Skyline Medical Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2017; filed November 14, 2017. The supplied filing is for Skyline Medical Inc., not Axe Compute Inc.
Business context
Skyline develops and sells the STREAMWAY System, a medical device for collecting and disposing of surgical and post-operative infectious fluids, plus related cleaning fluid and filters. The company reported five STREAMWAY unit sales in the first nine months of 2017 and 103 units sold cumulatively. Its first Canadian system sale occurred in March 2017.
Financial results and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2017 | $152,535 | $434,523 |
| Revenue, 2016 | $134,605 | $316,931 |
| Gross margin, 2017 | $123,829 (about 81%) | $346,814 (about 80%) |
| Gross margin, 2016 | $108,124 (about 80%) | $167,801 (about 53%) |
| Net loss, 2017 | $(992,095) | $(4,877,542) |
| Net loss, 2016 | $(1,055,593) | $(5,793,242) |
| Basic and diluted loss per share, 2017 | $(0.16) | $(0.78) |
- At September 30, total assets were $3.50 million, current liabilities $1.22 million, and stockholders’ equity $2.28 million. The balance sheet reported no debt. Cash and cash equivalents were $765,704; certificates of deposit were $1,224,728; and notes receivable were $785,000.
- Operating cash use was $3.14 million for the first nine months, versus $3.70 million in 2016. Investing cash use was $1.68 million, including $785,000 of advances to CytoBioscience. Financing provided $3.81 million, primarily from the January public offering and its over-allotment.
- Management reported operating cash burn of about $365,000 per month and accumulated deficit of approximately $51.9 million. It stated that losses were expected to continue at least through 2017 and that additional financing would be needed.
Changes versus the prior comparable period
- Revenue increased 13% for the quarter and 37% for the nine-month period. Management attributed the growth to sales activity, including the initial Canadian sale, and expected expanded sales efforts to contribute in later periods.
- Nine-month gross margin rose to about 80% from 53%; management said 2016 margins were reduced by replacing units for customers at no charge.
- Nine-month net loss narrowed by about $916,000. General and administrative and operations expenses declined, while sales and marketing expense rose by $332,000 for the nine months as the sales force and related efforts expanded.
- Common shares outstanding increased from 4,564,428 at December 31, 2016 to 6,232,761 at September 30, 2017. The company also reported 2.61 million outstanding options and 1.25 million warrants, which may create further dilution.
Outlook, risks, and unusual items
- Going concern: The filing states substantial doubt about the company’s ability to continue as a going concern. Management warned that financing may not be available on acceptable terms and that failure to obtain funds could force limitations on business activity. Further financing could dilute existing shareholders.
- Cash reporting inconsistency: The balance sheet lists $765,704 of cash and cash equivalents plus $1,224,728 of certificates of deposit. Elsewhere, management cites cash of $425,092 and $1.565 million in cash equivalents and certificates of deposit. The filing text does not provide a clear reconciliation of these figures.
- Strategic transactions: The August 2017 CytoBioscience merger agreement was terminated in November after quarter-end; the parties said they would focus on a proposed joint venture. As of the filing, Skyline had advanced $1.07 million to CytoBioscience, secured by its accounts receivable. Skyline also announced a proposed 51%-owned joint venture with Helomics and had advanced it $175,000 after quarter-end, secured by certain equipment. Further advances were contemplated.
- Commercial expansion: The company reported CE marking eligibility for marketing in 32 European countries and described new distributor and federal-market agreements. International expansion and increased sales efforts may require additional spending; revenue growth and customer adoption remain uncertain.
- Legal and listing matter: A lawyer’s demand letters challenged shareholder approval of a stock-plan amendment and related option grants. Nasdaq issued a deficiency letter but later advised the company it was compliant based on its submitted plan; the Nasdaq matter was closed. The company said it was investigating the claims and possible corrective action.
- Other risks: The filing cites recurring losses, negative operating cash flows, dependence on financing, product acceptance, competition, regulatory compliance, intellectual-property protection, and possible Nasdaq listing-standard issues. Management reported disclosure controls were effective as of September 30, 2017, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the reported cash and cash-equivalent figures and confirm the availability and maturity terms of certificates of deposit.
- Review subsequent financing, actual cash burn, and whether funding is sufficient to support operations and planned strategic advances.
- Confirm the status, repayment prospects, security, and terms of the CytoBioscience and Helomics advances and proposed joint ventures.
- Assess whether sales, distributor relationships, and international clearances translate into recurring system and consumables revenue.
- Evaluate potential dilution from outstanding options, warrants, equity compensation, and any future financing, as well as the stock-plan approval matter.