Axe Compute Inc. quarterly report, Q3 FY2013

Business context and reporting period

The supplied filing is Skyline Medical Inc.’s Form 10-Q for the quarter ended September 30, 2013, not a filing identified as Axe Compute Inc. Skyline was a development-stage medical-device company selling its STREAMWAY system for collecting and disposing of surgical fluids, along with related disposable kits and cleaning solution. Its financial statements are unaudited.

Financial results and position

Gross margin was approximately 76% for Q3 2013 and 65% for the first nine months of 2013; management reported approximately 14% for the comparable 2012 nine-month period. Q3 revenue included eight STREAMWAY systems and disposables. Interest expense rose to $629,722 for the nine months from $168,462 a year earlier. A $153,960 gain from revaluing equity-linked instruments partly offset expenses.

At September 30, 2013, cash was $328,362, total assets $636,647, current liabilities $1,385,174, total liabilities $1,845,295, and stockholders’ deficit $1,208,648. The resulting working-capital deficit was approximately $838,000. The company reported no note-payable balance at quarter-end, after converting debt to equity; liabilities still included $636,085 of accounts payable and $744,089 of current accrued expenses, plus $444,902 of long-term accrued expenses.

For the nine months, operating cash use was $3,336,166, investing cash use was $101,865, and financing provided $3,753,254. Cash increased by $315,223 from year-end 2012. Stock-based option and warrant compensation was $3,791,802 in the cash-flow reconciliation; the company separately reported $1,585,518 of stock-based compensation expense for the period.

Material changes versus the prior comparable period

• Nine-month revenue increased by $287,208, while the net loss widened by $1,547,110. Q3 revenue more than doubled year over year, but the quarterly net loss also increased.
• Operating cash use increased substantially, from $780,709 to $3,336,166 for the nine-month periods.
• Cash rose from $13,139 at December 31, 2012 to $328,362 at September 30, 2013, supported by equity and debt financing, warrant exercises, and debt conversions.
• Convertible notes were converted into shares during 2013, leaving no note payable reported at quarter-end but significantly increasing shares outstanding. The balance sheet reports 219,640,021 shares at September 30; the filing cover reports 221,068,939 shares at November 6.

Outlook, commentary, risks, and unusual items

• Outlook: Management said it had purchase orders for 51 STREAMWAY II units and anticipated production in Q4 2013. It said the new version adds control-screen, data-storage, and filter features. No formal revenue or earnings guidance was provided.
• Funding and going concern: Management estimated operating expenses of about $185,000 per month, said at least $1 million of additional financing was needed to fund approximately six months of operations, and projected existing resources would last approximately through April 30, 2014. The filing states that recurring losses and the stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern. Failure to obtain financing could require significant curtailment or cessation of operations; future financing could be highly dilutive or have onerous terms.
• Product and market risks: The company said it stopped producing the first-generation STREAMWAY to focus on STREAMWAY II, delaying some Q3 sales. Sales adoption, production, and expected orders remain uncertain.
• Unusual accounting item: Skyline wrote off $140,588 of STREAMWAY I patent assets in June 2013; it reported a new provisional patent for STREAMWAY II.
• Contingency: Management disclosed potential shareholder claims alleging violations of Minnesota preemptive rights in past securities issuances. The company said potential liability and remedies are uncertain and could materially affect its finances or cause dilution.
• Related-party and governance matters: Holders associated with Dr. Samuel Herschkowitz and SOK Partners converted secured notes into equity in September, and the filing said they and affiliates beneficially controlled more than 65% of outstanding common stock and derivative securities. Shareholders approved a proposed Delaware reincorporation and an increase in authorized common shares, but the merger was not yet effective as of the filing.
• Other subsequent event: Under an amended former-CEO settlement, the former CEO retained 333,330 exercised shares and options on 325,187 additional shares at $0.01 per share; the company agreed to pay $20,000 and the former CEO relinquished warrants for 800,000 shares.

Important facts for investors to verify

• Confirm the issuer: this filing is for Skyline Medical Inc., despite the request metadata naming Axe Compute Inc.
• Check whether the 51 STREAMWAY II purchase orders converted into completed production, shipments, and collected revenue, and whether the planned Q4 launch occurred.
• Review subsequent financing, cash use, payables and accrued obligations, and the company’s ability to meet its stated liquidity needs beyond the projected April 30, 2014 runway.
• Assess dilution from the large option and warrant overhang, debt conversions, reduced-price warrant exercises, and the proposed increase in authorized shares.
• Monitor the preemptive-rights exposure, related-party arrangements and control, and whether the reincorporation merger became effective.