagnostic companies, distributor dependence, reimbursement uncertainty, supply and manufacturing risks, and the risk that new products may not gain market acceptance.
- Potential legal exposure: Counsel advised that prior arrangements involving a promissory note to director Thomas Knox may have violated Sarbanes-Oxley Act Section 402’s prohibition on personal loans to directors or executive officers; possible governmental sanctions or private litigation were noted.
Important facts for investors to verify
- Whether ChubeWorkx repays the note, how the related litigation proceeds, and whether any settlement or judgment changes the recorded allowances or contingency assessment.
- Whether the anticipated China distributor purchases begin, and whether Akers can reduce dependence on its two major U.S. distributors.
- Actual cash burn, access to additional financing, and the basis for management’s estimate that working capital covers at least 12 months.
- Progress in remediating the material weakness in internal controls and the effectiveness of those remediation measures.
- The financial statement revenue presentation: MD&A reports product revenue of $1.794 million, while the audited statements show product revenue of $1.758 million, including related-party product revenue, with total revenue of $2.115 million. Investors should reconcile this presentation with the underlying statements and notes.
- Progress, clinical results and required regulatory clearances for pipeline products, and the commercial performance of wellness products.