Predictive Oncology Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2019. The request metadata names Axe Compute Inc., but the filing identifies Predictive Oncology Inc. (Nasdaq: POAI) as the registrant; confirm the filing is for the intended company. Financial figures below are in U.S. dollars. Share and per-share figures reflect the one-for-ten reverse split effective October 29, 2019.
Business context and reporting period
Predictive Oncology combines its STREAMWAY infectious-fluid management device business with precision oncology, diagnostics and contract research operations. It acquired the remaining 75% of Helomics on April 4, 2019, bringing Helomics’ precision medicine and CRO activities into the consolidated company. The filing reports three- and nine-month results through September 30, 2019 and is unaudited.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $522,696 | $329,930 | $1,064,088 | $1,100,108 |
| Gross profit | $314,600 | $246,924 | $663,886 | $790,788 |
| Gross margin | About 60% | About 75% | About 62% | About 72% |
| Net loss | ($4,008,512) | ($2,506,869) | ($5,836,592) | ($6,640,301) |
| Net loss per share, basic and diluted | ($1.31) | ($1.89) | ($2.32) | ($5.45) |
| Cash used in operating activities | Not separately provided | Not separately provided | ($5,936,803) | ($4,069,685) |
- Q3 revenue rose 58% year over year, while nine-month revenue declined 3%. The company reported 33 STREAMWAY unit sales in the first nine months of 2019 versus 35 in 2018.
- Q3 operating loss was $3,444,760, versus $1,861,083 a year earlier. Nine-month operating loss was $10,880,857, versus $5,034,007.
- Nine-month net loss improved year over year partly because of non-operating gains, including a $6,164,260 gain on revaluation of the prior Helomics investment and a $1,222,244 gain on revaluation of Helomics cash advances. These gains do not indicate operating profitability.
- At September 30, cash was $98,599; current assets were $1,062,626 and current liabilities were $10,782,168. Total liabilities were $11,168,148. The resulting current-asset shortfall underscores substantial near-term liquidity pressure.
- Balance-sheet notes payable, net of discounts, were $4,470,380. The filing separately cites debt totaling $4,969,595 and identifies principal obligations including $1,878,295 due December 2019, $1,920,000 payable to the CEO due February 2020, and a $847,500 note due March 2020. The filing text does not clearly reconcile these debt totals and components.
- Total assets of $31,881,811 included $23,790,290 of goodwill arising from the Helomics acquisition. Stockholders’ equity was $20,713,663.
Material changes versus comparable periods
- Gross margin fell in both the quarter and year-to-date comparison. Management attributed the Q3 decline primarily to Helomics costs exceeding revenue earned during the period.
- Q3 general and administrative expense increased by $1,854,388 year over year; nine-month expense increased by $4,717,031. Management cited severance and bridge-loan prepayment costs, acquisition and integration costs, higher combined-company compensation and facility costs, and a credit-loss charge on a note receivable.
- Helomics acquisition accounting materially changed the balance sheet, adding goodwill, intangible assets, fixed assets and lease obligations. The acquisition also increased operating and financing needs.
- Nine-month operating cash use increased by $1,867,118 versus 2018. Financing activities provided $6,465,004, including proceeds from debt, common stock and preferred stock issuance.
Outlook, risks and unusual items
- Going concern: Management states that substantial doubt exists about the company’s ability to continue as a going concern for one year after issuance of the financial statements. The company reported recurring losses, negative operating cash flow and a need for significant additional capital.
- Funding and outlook: The company said it expects to continue incurring net losses at least through the second quarter of 2020 and that operating revenue is not expected to sustain near-term operations. It planned to seek further debt or equity financing; financing may be dilutive, and there is no assurance it will be available on acceptable terms.
- Subsequent financing: An October public offering generated $2,811,309 in net proceeds. An October equity purchase agreement provides for up to $15 million over three years, subject to conditions, including an effective resale registration statement; purchases generally involve prices discounted to market. The facility is not equivalent to cash already raised.
- Receivable and contingency: The company reserved $787,524 against the CytoBioscience note and reported that recovery was in doubt. It obtained a judgment and was pursuing the collateral; management estimated the equipment could yield $250,000.
- Acquisition and impairment: Helomics consideration was valued at $26,711,791, including stock, forgiven receivables, debt extinguishment, warrants and revaluation of the earlier investment. The company reported $656,615 in acquisition costs. Management’s September qualitative assessment found goodwill more likely than not unimpaired, with formal 2019 impairment testing planned for Q4.
- Controls: Disclosure controls were deemed ineffective as of September 30, 2019 due to a material weakness: insufficient accounting resources and expertise for complex U.S. GAAP transactions. Management described hiring additional accounting resources and engaging an external accounting firm as remediation steps.
- Other risks: The filing highlights dependence on additional financing, debt maturities and possible dilution; integration and execution risks at Helomics; reimbursement, regulatory and laboratory-compliance risks; competition; intellectual-property and cybersecurity risks; and potential limits on tax-loss carryforwards after the ownership change.
Important facts for investors to verify
- Confirm the registrant identity: the supplied metadata says Axe Compute Inc., while the filing is for Predictive Oncology Inc.
- Review the latest cash position, operating cash burn, vendor balances and actual repayment or refinancing of debt due in December 2019 through March 2020.
- Check whether the October offering proceeds and the conditional equity line were sufficient to fund operations, and assess the likely dilution and pricing terms of any further financing.
- Track Helomics revenue, operating cash needs, signed contracts and progress toward integration; distinguish recurring operating performance from acquisition-related gains and expenses.
- Confirm the results of the planned goodwill impairment test and the Section 382 analysis of tax-loss carryforwards.
- Monitor remediation of the material weakness and whether management later concludes disclosure controls and internal financial reporting controls are effective.