Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended September 30, 2017; filed November 2, 2017. The company develops the early clinical-stage Hemopurifier device and, through majority-owned Exosome Sciences, researches diagnostic biomarkers. The statements are unaudited.
Financial results and position
| Metric | Three months ended September 30, 2017 | Six months ended September 30, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.236 million | $2.396 million |
| Operating loss | $1.236 million | $2.396 million |
| Net loss attributable to common stockholders | $1.304 million; $0.14 per share | $3.146 million; $0.35 per share |
| Cash used in operating activities | Not stated for the quarter | $2.103 million |
- Six-month cash used in investing activities was $24,000; financing provided $1.487 million, primarily from common-stock sales. Cash fell by $640,000 to $920,072.
- At September 30, current assets were $1.012 million and current liabilities $346,000, yielding working capital of approximately $666,000. Total assets were $1.146 million; total liabilities were $1.127 million.
- Convertible notes had $992,591 principal outstanding and a $780,579 net carrying amount, plus $6,071 accrued interest. The notes bear 10% interest; June 2017 amendments extended maturities to July 2019 and reduced conversion prices to $3 per share.
- No operating margin is meaningful because the company reported no revenue in the current quarter or six-month period.
Changes versus prior comparable periods
- Revenue declined from $387,438 to zero in the quarter and from $392,073 to zero for six months. The prior-period revenue came principally from the DARPA contract, which concluded in September 2016; its related subcontract ended in March 2017.
- Quarterly operating expenses decreased 52.7% and six-month expenses decreased 36.1%. Management attributed much of the decline to lower stock-based compensation following accelerated vesting of 2016 restricted stock unit awards, as well as reduced professional fees. Cash-based payroll increased with scientific staff additions.
- Six-month net loss narrowed to $3.154 million from $4.400 million; loss per share improved to $0.35 from $0.57. Lower operating expenses and lower debt-extinguishment and warrant-repricing charges were partly offset by higher interest expense and share-for-warrant exchange losses.
- Operating cash use increased to $2.103 million from $1.764 million year over year, despite the lower reported net loss.
Liquidity, outlook, and risks
- On October 4, 2017, after quarter-end, the company completed a public offering of 5,454,546 shares and warrants to buy an equal number of shares at $1.10 each, raising $6.0 million gross and $5.290 million net. Management said cash on hand plus these proceeds should fund operations for at least 12 months from the financial-statement issuance date.
- The offering warrants have a five-year term and a $1.10 exercise price. The company reported 15,095,867 common shares outstanding as of November 2, 2017. The financing materially increased potential dilution.
- Management expects continuing losses and negative cash flow and says additional financing will be required beyond the projected 12-month runway, including to fund clinical trials and research and development. Inability to raise capital on acceptable terms could disrupt research, regulatory work, and operations and adversely affect the company’s ability to continue as a going concern.
- The company reported completing a Hemopurifier feasibility study focused on safety in health-compromised people with viral infection. The device remains early-stage; regulatory approval, successful trials, market acceptance, competition, and patent protection remain significant uncertainties.
- In October, the company reported completing the first milestone under a nine-month NIH contract and invoicing $74,812.50; potential total contract revenue is $299,250. This is a subsequent event, not revenue reported for the six months ended September 30.
- Nasdaq notified the company of a potential delisting over its market-value requirement. In October, following appeal, Nasdaq confirmed continued-listing compliance, including the $2.5 million stockholders’ equity requirement; the company was required to appoint a new independent director by its March 2018 annual meeting.
- Six-month other expense included $376,909 loss on debt extinguishment, $130,214 loss on share-for-warrant exchanges, and $250,583 interest expense. These included noncash accounting charges. The company reported no pending or threatened legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the October offering proceeds support the stated runway, and the company’s cash burn and financing needs beyond that period.
- Actual clinical, regulatory, and commercialization milestones for the Hemopurifier, and progress on the NIH contract and ESI’s diagnostic program.
- Potential dilution from the offering warrants, convertible notes, outstanding warrants, options, and restricted stock units.
- Whether the company appointed the required independent director and maintained Nasdaq listing compliance.
- The nature and future cash impact, if any, of debt amendments and associated accounting losses; reported note carrying value is below principal outstanding.