Filing Summary: Skyline Medical Inc. — Form 10-Q
Issuer identification: The filing is for Skyline Medical Inc., not Axe Compute Inc. It reports the quarter ended September 30, 2016, and includes unaudited results for the three and nine months ended on that date.
Business context and reporting period
Skyline is a development-stage medical-device company selling the STREAMWAY system for collecting and disposing of surgical fluids, along with related cleaning fluid and filters. It reported two STREAMWAY unit sales during the first nine months of 2016, both in the third quarter. Share and per-share figures reflect the 1-for-25 reverse split effective October 27, 2016.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2016: $134,605; 2015: $85,792 | 2016: $316,931; 2015: $471,078 |
| Gross profit / margin | 2016: $108,124 / 80.3%; 2015: $66,019 / 77.0% | 2016: $167,801 / 52.9%; 2015: $271,771 / 57.7% |
| Net loss | 2016: $1,055,593; 2015: $1,116,402 | 2016: $5,793,242; 2015: $2,527,524 |
| Basic and diluted loss per share | 2016: $0.32; 2015: $7.09 | 2016: $2.57; 2015: $18.39 |
At September 30, 2016, cash was $634,478 and marketable securities were $576,888; current assets totaled $1.709 million against current liabilities of $1.473 million. Total assets were $1.917 million, total liabilities $1.906 million, and stockholders’ equity only $11,514. The balance sheet reported no debt; liabilities included $1.252 million of accrued expenses, including $432,376 classified as noncurrent.
For the nine months, operating cash use was $3.704 million, investing cash use was $604,000, and financing provided $86,253. Cash fell by $4.222 million from year-end 2015. Management said monthly negative cash flow had been reduced to approximately $350,000 beginning in June 2016. Accounts payable and accrued expenses together were approximately $2.0 million.
Material changes versus the prior comparable period
- Third-quarter revenue increased approximately 57% year over year, but nine-month revenue declined approximately 33%. Management attributed the subdued sales history partly to curtailed sales efforts and said only two system units were sold in the first nine months.
- Nine-month net loss increased to $5.793 million from $2.528 million, primarily alongside higher general and administrative and operating expenses. General and administrative expense rose $3.095 million; the filing cites former-CEO severance, stock-related and investor-relations costs, and legal expenses among the drivers.
- Nine-month gross margin fell to 52.9% from 57.7%, although third-quarter margin improved year over year. Management expected margins to improve with steadier production and volume purchasing discounts.
- Interest expense fell to $3 for the nine months from $394,641 in 2015; the company said it had no outstanding debt during the period. Operating cash use was lower than in 2015, but the company still consumed substantial cash.
Outlook, risks, contingencies, and unusual items
- Going concern and financing: The filing states substantial doubt exists about the company’s ability to continue as a going concern. Skyline anticipated further losses at least through fiscal 2016 and said it would need additional financing for operations, sales expansion, product development, and international entry. Financing availability and terms are uncertain and could materially dilute shareholders.
- Commercial outlook: Management said a new Vice President of Sales was rebuilding the sales organization and expected the effort to benefit future sales. It also said revenue from post-quarter sales was approximately $33,000. No specific revenue, earnings, or cash-flow guidance was provided.
- Potential partnerships: An August 2016 letter of intent with Electronic On-Ramp contemplated a joint venture that could provide access to bids for contracts associated with up to $550 million or more in federal funding; completion and awards were not assured. A September agreement with GLG Pharma concerns diagnostic tests using collected fluids and tissue; 400,000 shares were issued into escrow, subject to milestones, and royalties may be payable.
- Nasdaq listing: Nasdaq staff issued a delisting determination after continued minimum-bid-price noncompliance. The company requested a hearing, which stayed delisting pending the Panel’s decision. The filing said continued listing and future compliance were not assured; it also cited minimum stockholders’ equity as an issue to address.
- Separation agreement: The former CEO’s agreement provides cash installments and a possible additional cash or share payment, as well as 20,000 shares already issued. The filing reports a material severance-related expense increase.
- Other risks: The company cited limited sales, dependence on future funding, possible dilution, regulatory and product-development risks, and uncertainty around market adoption. Management reported disclosure controls were effective as of September 30, 2016; no material change in internal control over financial reporting was reported for the quarter.
Most important facts for investors to verify
- Confirm the intended issuer: this 10-Q is for Skyline Medical Inc., not Axe Compute Inc.
- Review cash runway and near-term obligations against the reported $634,478 cash balance, $1.473 million current liabilities, and approximately $350,000 monthly negative cash flow.
- Assess the company’s ability to raise capital, the likely dilution and terms, and the basis for the going-concern disclosure.
- Check the outcome of the Nasdaq hearing and whether the company met continued-listing requirements after the reverse split.
- Verify actual sales conversion, revenue trends, margins, and whether the EOR and GLG arrangements produce contracts or commercial revenue; the filing does not establish that they will.