Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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.
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.
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, 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 September
30, 2018 and its results of operations and cash flows for the three and nine months ended September 30, 2018 and 2017. The results
of operations for the three and nine months ended September 30, 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.
On
November 8, 2018, the Company effectuated a reverse stock split of its shares of common stock whereby every eight (8)
pre-split shares of common stock were exchanged for one (1) post-split share of the Company's common stock (“Reverse
Stock Split”). No fractional shares were issued in connection with the Reverse Stock Split. Stockholders who would
otherwise have held a fractional share of the common stock were given one additional full share of the Company’s common
stock. Numbers presented in these financial statements have been adjusted to reflect the Reverse Stock Split.
|
(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
(Unaudited)
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 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.
At
September 30, 2018, restricted cash included in non-current assets on the Company’s condensed consolidated balance sheet
was $500,000 representing cash in trust for the purpose of funding legal fees for certain threatened litigation.
|
(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.
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
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.
Following
is a description of the valuation methodologies used for assets measured at fair value as of September 30, 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.
|
|
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 September 30, 2018
|
|
$
|
-
|
|
|
$
|
4,866,033
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities at December 31, 2017
|
|
$
|
-
|
|
|
$
|
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 and
losses 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 increase of $6,900 and a decrease of $5,543 in unrealized
losses for the three and nine months ended September 30, 2018. These amounts were a decrease of $1,009 and $0 in unrealized gains
for the three and nine months ended September 30, 2017.
Proceeds
from the sale of marketable securities in the three and nine months ended September 30, 2018 were $3,153,987 and $5,460,662. Proceeds
from the sale of marketable securities in the three and nine months ended September 30, 2017 were $1,003,565 and $2,749,119. Gross
gains and losses, resulting from these sales, amounted to a loss of $6,900 and a gain of $1,719 for the three months ended September
30, 2018 and 2017 and a loss of $11,300 and a gain of $3,375 for the nine months ended September 30, 2018 and 2017.
|
(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.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
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 September 30, 2018 and December 31, 2017, allowances for doubtful accounts for trade receivables were $693,196 and $596,196.
Bad debt expenses for trade receivables were $0 and $0 for the three months ended September 30, 2018 and 2017, respectively, and
$125,500 and $47,741 for the nine months ended September 30, 2018 and 2017, respectively.
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 four
banks.
Major
Customers
For
the three months ended September 30, 2018, three customers generated 61%, 18% and 16%, or 95% in the aggregate, of the Company’s
revenue. For the nine months ended September 30, 2018, two customers generated 55% and 17%, or 72% in the aggregate, of the Company’s
revenue. As of September 30, 2018, the amount due from these two customers was $69,567. This concentration makes
the Company vulnerable to a near-term severe impact should these relationships be terminated.
For
the three months ended September 30, 2017, two customers generated 42% and 27%, or 69% in the aggregate, of the Company’s
revenue. For the nine months ended September 30, 2017, three customers generated 34%, 21% and 17%, or 72% in the aggregate, of
the Company’s revenue.
Three
customers accounted for 47%, 15%, and 13% or 75%, in the aggregate, of gross trade receivables, before accounting for allowance
for doubtful accounts, as of September 30, 2018. To limit such risks, the Company performs ongoing credit evaluations of its customers’
financial condition. As of September 30, 2018, the Company had $457,881, $146,196 and $127,329 in trade receivables, respectively,
from these customers.
Major
Suppliers
For
the three months ended September 30, 2018, three suppliers accounted for 25%, 18% and 11%, or 54% in the aggregate, of the Company’s
purchases. For the nine months ended September 30, 2018, one supplier accounted for 14% of the Company’s purchases.
For
the three months ended September 30, 2017, two suppliers accounted for 18% and 13%, or 31% in the aggregate, of the Company’s
purchases. For the nine months ended September 30, 2017, one supplier accounted for 11% of the Company’s purchases.
Two
vendors accounted for 21% and 14%, or 35%, in the aggregate, of trade payables as of September 30, 2018. As of September 30, 2018,
the Company had $150,668 and $98,738 in trade payables, respectively, from these vendors.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
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 $17,366 and $18,709 for the three months ended September 30, 2018 and 2017, respectively, and $44,716 and $54,536
for the nine months ended September 30, 2018 and 2017, respectively.
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 September 30, 2018 and December 31, 2017 were $1,002,336 and $1,130,667, respectively. Intangible assets at September
30, 2018 consisted of patents, trademarks and customer lists of $3,897,635 net of accumulated amortization and impairment of $2,895,299.
Effective
on October 9, 2018, the Company pulled the OxiChek product line from the market (See note 3). This served as a triggering event
for testing whether or not our intangible assets were impaired. The Company then preformed a recoverability analysis and determined
that as of September 30, 2018, there was no indication of impairment.
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 $42,777 for the three months ended September 30, 2018 and 2017 and $128,331
for the nine months ended September 30, 2018 and 2017.
The
following is an annual schedule of approximate future amortization of the Company’s intangible assets:
Period
|
|
Amount
|
|
2018 (three months)
|
|
$
|
42,777
|
|
2019
|
|
|
171,108
|
|
2020
|
|
|
149,298
|
|
2021
|
|
|
147,315
|
|
2022
|
|
|
147,315
|
|
2023
|
|
|
147,315
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
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 September 30, 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 may provide for rebates to the distributors under limited circumstances. The Company established an accrual of $71,632
and $126,471 as of September 30, 2018 and December 31, 2017. Accounts receivable will be reduced when the rebates are applied
by the customer. The Company recognized $26,262 and $51,791 during the three months ended September 30, 2018 and 2017, respectively,
for rebates and $70,156 and $224,469 during the nine months ended September 30, 2018 and 2017, respectively, which is included
as a reduction of product revenue in the Condensed Consolidated Statement of Operations and Comprehensive Loss.
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 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.
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 September 30, 2018 and 2017, no liability for
unrecognized tax benefits was required to be reported.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
There
was no income tax expense for the three and nine months ended September 30, 2018 and 2017. There is no income tax benefit for
the losses for the three and nine months ended September 30, 2018 and 2017 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 nine months ended September
30, 2018 and 2017. 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.
The
Company has identified its federal tax return and its state tax returns in New Jersey, California, Connecticut and Minnesota
as its “major” tax jurisdictions, and such returns for the years 2015 through 2017 remain subject to examination.
The
Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. The Tax Act reduced the U.S. federal corporate
tax rate from 35% to 21%. As December 31, 2017, the Company had made a reasonable estimate of the effects of the Tax Act. This
estimate incorporates assumptions made based upon the Company’s current interpretation of the Tax Act and may change as
the Company may receive additional clarification and implementation guidance and as the interpretation of the Tax Act evolves.
In accordance with Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB
118”), which allows us to record provisional amounts during a measurement period not to extend beyond one year form the
enactment date. SAB 118 was codified by the FASB as part of ASU No. 2018-05,
Amendments to SEC Paragraphs Pursuant to SEC Staff
Accounting Bulletin No. 118
. As of June 30, 2018, we have not made any additional measurement period adjustments. Such adjustments
may be necessary in future periods due to, among other things, the significant complexity of the Act and anticipated additional
regulatory guidance that may be issued by the Internal Revenue Service (“IRS”), changes in analysis, interpretations
and assumptions the Company has made and actions the Company may take as a result of the Act. We are continuing to gather information
to assess the application of the Act and expect to finalize the accounting for the effects of the Tax Act no later than the fourth
quarter of 2018. Future adjustments made to the provisional effects will be reported as a component of income tax expense in the
reporting period in which any such adjustments are determined. Based on the new tax law that lowers corporate tax rates, on December
31, 2017, the Company revalued its deferred tax assets.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
|
(n)
|
Shipping
and Handling Fees and Costs
|
The
Company charges actual shipping plus a handling fee to customers, which amounted to $8,625 and $13,679 for the three months ended
September 30, 2018 and 2017, respectively, and $41,006 and $47,148 for the nine months ended September 30, 2018 and 2017, respectively.
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 consumed are classified as part of the cost
of sales, which amounted to $18,126 and $16,148 for the three months ended September 30, 2018 and 2017, respectively, and $83,063
and $63,719 for the nine months ended September 30, 2018 and 2017, respectively.
|
(o)
|
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.
The
calculation of basic and diluted loss per share for the three months ended September 30, 2018 and 2017 was based on the loss attributable
to common shareholders of $3,083,949 and $1,177,644, respectively, and $7,011,394 and $3,344,932 for the nine months ended September
30, 2018 and 2017, respectively. The basic and diluted weighted average number of common shares outstanding for the three months
ended September 30, 2018 and 2017 was 11,779,584 and 1,111,510, respectively, and 10,805,151 and 1,033,606 for the nine months
ended September 30, 2018 and 2017, 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 and Nine Months
Ended
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Incentive and Award Stock
Options
|
|
|
10,500
|
|
|
|
31,875
|
|
Unvested Restricted Shares of Common
Stock
|
|
|
-
|
|
|
|
1,146
|
|
Warrants
|
|
|
1,416,229
|
|
|
|
186,321
|
|
Total
potentially dilutive shares
|
|
|
1,426,729
|
|
|
|
219,342
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
|
(p)
|
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
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The amendments in this Update
require that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of period and
end-of-period total amounts shown on the statement of cash flows. The amendments in this Update do not provide a definition of
restricted cash or restricted cash equivalents. The amendments in this Update are effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments
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. The Company adopted this as of January 1, 2018 (See note 2(f)).
Recently
Issued Accounting Pronouncements Not Adopted
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 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. 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.
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. For public business entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. The Company is evaluating the impact of adopting this pronouncement.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
2 - Significant Accounting Policies, continued
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 is evaluating the impact of adopting this pronouncement.
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 Company is currently evaluating
the effects the adoption of ASU 2018-09 will have on the consolidated financial statements.
Note
3 – Key Recent Events and Management Plans
By
way of a letter dated November 28, 2017, 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 informed Nasdaq that the Company is fully
committed to regain compliance with the Price Requirement as quickly as possible and, therefore, proposed to institute a reverse
stock split. NASDAQ approved of the Company’s proposal of a reverse stock split and granted the Company until November 26,
2018, for the Company to be in compliance with the Price Requirement. The Company’s latest reported stock price on November
13, 2018 was $2.46. If the Company’s stock remains priced above $1.00 by the end of trading on November 21, 2018, it is
expected that Nasdaq would give the Company notice of its compliance with the Price Requirement.
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 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.
By
way of a letter dated May 22, 2018, the Listing Qualifications Department of 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 Quarterly Report.
Company filed a Current Report on a Form 8-K with the Securities and Exchange Commission on May 25, 2018, that 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. NASDAQ informed the Company that it is in Compliance with NASDAQ Listing
Rule 5250(c)(1) on July 12, 2018.
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.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Key Recent Events and Management Plans, continued
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 50,000 to 100,000 shares and the second amendment, as approved
by the Board on October 5, 2016, increased the number of shares under the 2013 Plan from 100,000 to 103,750 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 50,000 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. The Company intends to have a shareholder meeting on December 7, 2018 to approve the amendments to the
2013 Plan.
On
or about June 15, 2018, certain parties brought certain class action lawsuits against the Company. See Note 10 - Contingencies
for details.
On
July 26, 2018, the Company implemented a reduction in workforce plan which resulted in the elimination of six staff positions
in four operating departments.
On
September 6, 2018, with the recommendation of the Nominating and Corporate Governance Committee (the “N&G Committee”)
of the Board appointed Mr. Joshua Silverman as a Director of the Company for a term that expires at the Company’s 2018 Annual
Meeting of Stockholders, or until his earlier death, disability, resignation or removal.
On
September 17, 2018, the Company reached an amicable resolution by way of a settlement agreement and release (the “
Settlement
Agreement
”) with Pulse Health, LLC, an Oregon limited liability company (the “
Plaintiff
”) with respect
to the lawsuit Plaintiff filed against the Company, in the United States District Court, District of Oregon (the “
Court
”),
Case No.:3:16-CV-01919-HZ (the “
Litigation
”), effective upon the Court entering a permanent injunction against
the Company, which the Court has entered on to the docket on October 4, 2018. Pursuant to the settlement reached between the Plaintiff
and the Company, on October 9, 2018 the Company paid $930,000 to the Plaintiff. The Company has also agreed to a permanent injunction
and will not make, use, sell or offer to sell the BreathScan OxiChek™ product, any product that detects aldehydes or oxidative
stress in exhaled human breath or breath condensate using either basic fuchsin or sodium metabisulfite or any form, analog or
equivalent thereof, and the BreathScan Lync device, or any equivalent thereof, as part of a test for aldehydes or oxidative stress
in human exhaled breath or breath condensate. The Company does not anticipate a material impact on revenues as a result of the
withdrawal of the BreathScan OxiChek™ product from sale. The Settlement Agreement does not contain any admission of liability,
wrongdoing, or responsibility by any of the parties.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Key Recent Events and Management Plans, continued
On
October 5, 2018, John J. Gormally submitted to the Board his resignation from his position as the Chief Executive Officer of the
Company and as a member of the Board, effective immediately. Mr.
Gormally’s
resignation was voluntary and not a result of any disagreement with the Company or its executive officers on any matter relating
to the Company’s operations, policies or practices. In connection with his resignation from the Board, Mr. Gormally entered
into a Resignation Agreement with the Company.
Effective
on October 5, 2018, the Board appointed Howard R. Yeaton, who through Financial Consulting Strategies LLC (“
FCS
”)
served previously as a consultant to the Company, 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 and nine
months ended September 30, 2018, the Company expensed $56,425 and $75,342, respectively, to FCS in connection with these services.
As of September 30, 2018, the Company owed FCS $22,862
which is included in trade and other payables – related party
on the Condensed Consolidated Balance Sheet.
On
October 6, 2018, finnCap Ltd, the Company’s Nominated Adviser on the AIM market of the London Stock Exchange (“
finnCap
”),
gave the Company formal three months’ notice of its resignation as the Company’s Nominated Adviser and Broker. Should
finnCap cease to act as the Company’s Nominated Adviser and the Company does not appoint a replacement Nominated Adviser,
the Company’s shares will be suspended from trading on AIM with immediate effect. The Company would then have one further
month to appoint a replacement Nominated Adviser failing which the admission of its AIM securities will be cancelled.
On
October 8, 2018, the Board, following a review of the Company’s commercial and product development strategies, determined
that it is in the best interests of the Company to focus primarily on the commercialization of its Particle Immuno-Filtration
Assay (PIFA®) Technology platform, and to explore other commercial opportunities for the deployment of PIFA® technology,
which is also utilized in the Company’s core commercialized products, the PIFA® Heparin/PF4 and PIFA® Pluss/PF4
rapid assays, which test for an allergic reaction to Heparin. The Company will continue to manufacture BreathScan Alcohol Detectors
(based on the Company’s Micro Particle Catalyzed (MPC®) Biosensor technology platform) and Tri-Cholesterol products
(based on the Company’s Rapid Enzymatic Assay (REA™) technology platform. The Company is taking steps to improve its
market presence for these products including the use of specialized independent sales representatives and through a program to
educate the marketplace through the preparation and publication of additional clinical studies and physician seminars on the risks
associated with heparin induced thrombocytopenia.
On
October 18, 2018, Richard C. Tarbox III submitted to the Board his resignation from his positions as interim Non-Executive Chairman
of the Board, as Secretary of the Company, as a member of the Board
and as a member
of each of the committees of the Board upon which he serves
, effective immediately. Mr. Tarbox’s resignation was
voluntary and as a result of his other business commitments, and not a result of any disagreement with the Company or its executive
officers on any matter relating to the Company’s operations, policies or practices.
On
October 19, 2018, as a result of Mr. Tarbox’s resignation from the Board and its committees the Board appointed Joshua Silverman
to its Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee, having determined that he satisfies
all applicable requirements to serve on such committees, including without limitation the applicable requirements of NASDAQ.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Key Recent Events and Management Plans, continued
On
November 2, 2018, the Company entered into a securities purchase agreement with certain investors (the “Purchase Agreement”)
pursuant to which the Company agreed to sell an aggregate of 694,445 shares of common stock and warrants to purchase approximately
694,445 shares of common stock (the “Warrants”). The combined purchase price for one share of common stock and each
Warrant will be priced at $2.88 (the “Offering”). The Purchase Agreement contains customary representations, warranties,
and covenants by the Company.
Each
Warrant has an initial exercise price of $3.76 per share, will be exercisable immediately after the date of issuance and will
expire five years from the date it becomes exercisable. Subject to limited exceptions, a holder of the Warrants will not have
the right to exercise any portion of such securities if the holder, together with its affiliates, would beneficially own in excess
of 4.99% of the number of shares of the Company’s common stock outstanding immediately after the exercise. The exercise
price of the Warrants, and in some cases the number of shares of common stock issuable upon exercise of the Warrants, will be
subject to adjustment in the event of stock splits, stock dividends, combinations, rights offerings and similar events affecting
the common stock.
In
addition, the Warrants provide that, in the event of a fundamental transaction (as such term is described in the Warrant), the
holder of such Warrant, at the holder’s option, may receive, for each warrant share (as such term is described in the Warrant)
that would have been issuable upon such exercise immediately prior to the occurrence of such fundamental transaction, the number
of shares of common stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and
any additional consideration receivable as a result of such fundamental transaction by a holder of the number of shares of common
stock for which the Warrant is exercisable immediately prior to such fundamental transaction. If holders of common stock are given
any choice as to the securities, cash or property to be received in a fundamental transaction, then the holder shall be given
the same choice as to the alternate consideration it receives upon any exercise of the Warrant following such fundamental transaction.
The Company shall cause any successor entity (as such term is described in the Warrant), at the option of the holder, to deliver
to the holder in exchange for the Warrant a security of the successor entity evidenced by a written instrument substantially similar
in form and substance to the Warrant which is exercisable for a corresponding number of shares of capital stock of such successor
entity (or its parent entity) equivalent to the shares of common stock acquirable and receivable upon exercise of the Warrant
(without regard to any limitations on the exercise of this Warrant) prior to such fundamental transaction, and with an exercise
price which applies the exercise price hereunder to such shares of capital stock.
The
Offering was made pursuant to a shelf registration statement on Form S-3 (File No. 333-214214), previously filed with the Securities
and Exchange Commission on October 24, 2016 and declared effective on November 16, 2016. Such securities are being offered only
by means of a prospectus.
On
November 7, 2018, effective as of November 8, 2018, the Company filed a Certificate of Amendment (the “Certificate of Amendment”)
to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of New Jersey to effect a reverse
stock split of its common stock at a ratio of eight-for-one (8-for-1). As a result of the reverse stock split, there are approximately
12,474,028 shares of common stock outstanding. The reverse stock split affected all stockholders uniformly and did not alter any
stockholder’s percentage interest in the Company’s equity, except to the extent that the reverse stock split would
have resulted in a stockholder owning a fractional share. Fractional shares have not been issued as a result of the reverse stock
split; instead, the board of directors of the Company determined to effect an issuance of shares to holders that would otherwise
have been entitled to a fractional share such that any fractional shares were rounded up to the nearest whole number.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
3 – Key Recent Events and Management Plans, continued
On
November 7, 2018, the announced that the Board of Directors has 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. The Company does not plan to disclose or comment on developments regarding the strategic review process until
it is complete or further disclosure is deemed appropriate. There can be no assurance that the exploration of strategic alternatives
will result in any transaction or other alternative.
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 first quarter of 2018, the Company raised an additional $7,155,200
from the exercise of warrants (Note 7). On November 2, 2018, the Company raised gross proceeds of $2,000,000 through the sale
of 694,445 shares of the Company’s common stock. Each share includes a warrant to purchase one share of common stock at
an exercise price of $3.76. As of November 7, 2018, the Company had cash and marketable securities of approximately $6.2 million
and working capital of approximately $6.2 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
(Unaudited)
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:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
562,175
|
|
|
$
|
458,441
|
|
Sub-Assemblies
|
|
|
907,381
|
|
|
|
886,274
|
|
Finished Goods
|
|
|
582,427
|
|
|
|
815,505
|
|
Reserve for Obsolescence
|
|
|
(1,244,008
|
)
|
|
|
(1,212,608
|
)
|
|
|
$
|
807,975
|
|
|
$
|
947,612
|
|
Obsolete
inventory charged to cost of goods during the three months ended September 30, 2018 and 2017 totaled $219,701 and $2,664, respectively,
and $251,984 and $3,158 during the nine months ended September 30, 2018 and 2017, respectively. In the three and nine months
ended September 30, 2018, the Company reserved $218,799 of inventory for the removal of OxiChek from the market which is included
in cost of goods sold and wrote-off, against the reserve, $187,399 of expired BreathScan Alcohol products, resulting in a net
increase of $31,400 in the reserve for obsolescence as of September 30, 2018 compared to that as of December 31, 2017.
Note
5 - Trade and Other Payables
Trade
and other payables consist of the following:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Trade Payables
|
|
$
|
684,966
|
|
|
$
|
948,951
|
|
Accrued Expenses
|
|
|
1,509,483
|
|
|
|
736,515
|
|
Deferred Compensation
|
|
|
59,750
|
|
|
|
59,750
|
|
|
|
$
|
2,254,199
|
|
|
$
|
1,745,216
|
|
Trade
and other payables – related party are as follows:
|
|
September
30, 2018
|
|
|
December
31, 2017
|
|
Trade
Payables
|
|
$
|
47,187
|
|
|
$
|
39,821
|
|
|
|
$
|
47,187
|
|
|
$
|
39,821
|
|
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 - 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 50,000 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 100,000 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 103,750 shares. As of September 30, 2018, grants of restricted stock and options to purchase 10,500 shares of Common Stock
have been issued, pursuant to the Amended Plan, and are unvested or unexercised and 22,287 shares of Common Stock remain available
for grants under the Amended Plan (Note 3).
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 168,750 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 September 30, 2018, grants totaling 40,013 shares
of restricted Common Stock have been issued pursuant to the Plan and 128,737 shares of Common Stock remain available for grants
under the Plan.
The
Plan is 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.
The
Company did not issue any options or warrants under the above plan during the nine months ended September 30, 2018.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 - Share-based Payments, continued
Stock
Options
The
following table summarizes the option activities for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Exercise
|
|
|
Grant
Date
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Fair
Value
|
|
|
(years)
|
|
|
Value
|
|
Balance
at December 31, 2017
|
|
|
31,875
|
|
|
$
|
34.00
|
|
|
$
|
20.48
|
|
|
|
2.02
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(21,375
|
)
|
|
|
35.76
|
|
|
|
22.00
|
|
|
|
1.07
|
|
|
|
-
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance
at September 30, 2018
|
|
|
10,500
|
|
|
$
|
30.40
|
|
|
$
|
17.44
|
|
|
|
1.69
|
|
|
$
|
-
|
|
Exercisable
as of September 30, 2018
|
|
|
10,500
|
|
|
$
|
30.40
|
|
|
$
|
17.44
|
|
|
|
1.69
|
|
|
$
|
-
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing
stock price of $2.27 for the Company’s common shares on September 30, 2018.
As
of September 30, 2018, all of the Company’s outstanding stock options were fully vested and exercisable.
During
the three months ended September 30, 2018 and 2017, the Company incurred stock option expenses totaling $1,477 and $4,373, respectively,
and $6,931 and $16,685 during the nine months ended September 30, 2018 and 2017, respectively.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
6 - Share-based Payments, continued
Stock
Warrants
The
table below summarizes the warrant activity for the nine months ended September 30, 2018:
|
|
Number
of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Average
Remaining
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance
at December 31, 2017
|
|
|
6,186,321
|
|
|
$
|
1.76
|
|
|
|
4.95
|
|
|
$
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Exercised
|
|
|
(4,770,092
|
)
|
|
|
1.52
|
|
|
|
-
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Canceled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance
at September 30, 2018
|
|
|
1,416,229
|
|
|
$
|
2.80
|
|
|
|
4.15
|
|
|
$
|
947,029
|
|
Exercisable
as of September 30, 2018
|
|
|
1,416,229
|
|
|
$
|
2.80
|
|
|
|
4.15
|
|
|
$
|
947,029
|
|
The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing
stock price of $2.27 for the Company’s common shares on September 30, 2018. All warrants were vested on date of grant.
Note
7 – 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
April 11, 2017, the Company issued 1,250 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 fair value of restricted shares issued 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 3,125 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 $1.66 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 nine months ended September 30, 2018.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
7 – Equity, continued
During
the nine months ended September 30, 2018, 1,755 shares of the Company’s Series B Preferred Stock, no par value, were converted
into 1,462,500 shares of Common Stock.
During
the nine months ended September 30, 2018, warrant holders from the December 21, 2017 public offering exercised 4,770,092 warrants
with an exercise price of $1.50 per common share, raising net proceeds of $7,155,200.
Note
8 - 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 several
commercialized products including BreathScan® Alcohol Detector.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
8 - Related Party Transactions, continued
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 $(17,353) and $34,328 for the three months ended
September 30, 2018 and 2017, respectively, and $41,418 and $128,108 for the nine months ended September 30, 2018 and 2017, respectively,
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 September 30, 2018 and 2017, the Company recognized sales of $- and $-, respectively, for the BreathScan
Breath Alcohol products acquired from the Settlement and $20,265 and $- during the nine months ended September 30, 2018 and 2017,
respectively.
As
of September 30, 2018, the Company owed ChubeWorkx Guernsey Limited, previously a major shareholder, royalties of $4,864 which
is included in trade and other payables – related party on the condensed consolidated financial statements.
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. The Company purchased a total of $16,300 and $- during the three
months ended September 30, 2018 and 2017, respectively, and $20,936 and $16,774 during the nine months ended September 30, 2018
and 2017, respectively. As of September 30, 2018, the Company owed Hainan and its related party $19,460 which is included
in trade and other payables – related party on the Condensed Consolidated Balance Sheet.
As
of September 30, 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 $18,790 as
of September 30, 2018.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
8 - Related Party Transactions, continued
On
January 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
$- and $54,342 during the three and nine months ended September 30, 2018, respectively, 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. As of September 30, 2018, the Company owed Medical Horizons $-.
Product
revenue – related party for the three and nine months ended September 30, 2018 and 2017 were $-.
Effective
on October 5, 2018, the Board appointed Howard R. Yeaton, who through FCS served previously as a consultant to the Company, 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 and nine months ended September 30, 2018, the Company expensed
$56,425 and $75,342, respectively, to FCS in connection with these services. As of September 30, 2018, the Company owed
FCS $22,862
which is included in trade and other payables – related party on the Condensed
Consolidated Balance Sheet.
Note
9 – 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 September 30, 2018 and 2017 totaled $40,926 and $40,440, respectively,
and $124,070 and $121,220 for the nine months ended September 30, 2018 and 2017, 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 $6,522 and $6,506 for the three months ended September
30, 2018 and 2017, respectively, and $19,512 and $6,506 for the nine months ended September 30, 2018 and 2017, respectively. 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 $10,210 and $6,608 for the three months ended September 30, 2018 and 2017, respectively, and $30,035 and $6,608 for the
nine months ended September 30, 2018 and 2017, 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 Company entered into a 36-month
contract with Oracle Corporation for the NetSuite accounting platform in March 2018 with annual cost commitments pursuant to the
table below. During the three and nine months ended September 30, 2018, the Company expensed $46,670 related to this contract.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
9 – Commitments, continued
The
schedule of lease commitments is as follows:
|
|
Thorofare
|
|
|
Ramsey
|
|
|
Pitman
|
|
|
Equipment
|
|
|
Oracle
|
|
|
|
|
|
|
Lease
|
|
|
Lease
|
|
|
Lease
|
|
|
Lease
|
|
|
NetSuite
|
|
|
Total
|
|
Next 12 Months
|
|
$
|
132,000
|
|
|
$
|
17,320
|
|
|
$
|
39,650
|
|
|
$
|
6,156
|
|
|
$
|
102,766
|
|
|
$
|
297,892
|
|
Next 13-24 Months
|
|
|
33,000
|
|
|
|
-
|
|
|
|
9,912
|
|
|
|
513
|
|
|
|
100,281
|
|
|
|
143,706
|
|
Next 25-36 Months
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46,157
|
|
|
|
46,157
|
|
Note
10 – 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.
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.
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.
As part of its ruling on
the Motion for Summary Judgment, the Court held “While it seems likely that Plaintiff did suffer some amount of damages,
Plaintiff has so far failed to provide a sufficient evidentiary foundation from which the trier of fact could reasonably calculate
the value of its injury.” The Court stated that it was “reasonably certain that Plaintiff suffered some damage”
and found that Pulse Health “may be entitled to nominal damages.” The Court further determined that equitable relief,
such as an injunction, “may be warranted.” Following such rulings, the Company discovered certain deficiencies in
its discovery responses and is taking the appropriate steps to supplement the record and correct these deficiencies. In addition,
the Court has ordered a settlement conference in front of a U.S. magistrate that was held on August 31, 2018.
On September 17, 2018, the
Company and Pulse entered into a settlement.
Pursuant to the settlement reached between
the Plaintiff and the Company, the Company accrued $930,000 payable to Pulse as of September 30, 2018, which was paid
on October 9, 2018. The Company has also agreed to a permanent injunction and will not make, use, sell or offer to sell the
BreathScan OxiChek™ product, any product that detects aldehydes or oxidative stress in exhaled human breath or breath
condensate using either basic fuchsin or sodium metabisulfite or any form, analog or equivalent thereof, and the BreathScan
Lync device, or any equivalent thereof, as part of a test for aldehydes or oxidative stress in human exhaled breath or breath
condensate. The Company does not anticipate a material impact on revenues as a result of the withdrawal of the
BreathScan OxiChek™ product from sale. The Settlement Agreement does not contain any admission of liability,
wrongdoing, or responsibility by any of the parties.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
10 – Contingencies, continued
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. Although there are currently two separate
actions pending, we anticipate that the two actions will be consolidated into one action.
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 September 30, 2018. All legal fees were expensed as and when incurred.
AKERS
BIOSCIENCES, INC. AND SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
Note
11 – Revenue Information
Revenue
by product lines was as follows:
|
|
Three
months ended
|
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
Product
Line
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MicroParticle Catalyzed
Biosensor (“MPC”)
|
|
$
|
(18,798
|
)
|
|
$
|
104,094
|
|
|
$
|
106,832
|
|
|
$
|
259,601
|
|
Particle ImmunoFiltration Assay (“PIFA”)
|
|
|
567,262
|
|
|
|
490,058
|
|
|
|
1,183,327
|
|
|
|
1,477,726
|
|
Rapid Enzymatic Assay (“REA”)
|
|
|
-
|
|
|
|
27,500
|
|
|
|
55,000
|
|
|
|
27,500
|
|
Other
|
|
|
8,625
|
|
|
|
16,679
|
|
|
|
41,006
|
|
|
|
613,614
|
|
Product Revenue Total
|
|
|
557,089
|
|
|
|
638,331
|
|
|
|
1,386,165
|
|
|
|
2,378,441
|
|
License Fees
|
|
|
-
|
|
|
|
37,500
|
|
|
|
-
|
|
|
|
37,500
|
|
Total Revenue
|
|
$
|
557,089
|
|
|
$
|
675,831
|
|
|
$
|
1,386,165
|
|
|
$
|
2,415,941
|
|
The
total revenue by geographic area determined based on the location of the customers was as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
Geographic
Region
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
United States
|
|
$
|
554,269
|
|
|
$
|
626,077
|
|
|
$
|
1,311,360
|
|
|
$
|
1,755,558
|
|
People’s Republic of China
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
502,268
|
|
Rest of World
|
|
|
2,820
|
|
|
|
49,754
|
|
|
|
74,805
|
|
|
|
158,115
|
|
Total Revenue
|
|
$
|
557,089
|
|
|
$
|
675,831
|
|
|
$
|
1,386,165
|
|
|
$
|
2,415,941
|
|
The
Company had long-lived assets totaling $59,355 and $59,830 located in the People’s Republic of China and $1,201,592 and
$1,305,950 located in the United States as of September 30, 2018 and December 31, 2017, respectively.