Aethlon Medical, Inc. — FY2018 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended March 31, 2018, not a standalone fourth-quarter report. Aethlon is a clinical-stage medical technology company developing the Hemopurifier, an extracorporeal device intended to remove certain viruses from blood, and, through its 80%-owned subsidiary Exosome Sciences, researching exosomal biomarkers. The Hemopurifier was not commercially approved, and the company had no product-sales revenue.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $149,625 | $392,073 |
| Operating expenses | $4,980,741 | $6,490,430 |
| Operating loss | $(4,831,116) | $(6,098,357) |
| Net loss attributable to common stockholders | $(5,679,558) | $(7,276,113) |
| Basic and diluted loss per share | $(0.46) | $(0.94) |
| Cash used in operating activities | $(3,910,680) | $(3,505,900) |
| Cash at fiscal year-end | $6,974,070 | $1,559,701 |
| Working capital | $6,752,293 | $985,496 |
- Revenue fell about 62%, primarily because the DARPA contract had ended; FY2018 revenue came from the NIH/NCI contract. The company reported no gross margin measure, and product margins are not applicable to its pre-commercial business.
- Operating expenses declined about 23%, mainly from lower stock-based compensation, professional fees and clinical-trial costs. R&D expense was approximately $586,000, versus $673,000 in FY2017.
- Other expense was $868,721, including $376,909 of debt-extinguishment losses, $130,215 of losses on share-for-warrant exchanges and $361,597 of interest and other debt expense.
- Financing activities provided $9.35 million net cash, principally through stock issuance, the October 2017 public offering and warrant exercises. Shares outstanding rose from 8.80 million to 17.74 million during the year.
- At March 31, 2018, total liabilities were $1.32 million, including $841,153 of convertible notes payable, net of discounts. Notes had a 10% stated interest rate; principal outstanding was $992,591, with both note balances shown as due July 1, 2019. Accrued interest was $55,701.
- Management expected the March 31 cash balance to fund operations for at least 12 months from issuance of the financial statements, but said further financing would be needed thereafter and to fund future U.S. clinical trials. The company reported no off-balance-sheet arrangements.
Material changes and business developments
- FDA-approved Hemopurifier feasibility study in HCV-infected dialysis patients concluded in March 2017 with eight participants. The filing reports no device-related adverse events among enrolled subjects meeting study criteria and average capture of 154 million HCV copies during four-hour treatments. The study was a small feasibility study and does not establish commercial efficacy or approval.
- FDA granted the device Expedited Access Pathway designation in September 2017; the company subsequently said it had transitioned to the Breakthrough Device program. It was discussing with FDA the clinical pathway for the proposed broad indication. The device remained investigational.
- The NIH/NCI fixed-price SBIR contract, entered into in September 2017, could provide $299,250 over nine months, with a $49,800 option. Aethlon invoiced $149,625 in FY2018 after completing work on initial milestones. DARPA and Battelle contracts were completed, and no further DARPA revenue was expected.
- ESI began enrollment in March 2018 for a planned follow-on TauSome biomarker study of up to 200 former professional football players and controls. The filing describes earlier findings as preliminary, not as a validated diagnostic.
- The company raised $5.29 million net in its October 2017 offering of 5.45 million shares and warrants, and received further proceeds from exercises of 2.16 million warrants. A separate at-the-market program generated $2.10 million net during the year; approximately $5.2 million remained available under that program as of the filing date.
Outlook, risks and unusual items
- The company has never been profitable and expects continued losses and negative operating cash flows. It stated that additional financing will be needed for ongoing operations, research and development, and anticipated clinical trials. Further equity or convertible financing could dilute shareholders.
- Commercialization depends on successful clinical development and regulatory clearance or approval, likely including a PMA supported by clinical data. Timing, trial design, approval and eventual market adoption are uncertain; there is no assurance that FDA approval will be obtained.
- Other key risks include limited operating scale and six full-time employees; reliance on third-party manufacturers and service providers; competition; product-liability and limited insurance coverage; patent and licensing challenges; dependence on government contracts and milestone awards; and potential reimbursement constraints.
- Convertible-note amendments extended maturities and reduced conversion prices to $3.00 per share. At March 31, 2018, the company disclosed 7.16 million potential common shares from options, warrants, restricted stock units and convertible notes, subject to applicable terms and dilution.
- The financial statements received an unqualified independent audit opinion. Management reported disclosure controls and internal control over financial reporting effective as of March 31, 2018; the auditor did not audit or opine on internal-control effectiveness.
Important facts for investors to verify
- Current cash runway, monthly cash burn, remaining ATM capacity and financing needs against the company’s stated 12-month expectation.
- FDA’s agreed clinical and regulatory pathway, trial requirements, timeline and funding plan for the Hemopurifier.
- Whether the small feasibility-study safety and virus-capture results are replicated in larger, appropriately designed studies.
- Convertible-note terms and maturities, warrant exercises, potential share issuance and the resulting dilution.
- NIH milestone completion and payment status, any Phase 2 award, and progress and results of the ESI biomarker study.