Akers Biosciences, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company develops and sells rapid diagnostic testing products. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $526,601 | $1,072,861 | $829,076 | $1,740,111 |
| Gross income | $223,775 | $782,270 | $228,750 | $1,190,799 |
| Gross margin | 42% | 73% | 28% | 68% |
| Operating loss | $2,113,197 | $820,662 | $4,006,652 | $2,182,815 |
| Net loss | $2,067,453 | $818,008 | $3,927,444 | $2,167,279 |
| Loss per share, basic and diluted | $0.02 | $0.09 | $0.05 | $0.27 |
Q2 revenue fell 51% year over year and six-month revenue fell 52%. The six-month decline reflected lower PIFA and MPC sales and a sharp fall in “Other” revenue; the prior-year “Other” category included a $500,000 initial order for manufacturing components. Q2 MPC revenue increased, and REA products generated revenue for the first time in the periods shown.
For the six months, operating cash use was $3,817,892, compared with $2,593,231 in 2017. Investing cash use was $2,999,777; financing provided $7,155,200, primarily from warrant exercises. Cash and restricted cash ended the period at $775,963, including $500,000 restricted for legal fees. Cash excluding restricted cash plus marketable securities totaled $8,253,538. Marketable securities were $7,977,575. Working capital was $8,719,743; shareholders’ equity was $10,794,809, and accumulated deficit was $108,773,291. The balance sheet reported no debt.
Current assets were $10,571,624 and current liabilities $1,851,881. Trade receivables were $412,623 net of a $693,196 doubtful-account allowance. The company recorded $125,500 of bad-debt expense in both the three- and six-month periods.
Material changes and notable items
- Gross margin contracted as revenue declined against fixed manufacturing costs. Management also cited higher direct personnel costs and additional costs associated with addressing low antigen yields for the PIFA Heparin product.
- Six-month administrative expense increased 53% to $2,481,135, principally reflecting higher legal and accounting costs related to an investigation, restatement and litigation, as well as bad debts and operating costs. Six-month sales and marketing expense decreased 4%; research and development expense increased 6%.
- Warrant exercises raised $7,155,200 and increased common shares outstanding substantially. Common shares outstanding rose from 44,220,552 at year-end 2017 to 94,106,292 at June 30, 2018; the company reported 94,106,292 shares outstanding on August 13, 2018. The 2018 weighted-average share count was also much higher than in 2017.
- Management reported restating previously issued 2017 financial statements because certain revenue did not qualify for recognition, some obligations were not recorded timely, and inventory was improperly valued. Previously issued information for the affected periods should not be relied upon.
Outlook, risks and contingencies
- Management expects continued operating losses in the near term while it pursues product development, clinical and regulatory work, commercialization and distribution partnerships. It gave no quantified revenue or earnings guidance.
- Management stated that working capital should cover estimated cash needs for at least 12 months, while also disclosing recurring losses, operating cash outflows, dependence on equity financing and risks to future capital raising. The filing identifies conditions that raise substantial doubt about the company’s ability to continue as a going concern.
- Lower-than-target antigen yields constrained PIFA Heparin production and caused backorders. Supplier/process adjustments and alternatives were under evaluation; validation and stability testing remained ahead, with outcomes uncertain. The company also said delays in customer negotiations could affect revenue projections.
- In May 2018, the company withdrew its initial 510(k) application for the PIFA Chlamydia assay and was assessing whether and when to resubmit. On July 26, it eliminated six staff positions.
- NASDAQ had found a shareholder-approval violation involving amendments to the 2013 equity plan. NASDAQ approved a remediation plan and gave the company until December 10, 2018 to regain compliance; the plan included seeking shareholder ratification and restrictions on certain plan shares and option exercises. The company separately reported that it regained compliance with NASDAQ’s filing requirement on July 12.
- Two securities class actions alleged misleading statements concerning revenue recognition and internal controls; the company also disclosed a threatened former-executive claim. In the Pulse Health case, some claims had been dismissed, but other issues remained for trial; the court noted possible nominal damages and that equitable relief might be warranted. The company recorded no litigation-loss accrual because it could not assess the outcomes.
- Disclosure controls and procedures were ineffective at June 30, 2018, following identification of material errors and weaknesses. Planned remediation included hiring an experienced financial executive, enhanced revenue controls, transaction monitoring and staff training. The filing says an additional financial executive was hired July 9.
- Customer concentration was significant: three customers represented 72% of Q2 revenue and two customers 66% of six-month revenue. The company also disclosed concentrated receivables and payables.
Key facts for investors to verify
- Whether PIFA production yields recover, backorders clear, and customer orders translate into sustained revenue.
- Cash burn, liquidity and access to additional financing relative to management’s 12-month working-capital assessment.
- Progress and outcomes of the 2013 Plan shareholder vote and NASDAQ remediation deadline.
- Implementation and effectiveness of financial-reporting control remediation, and any further restatements or regulatory developments.
- Developments, potential costs and insurance coverage for the Pulse Health litigation, securities class actions and threatened former-executive claim.
- Customer concentration, receivable collectability and the company’s share count and potential dilution from outstanding warrants and equity awards.