Item 2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
Overview
We were incorporated in Minnesota in April 2002 under the name BioDrain Medical, Inc.
Effective August 6, 2013, the Company changed its name to Skyline Medical Inc. Pursuant to an Agreement and Plan of Merger dated
effective December 16, 2013, the Company merged with and into a Delaware corporation with the same name that was its wholly-owned
subsidiary, with such Delaware Corporation as the surviving corporation of the merger. We manufacture an environmentally conscientious
system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative care. Since
our inception in 2002, we have invested significant resources into product development. We believe that our success
depends upon converting the traditional process of collecting and disposing of infectious fluids from the operating rooms of medical
facilities to our wall-mounted Fluid Management System (“SYSTEM”) and use of our proprietary cleaning fluid and bifurcated
filter.
We currently have a Vice President of Sales, one in house sales person and five regional
sales managers to sell the STREAMWAY SYSTEM. We have signed two independent contractors, and will continue to sign more, to further
represent the Company across the country and in Canada in the fourth quarter and fiscal 2018. We have been issued our Medical Device
Establishment License permitting the Company to sell the STREAMWAY SYSTEM and disposables across the 13 provinces of Canada. In
March 2017, the Company completed its first sale of a STREAMWAY SYSTEM to a customer in Ontario. In June 2017, we received notice
that our STREAMWAY SYSTEM has met all requirements and can now be affixed with the CE mark and marketed in 32 European countries.
We have signed a contract with a special consultant to hire distributors throughout Europe and Canada to sell the STREAMWAY SYSTEM.
During the fourth quarter, we have executed contracts with three international distributors. Quadromed, is a Canadian distributor
who will represent us throughout the entire Canadian country over the next two years, with annual automatic renewals. MediBridge
Sarl, is a Swiss distributor representing us in Switzerland entirely over the next two years, with annual automatic renewals. Device
Technologies Australia PTY LTD, is an Australian distributor representing us throughout Australia, New Zealand, Fiji and the Pacific
Islands over the next five years with annual automatic renewals.
We have also reached a short-term exclusive agreement with Alliant Healthcare, a major
provider of medical device products to the federal government. Alliant Healthcare is a CVE verified SDVOSB (Service-Disabled Veteran-Owned
Small Business). The agreement is for ninety days (July 1 – September 30, 2017), with an optional ninety-day renewal term
(October 1 – December 31, 2017, the government’s first fiscal quarter) upon agreement of both parties. We have signed
a three-year contract with Alliant effective November 1, 2017 ending October 31, 2020, with annual automatic renewals thereafter.
Since inception, we have been unprofitable. We incurred net losses of approximately $1.0
million and $4.9 million for the three and nine months ended September 30, 2017, and $1.1 million and $5.8 million for the three
and nine months ended September 30, 2016, respectively. As of September 30, 2017, and September 30, 2016, we had an accumulated
deficit of approximately $51.9 million and $47.0 million, respectively. We received approval from the FDA in April 2009 to commence
sales and marketing activities of the STREAMWAY SYSTEM and shipped the first system in 2009. However, there was no significant
revenue prior to 2011, primarily due to lack of funds to build and ship the product.
In the first quarter of 2014, the Company commenced sales of an updated version of the
STREAMWAY SYSTEM, which provides several enhancements to the existing product line including a more intuitive and easier to navigate
control screen, data storage capabilities, and additional inlet ports on the filters, among other improvements. This updated version
utilizes improved technology, including the capability for continuous flow and continuous suctioning, as covered by our provisional
patent application filed in 2013 and our non-provisional patent application filed in January 2014. We have sold one hundred three
STREAMWAY units to date.
We expect the revenue for STREAMWAY SYSTEM units to increase significantly at such time
as significantly more hospitals approve the use of the units for their applications and place orders for billable units. We also
expect an increase in trial-based units. Trial basis units are either installed in or hung on the hospital room wall. The unit
is connected to the hospital plumbing and sewer systems, as well as, the hospital vacuum system. The unit remains on the customer
site for 2 – 4 weeks, as contracted, at no cost to the customer. However, the customer does purchase the disposable products
(cleaning fluid and filters) necessary to effectively operate the units. Once the trial period has expired, the unit is either
returned to the Company or purchased by the customer. If purchased, at that time, the Company invoices the customer based upon
a contracted price negotiated prior to the trial.
We have never generated sufficient revenues to fund our capital requirements. We have
funded our operations through a variety of debt and equity instruments. See “Liquidity and Capital Resources – Financing
Transaction” below. In 2014, we completed private placements of Series A Preferred Stock and convertible notes raising aggregate
gross proceeds of $3,530,000. In September 2014, we commenced a public offering that was delayed, and we did not complete our public
offering until August 2015. During that period of time, due to limited funding and continued operating losses, we curtailed our
operations and delayed our expenditures to stay in operation. These factors negatively affected our sales in late 2014 and the
full year 2015. On August 31, 2015, the Company completed a public offering of units consisting of common stock, preferred stock
and warrants, as well as concurrent uplisting to the NASDAQ Capital Market, resulting in net proceeds of approximately $13.5 million.
On November 30, 2016, the Company completed a registered direct offering of units consisting of common stock and warrants, with
net proceeds of approximately $1.7 million. On January 19, 2017, the Company received net proceeds of $3.5 million because of a
public offering of units consisting of common stock and warrants. Subsequently, in connection with the offering the underwriter
exercised their over-allotment option in full; the Company received additional proceeds of $350,000 on February 22, 2017.
Our future cash requirements and the adequacy of available funds depend on our ability
to sell our products, the cash needs relating to our operations, prospective acquisitions and strategic relationships, and the
availability of future financing to fulfill our business plans. See “Plan of Financing; Going Concern Qualification”
below.
As a company, our limited history of operations 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.
Strategic Relationships and Transactions
The Company is seeking to broaden its business and from time to time considers acquisitions
of companies and strategic partnerships and investments.
On August 9, 2017, the Company entered into an Agreement and
Plan of Merger (the “Merger Agreement”) with Skyline Cyto Acquisition, Inc. and CytoBioscience, Inc. (“CytoBioscience”).
CytoBioscience creates and manufactures devices used in human cell research focused on new therapeutic drug development and has
a well-known scientific and technical staff, collaborative partnerships with leading pharmaceutical companies and strategic alliances
with key groups and academic institutions. The Merger Agreement contemplated a reverse triangular merger with CytoBioscience becoming
a wholly owned operating subsidiary of the Company (the “Merger”). In November 2017, the Company and CytoBioscience
announced that they terminated the Merger Agreement to focus on structuring a proposed joint venture to market CytoBioscience’s
personalized research services
In July 2017, the Company began to advance funds to CytoBioscience for working capital
for CytoBioscience’s business in contemplation of signing the Merger Agreement and completing the Merger. All of the notes
receivable bear simple interest at 8% and are due in full on December 31, 2017. All of the notes are covered by a security interest
in all of CytoBioscience’s accounts receivable and related rights in connection with all of the advances. The principal amount
of the secured promissory notes receivable from CytoBioscience totaled $785,000 as of September 30, 2017. Advances since the end
of the quarter total $285,000, for total principal amount of the secured notes of $1,070,000.
In November 2017, the Company announced proposed joint venture
with Helomics Corporation, a precision diagnostic company and integrated clinical contract research organization, to use the Helomics
D-CHIP™ platform to develop new approaches for personalized cancer diagnosis and care. This partnership between the two companies
is expected to provide Skyline with opportunities to generate revenues from additional markets. Skyline Medical will own 51% of
the joint venture, with Helomics owning the remaining 49%. In November 2017, the Company advanced $175,000 for working capital
for Helomics’ business in contemplation of the joint venture. The notes receivable bear simple interest at 8% and is due
in full on April 30, 2018. The note is covered by a security interest in certain equipment of Helomics.
Results of Operations
Revenue.
The Company recognized $153,000 of revenue in the three months ended
September 30, 2017 compared to $135,000 in revenue in the three months ended September 30, 2016, an increase of 13%. The Company
recognized $435,000 of revenue in the nine months ended September 30, 2017, compared to $317,000 in revenue in the nine months
ended September 30, 2016, an increase of 37%. There were 5 sales of STREAMWAY units year to date through September 30, 2017, including
our first sale of a STREAMWAY System in Canada. Our goal in ramping up our sales efforts following our hiring five regional sales
managers is to have a greater revenue effect in the upcoming quarters.
Cost of sales.
Cost of sales in the three months ended September 30, 2017 was
$29,000 and $26,000 in the three months ended September 30, 2016, respectively. Cost of sales was $88,000 in the nine months ended
September 30, 2017 and $149,000 in the nine months ended September 30, 2016, respectively. The gross profit margin was approximately
80% in the nine months ended September 30, 2017, compared to 53% in the prior year. Our margins were reduced in the first half
of 2016, as we replaced many of our STREAMWAY units for the new iteration units at no charge to our customers. Increased sales
will allow us to achieve volume purchasing discounts on both equipment components and our cleaning solution.
General and Administrative expense.
General and administrative expense primarily
consists of management salaries, professional fees, consulting fees, travel expense, administrative fees and general office expenses.
General and Administrative (G&A) expenses decreased by $111,000 for the three months
ended September 30, 2017 compared to the 2016 period. The decrease in the three-month period was primarily from $190,000 in investor
relations incurred during 2016 due to utilizing consultants and proxy solicitors; $29,000 in stock based compensation because of
amendments to employee stock options in 2017, and $68,000 in investors stock compensation due to fund raising activities in Q3
of 2016. Offsetting the decrease was an increase in professional fees of $140,000 mostly due to legal fees for the CytoBioscience
merger and consulting fees regarding new business development as well as merger and acquisition negotiations and activities. There
were increases in recruiting expenses of $15,000, due to a recruitment fee reduced in 2016, $11,000 for salaries, $6,000 for corporate
insurance, and state taxes of $5,000.
G&A expenses decreased by $716,000 for the nine months ended September 30, 2017 compared
to the 2016 period. The nine month decrease was predominantly from the $1,019,000 severance pay in 2016 for the former CEO, who
left the Company in May 2016; legal expense reduced by $483,000 as in 2016 we had a Unit Exchange Offer plus the negotiated settlement
with the former CEO; a decrease by $308,000 in investor relations incurred during 2016 due to utilizing consultants and proxy solicitors;
salaries, benefits and taxes reduced by $89,000 as the current CEO is not currently on payroll; recruiting fees are reduced by
$64,000 due to a fee paid in 2016; additional reduced expenses were for stock based compensation, $58,000 because of amendments
to employee stock options in 2017, audit and accounting fees, $6,000, licenses, permits and fees down by $20,000, stock transfer
expenses decreased by $9,000, depreciation expense was down by $11,000, travel down by $12,000, and bank charges down by $7,000.
Offsets include: $903,000 for investment stock compensation due to the direct registered raise in November of 2016, whereby warrants
were issued with a six-month vesting period culminating in May 2017; $287,000 for consulting paid by issuing 143,000 shares of
common stock, par value $0.01, to a consulting firm to assist in sales placements; $112,000 in bonuses that were cancelled in 2016
pursuant to the CEO negotiated settlement; for $33,000 in corporate insurance for increased policy rates in 2017, and for $41,000
because of a combination of increased state taxes in 2017 based on stock transactions and less in 2016 due to a reduction for anticipated
penalties.
Operations expense.
Operations expense primarily consists of expenses related
to product development and prototyping and testing in the company’s current stage.
Operations expense decreased by $100,000 in the three months ended September 30, 2017
compared to the three months ended September 30, 2016. The decreases for the three-month period include $63,000 in stock based
compensation resulting from an adjustment to the Company’s vesting expense pursuant to amended employee stock options in
2017; less consulting expenses of $46,000 due to higher 2016 expenses for attaining our CE mark; and, less research and development
costs, $10,000. The largest offset was for $9,000 regarding salaries per the hiring of the quality assurance manager in 2017,
and $9,000 due to corrections in inventory for obsolescence. Operations expense decreased by $353,000 in the nine months ended
September 30, 2017 compared to the nine months ended September 30, 2016. The nine-month reductions were from bonuses, $98,000,
from employee stock options exercised in 2016; $106,000 in stock based compensation because of amendments to employee stock options
in 2017; $78,000 in lower research and development costs; $11,000 in writing off obsolete inventory; $48,000 in consulting due
to higher 2016 expenses for attaining our CE mark, and $6,000 for shipping and postage.
Sales and Marketing expense.
Sales and marketing expense consists of expenses
required to sell products through independent reps, attendance at trades shows, product literature and other sales and marketing
activities
.
Sales and marketing expense increased by $164,000 in the three months ended September
30, 2017 compared to the three months ended September 30, 2016. The increases for the three-month period resulted from expanding
our sales force thus payroll, taxes and benefits were higher by $55,000; accordingly, travel expenses were increased as well by
$21,000, and commissions were higher by $13,000 due to increased sales in 2017. Additionally, stock based compensation increased
by $4,000 due to vesting of stock options, consulting increased by $38,000 due to our hiring an advocate for increasing government
sales, public relations increased by $24,000 due to hiring a firm to assist with the proposed CytoBioscience merger, trade shows
increased by $7,000 in the Company’s attempt for more exposure, and miscellaneous expenses increased by $4,000 due to higher
salesperson credentialing. Offsetting the increases was a reduction in advertising and promotion expenses of $3,000. Sales and
marketing expense increased by $332,000 in the nine months ended September 30, 2017 compared to the nine months ended September
30, 2016. The increases for the nine-month period resulted from expanding our sales force thus payroll, taxes and benefits were
higher by $210,000; accordingly, travel expenses were increased as well by $65,000, and commissions were higher by $25,000 due
to increased sales in 2017. Additionally, stock based compensation increased by $9,000 due to the quarterly vesting of inducement
options for our Vice President of Sales. Consulting increased by $8,000 due to our hiring an advocate for increasing government
sales, public relations increased by $24,000 due to hiring a firm to assist with the CytoBioscience merger, trade shows increased
by $6,000 in the Company’s attempt for more exposure, and miscellaneous expenses increased by $8,000 due to higher salesperson
credentialing. Offsetting the increases was a reduction in advertising and promotion expenses, $28,000.
Interest expense.
There was no interest expense in the first nine months of 2017,
and $3.00 in 2016.
Liquidity and Capital Resources
Payment Obligations Under Separation Agreement With Former CEO
Effective May 5, 2016, Joshua Kornberg resigned as the Chief Executive Officer and President
and an employee of the Company. In connection with Mr. Kornberg’s resignation, the Company and Mr. Kornberg entered into
a separation agreement on June 13, 2016 (the “Separation Agreement”). Pursuant to the Separation Agreement, on July
15, 2016, the Company was required to pay Mr. Kornberg: (a) $15,433.20 less any required tax withholdings in a lump sum on July
15, 2016; and (b) $75,000 less any required tax withholdings on July 15, 2016. The Company is required to pay Mr. Kornberg an additional
$75,000 less any required tax withholdings payable in 6 monthly installments of $12,500, due on the first regular payday of each
month, starting on August 15, 2016; and an additional $450,000 less any required tax withholdings payable in 11 monthly installments
of $40,909, due on the first regular payday of each month, starting on February 15, 2017. The Company issued to Mr. Kornberg a
restricted stock award (the “Award”) under the Company’s stock incentive plan consisting of 20,000 shares. The
award vested on July 15, 2016. The value of the award for purposes of the Separation Agreement (the “Award Value”)
is $90,350.61, based on a ten-day volume-weighted average closing sale price per share of the Company’s common stock. Mr.
Kornberg agreed that the withholding taxes in connection with the Award will be offset against cash payments otherwise due to him
in four monthly installments. In addition, the Company agreed to, at its option, either (a) pay Mr. Kornberg $309,649.39 (the “Additional
Cash Amount”), equal to the difference between $400,000 and the Award Value, payable in equal monthly installments of $40,909,
due on the first regular payday of each month, starting on January 15, 2018, less any required tax withholding, or (b) issue to
Mr. Kornberg shares of common stock of the Company (the “Additional Shares”) on January 15, 2018 with an aggregate
fair market equal to the Additional Cash Amount, based on a ten-day volume-weighted average closing sales price per share. Under
the Separation Agreement, all of Mr. Kornberg’s outstanding stock options and outstanding restricted stock prior to the date
of the Separation Agreement were canceled, consisting of options to purchase 22,085 shares and 2,667 shares of restricted stock.
The Separation Agreement included a waiver and release of claims by Mr. Kornberg. He will also continue to be bound by the terms
of any restrictive covenant agreements he had with the Company.
The foregoing summary of the Separation Agreement does not purport to be complete and
is qualified in its entirety be reference to the Separation Agreement, a copy of which was filed on June 17, 2016, as an exhibit
to our Current Report on Form 8-K.
Cash Flows
Net cash used in operating activities was $3,137,309 for the nine months ended September 30, 2017 compared
with net cash used of $3,704,307 for the 2016 period. The $567,000 decrease in cash used in operating activities was primarily
due an increase to vested stock option accounts from warrants issued in the 2017 public offering and by the reduced net loss in
2017. Offsets were decreases in payables, accruals, common stock issuance and equity instruments issued.
Cash flows used in investing activities was $1,676,015 for the nine months ended September 30, 2017 and $603,700
for the nine months ended September 30, 2016. The Company invested in certificates of deposits specifically maintaining balances
below $250,000 in each certificate to maintain FDIC banking protection. There was a moderate increase to purchases in fixed assets
and minimal fees related to patents, and an increase in notes receivable
Net cash provided by financing activities was $3,814,938 for the nine months ended September
30, 2017 compared to net cash provided of $86,253 for the nine months ended September 30, 2016. The cash provided came from the
net proceeds of the January public offering and the over-allotment option exercise by the underwriter.
Capital Resources
Our cash and cash equivalents were approximately $766,000 as of September 30, 2017, with certificates of deposit
of approximately $1,225,000. We had a cash balance of $425,000 as of September 30, 2017, with the remainder of our cash equivalents
in money market accounts. Since our inception, we have incurred significant losses. As of September 30, 2017, we had an accumulated
deficit of approximately $51,896,000.
From inception to September 30, 2017, our operations have been funded through a bank
loan and private convertible debt of approximately $5,435,000 and equity investments totaling approximately $27,766,000.
In the first nine months of 2017, we recognized $435,000 in revenues. Our product sales
since the end of the third quarter have resulted in approximately $93,000 in revenues.
Plan of Financing; Going Concern Qualification
Since our inception, we have incurred significant losses, and our accumulated deficit
was approximately $51.9 million as of September 30, 2017. Our operations from inception have been funded with private placements
of convertible debt securities and equity securities, in addition to a past bank loan (not currently outstanding) and a qualified
public offering raising a net $13,555,003 in 2015, after deducting underwriting discounts, commissions and expenses. As of September
30, 2017, the Company had no debt. On November 29, 2016, the Company closed a registered direct offering for net proceeds of $1,739,770.
On January 19, 2017, the Company closed on an underwritten public offering with net proceeds of $3,439,125. Additionally, as part
of the offering there was an over-allotment option that was exercised by the underwriter netting the Company $356,563.
We have not achieved profitability and anticipate that we will continue to incur net
losses at least through the end of 2017.
We had revenues of $435,000 in the first nine months of 2017, but we had negative operating cash flows
of $3,100,000. The negative cash flow is heavily impacted by our losses in the nine-month period of $4,878,000 which reflected
$2,150,000 of non-cash vesting expenses for warrants issued in conjunction with the registered direct offering and the public offering
completed in 2016 and 2017, respectively. Our cash balance was $425,092 as of September 30, 2017, with $1,565,000 in cash equivalents
and certificates of deposit, and our accounts payable and accrued expenses were an aggregate $1,217,000. We are currently incurring
negative operating cash flows of approximately $365,000 per month. Although we are attempting to curtail our operating expenses
for our core business, there is no guarantee that we will be able to reduce these expenses significantly, and expenses for some
periods may be higher as we prepare our product for broader sales, increase our sales efforts and maintain adequate inventories.
Further, our anticipated entry into the international marketplace will require additional cash expenditures.
In addition, as stated in “Strategic Relationships and
Transactions” above, we have made total advances of $1,070,000 to CytoBioscience and $175,000 to Helomics through the date
of this filing. We expect that we will need to make further advances to meet operating needs of those parties, and to further the
strategic partnerships with those companies. Such advances further deplete our cash resources, and we anticipate additional funding
challenges relating to other potential acquisitions and strategic relationships as we continue to fund our operations, strategic
partnerships and acquisition activities. We will attempt to raise the necessary funds through equity or debt financing, alternative
offerings or other means. If we are successful in securing adequate funding we plan to make significant capital or equipment investments,
and we will also continue to make human resource additions over the next 12 months. Such additional financing will be dilutive
to existing stockholders, and there is no assurance that such financing will be available upon acceptable terms. If such financing
or adequate funds from operations are not available, we will be forced to limit our business activities, which will have a material
adverse effect on our results of operations and financial condition.
As a result of the above factors, our independent registered public accounting firm has
indicated in their audit opinion, contained in our financial statements included in this annual report on Form 10-K, that they
have serious doubts about our ability to continue as a going concern. The financial statements have been prepared assuming the
Company will continue as a going concern.
2017 Firm Commitment Public Offering
On January 13, 2017, the Company announced the pricing of a firm commitment underwritten
public offering of 1,750,000 Units at an offering price of $2.25 per Unit, with each Unit consisting of one share of the Company’s
common stock and 0.2 of a Series D Warrant, with each whole Series D Warrant purchasing one share of our common stock at an exercise
price $2.25 per whole share. The shares of common stock and the Series D Warrants were immediately separable and were issued separately.
Gross proceeds to the Company from the offering was approximately $3,937,500 before deducting underwriting discounts and commissions
and other estimated offering expenses payable by the Company. The Company has granted the underwriter a 45-day option to purchase
an additional (i) up to 175,000 additional shares of common stock at the public offering price per unit less the price per warrant
included in the unit and less the underwriting discount and/or (ii) additional warrants to purchase up to 35,000 additional shares
of common stock at a purchase price of $0.01 per warrant to cover over-allotments, if any. The offering closed on January 19, 2017.
The underwriter exercised this option, and on February 22, 2017, the Company received net proceeds of approximately $358,312.
Inflation
We do not believe that inflation has had a material impact on our business and operating
results during the periods presented.
Off-Balance Sheet Arrangements
We have not engaged in any off-balance sheet activities as defined in Item 303(a)(4)
of Regulation S-K.
Critical Accounting Policies and Estimates and Recent Accounting Developments
The discussion and analysis of our financial condition and results of operations are
based upon our audited Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles
(“GAAP”). The preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of our financial statements, the reported amounts of
revenues and expenses during the reporting periods presented, as well as our disclosures of contingent assets and liabilities. On
an on-going basis, we evaluate our estimates and assumptions, including, but not limited to, fair value of stock-based compensation,
fair value of acquired intangible assets and goodwill, useful lives of intangible assets and property and equipment, income taxes,
and contingencies and litigation.
We base our estimates and assumptions on our historical experience. We also used any
other pertinent information available to us at the time that these estimates and assumptions are made. We believe that
these estimates and assumptions are reasonable under the circumstances and form the basis for our making judgments about the carrying
values of our assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could
differ from our estimates.
Our significant accounting policies are described in “Note 1 – Summary of
Significant Accounting Policies,” in Notes to Financial Statements of this Quarterly Report on Form 10-Q. We believe that
the following discussion addresses our critical accounting policies and reflects those areas that require more significant judgments,
and use of estimates and assumptions in the preparation of our Financial Statements.
Revenue Recognition.
We recognize revenue in accordance with the SEC’s
Staff Accounting Bulletin Topic 13 Revenue Recognition and ASC 605 – Revenue Recognition.
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has
occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either
shipment of the product or arrival at its destination based on the shipping terms of the transaction. Our standard terms specify
that shipment is FOB Skyline and we will, therefore, recognize revenue upon shipment in most cases. This revenue recognition policy
applies to shipments of our STREAMWAY SYSTEM units as well as shipments of cleaning solution and filters. When these conditions
are satisfied, we recognize gross product revenue, which is the price we charge generally to our customers for a particular product. Under
our standard terms and conditions, there is no provision for installation or acceptance of the product to take place prior to the
obligation of the customer. The customer’s right of return is limited only to our standard one-year warranty, whereby
we replace or repair, at our option. We believe it would be rare that the STREAMWAY SYSTEM unit or significant quantities
of cleaning solution or filters may be returned. Additionally, since we buy both the STREAMWAY SYSTEM units, cleaning solution,
and filters from “turnkey” suppliers, we would have the right to replacements from the suppliers if this situation
should occur.
Stock-Based Compensation
. Effective January 1, 2006, we adopted ASC 718-
Compensation-Stock Compensation (“ASC 718”). Under ASC 718 stock-based employee compensation cost is recognized
using the fair value based method for all new awards granted after January 1, 2006 and unvested awards outstanding at January 1,
2006. Compensation costs for unvested stock options and non-vested awards that were outstanding at January 1, 2006, are being recognized
over the requisite service period based on the grant-date fair value of those options and awards, using a straight-line method.
We elected the modified-prospective method in adopting ASC 718 under which prior periods are not retroactively restated.
ASC 718 requires companies to estimate the fair value of stock-based payment awards on
the date of grant using an option-pricing model. We use the Black-Scholes option-pricing model which requires the input of significant
assumptions including an estimate of the average period of time employees and directors will retain vested stock options before
exercising them, the estimated volatility of our common stock price over the expected term, the number of options that will ultimately
be forfeited before completing vesting requirements and the risk-free interest rate.
Because we do not have significant historical trading data on our common stock we relied
upon trading data from a composite of 10 medical companies traded on major exchanges and 15 medical companies quoted by the OTC
Bulletin Board to help us arrive at expectations as to volatility of our own stock when public trading commences. In 2013 the Company
experienced significant exercises of options and warrants. The options raised $6,500 in capital. Warrants exercised for cash produced
$1,330,000 of capital. In the case of options and warrants issued to consultants and investors we used the legal term of the option/warrant
as the estimated term unless there was a compelling reason to use a shorter term. The measurement date for employee and non-employee
options and warrants is the grant date of the option or warrant. The vesting period for options that contain service conditions
is based upon management’s best estimate as to when the applicable service conditions will be achieved. Changes in the assumptions
can materially affect the estimate of fair value of stock-based compensation and, consequently, the related expense recognized.
The assumptions we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve
inherent uncertainties and the application of management’s judgment. As a result, if factors change and we use different
assumptions, our equity-based compensation expense could be materially different in the future. See “Note 2 – Stockholders’
Equity, Stock Options and Warrants” in Notes to Financial Statements of this Quarterly Report on Form 10-Q for additional
information.
When an option or warrant is granted in place of cash compensation for services, we deem
the value of the service rendered to be the value of the option or warrant. In most cases, however, an option or warrant is
granted in addition to other forms of compensation and its separate value is difficult to determine without utilizing an option
pricing model. For that reason we also use the Black-Scholes option-pricing model to value options and warrants granted to
non-employees, which requires the input of significant assumptions including an estimate of the average period that investors
or consultants will retain vested stock options and warrants before exercising them, the estimated volatility of our common stock
price over the expected term, the number of options and warrants that will ultimately be forfeited before completing vesting
requirements and the risk-free interest rate. Changes in the assumptions can materially affect the estimate of fair
value of stock-based compensation and, consequently, the related expense recognizes that. Since we have no trading history in our
common stock and no first-hand experience with how our investors and consultants have acted in similar circumstances, the assumptions
we use in calculating the fair value of stock-based payment awards represent our best estimates, which involve inherent uncertainties
and the application of management's judgment. As a result, if factors change and we use different assumptions, our equity-based
consulting and interest expense could be materially different in the future.
Since our common stock has no significant public trading history we were required to
take an alternative approach to estimating future volatility and the future results could vary significantly from our estimates.
We compiled historical volatilities over a period of 2 to 7 years of 10 small-cap medical companies traded on major exchanges and
15 medical companies in the middle of the market cap size range on the OTC Bulletin Board and combined the results using a weighted
average approach. In the case of standard options to employees we determined the expected life to be the midpoint between
the vesting term and the legal term. In the case of options or warrants granted to non-employees, we estimated the life to
be the legal term unless there was a compelling reason to make it shorter.
Valuation of Intangible Assets
We review identifiable intangible assets for impairment in accordance with ASC 350-
Intangibles
– Goodwill and Other,
whenever events or changes in circumstances indicate the carrying amount may not be recoverable.
Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances
that indicate the carrying amount may not be recoverable include, but are not limited to, a significant change in the medical device
marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances
are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would
include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds
the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment
is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount
rate utilized is based on management's best estimate of the related risks and return at the time the impairment assessment is made.
The balance represented intellectual property in the form of patents for our original STREAMWAY product. The Company’s enhanced
STREAMWAY product has a new patent pending, see “Patents and Intellectual Property.”
Recent Accounting Developments
See Note 1 - “Summary of Significant Accounting Policies” to the Condensed
Financial Statements of this Quarterly Report on Form 10-Q for a discussion of recent accounting developments.
Information Regarding Forward-Looking Statements
This Form 10-Q contains “forward-looking statements” that indicate certain risks and uncertainties
related to the Company, many of which are beyond the Company’s control. The Company’s actual results could differ materially
and adversely from those anticipated in such forward-looking statements as a result of certain factors, including those set forth
below and elsewhere in this report. Important factors that may cause actual results to differ from projections include:
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Current negative operating cash flows, as well as the impact on our cash levels of advances to our strategic partners and
possible future advances to such organizations or others;
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The terms of any further financing, which may be highly dilutive and may include onerous terms;
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Risk that we will be unable to protect our intellectual property or claims that we are infringing on others’ intellectual property;
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The impact of competition, the obtaining and maintenance of any necessary regulatory clearances applicable to applications of the Company’s technology;
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Inability to raise sufficient additional capital to operate our business;
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Risk that we never become profitable if our product is not accepted by potential customers;
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Possible impact of government regulation and scrutiny;
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Unexpected costs and operating deficits, and lower than expected sales and revenues, if any;
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Adverse economic conditions;
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Adverse results of any legal proceedings;
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The volatility of our operating results and financial condition;
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Inability to attract or retain qualified senior management personnel, including sales and marketing personnel;
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The potential delisting of our common stock from The Nasdaq Capital Market if we do not continue to meet applicable listing standards; and
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Other specific risks that may be alluded to in this report.
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All statements other than statements of historical facts, included in this report regarding
the Company’s 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. The Company does 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 Skyline believes that
its plans, intentions and expectations reflected in or suggested by the forward-looking statements in this report are reasonable
the Company cannot assure potential investors that these plans, intentions or expectations will be achieved. The Company discloses
important factors that could cause the Company’s actual results to differ materially from its expectations in the “Risk
Factors” section and elsewhere our Annual Report on Form 10-K for the year ended December 31, 2016. The Company also included
updated risk factors, including risks related to the proposed merger transaction with CytoBioscience, as Exhibit 99.3 to its Current
Report on Form 8-K filed on August 1, 2017. These cautionary statements qualify all forward-looking statements attributable to
the Company or persons acting on its behalf.
Information regarding market and industry statistics contained in this report are included
based on information available to the Company that it believes is accurate. It is generally based on academic and other publications
that are not produced for purposes of securities offerings or economic analysis. The Company has not reviewed or included data
from all sources, and the Company cannot assure potential investors of the accuracy or completeness of the data included in this
report. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and
the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services.
The Company has no obligation to update forward-looking information to reflect actual results or changes in assumptions or other
factors that could affect those statements.