Business context and reporting period
The supplied filing is Skyline Medical Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2013—not a filing identified as Axe Compute Inc. Skyline, a development-stage medical-device company, sells its STREAMWAY surgical-fluid management system and related cleaning supplies. It reported FDA clearance for the product in 2009.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2013 | $150,856 | $278,583 |
| Revenue, 2012 | $24,960 | $47,595 |
| Net loss, 2013 | $1,175,535 | $3,277,061 |
| Net loss, 2012 | $2,135,775 | $2,849,142 |
| Gross margin, 2013 | 55.4% | 60.9% |
| Gross margin, 2012 | 93.1% | 67.4% |
For the first six months, operating cash use was $2.12 million, investing cash use was $58,371, and financing provided $2.31 million. Cash was $137,066 at quarter-end, up from $13,139 at December 31, 2012. Total assets were $443,576; current liabilities were $3.39 million, implying a working-capital deficit of about $3.00 million. Stockholders’ deficit was $3.49 million.
At June 30, current convertible debt was reported at $978,843, net of discounts, and related-party convertible notes at $597,282. The balance sheet also reported $468,903 of long-term accrued expenses. The filing says approximately $3.386 million in debts, liabilities, and cash obligations come due over the next 12 months.
Material changes versus the prior comparable period
- Revenue rose substantially from a low prior-year base; second-quarter 2013 sales included six STREAMWAY systems plus disposables. First-half revenue increased to $278,583 from $47,595.
- Second-quarter net loss narrowed year over year, while first-half net loss widened. First-half operating cash use increased to $2.12 million from $644,105.
- First-half gross margin declined to 60.9% from 67.4%; management attributed future margins to manufacturing costs and volume purchasing.
- The company raised $1.0 million through convertible notes and $1.0 million through equity financing in the first half. Common shares outstanding increased to about 122.0 million from 104.2 million at year-end 2012.
- Skyline wrote off $140,588 of STREAMWAY One patent costs in June. It reported a $1.378 million first-half stock-based compensation expense.
Outlook, risks and unusual items
Management anticipated producing 43 ordered STREAMWAY Two units in the third quarter of 2013 and said the company had completed the product design. It planned to expand sales efforts and potentially work with regional or national sales organizations. The filing provides no formal revenue or earnings guidance.
Management estimated approximately $150,000 in monthly operating expenses and said at least $1 million of additional financing was needed to fund roughly six months of operations. It expected existing cash to last only through about September 30, 2013. The company disclosed recurring losses, a stockholders’ deficit, and substantial doubt about its ability to continue as a going concern. Financing might be unavailable or highly dilutive.
About $597,000 of notes owed to related parties were due August 31, 2013 under an amended extension; one note was secured by substantially all company assets. Failure to repay or extend the notes could trigger default and enforcement against assets. The filing also describes possible shareholder claims over alleged historical violations of Minnesota preemptive rights; potential exposure is uncertain. Dr. Herschkowitz, SOK Partners, and affiliates beneficially owned shares and derivative securities representing more than 65% of outstanding common stock, according to the filing.
Other notable items include an amended settlement with the former CEO, involving a $20,000 cash payment, retention of 333,330 exercised shares, and an option to exercise for 325,187 additional shares at $0.01. The company reported disclosure controls as effective at June 30, 2013 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer: the supplied text identifies Skyline Medical Inc., although the request metadata names Axe Compute Inc.
- Verify whether Skyline obtained additional financing, extended or repaid the August 31 related-party notes, and met other near-term obligations.
- Check subsequent STREAMWAY Two production, fulfillment of the 43-unit purchase orders, and conversion of trials into sales.
- Review the terms and dilution potential of convertible notes, warrants, and options; the filing reports 27.7 million options and 56.7 million warrants outstanding at June 30.
- Assess the status and potential financial impact of preemptive-rights claims, the related-party arrangements, and the going-concern uncertainty.