Akers Biosciences, Inc. (AKER) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Financial figures are in U.S. dollars. Akers develops and sells rapid diagnostic products, including heparin-related tests, alcohol detectors and cholesterol screening products.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $464,513 | $526,601 | $1,076,634 | $829,076 |
| Gross profit / margin | $244,649 / 53% | $223,775 / 42% | $610,833 / 57% | $228,750 / 28% |
| Operating loss | $(821,710) | $(2,113,197) | $(1,761,715) | $(4,006,652) |
| Net loss | $(794,891) | $(2,067,453) | $(1,711,849) | $(3,927,444) |
| Loss per share, basic and diluted | $(0.06) | $(0.18) | $(0.14) | $(0.38) |
- Q2 revenue fell 12% year over year; first-half revenue rose 30%. First-half growth was mainly from PIFA sales, which increased 43% amid fewer supply issues than in 2018. Q2 PIFA revenue declined 14%, partly because a prior-year large order did not recur.
- Gross margin improved in both periods, which management attributed to a narrower, higher-margin product mix, cost reductions and improved production efficiency. Q2 operating expenses also declined, including administrative expense down 37%, sales and marketing down 97%, and compliance, research and development down 76%.
- Six-month operating cash use was $1.61 million, versus $3.82 million in 2018. Investing activities provided $1.29 million, principally from sales of marketable securities; financing provided no cash, compared with $7.16 million in 2018.
Financial position and liquidity
- At June 30, cash was $248,439, restricted cash was $115,094 and marketable securities were $4.02 million. Cash plus restricted cash at period-end was $363,533. The restricted amount was held in trust for certain legal fees.
- Working capital was $3.63 million; total assets were $5.93 million, total liabilities $1.62 million and shareholders’ equity $4.31 million. Accumulated deficit was $117.41 million.
- The balance sheet reports no borrowings; liabilities consisted of trade and other payables. No interest was paid during the first half.
- Management said available cash and marketable securities, together with expected operating cash, should cover obligations for one year after issuance of the statements. It also cautioned that recurring operating losses and negative operating cash flow continue, and that additional funding may be needed for longer-term plans. As of August 9, the company reported approximately $3.99 million of cash and marketable securities, excluding restricted cash.
Management commentary, outlook and notable developments
- The board’s strategic-alternatives process remained ongoing, including consideration of business combinations and opportunities in cannabis- or hemp-related sectors. There is no assurance a transaction will result. On July 25, 2019, Akers advanced a $100,000 unsecured loan to a prospective hemp-sector transaction counterparty, at 8% interest, due October 2, 2019.
- Akers reduced personnel, eliminated its sales and marketing staff and research and development function, reduced vendor and office costs, and delisted from London’s AIM market effective March 29, 2019. Management expects near-term operating losses to continue. No specific revenue or earnings guidance was provided.
- NASDAQ notified Akers that its share price did not meet the $1.00 minimum bid-price requirement. The company said it would monitor the price and consider options to regain compliance.
- Customer and supplier concentration is substantial: three customers represented 81% of Q2 revenue, and two customers represented 76% of gross receivables at quarter-end. The largest receivable was fully reserved; that customer filed suit in June. Two suppliers accounted for 76% of Q2 purchases.
- Material legal matters include a securities class-action settlement of $2.25 million, paid by the D&O insurer to the settlement agent in July and awaiting final court approval; the insurer has reserved certain rights in related matters. Watts and Chan shareholder derivative matters had a potential resolution in principle. Typenex settled for $50,000 cash and 40,000 shares. NovoTek seeks $1.55 million plus other amounts, with Akers disputing the claims and unable to estimate exposure. A product-liability complaint seeks more than $1 million; Akers expects insurance to cover potential exposure, although the insurer reserved rights. A former executive seeks $200,000 severance plus fees; Akers believes the potential liability is not material. A separate threatened former-executive claim has an uncertain outcome.
- During the first half, Akers recognized $75,000 in litigation settlement expense. It granted directors 374,481 restricted stock units, vesting January 1, 2020, with acceleration upon a change of control.
Important facts for investors to verify
- Progress and terms, if any, of the strategic-alternatives process and the hemp-related opportunity, including repayment of the $100,000 loan.
- Cash burn, available liquidity and any need or ability to raise additional capital; reconcile management’s one-year liquidity statement with its warning about recurring losses and potential funding needs.
- NASDAQ bid-price compliance plans and status.
- Customer concentration, collectability of the fully reserved customer balance, and outcomes of the NovoTek, product-liability, securities and derivative matters, including insurance coverage and any company-retained costs.
- Potential share dilution from outstanding warrants and director RSUs; the filing reports 2,110,737 warrants and 374,481 RSUs outstanding at June 30.