Notes
to Condensed Consolidated Financial Statements
Note
1 – Organization and Description of Business
Akers
Biosciences, Inc. (“Akers”), is a New Jersey corporation. These condensed consolidated financial statements include
two wholly owned subsidiaries, Akers Acquisition Sub, Inc. and Bout Time Marketing Corporation, (together, the “Company”).
All material intercompany transactions have been eliminated in consolidation.
On
November 7, 2018, the Company announced its intention to explore strategic alternatives in order to maximize shareholder value.
As announced, this process will consider a range of potential strategic alternatives including, but not limited to, business combinations,
while simultaneously supporting the Company’s management and employees in the execution of the Company’s current business
activities.
Furthermore,
the Company has undertaken steps to reduce its expenses, including reducing the number of personnel, reducing its office footprint,
eliminating services from non-critical vendors and has withdrawn its shares from registration on the AIM exchange in the United
Kingdom.
The
Company’s medical device business has as its current focus the production and sale of disposable diagnostic testing devices
that can be performed in minutes, to facilitate time sensitive therapeutic decisions. The Company’s principal products are
a rapid test detecting the antibody causing an allergic reaction to Heparin, breath alcohol detectors used for health and safety
and a consumer product used to screen for levels of cholesterols.
Note
2 – Significant Accounting Policies
|
(a)
|
Basis
of Presentation
|
The
Condensed Consolidated Financial Statements of the Company are prepared in U.S. Dollars and in accordance with accounting principles
generally accepted in the United States of America (US GAAP).
Certain
information and note disclosures normally included in the financial statements prepared in accordance with US GAAP have been condensed.
As such, the information included in these financial statements should be read in conjunction with the audited financial statements
as of and for the years ended December 31, 2018 and 2017 included in the Company’s 2018 Form 10-K, as filed on April 1,
2019. In the opinion of the management, these condensed consolidated financial statements include all adjustments, consisting
of only normal recurring nature, necessary for a fair statement of the financial position of the Company as of March 31, 2019
and its results of operations and cash flows for the three months ended March 31, 2019 and 2018. The results of operations for
the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full fiscal year ending
December 31, 2019.
The
Company is an emerging growth company as the term is used in The Jumpstart Our Business Startups Act enacted on April 5, 2012
and has elected to comply with certain reduced public company reporting requirements.
|
(b)
|
Use
of Estimates and Judgments
|
The
preparation of financial statements in conformity with US GAAP requires management to make judgments, estimates and assumptions
that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual
results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimates are revised and in any future periods affected. Information about
significant areas of estimation, uncertainty and critical judgments in applying accounting policies that have the most significant
effect on the amounts recognized in the financial statements is included in the following notes for revenue recognition, allowances
for doubtful accounts, inventory write-downs, impairment of intangible assets and valuation of share-based payments.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(c)
|
Functional
and Presentation Currency
|
These
condensed consolidated financial statements are presented in U.S. Dollars, which is the Company’s functional currency. All
financial information presented in U.S. Dollars has been rounded to the nearest dollar. Foreign Currency Transaction Gains or
Losses, resulting from cash balances denominated in Foreign Currencies, are recorded in the Condensed Consolidated Statements
of Operations and Comprehensive Loss.
|
(d)
|
Comprehensive
Income (Loss)
|
The
Company follows Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 220 in reporting
comprehensive income (loss). Comprehensive income is a more inclusive financial reporting methodology that includes disclosure
of certain financial information that historically has not been recognized in the calculation of net income.
|
(e)
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid investments, which include short-term bank deposits (up to 3 months from date of deposit)
that are not restricted as to withdrawal date or use, to be cash equivalents.
At
March 31, 2019, restricted cash included in non-current assets on the Company’s consolidated balance sheet was $480,000
representing cash in trust for the purpose of funding legal fees for certain litigations.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(g)
|
Fair
Value of Financial Instruments
|
The
Company’s financial instruments consist of cash and cash equivalents, marketable securities, receivables and trade and other
payables. The carrying value of cash and cash equivalents, receivables and trade and other payables approximate their fair value
because of their short maturities.
The
framework for measuring fair value provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The three levels of the fair value hierarchy
under FASB ASC 820 are described as follows:
|
Level
1
|
Inputs
to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company
has the ability to access.
|
|
|
|
|
Level
2
|
Inputs
to the valuation methodology include:
|
|
●
|
quoted
prices for similar assets or liabilities in active markets;
|
|
|
|
|
●
|
quoted
prices for identical or similar assets or liabilities in inactive markets;
|
|
|
|
|
●
|
inputs
other than quoted prices that are observable for the asset or liability;
|
|
|
|
|
●
|
inputs
that are derived principally from or corroborated by observable market data by correlation or other means
|
|
If
the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full
term of the asset or liability.
|
|
Level
3
|
Inputs
to the valuation methodology are unobservable and significant to the fair value measurement.
|
The
asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of input
that is significant to the fair value measurement. Valuation techniques maximize the use of relevant observable inputs and minimize
the use of unobservable inputs.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
Following
is a description of the valuation methodologies used for assets measured at fair value as of March 31, 2019 and December 31, 2018.
U.S.
Agency Securities:
Valued using pricing models maximizing the use of observable inputs for similar securities. This includes
basing value on yields currently available on comparable securities of issuers with similar credit ratings.
|
|
Quoted
Prices in Active Markets for Identical Assets or Liabilities
(Level
1)
|
|
|
Quoted
Prices for Similar Assets or Liabilities in Active Markets (Level 2)
|
|
|
Significant
Unobservable Inputs
(Level
3)
|
|
Marketable
securities at March 31, 2019
|
|
$
|
-
|
|
|
$
|
4,477,525
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities at December 31, 2018
|
|
$
|
-
|
|
|
$
|
5,272,998
|
|
|
$
|
-
|
|
Marketable
securities include U.S. agency securities, which are classified as available for sale. The securities are valued at fair market
value. Maturities of the securities are less than one year. Unrealized gains and losses relating to the available for sale investment
securities were recorded in the Condensed Consolidated Statement of Changes in Shareholders’ Equity as comprehensive (loss)
income. These amounts were $29,343 in unrealized gain for the three months ended March 31, 2019 and $16,843 in unrealized loss
for the three months ended March 31, 2018.
Gains
and losses resulting from the sales of marketable securities were a loss of $3,718 and $0 for the three months ended March 31,
2019 and 2018, respectively.
|
(h)
|
Trade
Receivables and Allowance for Doubtful Accounts
|
The
carrying amounts of current trade receivables is stated at cost, net of allowance for doubtful accounts and approximate their
fair value given their short-term nature.
The
normal credit terms extended to customers ranges between 30 and 90 days. Credit terms longer than these may be extended after
considering the credit worthiness of the customers and the business requirements. The Company reviews all receivables that exceed
terms and establishes an allowance for doubtful accounts based on management’s assessment of the collectability of trade
and other receivables. A considerable amount of judgment is required in assessing the amount of allowance. The Company considers
the historical level of credit losses, makes judgments about the credit worthiness of each customer based on ongoing credit evaluations
and monitors current economic trends that might impact the level of credit losses in the future.
As
of March 31, 2019 and December 31, 2018, allowances for doubtful accounts for trade receivables were $611,082 and $606,835. Bad
debt expenses for trade receivables were $4,247 and $0 for the three months ended March 31, 2019 and 2018, respectively.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash on deposit with
financial institutions and accounts receivable. At times, the Company’s cash in banks is in excess of the FDIC insurance
limit. The Company has not experienced any loss as a result of these cash deposits. These cash balances are maintained with two
banks.
Major
Customers
For
the three months ended March 31, 2019, two customers generated 45% and 44%, or 89% in the aggregate, of the Company’s revenue.
For the three months ended March 31, 2018, one customer generated 10% or more of the Company’s revenue.
Three
customers accounted for 49%, 17% and 14%, or 80% in the aggregate, of gross trade receivables, before accounting for allowance
for doubtful accounts, as of March 31, 2019. As of March 31, 2019, the Company had $458,902, $156,988 and $137,102 in trade receivables,
respectively, from these customers. These concentrations make the Company vulnerable to a near-term severe impact should these
relationships be terminated. The largest of these customer balances was fully reserved as of March 31, 2019.
Two
customers accounted for 59% and 14%, or 73% in the aggregate, of gross trade receivables, before accounting for allowance for
doubtful accounts, as of December 31, 2018. As of December 31, 2018, the Company had $458,902 and $111,037 in trade receivables,
respectively, from these customers. These concentrations make the Company vulnerable to a near-term severe impact should these
relationships be terminated.
The largest of these customer balances was fully reserved as of
December 31, 2018.
To
limit such risks, the Company performs ongoing credit evaluations of its customers’ financial condition.
Major
Suppliers
For
the three months ended March 31, 2019, two suppliers accounted for 31% and 13%, or 44%, in the aggregate, of the Company’s
purchases.
For
the three months ended March 31, 2018, one supplier accounted for 10% or more of the Company’s purchases.
Two
vendors accounted for 51% in the aggregate, of trade payables as of March 31, 2019.
One
vendor accounted for 10% of the Company’s trade payables as of March 31, 2018.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(j)
|
Property,
Plant and Equipment
|
Items
of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Costs include
expenditures that are directly attributable to the acquisition of the asset.
Gains
and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with
the carrying amount of property, plant and equipment and are recognized within “other income” in the Condensed Consolidated
Statement of Operations and Comprehensive Loss.
Depreciation
is recognized in profit and loss on the accelerated basis over the estimated useful lives of the property, plant and equipment.
Leased assets are depreciated over the shorter of the lease term or their useful lives.
Depreciation
expense totaled $5,435 and $13,675 for the three months ended March 31, 2019 and 2018, respectively.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
The
Company’s long-lived intangible assets, other than goodwill, are assessed for impairment when events or circumstances indicate
there may be an impairment. These assets were initially recorded at their estimated fair value at the time of acquisition and
assets not acquired in acquisitions were recorded at historical cost. However, if their estimated fair value is less than the
carrying amount, other intangible assets with indefinite life are reduced to their estimated fair value through an impairment
charge to our condensed consolidated statements of income.
Intangible
assets as of March 31, 2019 and December 31, 2018 were $233,409 and $243,411, respectively. Intangible assets at March 31, 2019
consisted of patents, trademarks and customer lists of $3,897,635 net of accumulated amortization and impairment of $3,664,226.
Amortization
is recognized on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date
that they are available for use. Amortization expense was $10,002 and $42,777 for the three months ended March 31, 2019 and 2018,
respectively.
The
following is an annual schedule of approximate future amortization of the Company’s intangible assets:
Period
|
|
Amount
|
|
2019
(nine months)
|
|
|
30,006
|
|
2020
|
|
|
40,008
|
|
2021
|
|
|
40,008
|
|
2022
|
|
|
40,008
|
|
2023
|
|
|
40,008
|
|
Thereafter
|
|
|
43,371
|
|
|
|
$
|
233,409
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
Beginning
on January 1, 2019, the Company recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of
the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.
The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration
it is entitled to in exchange for the goods and services transferred to the customer. The following five steps are applied to
achieve that core principle:
Step
1: Identify the contract with the customer
Step
2: Identify the performance obligations in the contract
Step
3: Determine the transaction price
Step
4: Allocate the transaction price to the performance obligations in the contract
Step
5: Recognize revenue when the company satisfies a performance obligation
The
Company does not have any significant contracts with customers requiring performance beyond delivery. Shipping and handling
activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather
than a promised service to the customer. Revenue and costs of sales are recognized when control of the product transfers to our
customer, which generally occurs upon delivery to the customer but can also occur when goods are shipped by the Company, depending
on the shipment terms of the contract. The Company’s performance obligations are satisfied at that time.
The
Company uses the most likely amount approach to determine the variable consideration of the transaction price in order to account
for the contractual rebates and incentives that are estimated and adjusted for over time.
The Company provides for rebates to its distributors. The Company had accrued for rebates and incentives of $19,504
and $23,179, as of March 31, 2019 and December 31, 2018. Accounts receivable will be
reduced when the rebates are applied by the customer. The Company recognized $8,698
and
$37,544 during the three months ended March 31, 2019 and 2018 for rebates, which is included as a reduction of product revenue
in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
The
Company utilizes an asset and liability approach for financial accounting and reporting for income taxes. The provision for income
taxes is based upon income or loss after adjustment for those permanent items that are not considered in the determination of
taxable income. Deferred income taxes represent the tax effects of differences between the financial reporting and tax basis of
the Company’s assets and liabilities at the enacted tax rates in effect for the years in which the differences are expected
to reverse.
The
Company evaluates the recoverability of deferred tax assets and establishes a valuation allowance when it is more likely than
not that some portion or all the deferred tax assets will not be realized. Management makes judgments as to the interpretation
of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In management’s
opinion, adequate provisions for income taxes have been made. If actual taxable income by tax jurisdiction varies from estimates,
additional allowances or reversals of reserves may be necessary.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(n)
|
Income
Taxes, continued
|
Tax
benefits are recognized only for tax positions that are more likely than not to be sustained upon examination by tax authorities.
The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely to be realized upon
settlement. A liability for “unrecognized tax benefits” is recorded for any tax benefits claimed in the Company’s
tax returns that do not meet these recognition and measurement standards. As of March 31, 2019 and December 31, 2018, no liability
for unrecognized tax benefits was required to be reported.
There
is no income tax benefit for the losses for the three months ended March 31, 2019 and 2018 since management has determined that
the realization of the net deferred assets is not assured and has created a valuation allowance for the entire amount of such
tax benefits.
The
Company’s policy for recording interest and penalties associated with tax audits is to record such items as a component
of general and administrative expense. There were no amounts accrued for penalties and interest for the three months ended March
31, 2019 and 2018. The Company does not expect its uncertain tax position to change during the next twelve months. Management
is currently unaware of any issues under review that could result in significant payments, accruals or material deviations from
its position.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(o)
|
Shipping
and Handling Fees and Costs
|
The
Company charges actual shipping costs plus a handling fee to customers, which amounted to $12,486 and $13,641 for the three months
ended March 31, 2019 and 2018. These fees are classified as part of product revenue in the Condensed Consolidated Statement of
Operations and Comprehensive Loss. Shipping and other related delivery costs, including those for incoming raw materials are classified
as part of the cost of net revenue, which amounted to $11,919 and $26,944 for the three months ended March 31, 2019 and 2018,
respectively.
|
(p)
|
Basic
and Diluted Earnings per Share of Common Stock
|
Basic
earnings per common share are based on the weighted average number of shares outstanding during the periods presented. Diluted
earnings per share are computed using the weighted average number of common shares plus dilutive common share equivalents outstanding
during the period. Potential common shares that would have the effect of increasing diluted earnings per share are considered
anti-dilutive.
The
calculation of basic and diluted loss per share for the three months ended March 31, 2019 and 2018 was based on the loss attributable
to common shareholders of $916,958 and $1,859,991, respectively. The basic and diluted weighted average number of common shares
outstanding for the three months ended March 31, 2019 and 2018 was 12,483,209 and 8,956,279, respectively.
Diluted
net loss per share is computed using the weighted average number of common and dilutive potential common shares outstanding during
the period.
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would
have been anti-dilutive:
|
|
For
the three months ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock
Options
|
|
|
6,877
|
|
|
|
31,875
|
|
RSUs
|
|
|
374,481
|
|
|
|
-
|
|
Warrants
|
|
|
2,110,737
|
|
|
|
2,374,813
|
|
Total
potentially dilutive shares
|
|
|
2,492,095
|
|
|
|
2,406,688
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(q)
|
Recently
Issued Accounting Pronouncements
|
Recently
Issued Accounting Pronouncements Adopted
As
the Company is an emerging growth company, it has elected to adopt recently issued accounting pronouncements based on effective
dates applicable to other than public business entities.
In
May 2014 and April 2016, the FASB issued ASU No. 2014-09 and ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606).
The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. In August 2015, FASB issued ASU 2015-14 which deferred the effective date of Update 2014-09 to annual reporting periods
beginning after December 15, 2018 for entities other than public business entities, and to annual reporting periods beginning
after December 15, 2017, including interim reporting periods within that reporting period for public business entities.
The
Company has elected to apply the modified retrospective method and the impact was determined to be immaterial on the condensed
consolidated financial statements. Accordingly, the new revenue standard was applied prospectively in our condensed consolidated
financial statements from January 1, 2019 forward and reported financial information for historical comparable periods will not
be revised and will continue to be reported under the accounting standards in effect during those historical periods.
The
Company has performed an analysis and identified its revenues and costs that are within the scope of the new guidance. The Company
has determined that its methods of recognizing revenues will not be significantly impacted by the new guidance.
In
June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services
from nonemployees. The guidance is effective for public business entities, certain not-for-profit entities, and certain employee
benefit plans for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other
entities, ASU 2018-07 is effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.
The Company early adopted ASC 2018-07 effective January 1, 2019. There was no material impact on the Company’s condensed
consolidated financial statements upon this adoption.
In
July 2018, the FASB issued ASU No. 2018-09, Codification Improvements, to makes changes to a variety of topics to clarify, correct
errors in, or make minor improvements to the Accounting Standards Codification. Certain items of the amendments in ASU 2018-09
will be effective for the Company in annual periods beginning after December 15, 2018. The adoption of ASU 2018-09 did not have
a material impact on the Company’s condensed consolidated financial statements.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
2 - Significant Accounting Policies, continued
|
(q)
|
Recently
Issued Accounting Pronouncements, continued
|
Recently
Issued Accounting Pronouncements Not Adopted
In
February 2016, the FASB issued ASU 2016-02—Leases (Topic 842) (“ASU-2016-02”), which requires an entity to recognize
right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02
offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required
to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to
assess the amount, timing and uncertainty of cash flows arising from leases. Leases will be classified as either finance or operating,
with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual
reporting periods beginning after December 15, 2019, including interim periods within that reporting period, and requires a modified
retrospective adoption, with early adoption permitted. The Company is currently evaluating the effect this guidance will have
on its condensed consolidated financial statements and related disclosure, and anticipates the guidance to result in increases
in its assets and liabilities as most of its operating lease commitments will be subject to the new standard and recognized as
right-of-use assets and lease liabilities.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
3 – Recent Developments and Management’s Plans
On
December 19, 2018, the Company announced its intent to delist from the AIM Market of the London Stock Exchange. The Company believes
that due to the relatively low liquidity in the Company’s common stock, reaming listed does not merit the ongoing costs
and regulatory complexities associated with maintaining the AIM listing. On March 5, 2019, the Company held a special meeting
of shareholders who then voted in favor of the Company delisting from the AIM Market. The delisting took effect on March 29, 2019.
On
November 7, 2018, the Company announced that its board of directors had initiated a process to evaluate strategic alternatives
to maximize shareholder value. This process will consider a range of potential strategic alternatives including, but not limited
to, business combinations, while simultaneously supporting the Company’s management and employees in the execution of the
Company’s current business activities. On November 19, 2018, the Company further announced that in its evaluation of strategic
alternatives it will consider a range of potential strategic alternatives including, but not limited to, business combinations
in sectors different than that currently engaged in, including cannabis and hemp related industries.
By
way of a letter dated May 10, 2019, the Listing Qualifications Department of NASDAQ advised the Company that it did not
comply with NASDAQ Listing Rule 5550(a)(2) for continued listing, because the Company’s common stock did not meet
NASDAQ’s minimum $1.00 bid price requirement (the "Price Requirement"). The Company intends to monitor the
closing bid price of the common stock and may, if appropriate, consider implementing available options to regain compliance
with the Price Requirement under the NASDAQ Listing Rules.
Historically,
the Company has relied upon public offerings and private placements of common stock to raise operating capital.
As of
May 10, 2019, the Company had cash and marketable securities of approximately $4.22
million (excluding restricted cash of $480,000) and working capital of approximately $3.67 million.
The
Company believes that its current working capital position will be sufficient to meet its obligations as they fall due within
one year after these financial statements are issued.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
4 – Inventories
Inventories
are measured at the lower of cost or net realizable value. The cost of inventories is based on the weighted-average principle,
and includes expenditures incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing
them to their existing location and condition. In the case of manufactured inventories and work in progress, costs include an
appropriate share of production overhead based on normal operating capacity.
Inventories
consist of the following:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
$
|
489,330
|
|
|
$
|
542,761
|
|
Sub-Assemblies
|
|
|
737,805
|
|
|
|
711,181
|
|
Finished
Goods
|
|
|
608,610
|
|
|
|
635,565
|
|
Reserve
for Obsolescence
|
|
|
(1,234,445
|
)
|
|
|
(1,304,240
|
)
|
|
|
$
|
601,300
|
|
|
$
|
585,267
|
|
Obsolete
inventory charged to cost of goods during the three months ended March 31, 2019 and 2018 totaled $0 and $24,460, respectively.
Note
5 - Trade and Other Payables
Trade
and other payables consists of the following:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Trade
Payables
|
|
$
|
1,147,529
|
|
|
$
|
686,578
|
|
Accrued
Expenses
|
|
|
869,142
|
|
|
|
1,227,172
|
|
Deferred
Compensation
|
|
|
59,750
|
|
|
|
59,750
|
|
|
|
$
|
2,076,421
|
|
|
$
|
1,973,500
|
|
See
also Note 9 for related party information.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
6 - Share-based Payments
Equity
incentive Plans
2013
Stock Incentive Plan
On
January 23, 2014, the Company adopted the 2013 Stock Incentive Plan (“2013 Plan”). The 2013 Plan was amended by the
Board on January 9, 2015 and September 30, 2016, and such amendments were ratified by shareholders on December 7, 2018. The 2013
Plan provides for the issuance of up to 103,750 shares of the Company’s common stock. As of March 31, 2019, grants of restricted
stock and options to purchase 74,403 shares of Common Stock have been issued pursuant to the 2013 Plan, and 29,347 shares of Common
Stock remain available for issuance.
2017
Stock Incentive Plan
On
August 7, 2017, the shareholders approved and the Company adopted the 2017 Stock Incentive Plan (“2017 Plan”). The
2017 Plan provides for the issuance of up to 168,750 shares of the Company’s common stock. As of March 31, 2019, grants
of restricted stock and options to purchase 51,032 shares of Common Stock have been issued pursuant to the 2017 Plan, and 117,718
shares of Common Stock remain available for issuance.
2018
Stock Incentive Plan
On
December 7, 2018, the shareholders approved and the Company adopted the 2018 Stock Incentive Plan (“2018 Plan”). The
2018 Plan provides for the issuance of up to 1,875,000 shares of the Company’s common stock. As of March 31, 2019, grants
of RSUs to purchase 374,481 shares of Common Stock have been issued pursuant to the 2018 Plan, and 1,500,519 shares of Common
Stock remain available for issuance.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
6 - Share-based Payments, continued
Stock
Options
The
following table summarizes the option activities for the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Grant
Date
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Fair
Value
|
|
|
Term
(years)
|
|
|
Value
|
|
Balance
at December 31, 2018
|
|
|
10,502
|
|
|
$
|
30.41
|
|
|
$
|
17.42
|
|
|
|
1.43
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(3,625
|
)
|
|
|
29.02
|
|
|
|
22.40
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2019
|
|
|
6,877
|
|
|
$
|
31.14
|
|
|
$
|
14.80
|
|
|
|
1.14
|
|
|
$
|
-
|
|
Exercisable
as of March 31, 2019
|
|
|
6,877
|
|
|
$
|
31.14
|
|
|
$
|
14.80
|
|
|
|
1.14
|
|
|
$
|
-
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing
stock price of $0.97 for the Company’s common shares on March 31, 2019.
As
of March 31, 2019, all of the Company’s outstanding stock options were fully vested and exercisable.
During
the three months ended March 31, 2019 and 2018, the Company incurred stock option expenses totaling $0 and $2,712, respectively.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
6 - Share-based Payments, continued
Restricted
Stock Units
On
March 29, 2019, the Compensation Committee of the Board of Directors approved the grant of 124,827 Restricted Stock Units (“RSU”)
to each of the three directors. Each RSU had a grant date fair value of $0.97 which shall be amortized on a straight-line basis
over the vesting period into administrative expenses within the Condensed Consolidated Statement of Operations and Comprehensive
Loss. Such RSUs were granted under the 2018 Plan, and shall vest on January 1, 2020, with vesting accelerated upon a change of
control. Upon vesting, such RSUs are settled with the issuance of common stock, including on a net of tax basis, at the discretion
of the holder.
At
March 31, 2019, the unamortized value of the RSU’s was $359,341. The unamortized amount will be expensed over a weighted
average period of 10 months. A summary of activity related to RSUs for the three months ended March 31, 2019 is presented below:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant
Date
|
|
|
|
RSUs
|
|
|
Fair
Value
|
|
Balance
at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
374,481
|
|
|
$
|
0.97
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2019
|
|
|
374,481
|
|
|
$
|
0.97
|
|
Exercisable
as of March 31, 2019
|
|
|
-
|
|
|
|
-
|
|
During
the three months ended March 31, 2019, the Company incurred RSU expense of $3,906.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
6 - Share-based Payments, continued
Stock
Warrants
The
table below summarizes the warrant activity for the year ended March 31, 2019:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Term
(years)
|
|
|
Value
|
|
Balance
at December 31, 2018
|
|
|
2,110,737
|
|
|
$
|
3.10
|
|
|
|
4.21
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2019
|
|
|
2,110,737
|
|
|
$
|
3.10
|
|
|
|
3.96
|
|
|
$
|
-
|
|
Exercisable
as of March 31, 2019
|
|
|
2,110,737
|
|
|
$
|
3.10
|
|
|
|
3.96
|
|
|
$
|
-
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing
stock price of $0.97 for the Company’s common shares on March 31, 2019. All warrants were vested on date of grant.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
7 – Equity
During
the three months ended March 31, 2019, the Company issued 15,000 shares of Common Stock to Mr. Yeaton pursuant to his employment
agreement. These shares had a fair value of $15,874 on the date of grant, in which $4,238 was recorded in trade and other payables
in the consolidated balance sheet as of December 31, 2018 and the remaining $11,636 was recorded as an expense in the
condensed consolidated statement of operations for the three months ended March 31, 2019.
Note
8 – Commitments and Contingencies
Lease
Commitments
The
Company leases its facility in West Deptford, New Jersey under an operating lease (“Thorofare Lease”) with annual
rentals of $132,000 plus common area maintenance (CAM) charges. The lease, which took effect on January 1, 2008, reduced the CAM
charges allowing the Company to reach their own agreements with utilities and other maintenance providers. On January 7, 2013,
the Company extended its lease agreement for a term of 7 years, expiring December 31, 2019. Rent expense for the Thorofare Lease,
including related CAM charges for the three months ended March 31, 2019 and 2018 totaled $41,365 and $42,218, respectively. The
Company entered into a 29-month lease for warehouse space located in Pitman, New Jersey (“Pitman Lease”) with annual
rents of $40,839. The lease took effect on August 1, 2017 and runs through December 31, 2019. Rent expenses for the Pitman Lease
totaled $10,210 and $9,913 for the three months ended March 31, 2019 and 2018, respectively. A security deposit of $4,950 is included
in other assets on the Condensed Consolidated Balance Sheet.
The
Company entered into a 60-month operating lease for equipment with annual rentals of $6,156 on September 29, 2014. The lease commenced
on October 21, 2014 upon the delivery of the equipment.
The
schedule of lease commitments is as follows:
|
|
|
Thorofare
|
|
|
Pitman
|
|
|
Equipment
|
|
|
|
|
|
|
|
Lease
|
|
|
Lease
|
|
|
Lease
|
|
|
Total
|
|
Next
9 Months
|
|
|
$
|
99,000
|
|
|
$
|
29,736
|
|
|
$
|
4,617
|
|
|
$
|
133,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
8 – Commitments and Contingencies, continued
ChubeWorkx
On
August 17, 2016, pursuant to a Settlement Agreement (the “Settlement Agreement”) with ChubeWorkx Guernsey Limited
(“ChubeWorkx”), which settled all pending claims between the Company and ChubeWorkx. Specifically, the Company and
ChubeWorkx agreed to voluntarily dismiss (i) the action in the United States Federal Court, District of New Jersey brought by
the Company against ChubeWorkx for outstanding amounts due to the Company under a promissory note and (ii) the action in The High
Court of Justice, Queen’s Bench Division Commercial Court, Royal Courts of Justice, United Kingdom brought by ChubeWorkx
against the Company arising from an exclusive licensing agreement between ChubeWorkx and the Company (“Licensing Agreement”).
In
return for the Company regaining the full rights to sell breath technology products, under the terms of the Settlement Agreement,
ChubeWorkx is entitled to receive a royalty of 5% of the Company’s gross revenues (the “ChubeWorkx Royalty”)
until ChubeWorkx has earned an aggregate $5,000,000, after which point ChubeWorkx will no longer be entitled to receive any royalties
from the Company and the Company shall have no further obligation to ChubeWorkx. The Settlement Agreement further allows the Company
to retain 50% of the ChubeWorkx Royalty until the full $549,609 cash component of the monies owed by ChubeWorkx to the Company
as described above has been satisfied. The Company recorded royalty expenses of $31,284 and $31,689 for the three months ended
March 31, 2019 and 2018, respectively, which are included in sales and marketing expenses on the Condensed Consolidated Statement
of Operations and Comprehensive Loss. As of March 31, 2019, the Company owed ChubeWorkx royalties of $15,642 which is included
in trade and other payables.
Other
terms of the Settlement included: 1) the pledge as security of all earned but unpaid royalties by the Company to ChubeWorkx all
Company assets, worthy to satisfy its obligations, including all inventory and receivables, with the exception of (i) distribution
contracts of the Company or any of its affiliates, (ii) customer lists, (iii) manufacturing processes (including all intellectual
property required to use those processes and exploit products made thereby), and (iv) all equipment required to perform said manufacturing
processes and other equipment; 2) the pledge as security of the settlement sum which remains unpaid by the Company to ChubeWorkx
all Company (i) distribution contracts of the Company or any of its affiliates, (ii) customer lists, (iii) manufacturing processes
(including all intellectual property required to use those processes and exploit products made thereby), and (iv) all equipment
required to perform said manufacturing processes and other equipment; and 3) the grant of voting proxy by ChubeWorkx to the Company
which allows the Company to vote ChubeWorkx’s shares for corporate formalities under certain conditions.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
8 – Commitments and Contingencies, continued
ChubeWorkx,
continued
The
pledged assets are only at risk in the event that the Company cannot satisfy any outstanding royalty payment obligations subject
to various cure periods and/or through a restructuring and/or liquidation under the United States Bankruptcy laws of the Company
in favor of payment of said obligation.
Litigation
and Settlements
Faulkner
v. Akers Biosciences, Inc., No. 2:18-cv-10521 (D.N.J.) and Gleason v. Akers Biosciences, Inc., No. 2:18-cv-10805 (D.N.J.)
On
June 13, 2018, Plaintiff Tim Faulkner filed a class action complaint alleging securities violations against Akers Biosciences,
Inc. (“Akers”), John J. Gormally, and Gary M. Rauch (“Individual Defendants”) (together with Akers, “Defendants”)
on behalf of all persons and entities who purchased publicly traded Akers securities from May 15, 2017 through June 5, 2018 (the
“Faulkner Action”). The complaint alleges violations of Section 10(b) of the Exchange Act and Rule 10b-5 against all
Defendants, and violations of Section 20(a) of the Exchange Act against the Individual Defendants. In particular, the complaint
alleges that Defendants made false and/or misleading statements and/or failed to disclose in its first, second, and third quarter
2017 10-Qs and its 2017 10-K that: (1) Akers was improperly recognizing revenue for the fiscal year ended December 31, 2017; and,
(2) Akers had downplayed weaknesses in its internal controls over financial reporting and failed to disclose the true extent of
those weaknesses. On June 20, 2018, Plaintiff David Gleason filed a class action complaint under the caption Gleason v. Akers
Biosciences, Inc., No. 2:18-cv-10805 (D.N.J.) based on the same allegations and causes of action (the “Gleason Action”).
On November 21, 2018, the Faulkner and Gleason Actions were consolidated under the Faulkner Action docket. The parties conducted
a mediation on January 10, 2019, and agreed to a settlement in principle disposing of the consolidated action as to all Defendants,
including the Individual Defendants. On March 8, 2019, the parties signed a settlement agreement, subject to approval by the Court,
whereby the Company agreed to pay $2,250,000 in exchange for full releases and discharge of all claims against the Company. On
the same day, Lead Plaintiffs filed a motion for preliminary approval of the settlement and to establish notice procedures. That
motion remains pending.
Watts
v. Gormally, et al., No. 2:18-15992 (D.N.J.)
On
November 9, 2018, Plaintiff Cale Watts filed a verified shareholder derivative complaint alleging violations of the Securities
Exchange Act of 1934, breach of fiduciary duty, unjust enrichment, and waste of corporate assets based on alleged material weaknesses
in controls, management, and documentation (the “Watts Action”). On January 14, 2019, the parties reached an agreement
in principle to settle the Watts Action that included corporate reforms and a payment of attorneys’ fees of $200,000. The
parties finalized a Stipulation of Settlement on March 4, 2019. On March 22, 2019, Plaintiffs filed a motion for preliminary approval
of the proposed Settlement, approving the proposed form and method of providing notice of the settlement, scheduling a hearing
for final approval of the settlement. (“Motion for Preliminary Approval”). On April 1, 2019, Proposed Intervenors
Tiffany Chan, Jasmine Henderson, and Don Danesh Wijesekera (the “Proposed Intervenors”) filed an Opposition to the
Motion for Preliminary Approval and a Motion to Intervene and Stay Proceedings (“Motion to Intervene and Stay”).
Defendants’ Opposition to the Motion to Intervene and Stay is due June 17, 2019, and its Reply to the Opposition to the
Motion for Preliminary Approval is due June 24, 2019. The motion day for the Motion for Preliminary Approval and the Motion to
Intervene and Stay is July 1, 2019.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
8 – Commitments and Contingencies, continued
Litigation
and Settlements, continued
Chan
v. Gormally, et al., No. 2:19-cv-4989 (D.N.J.)
On
February 7, 2019, Tiffany Chan, Jasmine Henderson, and Don Danesh filed a verified shareholder derivative complaint alleging violations
of Section 14(a) of the Exchange Act and SEC Rule 14a-9, breach of fiduciary duty, unjust enrichment, and waste of corporate assets
based on the same circumstances as the Watts Action. The Chan Action further alleges that the Company should not have settled
the Watts Action because the Watts Action plaintiffs lacked standing and the settlement would cause irreparable harm to the Company
and its shareholders. On April 4, 2019, the Court entered the parties’ stipulation and consent order to extend Defendants’
time to answer, move, or otherwise respond to the Complaint until 20 days after the Court decides the Motion for Preliminary Approval
of the Watts’ Settlement and the Motions in Opposition to the Watts’ Settlement, or Stays the Watts Action.
Faulkner,
Gleason, Watts and Chan Matters
As
of December 31, 2018, with regard to the Faulkner, Gleason, Watts and Chan matters, the Company believes that other than the Company’s
retention requirement under its D&O liability insurance coverage of $500,000, the Company has no additional liability. The
D&O liability insurance coverage provides insurance coverage to both the Company and the Directors and Officers for covered
defense and indemnification. Furthermore, during the year ended December 31, 2018, the Company recorded a charge of $500,000,
representing the full amount of such retention requirement. Therefore, assuming that the settlements are approved, as discussed
above, the Company believes it has no further liability with respect to these matters.
Typenex
Medical, LLC v. Akers Biosciences, Inc., JAMS Ref. No. 1450005929
On
November 15, 2018, Typenex Medical LLC (“Typenex”), a telemarketing entity with whom the Company had entered into
a marketing and commission agreement dated September 30, 2016 (the “Marketing Contract”), filed an arbitration against
the Company before JAMS ADR (the “Arbitration”), and an arbiter was appointed to the Arbitration on December 14, 2018.
In the Arbitration, Typenex has stated that it seeks “at least” $220,500 based on the allegation that the Marketing
Contract entitles Typenex to a commission on sales of certain of the Company’s heparin-related products in the period two
years from the Marketing Contract’s expiration, and in the alternative, Typenex seeks relief for breach of the implied covenant
of good faith and fair dealing, and/or unjust enrichment. The Company vigorously opposes Typenex’s interpretation of the
Marketing Contract and will continue to defend this action in the Arbitration. The parties are currently in discovery and are
next scheduled to meet on May 29, 2019 for a court ordered hearing.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
8 – Commitments and Contingencies, continued
Litigation
and Settlements, continued
Other
A
former executive has threatened to sue the Company and executives over the termination of executive’s employment and for
contractual severance pay. The executive asserts that the Company terminated the executive for using sick leave in violation of
New Jersey law and that the termination was without cause within the meaning of an employment agreement which provides for severance
of one year’s salary in the event of termination without cause. With respect to this matter, the Company believes that the
ultimate liability from the settlement of this matter will not be material to the Company’s condensed consolidated financial
statements.
A
former executive has threatened to sue the Company over the termination of the executive’s employment. The executive contends
that the termination was in retaliation for complaints to the employer protected under the California whistleblower protection
laws. The executive also contends that the Company failed to pay a bonus in violation of an employment contract. The Company’s
management and legal counsel believes it is too early to determine the probable outcome of this matter.
The
Company intends to establish a rigorous defense of all claims. All legal fees were expensed as and when incurred.
Note
9 – Related Parties
CEO
and Interim CFO
Effective
on October 5, 2018, the Board appointed Howard R. Yeaton, to serve as the Chief Executive Officer and interim Chief Financial
Officer of the Company. Mr. Yeaton is the managing principal of FCS and the Company’s relationship with FCS shall continue,
with FCS continuing to provide accounting services to the Company. FCS is considered to be a related party. During the three months
ended March 31, 2019, the Company incurred costs of $
23,506
with FCS in connection with these services. As of March 31, 2019, the Company owed FCS $52,913
which is included in trade and other payables on the Condensed Consolidated Balance Sheet.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
10 – Revenue Information
Revenue
by product lines was as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Product
Line
|
|
2019
|
|
|
2018
|
|
MicroParticle
Catalyzed Biosensor (“MPC”)
|
|
$
|
23,320
|
|
|
$
|
18,950
|
|
Particle
ImmunoFiltration Assay (“PIFA”)
|
|
|
576,317
|
|
|
|
259,983
|
|
Rapid
Enzymatic Assay (“REA”)
|
|
|
-
|
|
|
|
9,900
|
|
Other
|
|
|
12,486
|
|
|
|
13,642
|
|
Total
Revenue
|
|
$
|
612,123
|
|
|
$
|
302,475
|
|
The
total revenue by geographic area determined based on the location of the customers was as follows:
|
|
Three
Months Ended
|
|
|
|
March
31,
|
|
Geographic
Region
|
|
2019
|
|
|
2018
|
|
United
States
|
|
$
|
612,123
|
|
|
$
|
294,733
|
|
Rest
of World
|
|
|
-
|
|
|
|
7,742
|
|
Total
Revenue
|
|
$
|
612,123
|
|
|
$
|
302,475
|
|
The
Company had long-lived assets totaling $14,760 and $74,339 located in the People’s Republic of China and $296,670 and $1,272,816
located in the United States as of March 31, 2019 and December 31, 2018, respectively.
Note
11 – Employee Benefit Plan
The
Company maintains a defined contribution benefit plan under section 401(k) of the Internal Revenue Code covering substantially
all qualified employees of the Company (the “401(k) Plan”). Under the 401(k) Plan, the Company matches 100% up to
a 3% contribution, and 50% over a 3% contribution, up to a maximum of 5%.
During
the three months ended March 31, 2019 and 2018, the Company made matching contributions to the 401(k) Plan of $9,464 and $13,802,
respectively.