AXE Compute Inc.: Form 10-Q for the period ended Mar 31, 2024

The following discussion and analysis should be read together with our unaudited condensed consolidated financial statements and related notes thereto set forth in this Quarterly Report on Form 10-Q as well as our Annual Report on Form 10-K for the year ended December 31, 2023.

This Quarterly Report on Form 10-Q contains “forward-looking statements” that are management’s present expectations of future events. Actual results could differ materially and adversely from those anticipated in such forward-looking statements as a result of certain factors, including but not limited to those set forth below and elsewhere in this report, many of which are beyond our control. Important factors that may cause actual results to differ from forward-looking statements include:

• Our ability to continue operating beyond twelve months without additional financing;
• Continued negative operating cash flows;
• Our capital needs to accomplish our goals, including any further financing, which may be highly dilutive and may include onerous terms;
• Risks related to recent and future acquisitions, including risks related to the benefits and costs of acquisition;
• Risks related to our partnerships with other companies, including the need to negotiate the definitive agreements; possible failure to realize anticipated benefits of these partnerships; and costs of providing funding to our partner companies, which may never be repaid or provide anticipated returns;
• Risks related to the initiation, formation, or success of our collaboration arrangements, commercialization activities and product sales levels by our collaboration partners and future payments that may come due to us under these arrangements,
• Risk that we will be unable to protect our intellectual property or claims that we are infringing on others’ intellectual property;
• The impact of competition;
• Acquisition and maintenance of any necessary regulatory clearances applicable to applications of our technology;
• Inability to attract or retain qualified senior management personnel, including sales and marketing personnel;
• Risk that we never become profitable if our products and services are not accepted by potential customers;
• Possible impact of government regulation and scrutiny;
• Unexpected costs and operating deficits, and lower than expected sales and revenues, if any;
• Adverse results of any legal proceedings;
• The volatility of our operating results and financial condition,
• Management of growth;
• Risk that our business and operations could be materially and adversely affected by disruptions caused by economic and geopolitical uncertainties as well as epidemics or pandemics; and
• Other specific risks that may be alluded to in this report.

All statements, other than statements of historical facts, included in this report regarding our growth strategy, future operations, financial position, estimated revenue or losses, projected costs, prospects and plans, and objectives of management are forward-looking statements. When used in this report, the words “will,” “may,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project,” “plan,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update any forward-looking statements or other information contained herein. Potential investors should not place undue reliance on these forward-looking statements. Although we believe that our plans, intentions, and expectations reflected in or suggested by the forward-looking statements in this report are reasonable, we cannot assure potential investors that these plans, intentions or expectations will be achieved. We disclose important factors that could cause actual results to differ materially from expectations in the “Risk Factors” section and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2023, and in Item 1A of Part II below. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

Overview

We are a knowledge and science-driven company that applies artificial intelligence (“AI”) to support the discovery and development of optimal cancer therapies, which can ultimately lead to more effective treatments and improved patient outcomes. We use AI and a proprietary biobank of 150,000+ tumor samples, categorized by tumor type, to provide actionable insights about drug compounds to improve the drug discovery process and increase the probability of drug compound success. We offer a suite of solutions for oncology drug development from early discovery to clinical trials.

Our mission is to change the landscape of oncology drug discovery and enable the development of more effective therapies for the treatment of cancer. By harnessing the power of machine learning and scientific rigor, we believe that we can improve the probability of success of advancing pharmaceutical and biological drug candidates with a higher degree of confidence.

We operate in three business areas. In our first area, we provide optimized, high-confidence drug-response predictions through the application of AI using our proprietary biobank of tumor samples to enable a more informed selection of drug/tumor combinations and increase the probability of success during development. We also create and develop tumor-specific 3D cell culture models mimicking the physiological environment of human tissue enabling better-informed decision-making during development. In our second business area, we provide services and research using a proprietary self-contained and automated system that conducts high-throughput, self-interaction chromatography screens using additives and excipients commonly included in protein formulations resulting in soluble and physically stable formulations of biologics. Our third business area produces the United States Food and Drug Administration (“FDA”)-cleared STREAMWAY® System and associated products for automated medical fluid waste management and patient-to-drain medical fluid disposal.

We have three reportable segments, which have been delineated by location and business area:

• Pittsburgh segment: provides services that include the application of AI using its proprietary biobank of 150,000+ tumor samples. Pittsburgh also creates proprietary 3D culture models used in drug development.
• Birmingham segment: provides contract services and research focused on solubility improvements, stability studies, and protein production.
• Eagan segment: produces the FDA-cleared STREAMWAY System and associated products for automated medical fluid waste management and patient-to-drain medical fluid disposal.

Capital Requirements

Since inception, we have been unprofitable. We incurred net losses of $4,218,843 and $3,421,802 for the three months ended March 31, 2024, and 2023, respectively. As of March 31, 2024, and December 31, 2023, we had an accumulated deficit of $171,980,726 and $167,761,883, respectively.

We have never generated sufficient revenues to fund our capital requirements. We have funded our operations through a variety of debt and equity instruments. Since 2017, we have diversified our business by investing in ventures, including making significant loans and investments in early-stage companies. These activities led to the acquisition of Helomics Corporation in April 2019, two transactions to acquire the assets of three businesses in 2020, and the acquisition of zPREDICTA Inc. in November 2021, each of which have accelerated our capital needs. See “Liquidity and Capital Resources – Liquidity and Plan of Financing; Going Concern” and “Liquidity and Capital Resources – Financing Transactions” below.

Our future cash requirements and the adequacy of available funds depend on our ability to generate revenues from our oncology businesses located in Pittsburgh and Birmingham; our ability to continue to sell our Skyline Medical products and services and to reach profitability in all our businesses; and the availability of future financing to fulfill our business plans. See “Liquidity and Capital Resources – Liquidity and Plan of Financing; Going Concern” below.

Our limited history of operations, especially in our drug discovery business, and our change in the emphasis of our business, starting in 2017, makes prediction of future operating results difficult. We believe that period-to-period comparisons of our operating results should not be relied on as predictive of our future results.

Results of Operations

Comparison of three months ended March 31, 2024, and 2023

Revenue. We recorded revenue of $419,646 and $239,895 in the three months ended March 31, 2024, and 2023, respectively. Revenue in the three months ended March 31, 2024, and 2023, was primarily derived from the Eagan operating segment. The increase in revenue from the comparative period was primarily due to a change in sales mix with increased sales of STREAMWAY systems in the three months ended March 31, 2024.

Cost of sales. Cost of sales was $187,415 and $120,139 in the three months ended March 31, 2024, and 2023, respectively. The gross profit margin was approximately 55% in the three months ended March 31, 2024, compared to 50% in the three months ended March 31, 2023. The improvement in gross profit margin was primarily due to a change in sales mix with increased sales of STREAMWAY systems in the three months ended March 31, 2024.

General and administrative expense. General and administrative (“G&A”) expenses primarily consist of management salaries, professional fees, consulting fees, administrative fees, and general office expenses. G&A expenses increased by $291,092 to $2,627,076 in the three months ended March 31, 2024, compared to $2,335,984 in the comparable period in 2023. The increase was primarily due to increased professional fees including audit and consultant fees as well as increased business taxes, offset by decreased employee compensation as well as decreased depreciation due to fully depreciated assets.

Operations expense. Operations expenses primarily consist of expenses related to product development and prototyping and testing. Operations expenses increased by $223,675 to $1,102,193 in the three months ended March 31, 2024, compared to $878,518 in the comparable period in 2023. The increase was primarily due to increased employee compensation associated with our research and development efforts.

Sales and marketing expense. Sales and marketing expenses consist of expenses required to market and sell our products including staff-related expenses for individuals performing this work. Sales and marketing expenses increased by $369,497 to $739,734 in the three months ended March 31, 2024, compared to $370,237 in the comparable period in 2023. The increase was primarily due to severance related to a former executive.

Other income. We earned other income of $18,657 in the three months ended March 31, 2024, compared to $42,228 in the comparable period in 2023. Other income is primarily interest income.

Other expense. We incurred other expense of $1,737 in the three months ended March 31, 2024, compared to none in the three months ended March 31, 2023. Other expense is primarily interest expense.

Gain on derivative instruments. We recorded a gain of $1,009 in the three months ended March 31, 2024, compared to $953 in the comparable period in 2023 related to the change in fair value of the derivative instruments.

Liquidity and Capital Resources

Cash Flows

Net cash used in operating activities remained relatively consistent at $3,416,021 and $3,427,761 for the three months ended March 31, 2024, and 2023, respectively. The increase in the Company’s net loss was primarily offset by an increase in cash provided by changes in working capital, primarily due to increases in accounts payable and accrued expenses.

Net cash used in investing activities was $3,032 and $46,643 for the three months ended March 31, 2024, and 2023, respectively. Cash used in investing activities decreased in the 2024 period primarily due to a decrease in the acquisition of property and equipment and intangible assets.

Net cash used in financing activities was $112,372 for the three months ended March 31, 2024, and none for the comparable period in 2023. The cash used in the three months ended March 31, 2024, was primarily related to repayment of a note payable for insurance premiums financed over the insured period.

Liquidity and Plan of Financing; Going Concern

We have incurred significant and recurring losses from operations for the past several years and, as of March 31, 2024, had an accumulated deficit of $171,980,726. We had cash of $5,197,235 as of March 31, 2024, and need to raise significant additional capital to meet our operating needs. We had short-term obligations of $4,516,661 and long-term operating lease obligations of $2,027,348 as of March 31, 2024. We do not expect to generate sufficient operating revenue to sustain our operations in the near term. During the three months ended March 31, 2024, we incurred negative cash flows from operations of $3,416,021. Although we have attempted to improve our cash flows from operations by bolstering revenues and continue to seek ways to generate revenue through business development activities, there is no guarantee that we will be able to improve our cash flows from operations sufficiently or achieve profitability in the near term. As a result of these conditions, substantial doubt exists about our ability to continue as a going concern within one year after the date our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q are issued.

We are evaluating alternatives to obtain the required additional funding to maintain future operations. These alternatives may include, but are not limited to, equity financing, issuing debt, entering into other financing arrangements, or monetizing operating businesses or assets. These possibilities, to the extent available, may be on terms that result in significant dilution to our existing stockholders or that result in our existing stockholders losing part or all of their investment. Despite these potential sources of funding, we may be unable to access financing or obtain additional liquidity when needed or under acceptable terms, if at all. If such financing or adequate funds from operations are not available, we would be forced to limit our business activities and we could default on existing payment obligations, which would have a material adverse effect on our financial condition and results of operations, and may ultimately be required to cease our operations and liquidate our business. Our condensed consolidated financial statements as of and for the three months ended March 31, 2024, included in this Quarterly Report on Form 10-Q, have been prepared assuming we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty.

Financing Transactions

We have primarily funded our operations through a combination of debt and equity instruments including short-term borrowings, and a variety of debt and equity offerings. We have no off-balance sheet transactions. There were no financing transactions during the three months ended March 31, 2024, or 2023.

Accounting Standards and Recent Accounting Developments

See Note 1 - Summary of Significant Accounting Policies to the unaudited condensed consolidated financial statements of this Quarterly Report on Form 10-Q for a discussion of recent accounting developments.

Evaluation of Disclosure Controls and Procedures

Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), defines the term “disclosure controls and procedures” as those controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Management, with the participation of our Chief Executive Officer and Interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of March 31, 2024. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective as of March 31, 2024.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the three months ended March 31, 2024, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

As of the date of this Quarterly Report on Form 10-Q, there have been no material changes to our risk factors from those disclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 28, 2024.

In addition to the information set forth in this Quarterly Report on Form 10-Q, the reader should carefully consider the risks included in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, before making an investment decision. Our business could be harmed by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment.