Axe Compute Inc. annual report, FY2013

Business context and reporting period

The supplied filing is Skyline Medical, Inc.’s Form 10-K for the fiscal year ended December 31, 2013—not a filing identified as Axe Compute Inc. The company, formerly BioDrain Medical, is a development-stage medical-device business selling the STREAMWAY system, a wall-mounted device intended to collect, measure, and drain surgical fluids, along with proprietary disposable filters and cleaning kits. Its common stock traded on OTCQB as SKLN.

Financial performance and position

At December 31, 2013, cash was $101,953; total assets were $593,426; total liabilities were $3,811,880; and stockholders’ deficit was $3,218,454. Current liabilities were $3,469,065, including $1,062,108 in accounts payable and $2,057,957 in accrued expenses. The balance sheet showed a $280,000 short-term note payable and no convertible debt at year-end. Financing activities provided $4,160,096 in 2013; investing activities used $216,116.

Changes versus prior year and operating developments

• Revenue increased by approximately 148%, reflecting sales of 21 STREAMWAY systems and disposables, compared with seven systems and related disposables in 2012. Management reported more than 30 systems installed or sold to date.
• Gross margin improved from 32% to 59%, which management attributed to purchasing and product-cost improvements. The company discontinued production of the original STREAMWAY in June 2013 to focus on the enhanced model.
• Operating expenses rose substantially: general and administrative expense increased to $7.53 million from $6.29 million; operations expense to $1.10 million from $761,047; and sales and marketing expense to $578,793 from $172,970. Interest expense increased to $636,503 from $259,349.
• Net loss widened by about 27%, while reported loss per share declined from $0.11 to $0.06, alongside a higher weighted-average share count. Common shares outstanding at year-end were 219,937,619; the filing reports 221,535,194 shares as of March 17, 2014.

Outlook, risks, contingencies, and unusual items

Management reported approximately 50 purchase orders for enhanced STREAMWAY systems, with anticipated installations over the following 12 months beginning in late February 2014. It expected sales to improve as customers evaluated and approved the product, but provided no quantified revenue or earnings guidance. The filing also describes customer trials, during which customers buy consumables and may purchase or return the equipment after the trial.

The company reported operating expenses of about $250,000 per month and approximately $3.812 million of debts, liabilities, and cash obligations coming due in 2014. It said the February 2014 preferred-stock financing was intended to fund roughly six months of operations; cash at the filing date was reported at approximately $467,000. Management estimated existing resources would last through about June 30, 2014 and said further financing might be needed. The independent auditor highlighted substantial doubt about the company’s ability to continue as a going concern.

• In February 2014, the company raised $2.055 million gross through 20,550 Series A convertible preferred shares and warrants. The preferred stock has a 1.2-times liquidation preference and a 6% annual dividend, payable quarterly. The terms include conversion-price adjustments and potential additional warrants if listing conditions or sales/install targets are not met.
• Key risks include continued losses and financing dependence, potential dilution, uncertain customer adoption, competition from larger and better-funded manufacturers, installation disruption and costs, regulatory compliance, and intellectual-property risks. A new international patent application for the enhanced system was filed in January 2014; existing patents begin to expire in 2023.
• A March 5, 2014 lawsuit by Marshall Ryan and Mid-State Stainless alleges, among other claims, breach of consulting, manufacturing, and supply agreements, fraud, and negligent misrepresentation. The company said it believes the claims are without merit.
• The filing discloses potential shareholder claims relating to historical issuances allegedly made without honoring Minnesota preemptive rights. It also describes substantial related-party financing and control by the CEO, SOK Partners, and affiliated holders.
• Management reported effective disclosure controls and no material weaknesses in internal control over financial reporting; the auditor did not attest to internal-control effectiveness.

Most important facts for investors to verify

• Confirm the issuer and filing identity: the supplied document is Skyline Medical, Inc.’s 2013 10-K, not an Axe Compute Inc. filing.
• Review the audited financial statements and subsequent-event disclosures for cash needs, 2014 obligations, preferred-stock terms, and the going-concern qualification.
• Validate the status, enforceability, and expected timing of the approximately 50 enhanced-system purchase orders, and distinguish firm orders from evaluation placements.
• Reconcile the preferred-stock warrant exercise price: the narrative gives $0.325 in places, while the financial-statement subsequent-event note states $0.26.
• Assess actual post-year-end cash, financing proceeds net of expenses, dilution from preferred conversion and warrants, and the effect of the March 2014 warrant settlement.
• Track the Ryan/Mid-State litigation and any potential preemptive-rights claims, as well as related-party arrangements and voting control.