Business context and reporting period
Skyline Medical Inc. (identified as BioDrain Medical before its 2013 name change) filed this unaudited Form 10-Q for the quarter ended March 31, 2014. The company is a development-stage medical-device business selling the STREAMWAY system for collecting and disposing of surgical fluids, along with cleaning fluid and disposable filters. The filing describes the enhanced STREAMWAY as entering sales in Q1. Note: the request metadata names Axe Compute Inc., but the filing itself identifies Skyline Medical Inc.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $70,220 | $127,727 |
| Gross profit / margin | $39,137 / 55.7% | $86,123 / 67.5% |
| Net loss | $1,616,993 | $2,101,525 |
| Interest expense | $18,123 | $95,552 |
| Cash used in operations | $1,752,443 | $940,285 |
| Cash used in investing | $86,603 | $0 |
| Cash provided by financing | $1,867,831 | $1,300,000 |
- At March 31, cash was $130,738; current assets were $708,804 versus current liabilities of $2,347,920, a working-capital deficit of about $1.64 million. Total liabilities were $2,654,266, and stockholders’ deficit was $1,656,779.
- The company reported no short-term note payable at quarter-end, after repaying a $300,000 note in February. Management nonetheless cited about $2.7 million of debts, liabilities and cash obligations predominantly due during 2014.
- Q1 financing included $2.055 million gross proceeds from Series A convertible preferred stock. The filing also reports $20,000 of additional note proceeds and $300,000 of debt principal payments.
- Basic and diluted loss per share was $0.01, versus $0.02 in Q1 2013. Weighted-average shares rose to 221.2 million from 107.8 million.
Material changes versus the prior comparable period
- Revenue fell about 45%. Q1 2014 sales included three STREAMWAY systems under a pay-per-procedure arrangement, generating only about $9,000 of hardware revenue, plus disposable sales.
- Gross margin declined to approximately 56% from 67%. Management attributed variability to early production and expected improvement with more consistent manufacturing and volume purchasing; that expectation is not assured.
- Net loss narrowed about 23%, largely alongside lower general and administrative expense and sharply lower interest expense. G&A fell $644,000, including lower stock-based and investor stock compensation; hiring, legal and financing-related fees partly offset the reduction.
- Operating cash use increased $812,000, primarily due to higher inventory, prepayments and payroll as the company expanded production and its sales team.
- Sales and marketing expense increased $121,000, and operations expense increased $61,000. Research and development expense was $118,351, versus $58,277.
Outlook, risks and unusual items
- Management estimated that available cash and short-term investments would fund operations only through approximately June 30, 2014; additional financing would then be needed. The filing states that recurring losses and the stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern.
- The company said it was pursuing a bank credit line or purchase-order factoring and could require additional equity financing, which could be highly dilutive or have onerous terms. It reported operating expenses of about $250,000 per month.
- Management reported approximately $129,000 in product revenue after quarter-end, eight additional unit sales through April 30 and eight more units shipped and sold by May 16. It also cited purchase orders for about 36 systems for installation over the next 12 months, plus trials and demonstrations at five hospital systems. These are forward-looking commercial indicators, not guaranteed revenue.
- The February preferred financing carries a 6% annual dividend, conversion terms initially at $0.26 per share, warrants initially exercisable at $0.325, and a liquidation preference of 1.2 times the $2.055 million stated investment plus declared unpaid dividends. The terms include potential adjustments and additional warrants under specified conditions.
- A March 2014 lawsuit by Marshall Ryan and Mid-State Stainless alleges contract breaches, fraud and related claims. Skyline says it believes the claims are without merit and is preparing its response.
- The company filed an international patent application in January 2014 for the enhanced system. The filing describes continuous suction and fluid evacuation capabilities; patent protection remains pending.
- Management said disclosure controls were effective as of March 31, 2014, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the issuer identity: the request metadata says Axe Compute Inc., while the filing is for Skyline Medical Inc.
- Verify subsequent cash collections, sales conversion from trials and purchase orders, and the timing of installations; assess whether reported post-quarter sales support the company’s revenue expectations.
- Review the runway and funding plan against the stated June 30, 2014 cash horizon, monthly operating costs and 2014 obligations, including financing availability and terms.
- Assess the dilution and potential share-count effects of the preferred-stock conversion, dividends, warrants, options and any required additional warrants.
- Review the lawsuit, preferred-stock registration obligations, and the conditions tied to exchange listing and the 500-unit installation or firm-order threshold.