Filing summary
Entity note: The supplied filing is Skyline Medical Inc.’s Form 10-Q, not a filing for Axe Compute Inc. It covers the quarter ended September 30, 2015, and is signed November 13, 2015.
Business context and reporting period
Skyline develops and sells the STREAMWAY system for collecting and disposing of surgical fluids, along with related cleaning fluid and filters. The company describes itself as a development-stage business and reports limited product sales. Its statements are unaudited.
Financial results and liquidity
| Metric | Q3 2015 | Nine months 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $85,792 | $471,078 | $397,254; $785,767 |
| Gross profit | $66,019 | $271,771 | $262,528; $521,593 |
| Gross margin | About 77% | About 58% | About 66% for nine months |
| Net loss | $1,116,402 | $2,527,524 | $1,115,221; $4,468,170 |
| Loss per share, basic and diluted | $0.28 | $0.74 | $0.37; $1.51 |
Cash was $7.73 million at September 30, 2015, versus $16,384 at December 31, 2014. Current assets were $8.20 million and current liabilities $2.60 million. Total liabilities were $2.60 million, with no convertible notes outstanding after their August redemption. Stockholders’ equity was $5.81 million, compared with a $5.52 million deficit at year-end 2014.
For the first nine months, reported cash flows were $4.64 million used in operations, $23,739 used in investing, and $12.38 million provided by financing. The cash-flow statement reports a $7.72 million net increase in cash. The company completed a public offering and reported $13.555 million in net proceeds in MD&A; it also paid $1.55 million to redeem convertible notes, including a 40% premium plus accrued interest.
Material changes versus prior periods
- Nine-month revenue fell about 40% year over year. Management attributed the decline to reduced sales staffing and selling activity during a cash shortfall; the company sold 15 STREAMWAY systems in the period.
- Nine-month net loss narrowed to $2.53 million from $4.47 million, mainly alongside lower general, administrative, operations, and sales and marketing expenses. Interest expense increased to $394,641 from $164,962.
- Nine-month gross margin declined to about 58% from 66%, which management attributed in part to replacing earlier units for customers at no charge. Management said Q3 margin of about 77% was more representative of expected margins.
- The August financing and exchange issued 1,895,010 common shares, 1,895,010 Series B preferred shares, and 7,580,040 Series A warrants. Common shares outstanding were 5,203,428 at September 30.
Outlook, risks, contingencies, and unusual items
- Management anticipated continued losses at least through 2015; the risk-factor disclosure says losses were expected to continue at least through the first quarter of 2016. It reported operating expenses of about $250,000 per month and said revenue growth and more consistent production could improve margins, but provided no quantified sales guidance.
- The filing states substantial doubt about the company’s ability to continue as a going concern. Management said additional financing may be needed, and the company’s independent auditor had raised going-concern concerns in the prior annual report. The company reported an accumulated deficit of $38.23 million.
- The Series A warrants have a cashless-exercise feature. The filing estimates that, under a specified low-share-price scenario, exercise of the 7.58 million offering and exchange warrants could result in approximately 76.3 million common shares, creating significant potential dilution.
- The company settled litigation with former sales managers for $271,236 including legal and other fees. It also paid $442,893, including interest and penalties, to complete the Marshall Ryan settlement on September 1, 2015.
- Management reported effective disclosure controls as of September 30, 2015 and no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the intended issuer: the filing identifies Skyline Medical Inc., whereas the request metadata names Axe Compute Inc.
- Reconcile the filing’s differing cash-use disclosures: the cash-flow statement reports $4.64 million used in operations, while MD&A also cites $5.131 million of negative operating cash flow.
- Reconcile offering proceeds: MD&A cites $13.555 million net proceeds, while the cash-flow statement reports $13.042 million of net proceeds from common-stock issuance.
- Review the warrant terms and potential dilution, including the cashless-exercise formula, share-price floor, and ownership limits.
- Assess cash runway and financing needs in light of reported cash, monthly expenses, obligations, ongoing losses, and the going-concern disclosure.