Akers Biosciences, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; filed November 14, 2019. Amounts below are in U.S. dollars. Akers develops and sells rapid diagnostic products, including tests related to heparin, cholesterol and alcohol screening.
Financial performance and liquidity
| Metric | Three months ended Sep. 30, 2019 | Three months ended Sep. 30, 2018 | Nine months ended Sep. 30, 2019 | Nine months ended Sep. 30, 2018 |
|---|---|---|---|---|
| Revenue | $420,812 | $557,089 | $1,497,448 | $1,386,165 |
| Gross profit (margin) | $135,302 (32%) | $80,636 (14%) | $746,137 (50%) | $309,386 (22%) |
| Operating loss | $865,489 | $3,124,301 | $2,627,201 | $7,130,954 |
| Net loss | $837,026 | $3,083,950 | $2,548,875 | $7,011,394 |
| Basic and diluted loss per share | $0.07 | $0.26 | $0.20 | $0.65 |
| Net cash used in operating activities | Not stated for the quarter | Not stated for the quarter | $2,572,578 | $5,863,364 |
- At September 30, cash was $363,294, restricted cash was $115,094 and marketable securities were $2,845,250. Working capital was $2,942,409; total assets were $4,971,158 and shareholders’ equity was $3,598,195. Total liabilities of $1,372,963 consisted of current trade and other payables; the balance sheet reports no debt.
- Cash and restricted cash declined by $203,367 during the first nine months. Investing activities provided $2,369,211, mainly from sales of marketable securities; financing activities provided no cash. Capital expenditures were zero.
- As of November 12, the company reported approximately $3.04 million of cash and marketable securities, excluding restricted cash, and approximately $2.67 million of working capital. These are later-date figures than the September 30 balance sheet.
Changes versus the prior comparable period
- Third-quarter revenue fell 24%, principally because a large 2018 PIFA customer order did not recur. Nine-month revenue rose 8%, reflecting improved PIFA sales after supply issues in early 2018 and a large REA order; quarterly revenue nonetheless remained lower year over year.
- Gross margin improved in both periods. Management attributed this to a narrower, higher-margin product mix, production efficiencies and lower headcount.
- Nine-month operating loss narrowed substantially, alongside lower administrative, sales and marketing, and research and development costs. The company eliminated its sales and marketing personnel in Q1 2019 and had already discontinued its R&D function. The 2018 comparison included a $930,000 litigation settlement expense.
- Two customers generated 92% of Q3 revenue and 81% of nine-month revenue. Three customers represented 97% of gross trade receivables; the largest balance was fully reserved, and that customer sued the company.
Outlook, risks and unusual items
- Going concern and financing: Management expects near-term operating losses and states that continued operations depend on additional financing. The filing says existing capital resources were expected to fund current operations for only 10–12 months and identifies substantial doubt about the company’s ability to continue as a going concern for at least one year from issuance of the statements. No assurance is given that financing will be available on acceptable terms or at all.
- Strategic alternatives: The board’s review, begun in 2018, remained ongoing and could include a business combination or a move into a different sector, including cannabis or hemp. There is no assurance it will result in a transaction. Discussions with a prospective hemp-sector counterparty were suspended; Akers advanced it an unsecured $100,000 note, due October 2, 2019, and reported pursuing collection. The company reserved the full $100,000.
- NASDAQ listing: Akers had received notice that its bid price was below the $1.00 minimum. On November 7, 2019, Nasdaq said the company was ineligible for an additional compliance period because its June 30 equity was below the $5 million requirement. Akers appealed and requested a hearing and a stay of delisting; continued listing was not assured.
- Litigation: A securities class-action settlement of $2.25 million had been paid by the D&O insurer, but final court approval remained pending. The insurer had reserved certain rights, and additional costs were possible. A proposed settlement of the Watts and Chan derivative matters included $325,000 in attorneys’ fees and corporate reforms; preliminary approval was pending. NovoTek sought $1,551,562 plus other amounts, with Akers disputing the claims and unable to estimate exposure. A product-liability plaintiff sought more than $1 million; the insurer had reserved rights. A former executive sought $200,000 in severance plus fees. Other employment-related claims were also described.
- Other notable matters: Under a settlement, Typenex was to receive $50,000 and 40,000 shares. The company’s Pulse settlement included an injunction barring certain breath-test products. Akers reported concentrated suppliers and warned that disruption at its single manufacturing location could harm operations.
- Management actions and expectations: Cost reductions included staff cuts, reduced office footprint, termination of sales representative agreements, and withdrawal from London’s AIM market. Management gave no quantified revenue or earnings guidance and said losses could continue in the near term.
Important facts for investors to verify
- Availability, timing and terms of additional financing, and the company’s updated cash runway and going-concern assessment.
- Outcome of the Nasdaq appeal and hearing, including whether the stock remains listed and how compliance will be restored.
- Collection status of the $100,000 unsecured note and any recovery of the fully reserved customer receivable.
- Final court approval and insurance coverage for the securities and derivative settlements, and developments in NovoTek, product-liability and employment disputes.
- Whether the strategic-alternatives process produces a transaction, and the implications for existing shareholders, including potential dilution.
- Customer and supplier concentration, operational capacity after staffing reductions, and the sustainability of improved gross margins.