Business context and reporting period
This is BioDrain Medical, Inc.’s Form 10-K for the fiscal year ended December 31, 2012—not a filing for Axe Compute Inc. The company describes itself as an early-stage medical-device business developing and selling its Streamway Fluid Management System (FMS), a wall-mounted system for collecting, measuring and disposing of surgical fluids. The FMS received FDA 510(k) clearance in 2009. The filing reports annual results, with December 31, 2011 as the comparative period.
Financial results and liquidity
- Revenue: $188,772 in 2012, up from $96,637 in 2011. Revenue included nine FMS systems sold in 2012 versus five in 2011, along with disposable supplies.
- Gross profit and margin: $60,232 and 32% in 2012, compared with $40,557 and 42% in 2011.
- Net loss: $7.42 million in 2012 versus $4.49 million in 2011; loss per share was $0.11 versus $0.18. Accumulated deficit reached $19.29 million.
- Expenses: General and administrative expense rose to $6.29 million from $3.56 million, principally reflecting investor stock compensation and other equity-based compensation. Operations expense increased to $761,000 from $352,000; sales and marketing expense declined to $173,000 from $233,000. Interest expense was $259,000, up from $230,000.
- Cash flow: Cash used in operations was $1.18 million, versus $1.78 million in 2011. Financing provided $1.07 million, down from $1.90 million. Cash at year-end was only $13,139, compared with $122,985 a year earlier.
- Balance sheet: Total assets were $369,577; current liabilities were $3.41 million, including $1.60 million accrued expenses and $734,000 accounts payable. Long-term debt and convertible debt, net of discounts, was reported at $89,300. Stockholders’ deficit was $3.30 million.
Material changes, outlook and risks
- Revenue increased, but gross margin fell 10 percentage points and the net loss widened by about $2.94 million. The company attributed much of the expense increase to stock and warrant compensation, including compensation issued to investors.
- Management said operating expenses were about $125,000 per month and estimated that at least $2 million of additional financing was needed to fund the next 6–9 months. It expected to pursue debt or equity financing and negotiate extensions, conversions or settlements of obligations; no specific revenue or earnings guidance was provided.
- The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. The filing warns that insufficient financing could force substantial curtailment of operations, bankruptcy or cessation of business.
- The filing identifies significant near-term obligations and warns of possible default on notes held by Dr. Herschkowitz and SOK Partners. Those notes carried 20% interest, were secured by company assets, and were extended to April 30, 2013. The filing gives differing totals for near-term debts, liabilities and cash obligations in its discussion; the exact amount is not clear from the filing text.
- After year-end, the company reported $300,000 from convertible notes and $500,000 from a private placement, and separately described a March 2013 $500,000 stock sale. The relationship between the reported private-placement amounts should be verified.
- Related-party financing involved substantial dilution and governance influence. The filing says Dr. Herschkowitz, SOK and affiliates beneficially owned 66% of outstanding shares, including derivative securities, and had significant influence over board elections and other matters.
- Key business risks include limited commercial adoption, dependence on additional financing, competition from larger medical-device companies, manufacturing scale-up, patent ownership or infringement disputes, and installation costs or operating-room downtime. A former sales executive’s lawsuit was settled in December 2012.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for BioDrain Medical, Inc., not Axe Compute Inc.
- Review audited statements and debt agreements to reconcile the filing’s differing near-term obligation figures, note balances and maturity dates.
- Verify the timing, terms and total proceeds of the post-year-end financings, including whether the reported $500,000 placements are separate or overlapping.
- Assess current cash runway, financing availability, any subsequent debt extensions or defaults, and the status of secured creditors’ rights.
- Check the latest share count, convertible-note terms, warrants and related-party ownership for potential dilution and control effects.
- Validate paid system sales, trial-to-purchase conversion, recurring disposable-kit sales, gross margins and the resources available to increase production.