Business context and reporting period
This is Skyline Medical Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2017. The request metadata names Axe Compute Inc., but the filing identifies Skyline Medical Inc.; confirm the intended issuer. Skyline develops and sells the STREAMWAY system for collecting and disposing of surgical fluids, along with related consumables. The filing says it made its first sale outside the United States in March 2017.
Financial results and position
| Metric | Q1 2017 | Q1 2016 or prior date |
|---|---|---|
| Revenue | $175,166 | $96,905; up 81% |
| Gross profit and margin | $138,174; 79% | $11,022; 11% |
| Operating expenses | $1,480,021 | $2,187,391 |
| Net loss | $1,341,847 | $2,176,369 |
| Basic and diluted loss per share | $0.21 | $3.01 |
| Operating cash used | $1,156,208 | $1,587,882 |
At March 31, 2017, total assets were $5.47 million, including $2.09 million in cash and cash equivalents and $2.69 million in certificates of deposit. Current liabilities were $1.30 million; total liabilities were $1.48 million. The company reported no debt. Stockholders’ equity was $3.98 million, versus $0.92 million at December 31, 2016. Accumulated deficit was $48.36 million.
Investing activities used $2.34 million, primarily reflecting $2.59 million invested in certificates of deposit, partly offset by securities-sale proceeds. Financing provided $3.81 million, principally from the January public offering and underwriter’s over-allotment exercise. Cash increased by $322,318 during the quarter.
Material changes versus the prior comparable period
- Revenue rose 81%, with three STREAMWAY unit sales in the quarter, including the first Canadian sale. Management reported approximately $39,000 of product sales after quarter-end.
- Gross margin increased to approximately 79% from 11%; management attributed the prior-year margin weakness partly to replacing units at no charge. It expected margins to stabilize as production became more consistent.
- General and administrative expense fell by approximately $557,000, mainly because of lower legal fees, payroll-related costs and bonuses. Operations expense declined by approximately $190,000. Sales and marketing expense increased by approximately $39,000 as the sales force expanded.
- Net loss narrowed by approximately $835,000, while operating cash use decreased by approximately $432,000.
- The January 2017 offering and over-allotment increased common shares outstanding during the quarter. The filing reports 6,489,428 shares at March 31, while the cover page reports 6,189,428 shares as of May 12; the filing does not explain this difference.
Outlook, risks and unusual items
- Management expected net losses to continue at least through the first three quarters of 2017. It reported negative operating cash flow of approximately $385,000 per month and said additional financing might be needed. Future financing may be dilutive, may not be available on acceptable terms, and failure to obtain adequate funds could force limits on business activity.
- The filing states that substantial doubt remains about the company’s ability to continue as a going concern. Management cited recurring losses, limited revenue and dependence on financing; the financial statements include no adjustments for the outcome of this uncertainty.
- The company raised approximately $3.44 million net from the January offering and approximately $357,000 net from the over-allotment. It said Nasdaq confirmed in February that it met continued-listing requirements.
- Management planned to add about 30 independent sales contractors in the second quarter and was negotiating with distributors for U.S. federal-government sales. These are plans, not assured outcomes.
- In April 2017, the company terminated its partnership, reseller and distribution agreements with GLG Pharma. This followed the quarter and is a subsequent event. The filing also reports issuance of 100,000 shares to a consultant on April 24.
- Risks include continued cash burn, uncertain product acceptance and sales growth, need for financing, potential dilution, competition, regulatory compliance, intellectual-property protection and retaining qualified personnel. Management said disclosure controls were effective at quarter-end; it reported no material change in internal control over financial reporting and no pending legal proceedings.
Important facts for investors to verify
- Reconcile the reported March 31 share count of 6,489,428 with the cover-page May 12 count of 6,189,428, and assess dilution from outstanding warrants and equity awards.
- Reconcile the MD&A’s reference to a $175,698 “cash balance” with the balance sheet’s $2.09 million in cash and cash equivalents and $2.69 million in certificates of deposit; assess availability, restrictions and cash runway.
- Evaluate the going-concern warning against the reported monthly cash burn, expected losses and potential need for additional financing.
- Confirm the implications of the GLG agreement termination for planned distribution, development milestones and expected revenue.
- Track whether management’s sales-force expansion, unit-sales expectations and margin-stabilization outlook translate into sustained revenue growth and cash generation.