Axe Compute Inc. quarterly report, Q2 FY2016

Filing and reporting period

The filing is Skyline Medical Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The request metadata names Axe Compute Inc., but the supplied filing is for Skyline Medical Inc. Skyline is a development-stage medical-device company selling its STREAMWAY system for collecting and disposing of surgical fluids, along with related consumables.

Financial performance and position

• Six-month revenue fell about 53% year over year. The company reported no STREAMWAY unit sales in the 2016 period; revenue came from other sales, including consumables.
• Six-month gross margin was approximately 33%, versus 53% in 2015. Management attributed lower margins partly to replacing earlier STREAMWAY units with updated units at no charge.
• Cash and cash equivalents were $583,044 at June 30, down from $4.86 million at December 31, 2015. The company also held $701,243 in certificates of deposit and $855,878 in marketable securities.
• Operating cash used was $2.78 million for the six months, compared with $214,581 in the prior-year period. Investing activities used $1.57 million, primarily for marketable securities and certificates of deposit; financing provided $86,253.
• Total assets were $2.89 million and total liabilities were $2.11 million at June 30. Current assets were $2.68 million versus current liabilities of $1.55 million. The company reported no outstanding debt.
• Accounts payable and accrued expenses totaled approximately $2.10 million. Accumulated deficit was $45.23 million.

Changes, outlook, and risks

• General and administrative expense rose sharply: to $3.95 million for the six months from $728,424 in 2015. Management cited, among other items, a $1.0 million former-CEO severance expense, equity compensation for an investment-banking firm, and higher legal and recruiting costs. Operations expense also increased; sales and marketing expense declined.
• Management said the company had been using approximately $500,000 of cash per month, mainly due to legal and professional fees related to tender offers, and expected the monthly burn to decrease to about $325,000 beginning in June 2016. It warned expenses could rise as it prepares for broader sales efforts and maintains inventory.
• The company expects continuing net losses at least through fiscal 2016 and says additional financing is needed for operations, sales expansion, product development, and international efforts. Financing may be dilutive, may not be available on acceptable terms, and failure to obtain it could force the company to limit operations. Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern.
• Management expects sales efforts and margins to improve as production becomes more consistent and purchasing volumes increase. A new Vice President of Sales was hired July 1; management expects the hire to help rebuild the sales organization. The company reported about $38,000 of product sales after quarter-end, but provided no specific revenue forecast.
• In June, the company entered a separation agreement with former CEO Joshua Kornberg. The filing records $1.0 million of severance expense and describes further cash installments and potential additional cash or shares. It also issued him 500,000 shares, which vested July 15. A separate 3,399,864-share issuance to an investment-banking firm was recorded at $0.15 per share.
• Warrant exchanges and cashless exercises materially increased shares outstanding. Common shares outstanding were 77,698,393 at June 30 and 81,804,903 as of August 3. The filing also identifies potential dilution from outstanding warrants and options.
• Other risks include low sales and customer adoption, dependence on additional capital and key personnel, medical-device regulation, and intellectual-property protection. The company disclosed $440,655 deposited at one bank in excess of insurance limits. It reported no legal proceedings and no material change to other previously disclosed risk factors.

Important facts for investors to verify

1. Cash runway: reconcile the $583,044 cash balance and investment holdings with the stated monthly cash burn, $2.10 million of payables and accrued expenses, and post-quarter cash flows.
2. Financing needs and going-concern risk: confirm whether the company obtained additional funding and on what terms, including dilution and any operational restrictions.
3. Commercial traction: verify unit orders, customer conversions after trials, consumables revenue, and whether the new sales organization has increased sales.
4. Share dilution: review the outstanding warrant and option terms, cashless exercise provisions, and share count changes after June 30.
5. Separation-agreement obligations and unusual equity compensation: confirm actual payments, any later share issuance, and the accounting for the former CEO settlement and investment-banking shares.