Business context and reporting period
This is BioDrain Medical, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011—not a filing identifying Axe Compute Inc. BioDrain describes itself as a development-stage medical-device company developing and selling its Fluid Management System (FMS), marketed as Streamway, for collecting and disposing of surgical fluids. The FDA cleared the product for marketing on April 1, 2009; the company says its first sale was in June 2009.
Financial performance and position
| Metric | Three months ended Sep. 30 | Nine months ended Sep. 30 |
|---|---|---|
| Revenue | 2011: $20,264; 2010: $0 | 2011: $22,638; 2010: $288 |
| Gross profit | 2011: $9,103; 2010: $0 | 2011: $9,657; 2010: $148 |
| Net loss | 2011: $654,114; 2010: $158,110 | 2011: $1,518,933; 2010: $956,180 |
| Loss per share, basic and diluted | 2011: $0.02; 2010: $0.01 | 2011: $0.07; 2010: $0.08 |
| Net cash used in operations | Nine months 2011: $1,185,888; 2010: $773,129 | |
| Net cash from financing | Nine months 2011: $1,254,233; 2010: $776,931 |
At September 30, 2011, cash was $77,728, current assets were $127,654, current liabilities were $1,955,852, total assets were $274,195, and shareholders’ deficit was $2,474,783. Accounts payable were $719,969 and accrued expenses were $551,896. The balance sheet reports $683,987 of current convertible debt and $705,593 of long-term debt and convertible debt, net of discounts; the debt note separately reports total debt of $1,379,580, so the presentation does not fully reconcile.
Changes versus the prior comparable period
- Revenue rose from minimal evaluation-supply sales to $22,638 for the first nine months of 2011; the quarter included one Streamway system and disposable supplies.
- Nine-month net loss increased by about $563,000, while the reported loss per share narrowed from $0.08 to $0.07 as weighted-average shares increased from 12.4 million to 22.2 million.
- Nine-month operating cash use increased by about $413,000. Management attributed this mainly to increased payments on overdue accounts payable.
- Nine-month general and administrative expense fell to $1.015 million from $1.532 million, mainly due to lower consulting and salary costs. Operations expense rose to $402,479 from $165,308; interest expense rose to $176,118 from $107,580.
- The nine-month gain on revaluation of equity-linked instruments fell to $213,921 from $1,025,294. This noncash gain reduced reported expense in both periods.
Outlook, risks and unusual items
- Management states the company had sufficient funds only through approximately November 2011 and needed additional financing thereafter. It estimated approximately $2 million of capital needs for the next 12 months and said that raising at least $2 million in new equity would fund its plan for that period.
- An institutional investor had committed to $1 million of convertible debt, contingent on the company first raising an equal amount in equity. The filing says success in raising further capital was in substantial doubt and warns that failure could force spending reductions, suspension of operations, or cessation of business. The auditor’s report is not included in the supplied text; the notes themselves state substantial doubt about the company’s ability to continue as a going concern.
- Management expected revenue to increase if hospitals approved evaluated units and placed orders, but provided no quantified revenue or earnings guidance. It expected higher operations and sales-and-marketing costs as shipments, sales staffing, promotion, and customer support increased.
- Gross margin on 2011 sales was reported as 43%; management attributed the low margin to a discount intended to encourage customer use and anticipated improvement with purchasing-volume discounts. The filing’s statements show nine-month cost of goods sold of $12,981, while MD&A states $13,981; verify the correct figure.
- Significant potential dilution: 29,139,828 common shares were outstanding at September 30, and the filing reports 31,298,440 shares underlying outstanding options and warrants. Shares outstanding were 30,427,328 on November 1, 2011.
- The patent assignment requires a 4% royalty on FMS sales. It also includes potential change-of-control payments, depending on timing after first sale, of up to $2 million over the patent’s life.
- The company reported no legal proceedings or off-balance-sheet arrangements. It stated there were no disclosed subsequent events requiring disclosure, while separately describing post-quarter stock issuances and financing-related equity sales.
Important facts for investors to verify
- Confirm the filing’s registrant: the supplied 10-Q is for BioDrain Medical, Inc., not Axe Compute Inc.
- Reconcile the $1,379,580 debt total in the debt note with current and long-term debt on the balance sheet, and confirm maturities and conversion terms.
- Resolve the nine-month cost-of-goods-sold discrepancy ($12,981 versus $13,981) and the related gross-profit presentation.
- Verify financing completed after September 30, the status and conditions of the $1 million convertible-debt commitment, and the company’s actual liquidity and ability to meet obligations.
- Assess customer evaluation-to-order conversion, product economics at scale, potential share dilution, and the patent royalty and change-of-control terms.