Predictive Oncology Inc. (NASDAQ: POAI) — 2019 Form 10-K
Filing identity: The request identifies Axe Compute Inc., but the supplied filing is for Predictive Oncology Inc. This summary reflects the filing provided. Reporting period is the fiscal year ended December 31, 2019, compared with 2018; it is not a standalone fourth-quarter report.
Business context
Predictive Oncology operated medical-device businesses selling the STREAMWAY fluid-disposal system and, following its April 2019 acquisition of Helomics, a precision-medicine business offering clinical testing and contract research. Helomics’ strategy uses tumor-response data, tumor models and AI to support drug discovery and personalized treatment. Management said it would focus resources on Helomics and precision medicine. In December 2019, the company disclosed interest from several parties in a possible acquisition of Skyline Medical; no sale was reported as completed.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1.412 million | $1.412 million |
| Gross profit / gross margin | $880,000 / 62% | $996,000 / 71% |
| Operating loss | $13.774 million | $7.861 million |
| Net loss | $19.391 million | $10.086 million |
| Net loss attributable to common shareholders | $19.681 million | $10.086 million |
| Net cash used in operating activities | $8.732 million | $5.288 million |
| Cash at year-end | $151,000 | $162,000 |
Revenue was essentially unchanged, and all 2019 revenue was attributed to Skyline Medical except $48,447 from Helomics. The company sold 41 STREAMWAY units in both years. The gross-margin decline was primarily attributed to Helomics costs exceeding its revenue. General and administrative expense rose to $9.781 million from $4.627 million, while sales and marketing expense declined to $1.913 million from $2.369 million.
Other significant 2019 items included $8.1 million of goodwill impairment, $770,250 of intangible-asset impairment, and a $1.038 million credit-loss allowance on the CytoBioscience note receivable. These were partly offset by a $6.164 million gain from revaluing the prior Helomics investment on acquisition. Other expense was $3.980 million, primarily interest, penalties, debt-discount amortization and debt-extinguishment loss. R&D spending was $423,000, down from $526,000.
At December 31, 2019, total assets were $22.376 million and total liabilities were $11.144 million. Current assets were $798,000 versus current liabilities of $10.874 million. Notes payable were $5.146 million gross and $4.796 million net of discounts on the balance sheet; the filing separately reports total outstanding debt, including accrued interest and penalties, of $6.214 million. Accounts payable plus accrued expenses totaled $5.527 million on the balance sheet. The risk-factor discussion gives a different aggregate of $5.397 million, which does not reconcile to that balance-sheet total.
Financing provided $9.320 million of cash in 2019, including equity and preferred-stock proceeds and new debt. The company had a $15 million equity line, with $14.681 million reported available at year-end, subject to conditions, market factors and dilution. Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern. The auditor’s opinion on the financial statements was unqualified but included a going-concern emphasis.
Material changes and outlook
- The April 2019 Helomics merger expanded the business and materially increased operating costs, assets and financing needs. Helomics generated only $48,447 of consolidated 2019 revenue after acquisition; its reported segment loss was $12.354 million.
- Net loss increased by approximately $9.304 million year over year, while operating cash outflow increased by approximately $3.444 million. Management attributed much of the expense growth to the merger and the larger combined operation.
- Management expected continued net losses at least through the remainder of 2020 and said operations would require additional capital. It planned to seek debt or equity financing, with no assurance funding would be available on acceptable terms. No numerical revenue or profit guidance was provided.
- Debt maturities were concentrated in 2020. Following extensions and other subsequent events, the filing estimated approximately $7.733 million of principal, interest and premiums payable from June through September 2020, unless converted or extended. The company warned that further extensions could increase debt and require equity issuance.
- Subsequent to year-end, the company reported 2020 financings, including a March private placement with $3.127 million net proceeds and other borrowing and equity-line proceeds. It stated that, despite 2020 funding, additional financing was not considered probable enough to remove the going-concern uncertainty.
- COVID-19 was identified as a material uncertainty that could affect business development, operations and component supply; the company said the impact could not then be predicted.
Risks, contingencies and controls
- Funding and default risk: Low year-end cash, operating cash burn, near-term maturities, secured debt and potential default penalties create significant liquidity and asset-enforcement risks. The L2 note carries an 18% default rate and security over substantially all company assets.
- Dilution: The equity line, preferred-stock conversions, warrants and further capital raises could substantially dilute existing shareholders. Common shares outstanding were 4,056,652 at year-end and 5,847,718 as of March 27, 2020.
- Execution and valuation: Helomics’ commercial plan remains unproven; the company recorded substantial goodwill impairment soon after acquisition and may record further impairment. AI models require development and validation before commercialization.
- Regulatory and operating exposure: Clinical testing depends on CLIA and state laboratory requirements, reimbursement rules, data privacy compliance and access to certain sole-source test materials. The STREAMWAY business faces competition from better-resourced companies and customer-adoption risk.
- Internal controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to inadequate accounting resources and expertise for complex U.S. GAAP transactions. Remediation included added accounting resources and outside assistance; effectiveness had not yet been established.
- Unusual and related-party matters: CEO Carl Schwartz provided loans to the company. In January 2020, his outstanding notes were exchanged for a new $2.115 million note bearing 12% interest, maturing September 30, 2020, plus 50,000 common shares. The filing also disclosed a term sheet to acquire certain InventaBio/Soluble and BioDtech assets in exchange for waiving the CytoBioscience note and issuing 125,000 shares; completion was conditional.
Investor facts to verify
- Reconcile the filing’s differing accounts-payable-and-accrued-expense totals and confirm the full debt balance, including accrued interest, penalties and premiums.
- Confirm the status and repayment or extension of 2020 maturities, debt defaults, collateral rights and any restrictions imposed by secured lenders.
- Assess current cash, cash runway and net proceeds from subsequent financings, and whether the equity line remains usable under its conditions.
- Track dilution from outstanding preferred stock, warrants, convertible notes and post-year-end share issuances.
- Verify Helomics revenue growth, CRO customer contracts, validation and commercialization milestones, and the assumptions supporting goodwill valuation.
- Confirm the status of the possible Skyline Medical sale and the InventaBio/Soluble/BioDtech asset transaction.
- Review progress in remediating the material weakness in internal controls and any subsequent auditor or management updates on going concern.