Notes
to Condensed Consolidated Financial Statements
Note
1 - Nature of Business
The
accompanying financial statements have been prepared by Akers Biosciences, Inc. (“Akers” or the “Company”),
a company domiciled in the United States of America. The address of the Company’s registered office is 201 Grove Road, West
Deptford, New Jersey, 08086. The Company is incorporated in the United States of America under the laws of the State of New Jersey.
The
condensed consolidated financial statements include two dormant subsidiaries, Akers Acquisition Sub, Inc. and Bout Time Marketing
Corporation. All material intercompany transactions have been eliminated upon consolidation.
The
Company’s primary focus is the development and sale of disposable diagnostic testing devices that can be performed in minutes,
to facilitate time sensitive therapeutic decisions. The Company’s main products are a disposable breathalyzer test that
measures the blood alcohol content of the user, a rapid test detecting the antibody causing an allergic reaction to Heparin and
a disposable breathalyzer test that measures Free Radical activity in the human body.
Note
2 - Basis of Presentation and 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, 2017 and 2016 included in the Company’s 2017 Form 10-K/A, Amendment No. 1,
as filed on July 13, 2018. 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, 2018 and its results of operations and cash flows for the three months ended March 31, 2018 and 2017. The results
of operations for the three months ended March 31, 2018 are not necessarily indicative of the results to be expected for the full
fiscal year ending December 31, 2018.
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.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
|
(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.
|
(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 loans and cash balances denominated in Foreign Currencies, are recorded in the Condensed Consolidated Statement
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
|
Cash
and cash equivalents comprise cash balances. 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. Bank
overdrafts are shown as part of trade and other payables in the Condensed Consolidated Balance Sheet.
|
(f)
|
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 fair value of marketable securities is described in Note 4.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
|
(g)
|
Fair
Value Measurement – Marketable Securities
|
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.
|
(h)
|
Trade
Receivables, Trade Receivables – Related Party 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.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
As
of March 31, 2018 and December 31, 2017, allowances for doubtful accounts for trade receivables were $596,196. Bad debt expenses
for trade receivables were $- and $42,361 for the three months ended March 31, 2018 and 2017.
As
of March 31, 2018 and December 31, 2017, the aging of trade receivables was as follows:
|
|
March
31,
|
|
|
December
31,
|
|
Aging
Period
|
|
2018
|
|
|
%
|
|
|
2017
|
|
|
%
|
|
|
|
|
|
|
|
|
|
(restated)
|
|
|
|
|
Current
|
|
$
|
237,066
|
|
|
|
24
|
%
|
|
$
|
1,181,335
|
|
|
|
76
|
%
|
01-30
Days
|
|
|
4,657
|
|
|
|
0
|
%
|
|
|
79,535
|
|
|
|
5
|
%
|
31-60
Days
|
|
|
1,428
|
|
|
|
0
|
%
|
|
|
20,154
|
|
|
|
1
|
%
|
61-90
Days
|
|
|
117
|
|
|
|
0
|
%
|
|
|
25,100
|
|
|
|
2
|
%
|
>90
Days
|
|
|
769,826
|
|
|
|
76
|
%
|
|
|
254,743
|
|
|
|
16
|
%
|
Subtotal
|
|
$
|
1,013,094
|
|
|
|
|
|
|
$
|
1,560,867
|
|
|
|
|
|
Bad
Debts Allowance
|
|
|
(596,196
|
)
|
|
|
|
|
|
|
(596,196
|
)
|
|
|
|
|
Total
|
|
$
|
416,898
|
|
|
|
|
|
|
$
|
964,671
|
|
|
|
|
|
The
aging above represents the number of days that the account receivable balance exceeds the credit terms. Included in the current
category is accounts receivable of $- and $470,000 as of March 31, 2018 and December 31, 2017 with payment terms
extended to 180 days.
|
(i)
|
Concentration
of Credit Risk
|
The
Company is exposed to credit risk in the normal course of business primarily related to trade receivables and cash and cash equivalents.
All
of the Company’s cash is maintained with Fulton Bank of New Jersey, Bank of America, NA and PayPal. The funds are insured
by the FDIC up to a maximum of $250,000, but are otherwise unprotected. The Company placed $631,099 and $426,927 with Fulton Bank
of New Jersey, $12,578 and $7,915 with Bank of America, NA and $3,590 with PayPal as of March 31, 2018 and December 31, 2017.
No losses have been incurred in these accounts.
Three customers accounted for
76% of trade receivables as of March 31, 2018. To limit such risks, the Company performs ongoing credit evaluations of
its customers’ financial condition.
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.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
|
(k)
|
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.
The
estimated useful lives for the current and comparative periods are as follows:
|
|
Useful
Life
|
|
|
(in
years)
|
Plant
and equipment
|
|
5-12
|
Furniture
and fixtures
|
|
5-10
|
Computer
equipment & software
|
|
3-5
|
Leasehold
Improvements
|
|
Shorter
of the remaining lease or estimated useful life
|
Depreciation
methods, useful lives and residual values are reviewed at each reporting date.
|
(i)
|
Patents
and Trade Secrets
|
The
Company has developed or acquired several diagnostic tests that can detect the presence of various substances in a person’s
breath, blood, urine and saliva. Propriety protection for the Company’s products, technology and process is important to
its competitive position. As of March 31, 2018, the Company has ten patents from the United States Patent Office in effect (9,383,368;
7,896,167; 8,097,171; 8,003,061; 8,425,859; 8,871,521; 8,808,639; D691,056; D691,057 and D691,058). Other patents are in effect
in Australia through the Design Registry (348,310; 348,311 and 348,312), European Union Patents 1793906, 2684025, 002216895-0001;
002216895-0002 and 002216895-0003), in Hong Kong (HK11004006) and in Japan (1,515,170; 4,885,134; 4,931,821 5,775,790, and 6023096).
Patents are in the national phase of prosecution in many Patent Cooperation Treaty participating countries. Additional proprietary
technology consists of numerous different inventions. The Company intends to file additional patent applications, where appropriate,
relating to new products, technologies and their use in the U.S., European and Asian markets. Management intends to protect all
other intellectual property (e.g. copyrights, trademarks and trade secrets) using all legal remedies available to the Company.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Costs
associated with applying for patents are capitalized as patent costs. Once the patents are approved, the respective costs are
amortized over their estimated useful lives (maximum of 17 years) on a straight-line basis. Patent pending costs for patents that
are not approved are charged to operations the year the patent is rejected.
In
addition, patents may be purchased from third parties. The costs of acquiring the patent are capitalized as patent costs if it
represents a future economic benefit to the Company. Once a patent is acquired it is amortized over its remaining useful life.
|
(iii)
|
Other
Intangible Assets
|
Other
intangible assets that are acquired by the Company, which have definite useful lives, are measured at cost less accumulated amortization
and accumulated impairment losses.
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. The estimated useful lives for the current and comparative periods are as follows:
|
|
Useful
Life
|
|
|
(in
years)
|
Patents
and trademarks
|
|
12-17
|
Customer
lists
|
|
5
|
|
(m)
|
Recoverability
of Long Lived Assets
|
In
accordance with FASB ASC 360-10-35 “Impairment or Disposal of Long-lived Assets”, long-lived assets to be held and
used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may
not be fully recoverable or that the useful lives of those assets are no longer appropriate. The Company evaluates at each balance
sheet date whether events and circumstances have occurred that indicate possible impairment.
The
Company determines the existence of such impairment by measuring the expected future cash flows (undiscounted and without interest
charges) and comparing such amount to the carrying amount of the assets. An impairment loss, if one exists, is then measured as
the amount by which the carrying amount of the asset exceeds the discounted estimated future cash flows. Assets to be disposed
of are reported at the lower of the carrying amount or fair value of such assets less costs to sell. Asset impairment charges
are recorded to reduce the carrying amount of the long-lived asset that will be sold or disposed of to their estimated fair values.
Charges for the asset impairment reduce the carrying amount of the long-lived assets to their estimated salvage value in connection
with the decision to dispose of such assets.
In
accordance with FASB ASC 323, the Company recognizes investments in joint ventures based upon the Company’s ability to significantly
influence the operational or financial policies of the joint venture. An objective judgment of the level of influence is made
at the time of the investment based upon several factors including, but not limited to the following:
|
a)
|
Representation
on the Board of Directors
|
|
b)
|
Participation
in policy-making processes
|
|
c)
|
Material
intra-entity transactions
|
|
d)
|
Interchange
of management personnel
|
|
e)
|
Technological
dependencies
|
|
f)
|
Extent
of ownership and the ability to influence decision making based upon the makeup of other owners when the shareholder group
is small.
|
The
Company follows the equity method for valuating investments in joint ventures when the existence of significant influence over
operational and financial policy has been established, as determined by management; otherwise, the Company will valuate these
investments using the cost method.
Investments
recorded using the cost method will be assessed for any decrease in value that has occurred that is other than temporary and the
other than temporary decrease in value shall be recognized. As and when circumstances and facts change, the Company will evaluate
the Company’s ability to significantly influence operational and financial policy to establish a basis for converting the
investment accounted for using the cost method to the equity method of valuation.
In
accordance with FASB ASC 605, the Company recognizes revenue when (i) persuasive evidence of a customer or distributor arrangement
exists, (ii) a retailer, distributor or wholesaler receives the goods and acceptance occurs, (iii) the price is fixed or determinable,
and (iv) the collectability of the revenue is reasonably assured. Subject to these criteria, the Company recognizes revenue from
product sales when title passes to the customer based on shipping terms. The Company typically does not accept returns nor offer
charge backs or rebates except for certain distributors. Revenue recorded is net of any discount, rebate or sales return. The
accrual for estimated sales returns was $- as of March 31, 2018 and December 31, 2017. In cases where the right of return is
granted and the Company does not have historical experience to reasonably estimate the sales returns, the revenue is recognized
when the return privilege has substantially expired.
The
Company implemented a standard dealer cost model during the year ended December 31, 2016 which includes a provision for rebates
to the distributors under limited circumstances. The Company established an accrual of $57,725 and $126,471 as of March 31, 2018
and December 31, 2017. Accounts receivable will be reduced when the rebates are applied by the customer. The Company recognized
$37,544 and $102,824 during the three months ended March 31, 2018 and 2017 for rebates, which is included as a reduction of product
revenue in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
License
fee revenue is recognized on a straight-line basis over the term of the license agreement.
When
the Company enters into arrangements that contain more than one deliverable, the Company allocates revenue to the separate elements
under the arrangement based on their relative selling prices in accordance with FASB ASC 605-25.
The
Company follows FASB ASC 740 when accounting for income taxes, which requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between
the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income
tax expense or benefit is the tax payable or refundable for the period plus or minus the change during the period in deferred
tax assets and liabilities.
|
(q)
|
Shipping
and Handling Fees and Costs
|
The
Company charges actual shipping plus a handling fee to customers, which amounted to $13,641 and $18,420 for the
three months ended March 31, 2018 and 2017. 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 $26,944 and $16,177 for the three months ended March 31,
2018 and 2017.
|
(r)
|
Research
and Development Costs
|
In
accordance with FASB ASC 730, research and development costs are expensed when incurred.
The
Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation—Stock Compensation”,
which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors
based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant
using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense
over shorter of the period over which services are to be received or the vesting period.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
Company accounts for stock-based compensation awards to non-employees in accordance with FASB ASC 505-50, “Equity-Based
Payments to Non-Employees”. Under FASB ASC 505-50, the Company determines the fair value of the stock warrants or stock-based
compensation awards granted as either the fair value of the consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
The
Company estimates the fair value of stock-based awards to non-employees on the date of grant using the Black-Scholes model. The
value of the portion of the award that is ultimately expected to vest is recognized as expense over the period which services
are to be received. At the end of each financial reporting period, prior to vesting or prior to completion of services, the fair
value of equity based payments will be re-measured and the non-cash expense recognized during the period will be adjusted accordingly.
Since the fair value of equity based payments granted to non-employees is subject to change in the future, the amount of the future
expense will include fair value re-measurement until the equity based payments are fully vested or the service is completed.
|
(t)
|
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, i.e. the exercise prices of the outstanding stock options were greater than the market price of the common stock.
|
(u)
|
Recently
Adopted Accounting Pronouncements
|
As
of March 31, 2018 and for the three months then ended, there were no recently adopted accounting pronouncements that had a material
effect on the Company’s financial statements.
|
(v)
|
Recently
Issued Accounting Pronouncements Not Yet Adopted
|
As
the Company is an emerging growth company, it has elected to adopt recently issued standards based on effective dates applicable
to nonpublic entities. All effective dates as mentioned in the following paragraphs refer to that applicable to nonpublic 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 and interim reporting periods within annual reporting periods beginning after December 15, 2019.
Early application is permitted as of annual reporting periods beginning after December 15, 2016 including interim reporting periods
within that reporting period. The Company is currently evaluating the effect of the amendments but it does not anticipate a material
impact of its financial statements. The Company expects to use the modified retrospective adoption method
and
will adopt this Update as of January 1, 2019.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
.
The amendments in this Update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement
of financial position. The amendments in this Update are effective for financial statements issued for annual periods beginning
after December 15, 2017, and interim periods within annual periods beginning after December 31, 2018. Earlier application is permitted
for all entities as of the beginning of an interim or annual reporting period. The Company has no deferred tax balances as a 100%
valuation allowance has been made. No material impact is expected.
In
January 2016, the FASB issued ASU No. 2016-01,
Financial Instruments – Overall (Subtopic 825-10)
,
Recognition
and Measurement of Financial Assets and Financial Liabilities
. The amendments in this Update require all equity investments
to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under
the equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require
an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability
resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. The amendments in this Update are effective for fiscal years
beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company is evaluating
the effect of the adoption of this Update on its financial statements.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. The amendments in this Update specify the accounting
for leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases.
The amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal
years beginning after December 15, 2020. Early application of the amendments in this Update is permitted. The Company is currently
evaluating the effect the amendments in this Update will have on its financial statements and related disclosures.
In
March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
, which clarifies certain aspects of the principal versus agent guidance in the new revenue
recognition standard. The effective date and transition requirement for this ASU are the same as the effective date and transition
requirements of ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, as amended by ASU 2015-14,
Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date
, which deferred the effective date to annual reporting
periods beginning after December 15, 2018. The Company is currently evaluating the effect the amendments in this Update will have
on its financial statements and related disclosures.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
In
March 2016, the FASB issued ASU No. 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting
, which simplifies several aspects of the accounting for share-based payment award transactions,
including: (1) income tax consequences; (2) classification of awards as either equity or liabilities, and (3) classification on
the statement of cash flows. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, and
interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted in any interim or annual
period. The Company is currently evaluating the effect the amendments in this Update will have on its financial statements and
related disclosures.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts
and Cash Payments
. The Update addresses eight specific changes to how cash receipts and cash payments are presented and classified
in the statement of cash flows. The amendments in this Update are effective for fiscal years beginning after December 15, 2018,
and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. An entity that elects
early adoption must adopt all of the amendments in the same period. The amendments in this Update should be applied using a retrospective
transition method to each period presented. If it is impracticable to apply the amendments retrospectively for some of the issues,
the amendments for those issues would be applied prospectively as of the earliest date practicable. The Company is currently evaluating
the effect the amendments in this Update will have on its financial statements and related disclosures.
In
May 2017, the FASB issued ASU 2017-09,
Compensation - Stock Compensation
(Topic 718), Scope of Modification Accounting.
The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require
an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and
interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption
in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been
issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance.
The amendments in this Update should be applied prospectively to an award modified on or after the adoption date.
Note
3 – Key Recent Events and Management Plans
On
April 25, 2018, the Board of Directors of the Company terminated Dr. Raymond F. Akers from his position as Executive Chairman
of the Board and from each of his officer positions as Chief Scientific Director and Secretary of the Company. Dr. Raymond F.
Akers continued as a member of the Board of Directors until his resignation on May 27, 2018.
On
April 25, 2018, the Board appointed Richard Carlyle Tarbox III, a current director of the Company as the interim Non-Executive
Chairman of the Board, to hold that position until his successor is appointed, and to the position of Secretary of the Company.
The
Company was not able to timely file this Quarterly Report on Form 10-Q due to delays in evaluating certain accounting and reporting
matters. The Company’s evaluation resulted in its filing a notification on June 18, 2018 on Form 8-K providing notice that
investors should no longer rely upon the financial statements included within the Company’s Quarterly Reports as of and
for the periods ended June 30, 2017 and September 30, 2017, as well as the Company’s Annual Report on Form 10-K for the
year ended December 31, 2017. The Company has since prepared amended financial statements for such periods and the respective
amended Quarterly and Annual financial reports have been filed contemporaneously with the filing of this Quarterly Report on Form
10-Q for the three months ended March 31, 2018.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
By
way of a letter dated May 22, 2018, the Listing Qualifications Department of the NASDAQ Stock Market LLC (“NASDAQ”)
advised the Company that it did not comply with NASDAQ Listing Rule 5250(c)(1) for continued listing because NASDAQ has not received
the Company’s Form 10-Q for the period ended March 31, 2018 (the “Quarterly Report”). NASDAQ has informed the
Company that the Company is required to submit a plan to regain compliance with NASDAQ’s filing requirements for continued
listing within 60 calendar days of the date of the Notice. Upon acceptance of the Company’s compliance plan, NASDAQ is permitted
to grant an extension of up to 180 calendar days from the Quarterly Report’s filing due date, or until November 19, 2018,
for the Company to regain compliance with NASDAQ Listing Rule 5250(c)(1). The Company believes that its filing of this Quarterly
Report and the Amended Quarterly and Annual Reports as discussed above have cured the potential default as to the Company meeting
the requirements to continue its listing in good standing under NASDAQ.
On
June 11, 2018, the Company received a letter from the Listing Qualifications Department NASDAQ notifying the Company that it has
determined that the Company violated the shareholder approval requirements of Listing Rule 5635(c). Listing Rule 5635(c) requires
shareholder approval prior to the issuance of securities when a stock option or purchase plan is to be established or materially
amended or other equity compensation arrangement made or materially amended, pursuant to which stock may be acquired by officers,
directors, employees or consultants.
Prior
to the Company’s public offering and listing on NASDAQ, the Company’s 2013 Incentive Stock and Award Plan (the “2013
Plan”) was approved by its Board of Directors. NASDAQ has concluded that the 2013 Plan was materially amended on two occasions
after the Company’s public offering and listing on NASDAQ. The first amendment, as approved by the Board on January 9, 2015,
increased the number of shares available under the 2013 Plan from 400,000 to 800,000 shares and the second amendment, as approved
by the Board on October 5, 2016, increased the number of shares under the 2013 Plan from 800,000 to 830,000 shares (the “2013
Plan Amendments”).
During the first quarter of
2018, the Company promptly notified NASDAQ, as required by Listing Rule 5625, when it became aware of its potential non-compliance
with Listing Rule 5635(c). On May 4, 2018, the Staff requested additional information from the Company with respect to such non-compliance
and on May 31, 2018, the Company responded. On June 25, 2018, the Company submitted a plan to NASDAQ to remediate this matter
(the “5635 Compliance Plan”). The 5635 Compliance Plan included that a proposal for shareholders of the Company to
ratify the 2013 Plan Amendments be included in the proxy statement for the Company’s 2018 annual meeting of the shareholders
of the Company and that the Company shall suspend the trading of each share granted, and each share granted upon the exercise
of any option granted, in excess of 400,000 shares under the 2013 Plan (the number of shares properly approved pursuant to the
2013 Plan prior to the 2013 Plan Amendments until shareholder ratification). The 5635 Compliance Plan also proposes to
prevent the exercise of any option granted under the 2013 Plan until shareholder ratification.
On July 12, 2018, NASDAQ approved
of the 5635 Compliance Plan and granted the Company until December 10, 2018, to regain compliance with Listing Rule 5635.
On or about June 15, 2018, certain
parties brought certain class action lawsuits against the Company.
Faulkner
v. Akers Biosciences, Inc., No. 2:18-cv-10521 (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 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 July 10, 2018,
Plaintiff and Defendants entered into a stipulation that Defendants are not required to respond to the complaint until the court
appoints a lead plaintiff and lead counsel for the class, and then after the lead plaintiff chooses whether to file an amended
complaint or whether to designate the complaint as the operative complaint.
Gleason
v. Akers Biosciences, Inc., No. 2:18-cv-10805 (D.N.J.)
On June 20, 2018, Plaintiff
David Gleason 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 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. No Defendant has
been served yet, and no response is due at this time.
Other class action lawsuits have been
threatened against the Company and may be filed shortly. Ultimately, there will be one class action complaint upon the
appointment of a lead plaintiff and lead Counsel.
The
Company maintains D&O liability insurance coverage, insuring both the Company and the Directors and Officers for covered defense
and indemnification, and has noticed these matters thereunder.
Historically,
the Company has relied upon public offerings and private placements of Common Stock to raise operating capital. During the year
ended December 31, 2017, the Company raised $9,478,897, net of expenses, in public and private offerings and an additional $981,948,
net of expenses, from the exercise of warrants. During the three months ended March 31, 2018, the Company raised an additional
$5,717,325 from the exercise of warrants (Note 10). As of July 6, 2018, the Company had cash and marketable securities of approximately
$8.1 million and working capital of approximately $8.8 million. The Company is not yet able to determine the impact of the key
events during June and July of 2018 may have on the Company’s ability to raise capital, nor the impact that these matters
might have on its business operations.
Additionally, a former executive
has threatened to sue the Company, Board members, and executives under the New Jersey Conscientious Employee Protection Act (“CEPA”),
N.J. Stat. Ann. § 34-19.1 over the termination of his employment. That statute prohibits any retaliatory action against an
employee who discloses, or threatens to disclose to a supervisor or to a public entity any activity, policy or practice of the
employer that is a violation of a law, or a rule or regulation. Remedies may include a counter claim for back pay,
reinstatement, compensatory and punitive damages and attorneys’ fees if appropriate. The Company will vigorously
defend any litigation brought by this former executive.
The
Company believes that
its current working capital position will be sufficient to meet its obligations as they fall due within one year
after the financial statements are issued.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
4 - Fair Value Measurement - Marketable Securities
Following
is a description of the valuation methodologies used for assets measured at fair value as of March 31, 2018 and December 31, 2017.
U.S.
Agency Securities and Corporate and Municipal 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.
|
|
As
of March 31, 2018
|
|
|
|
|
|
|
Accrued
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Income
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Level
2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
26
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31
|
|
Municipal
securities
|
|
|
8,680,430
|
|
|
|
15,392
|
|
|
|
-
|
|
|
|
(16,843
|
)
|
|
|
8,678,979
|
|
Total
Level 2:
|
|
|
8,680,456
|
|
|
|
15,397
|
|
|
|
-
|
|
|
|
(16,843
|
)
|
|
|
8,679,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
8,680,456
|
|
|
$
|
15,397
|
|
|
$
|
-
|
|
|
$
|
(16,843
|
)
|
|
$
|
8,679,010
|
|
|
|
As
of December 31, 2017
|
|
|
|
|
|
|
Accrued
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Income
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
Level
2:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
5,165
|
|
|
$
|
161
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,326
|
|
Municipal
securities
|
|
|
5,005,000
|
|
|
|
1,281
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,006,281
|
|
Total
Level 2:
|
|
|
5,010,165
|
|
|
|
1,442
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,011,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total:
|
|
$
|
5,010,165
|
|
|
$
|
1,442
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,011,607
|
|
Marketable
securities include U.S. agency securities, corporate securities, and municipal 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 relating
to the available for sale investment securities were recorded in the Condensed Consolidated Statement of Changes in Shareholders’
Equity as comprehensive income. These amounts were an unrealized loss of $16,843 and unrealized gain of $156 (net of effect of
income tax expense of $-) for the three months ended March 31, 2018 and 2017.
Proceeds
from the sale of marketable securities in the three months ended March 31, 2018 and 2017 were $302,095 and $1,095,218. Gross gains
of $- and $1,051 resulted from these sales for the three months ended March 31, 2018 and 2017.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
5 - Inventories
Inventories
consists of the following categories:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
(restated)
|
|
Raw
Materials
|
|
$
|
513,052
|
|
|
$
|
458,441
|
|
Sub-Assemblies
|
|
|
898,778
|
|
|
|
886,274
|
|
Finished
Goods
|
|
|
774,725
|
|
|
|
815,505
|
|
Reserve
for Obsolescence
|
|
|
(1,212,608
|
)
|
|
|
(1,212,608
|
)
|
|
|
$
|
973,947
|
|
|
$
|
947,612
|
|
Obsolete
inventory charged to cost of goods during the three months ended March 31, 2018 and 2017 totaled $24,460 and a credit of $32,333.
Note
6 - Property, Plant and Equipment
Property,
plant and equipment consists of the following:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Computer
Equipment
|
|
$
|
114,771
|
|
|
$
|
114,771
|
|
Computer
Software
|
|
|
40,681
|
|
|
|
40,681
|
|
Office
Equipment
|
|
|
39,959
|
|
|
|
39,959
|
|
Furniture
& Fixtures
|
|
|
38,356
|
|
|
|
38,356
|
|
Machinery
& Equipment
|
|
|
1,153,960
|
|
|
|
1,138,134
|
|
Molds
& Dies
|
|
|
890,571
|
|
|
|
868,570
|
|
Leasehold
Improvements
|
|
|
222,593
|
|
|
|
222,593
|
|
|
|
|
2,500,891
|
|
|
|
2,463,064
|
|
Less
|
|
|
|
|
|
|
|
|
Accumulated
Depreciation
|
|
|
2,241,626
|
|
|
|
2,227,951
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
259,265
|
|
|
$
|
235,113
|
|
Depreciation
expenses totaled $13,675 and $17,941 for the three months ended March 31, 2018 and 2017.
Note
7 - Intangible Assets
Intangible
assets as of March 31, 2018 and December 31, 2017 and the movements for the periods then ended are as follows:
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
|
|
|
|
|
Distributor
&
|
|
|
|
|
|
|
Patents
&
|
|
|
Customer
|
|
|
|
|
|
|
Trademarks
|
|
|
Relationships
|
|
|
Totals
|
|
Cost
or Deemed Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2017
|
|
$
|
2,626,996
|
|
|
$
|
1,270,639
|
|
|
$
|
3,897,635
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At
March 31, 2018
|
|
$
|
2,626,996
|
|
|
$
|
1,270,639
|
|
|
$
|
3,897,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2017
|
|
$
|
1,496,329
|
|
|
$
|
1,270,639
|
|
|
$
|
2,766,968
|
|
Amortization
Charge
|
|
|
42,777
|
|
|
|
-
|
|
|
|
42,777
|
|
Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
At
March 31, 2018
|
|
$
|
1,539,106
|
|
|
$
|
1,270,639
|
|
|
$
|
2,809,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Book Value
|
|
|
|
|
|
|
|
|
|
|
|
|
At
December 31, 2017
|
|
$
|
1,130,667
|
|
|
$
|
-
|
|
|
$
|
1,130,667
|
|
At
March 31, 2018
|
|
$
|
1,087,890
|
|
|
$
|
-
|
|
|
$
|
1,087,890
|
|
Amortization
expense totaled $42,777 for the three months ended March 31, 2018 and 2017.
The
estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows:
Period
|
|
Amount
|
|
2019
|
|
$
|
171,108
|
|
2020
|
|
|
149,298
|
|
2021
|
|
|
147,315
|
|
2022
|
|
|
147,315
|
|
2023
|
|
|
147,315
|
|
Note
8 - Trade and Other Payables
Trade
and other payables consists of the following:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
(restated)
|
|
Trade
Payables
|
|
$
|
598,359
|
|
|
$
|
948,951
|
|
Accrued
Expenses
|
|
|
702,424
|
|
|
|
736,515
|
|
Deferred
Compensation
|
|
|
59,750
|
|
|
|
59,750
|
|
|
|
$
|
1,360,533
|
|
|
$
|
1,745,216
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Trade
and other payables – related party are as follows:
|
|
March
31, 2018
|
|
|
December
31, 2017
|
|
Trade
Payables
|
|
$
|
19,005
|
|
|
$
|
39,821
|
|
|
|
$
|
19,005
|
|
|
$
|
39,821
|
|
As
of March 31, 2018 the Company owed ChubeWorkx Guernsey Limited, previously a major shareholder, royalties of $15,845 (Note 13)
which was paid on April 23, 2018.
As
of March 31, 2018, the Company owed Hainan $670. Senior management at Hainan are actively involved in Shenzhen Savy-Akers Biosciences
(“Shenzhen”) which is therefore being included as a related party. The Company owed Shenzhen $2,490 as of March 31,
2018.
Trade
and other payables are non-interest bearing and are normally settled on 30 – 60 day terms.
Note
9 - Share-based Payments
On
January 23, 2014, upon effectiveness of the registration statement filed with the SEC, the Company adopted the 2013 Stock Incentive
Plan (the “Plan”) which will provide for the issuance of up to 400,000 shares. The purpose of the Plan is to provide
additional incentive to those officers, employees, consultants and non-employee directors of the Company and its parents, subsidiaries
and affiliates whose contributions are essential to the growth and success of the Company’s business.
On
January 9, 2015, the Board of Directors of the Company approved, upon recommendation from the Compensation Committee of the Board,
by unanimous written consent the Amended and Restated 2013 Incentive Stock and Award Plan (the “Amended Plan”), which
increases the number of authorized shares of Common Stock subject to the Plan to 800,000 shares (Note 3).
On
September 30, 2016, the Board of Directors increased the number of authorized shares of Common Stock subject to the Amended
Plan to 830,000 shares. As of March 31, 2018, grants of restricted stock and options to purchase 255,000 shares of Common Stock
have been issued, pursuant to the Amended Plan, and are unvested or unexercised and 7,292 shares of Common Stock
remain available for grants under the Amended Plan.
On
August 7, 2017, the Shareholders approved and the Company adopted the 2017 Equity Incentive Plan (the “Plan”) which
will provide for the issuance of up to 1,350,000 shares. The purpose of the Plan is to provide additional incentive to those officers,
employees, consultants and non-employee directors of the Company and its parents, subsidiaries and affiliates whose contributions
are essential to the growth and success of the Company’s business. As of March 31, 2018, grants totaling 320,107 shares
of restricted Common Stock have been issued pursuant to the Plan and 1,029,893 shares of Common Stock remain
available for grants under the Plan.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
Plan may be administered by the Board or a Board-appointed committee. Eligible recipients of option awards are employees,
officers, consultants or directors (including non-employee directors) of the Company or of any parent, subsidiary or affiliate
of the Company. The Board has the authority to grant to any eligible recipient any options, restricted stock or other awards
valued in whole or in part by reference to, or otherwise based on, the Company’s Common Stock.
Qualified
option holders may exercise their options at their discretion. Each option granted may be exchanged for a prescribed number of
shares of Common Stock.
The
Company did not issue any options or warrants under the above plan during the three months ended March 31, 2018.
The
following table summarizes the option activities for the three months ended March 31, 2018:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
(years)
|
|
|
Value
|
|
Balance
at December 31, 2017
|
|
|
255,000
|
|
|
$
|
4.25
|
|
|
|
2.02
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2018
|
|
|
255,000
|
|
|
$
|
4.25
|
|
|
|
1.78
|
|
|
$
|
-
|
|
Exercisable
as of March 31, 2018
|
|
|
250,334
|
|
|
$
|
4.27
|
|
|
|
1.75
|
|
|
$
|
-
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing
stock price of $0.83 for our common shares on March 31, 2018.
A
summary of the Company’s non-vested shares as of March 31, 2018 and the changes during the three months then ended are as
follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
Grant
|
|
Non-Vested
Shares
|
|
Shares
|
|
|
Date
Fair Value
|
|
Non-vested
at December 31, 2017
|
|
|
4,666
|
|
|
$
|
2.36
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non-vested
at March 31, 2018
|
|
|
4,666
|
|
|
$
|
2.36
|
|
Unrecognized
compensation cost related to non-vested employee stock options totaled $4,219 as of March 31, 2018. The cost is to be recognized
over a weighted average period of 0.38 years.
During
the three months ended March 31, 2018 and 2017, the Company incurred stock option expenses totaling $2,712 and $5,036.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
table below summarizes the warrant activity for the three months ended March 31, 2018:
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Warrants
|
|
|
Price
|
|
|
Term
(years)
|
|
Balance
at December 31, 2017
|
|
|
49,490,571
|
|
|
$
|
0.22
|
|
|
|
4.95
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(30,492,070
|
)
|
|
|
0.19
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at March 31, 2018
|
|
|
18,998,501
|
|
|
$
|
0.28
|
|
|
|
4.68
|
|
Exercisable
as of March 31, 2018
|
|
|
18,998,501
|
|
|
$
|
0.28
|
|
|
|
4.68
|
|
Note
10 - Equity
The
holders of common shares are entitled to one vote per share at meetings of the Company. Holders of Series B convertible preferred
shares have no voting rights at meetings of the Company.
A
restricted stock award is an award of common shares that are subject to certain restrictions during a specified period. Restricted
stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the release
of the restrictions. The grantee cannot transfer the shares before the restricted shares vest. Shares on non-vested restricted
stock have the same voting rights as Common Stock, are entitled to receive dividends and other distributions thereon and
are considered to be currently issued and outstanding. The Company expenses the cost of the restricted stock awards, which is
determined to be the fair market value of the shares at the date of grant, straight-line over the period during which the restrictions
lapse. For these purposes, the fair market value of the restricted stock is determined based on the closing price of the Company’s
Common Stock on the grant date.
On
June 8, 2016, the Company issued 27,500 restricted common shares to an officer in connection with his employment agreement. These
shares vest 1/3 immediately on the date of the grant and the remaining 2/3 vests equally on March 1, 2017 and March 1, 2018. The
fair value of these shares was $54,725 and was based on the share price on the date of the grant. $3,469 and $5,203 was recorded
during the three months ended March 31, 2018 and 2017 as administrative expense on the Condensed Consolidated Statement of Operations
and Comprehensive Loss.
On
April 11, 2017, the Company issued 10,000 restricted shares to a consultant for services to be rendered during the year ending
December 31, 2017. These shares vested on the date of the grant. The fair value of these shares was $18,000 and was based on the
share price on the date of the grant. During the year ended December 31, 2017, $5,455 was recognized as stock based compensation
expense. The remaining $12,545 was recognized during the three months ended March 31, 2018 as sales and marketing expenses
on the Condensed Consolidated Statement of Operations and Comprehensive Loss.
On
January 16, 2018, the Board of Directors issued 25,000 restricted shares of Common Stock to a key employee of the Company
as part of the Plan. The fair value of the shares was $5,175 and was based on the closing share price of $0.2070 per share. The
share grants vested immediately. The Company recorded the expense as sales and marketing expenses on the Condensed Consolidated
Statement of Operations and Comprehensive Loss for the three months ended March 31, 2018.
During
the three months ended March 31, 2018, 1,755 shares of the Company’s Series B Preferred Stock, no par value,
converted into 11,700,002 shares of Common Stock.
During
the three months ended March 31, 2018, warrant holders from the December 21, 2017 public offering executed 30,492,070 warrants
with an exercise price of $0.1875 per common share, raising net proceeds of $5,717,325.
Note
11 - Loss per share
The
calculation of basic and diluted loss per share at March 31, 2018 and 2017 was based on the loss attributable to common shareholders
of $1,859,991 and $1,349,270. The basic and diluted weighted average number of common shares outstanding at March 31, 2018
and 2017 was 71,315,461 and 6,993,574.
Diluted
net loss per share is computed using the weighted average number of common and dilutive potential common shares outstanding during
the period.
Potential
common shares consist of options, warrants and unvested restricted stock. Diluted net loss per common share was the same as basic
net loss per common share for the three months ended March 31, 2018 and 2017 since the effect of options and warrants would be
anti-dilutive due to the net loss attributable to the common shareholders. Instruments excluded from dilutive earnings per share,
because their inclusion would be anti-dilutive, were as follows: incentive and award stock options – 255,000 and 259,000;
unvested restricted shares of Common Stock – - and 9,166; warrants – 18,998,501 and 1,455,650 as of March 31,
2018 and 2017.
Note
12 - Income Tax Expense
There
is no income tax benefit for the losses for the three months ended March 31, 2018 and 2017 since management has determined
that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount
of such benefits.
The
Company’s policy is to record interest and penalties associated with unrecognized tax benefits as additional income taxes
in the statement of operations. As of January 1, 2018, the Company had no unrecognized tax benefits, or any tax related interest
or penalties. There were no changes in the Company’s unrecognized tax benefits during the three months ended March 31, 2018
related to unrecognized tax benefits. With few exceptions, the U.S. and state income tax returns filed for the tax years ended
on December 31, 2014 and thereafter are subject to examination by the relevant taxing authorities.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
13 - Related Party Transactions
On
June 19, 2012, the Company entered into a 3-year exclusive License & Supply Agreement with ChubeWorkx Guernsey Limited (as
successor to SONO International Limited) (“ChubeWorkx”) for the purchase and distribution of Akers’ proprietary
breathalyzers outside North America. ChubeWorkx paid a licensing fee of $1,000,000 which was recognized over the term of the agreement
through September 30, 2015.
On
June 13, 2013, the Company announced an expansion of the License and Supply Agreement with ChubeWorkx to include worldwide marketing
and distribution of the “Be CHUBE” program using the Company’s breathalyzer.
On
August 17, 2016, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with ChubeWorkx Guernsey
Limited (“ChubeWorkx”), a major shareholder, 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”).
Under
the terms of the Settlement Agreement, the Company would receive the full outstanding principal amount in the year ended
December 31, 2016 in the form of $750,000 of BreathScan® Alcohol Detector inventory and the balance of $549,609 as prepaid
royalty. Akers’ established an allowance for this doubtful note in the Company’s financial statements for the year
ended December 31, 2015. As a result of the Settlement Agreement, the Company reversed the allowance for doubtful note in the
amount of $1,299,609 which was included in the Consolidated Statement of Operations and Comprehensive Loss for the year ended
December 31, 2016.
In
addition to addressing the promissory note described above, the Settlement Agreement also allows the Company to market and sell
all of the Company’s breath technology tests worldwide, unencumbered by any past/future claims by ChubeWorkx under the Licensing
Agreement (entered into with ChubeWorkx in 2012 and subsequently amended in 2013). Under the terms of the Settlement Agreement,
ChubeWorkx no longer holds any rights pertaining to Akers’ BreathScan® technology, which serves as the basis for a number
of commercialized products including BreathScan® Alcohol Detector and BreathScan OxiChek™; and a number of products
in development.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
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 $31,689 and $32,279 for the three months ended
March 31, 2018 and 2017 which are included in sales and marketing expenses – related party on the Condensed Consolidated
Statement of Operations and Comprehensive Loss.
Other
terms of the Settlement include: 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.
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.
During
the three months ended March 31, 2018 and 2017, the Company recognized $- for the BreathScan Breath Alcohol products acquired
from the Settlement.
The
Company began purchasing manufacturing molds, plastic components and the assembled BreathScan Lync™ device through Hainan
and its related party during the year ended December 31, 2016 (Note 8). The Company purchased a total of $23,805 and $16,744
during the three months ended March 31, 2018 and 2017. As of March 31, 2018, the Company owed the Hainan and its related party
$3,160 which is included in trade and other payables – related party on the Condensed Consolidated Balance Sheet.
During
the three months ended March 31, 2018, the Company engaged Medical Horizons, Inc. (“Medical Horizons”), a company
owned and operated by the spouse of a member of the Company’s leadership team, to provide engineering and design services.
The Company recorded $48,589 during the three months ended March 31, 2018 related to the engagement of Medical Horizons
which is included in research and development – related party on the Condensed Consolidated Statement of Operations and
Comprehensive Loss.
Product
revenue – related party for the three months ended March 31, 2018 and 2017 were $- and $24,063. The revenue was the result
of sales to Hainan and its related party.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
14 – 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, 2018 and 2017 totaled $42,218 and $40,487, respectively.
The
Company entered into a 24-month lease for a satellite office located in Ramsey, New Jersey (“Ramsey Lease”) with annual
rents of $25,980 plus common area maintenance (CAM) charges. The lease took effect on June 1, 2017 and runs through May 31, 2019.
Rent expenses for the Ramsey Lease, including related CAM charges totaled $6,495 and $- for the three months ended March 31, 2018
and 2017. The Company posted a security deposit of $4,330 which is included in other assets on the Condensed Consolidated Balance
Sheet.
The
Company entered into a 29-month lease for warehouse space located in Pitman, New Jersey (“Pitman Lease”) with annual
rents of $39,650. The lease took effect on August 1, 2017 and runs through December 31, 2019. Rent expenses for the Pitman Lease
totaled $9,913 and $- for the three months ended March 31, 2018 and 2017. 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
|
|
|
Ramsey
|
|
|
Pitman
|
|
|
Equipment
|
|
|
|
|
|
|
Lease
|
|
|
Lease
|
|
|
Lease
|
|
|
Lease
|
|
|
Total
|
|
Next
12 Months
|
|
$
|
132,000
|
|
|
$
|
25,980
|
|
|
$
|
39,650
|
|
|
$
|
6,156
|
|
|
$
|
203,786
|
|
Next
13-24 Months
|
|
|
99,000
|
|
|
|
4,330
|
|
|
|
29,736
|
|
|
|
3,591
|
|
|
|
136,657
|
|
On
June 30, 2017, the Company signed the Third Amendment to the exclusive Distribution Agreement with NovoTek Pharmaceuticals Limited
(‘NovoTek’) which expanded the geographic area of coverage to include Poland and grants NovoTek the right to assemble
certain PIFA Heparin PF/4 products in their facilities from components acquired from the Company.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
Note
15 - Major Customers
For
the three months ended March 31, 2018, one customer generated 10% or more of the Company’s revenue. Sales to this
customer accounted for 79% of the Company’s revenue. As of March 31, 2018, the amount due from this customer
was $175,881. This concentration makes the Company vulnerable to a near-term severe impact should the relationships be
terminated.
For
the three months ended March 31, 2017, two customers generated 10% or more of the Company’s revenue. Sales to these customers
accounted for 67% of the Company’s revenue.
Note
16 - Major Suppliers
For
the three months ended March 31, 2018, one supplier accounted for 10% or more of the Company’s purchases. As of March 31,
2018, the amount due to the supplier was $9,302.
For
the three months ended March 31, 2017, two suppliers each accounted for more than 10% of the Company’s purchases. In aggregate,
these suppliers accounted for 23% of the Company’s total purchases.
Note
17 – Contingencies
On
October 17, 2016 the Company was served with a notice that Pulse Health LLC (“Pulse”) filed a lawsuit against the
Company on September 30, 2016 in United States Federal District Court, District of Oregon, alleging a breach of contract under
the settlement agreement entered into by the Company and Pulse on April 8, 2011 which settled all claims and disputes between
the Company and Pulse arising from a previously executed Technology Development Agreement entered into by the Company and Pulse
and damages resulting from said alleged breach. Additionally, Pulse alleges false advertising and unlawful trade practices in
connection with the Company’s sales activities related to the Company’s OxiChek™ products.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
Company filed a series of motions with the Court seeking (1) to dismiss the Pulse complaint for lack of jurisdiction or, in the
alternative, transfer the matter to the District Court for the District of New Jersey, Camden Vicinage and (2) to dismiss the
unfair competition claims for failure to state a claim on which relief could be granted. Oral arguments on these motions were
heard by the Court on March 10, 2017.
The
Court decided by order dated April 14, 2017 in favor of the Company and has dismissed with prejudice the claims brought by Pulse
for unfair competition (both federal and state counts). The court decided against the Company in its motions for transfer of venue
and for lack of jurisdiction. As such, the case shall proceed in the District Court of Oregon.
Pulse
subsequently filed an Amended Complaint, in which Pulse seeks not less than $500,000 in damages and, among other items, an injunction
prohibiting the Company from manufacture, use and sale of the OxiChek product. The Company answered the Amended Complaint on May
11, 2017. Discovery concluded on January 22, 2018.
The Company filed a Motion for
Summary Judgment on January 24, 2018. On June 21, 2018, the Court ruled in favor of the Company on some issues and determined
that other issues warranted a trial. Trial has been set for November 13, 2018 in Portland, Oregon.
On
or about June 15, 2018, certain parties brought certain class action lawsuits against the Company.
Faulkner
v. Akers Biosciences, Inc., No. 2:18-cv-10521 (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 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 July 10, 2018,
Plaintiff and Defendants entered into a stipulation that Defendants are not required to respond to the complaint until the court
appoints a lead plaintiff and lead counsel for the class, and then after the lead plaintiff chooses whether to file an amended
complaint or whether to designate the complaint as the operative complaint.
Gleason v.
Akers Biosciences, Inc., No. 2:18-cv-10805 (D.N.J.)
On June 20, 2018, Plaintiff David Gleason
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 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. No Defendant has been served yet, and no response is due
at this time.
Other
class action lawsuits have been threatened against the Company and may be filed shortly. Ultimately, there will be one class action
complaint upon the appointment of a lead plaintiff and lead Counsel.
The
Company maintains D&O liability insurance coverage, insuring both the Company and the Directors and Officers for covered defense
and indemnification, and has noticed these matters thereunder.
Additionally, a former executive
has threatened to sue the Company, Board members, and executives under CEPA over the termination of his employment. That statute
prohibits any retaliatory action against an employee who discloses, or threatens to disclose to a supervisor or to a public entity
any activity, policy or practice of the employer that is a violation of a law, or a rule or regulation. Remedies may include
a counter claim for back pay, reinstatement, compensatory and punitive damages and attorneys’ fees if appropriate.
The Company will vigorously defend any litigation brought by this former executive.
The
Company intends to establish a rigorous defense of all claims. The Company is unable to assess the potential outcome, so no accrual
for losses was made as of March 31, 2018. All legal fees were expensed as and when incurred.
Note
18 – Segment Information
The
Company is organized and operates as one operating segment. In accordance with FASB ASC 280 “Segment Reporting”, the
Chief Operating Officer is the chief operating decision-maker who reviews operating results to make decisions on allocation of
resources and assessment of performance for the entire company.
The
total revenue by different product lines was as follows:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
Product
Line
|
|
2018
|
|
|
2017
|
|
MicroParticle
Catalyzed Biosensor (“MPC”)
|
|
$
|
18,950
|
|
|
$
|
85,659
|
|
Particle
ImmunoFiltration Assay (“PIFA”)
|
|
|
259,983
|
|
|
|
560,921
|
|
Rapid
Enzymatic Assay ("REA")
|
|
|
9,900
|
|
|
|
-
|
|
Other
|
|
|
13,642
|
|
|
|
20,670
|
|
Product
Revenue Total
|
|
$
|
302,475
|
|
|
$
|
667,250
|
|
License
Fees
|
|
|
-
|
|
|
|
-
|
|
Total
Revenue
|
|
$
|
302,475
|
|
|
$
|
667,250
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
The
total revenue by geographic area determined based on the location of the customers was as follows:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
Geographic
Region
|
|
2018
|
|
|
2017
|
|
United
States
|
|
$
|
294,733
|
|
|
$
|
617,691
|
|
People's
Republic of China
|
|
|
-
|
|
|
|
21,030
|
|
Rest
of World
|
|
|
7,742
|
|
|
|
28,529
|
|
Total
Revenue
|
|
$
|
302,475
|
|
|
$
|
667,250
|
|
The
Company had long-lived assets totaling $74,339 and $59,830 located in the People’s Republic of China and $1,272,816
and $1,305,950 located in the United States as of March 31, 2018 and December 31, 2017, respectively.
Note
19 - Subsequent Events
During
the period April 1, 2018 through July 6, 2018, the Company received $1,437,875 from the exercise of 7,668,667
warrants. See also Note 3.