Q annual report, FY2014

Akers Biosciences, Inc. — FY2014 Form 10-K

Business context and period. Akers develops and manufactures rapid, single-use diagnostic tests and sample-preparation devices for clinical, consumer wellness and other markets. This annual report covers the fiscal year ended December 31, 2014; it is not a standalone fourth-quarter report. The company’s main commercial lines included heparin/PF4 assays, breath alcohol products and cholesterol testing. Its development portfolio included infectious-disease and breath-based diagnostic products.

Financial performance and position

Metric	FY2014	FY2013
Total revenue	$4.427 million	$3.578 million
Gross profit	$3.252 million	$1.664 million
Gross margin on product revenue, as reported	71%	37%
Operating loss	$3.204 million	$1.811 million
Net loss attributable to common stockholders	$3.143 million	$1.527 million
Loss per common share, basic and diluted	$0.66	$0.96
Cash used in operating activities	$3.884 million	$2.730 million

Revenue increased 24%. PIFA Heparin/PF4 product sales rose 110% to $2.241 million; REA product revenue was $864,000, compared with none in 2013. MPC revenue fell 51% to $918,049, chiefly reflecting lower orders from Chubeworkx. Licensing revenue declined to $343,333 from $533,333.
Cost of sales fell 39% to $1.175 million. Management attributed improved gross margin primarily to a shift in production mix toward PIFA products and lower indirect manufacturing costs.
Administrative expenses rose to $3.979 million, including higher personnel, professional, investor-relations and stock-based compensation costs. Sales and marketing expense increased 90% to $1.302 million; R&D expense decreased 9% to $916,308.
At year-end, cash was $455,841, marketable securities were $9.265 million, working capital was $11.216 million, total assets were $16.651 million and stockholders’ equity was $14.807 million. Accumulated deficit was $84.864 million.
Total liabilities were $1.844 million; no notes payable were reported at year-end. The company held related-party notes receivable, including a $1.476 million Chubeworkx note, rather than reporting that balance as debt.
Cash from the 2014 IPO contributed $13.101 million net proceeds. Investing activities used $9.287 million, mainly for purchases of marketable securities; financing activities provided $13.523 million.

Material changes and notable items

Despite revenue growth and better gross margin, operating and net losses widened, in part as public-company, staffing, marketing and stock-compensation costs increased.
Chubeworkx-related breath alcohol product revenue fell to $766,379 from $1.719 million. Management linked the decline to France’s indefinite postponement of fines for drivers who failed to carry breathalyzers.
Product revenue was highly concentrated: four customers generated approximately 85% of FY2014 revenue. Four principal customers represented 98% of trade and notes receivable, according to the risk disclosures.
A $1.0 million initial Novotek order for PIFA products shipped in December 2014. The filing says collection was scheduled in two $500,000 installments in April and July 2015.
The company recognized $864,000 of 36S revenue despite a contractual return right if Australian TGA approval were denied; the filing states that approval remained pending and management considered rejection unlikely.
On December 31, 2014, the $1.476 million Chubeworkx trade receivable was converted to a 5% note payable in 60 monthly installments. The first three installments were reported settled by the filing date.
The January 2014 IPO materially expanded equity and cash resources, while shares outstanding increased to 4,954,837 at year-end from 2,167,837. The filing reports 5,144,837 shares outstanding as of March 23, 2015.

Outlook, risks and contingencies

Management expects continuing operating losses in the near term, with spending focused on product development, clinical and regulatory work, distribution and commercialization. It estimated FY2015 R&D expense of $1.2 million.
Management believed working capital would cover estimated cash needs for at least 36 months, while also noting that operating cash flows were expected to be inadequate for anticipated expenses and that additional financing might be needed. The company had relied substantially on equity financing.
Key execution risks include regulatory clearance and clinical-trial outcomes, customer and distributor concentration, collection of large receivables, competition, reimbursement, supplier availability and limited internal sales and financial-control resources. The filing says a single supplier accounted for 17% of purchases in 2014.
The company entered a China joint venture in October 2014; subsequent to year-end it invested $64,675 for a 19.9% interest. Management expected the venture to begin generating revenue in FY2015.
Disclosure controls and procedures were deemed ineffective, though identified disclosure-control deficiencies were not considered material. Management also identified a material weakness in internal control over financial reporting related to segregation of duties, plus other non-material data-management and documentation weaknesses. No auditor attestation on internal controls was provided.
A contract and royalty dispute with Lawrence Martin remained unresolved; the company stated that it had not accrued a potential loss. Management also disclosed a possible Sarbanes-Oxley Act Section 402 issue involving a former personal note arrangement with director Thomas Knox, which it said had been cancelled and addressed; potential regulatory or private litigation consequences were noted.
The company reported no significant off-balance-sheet arrangements and no income-tax benefit, as deferred tax assets were fully offset by a valuation allowance. The financial statements received an unqualified audit opinion; the auditor did not opine on internal-control effectiveness.

Important facts for investors to verify

Whether Novotek, 36S and Chubeworkx receivables were collected on the stated terms, and whether the Chubeworkx installment note remains current.
Whether the 36S product received TGA approval and whether the $864,000 sale was retained without return or collection issues.
Whether PIFA growth and the reported margin improvement persisted after the large initial Novotek stocking order, and whether the breath alcohol business recovered.
Whether the company’s stated 36-month working-capital runway proved adequate given recurring losses and operating cash use.
Progress and required funding for FDA clearances, clinical trials, China registration and commercialization of pipeline products.
Remediation of the segregation-of-duties material weakness and other control deficiencies; developments in the Martin dispute and the disclosed Section 402 matter.
Potential dilution from outstanding options and restricted stock, including the 190,000 restricted shares issued in January 2015 for 2014 services.