BioDrain Medical, Inc. — Form 10-Q Summary
Filing identity: The supplied filing is for BioDrain Medical, Inc., not Axe Compute Inc. It covers the quarter ended September 30, 2012, and was signed November 15, 2012. The company identifies itself as a development-stage medical-device business.
Business context and reporting period
BioDrain developed the STREAMWAY system for collecting and disposing of infectious fluids from surgical and post-operative care, and sells related cleaning fluid. It received FDA 510(k) clearance in April 2009. Management reported five units sold in 2011 and ten units placed by October 2012; some placements were for evaluation. The financial statements are unaudited.
Financial results and liquidity
| Metric | Q3 2012 / September 30, 2012 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $51,615 for Q3; $99,210 for the first nine months | $20,264 for Q3 and $22,638 for nine months in 2011, per the statements. MD&A instead gives Q3 2011 revenue as $20,638. |
| Gross profit (loss) | $(18,347) for Q3; $13,732 for nine months | $9,103 for Q3 and $9,657 for nine months in 2011 |
| Net loss | $(2,855,713) for Q3; $(5,704,855) for nine months | $(654,114) for Q3 and $(1,518,933) for nine months in 2011 |
| Loss per share | $(0.04) for Q3; $(0.10) for nine months | $(0.02) for Q3 and $(0.07) for nine months in 2011 |
| Cash and current liquidity | Cash $102,136; current assets $299,378; current liabilities $2,495,569 | Cash was $122,985 and current liabilities $2,353,268 at December 31, 2011. Working-capital deficit at September 30, 2012 was approximately $2.20 million. |
| Debt and equity | Current convertible debt $1,156,082; long-term debt $89,300; stockholders’ deficit $(2,228,858) | At December 31, 2011, current convertible debt was $1,055,559, long-term debt $630,153, and stockholders’ deficit $(2,703,264). |
| Cash flows, nine months | Operating cash used $780,709; financing cash provided $759,860; investing cash flow $0; cash decreased $20,849 | In 2011, operating cash used was $1,185,888 and financing cash provided was $1,254,233. |
Gross margin was negative in Q3, which management attributed to timing. Nine-month gross profit was positive, but small relative to operating costs. The cash-flow statement shows substantial non-cash stock and warrant compensation. Cash at September 30 was approximately $102,000; management estimated current operating costs at about $125,000 per month.
Material changes versus the prior comparable period
- Nine-month revenue increased to $99,210 from $22,638, but remained limited; management said 2012 revenue was predominantly from disposable supplies for previously placed units.
- Nine-month net loss widened to $5.70 million from $1.52 million. General and administrative expense rose to $5.03 million from $1.01 million, including substantial investor stock compensation, stock-based compensation, and higher professional fees related partly to restructuring.
- Cash used in operations declined year over year despite the larger reported loss, which the filing attributes in part to non-cash compensation and changes in working-capital accounts.
- Shares outstanding rose from 32.1 million at December 31, 2011 to 98.6 million at September 30, 2012. The company also reported 13.47 million options and 31.78 million warrants outstanding, creating significant potential dilution.
Outlook, risks, contingencies, and unusual items
- Going concern and funding: The filing states that recurring operating losses and stockholders’ deficit raise substantial doubt about the company’s ability to continue as a going concern. Management said it needed to raise at least $2 million to fund the next 12 months and did not expect 2012 revenue to cover capital needs. It reported that post-quarter financing was expected to support operations through year-end 2012.
- Sales outlook: Management expected STREAMWAY sales to increase over the following two quarters as evaluations convert to orders, citing product improvements, manufacturing efficiencies, and expected growth in disposable sales. These are forward-looking expectations, not assured results; no quantified revenue guidance was provided.
- Debt defaults and restructuring: As of September 30, the company reported approximately $740,000 of principal and accrued interest on debt past due and/or in default. Holders of debt representing $418,500 had threatened legal action. The company was negotiating conversions or other restructuring. It also reported a November 2012 related-party note issuance of $156,243, with proceeds used to repay approximately $155,000 of secured debt.
- Related-party financing and dilution: SOK Partners’ 20% convertible note was secured by substantially all company assets and subject to default provisions. An August forbearance agreement extended related-party notes to December 31, 2012, adjusted their conversion price to $0.014 per share, and included issuance of 26.5 million shares to Dr. Herschkowitz and SOK. Based on balances and accrued interest at September 30, the notes were convertible into approximately 42.7 million shares.
- Legal matter: A former sales and marketing executive sued over alleged breach of employment contract and defamation; the company had answered the complaint and agreed to mediation.
- Other reported matters: The company recorded a $78,275 nine-month gain on revaluation of equity-linked instruments. It reported no investing cash flows during the nine-month period. Management said disclosure controls were effective as of September 30 and reported no material quarterly change in internal control over financial reporting.
Investor verification priorities
- Reconcile the Q3 2011 revenue discrepancy: the financial statements report $20,264, while MD&A reports $20,638.
- Verify available cash, near-term cash burn, and whether the stated $2 million funding requirement was met after the filing date.
- Confirm the status, maturity, default terms, security, and creditor negotiations for past-due debt, including related-party obligations and subsequent financing.
- Assess the fully diluted share count and potential conversion or exercise dilution from the 42.7 million related-party conversion shares, options, warrants, and subsequent issuances.
- Track whether hospital evaluations convert into billable STREAMWAY orders and recurring disposable-supply revenue, and whether reported product improvements translate into sustainable gross margins.
- Review the outcome of the former executive’s lawsuit and any other creditor actions that could affect liquidity or operations.