Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2016, filed November 10, 2016. This is the company’s fiscal second quarter of fiscal 2017, despite the request metadata labeling it “2016 Q2.” Aethlon develops medical devices, including the Hemopurifier, and diagnostic technologies through majority-owned Exosome Sciences, Inc. (ESI).
Financial performance
| Metric | Three months ended Sep. 30, 2016 | Three months ended Sep. 30, 2015 | Six months ended Sep. 30, 2016 | Six months ended Sep. 30, 2015 |
|---|---|---|---|---|
| Revenue | $387,438 | $188,366 | $392,073 | $380,874 |
| Operating expenses | $2,614,116 | $1,312,727 | $3,750,602 | $2,595,206 |
| Operating loss | $(2,226,678) | $(1,124,361) | $(3,358,529) | $(2,214,332) |
| Net loss attributable to common stockholders | $(2,255,586) | $(1,224,606) | $(4,384,602) | $(2,407,642) |
| Loss per share, basic and diluted | $(0.29) | $(0.16) | $(0.57) | $(0.34) |
- Revenue was entirely government-contract revenue, principally from DARPA; ESI had no revenue. The filing reports no gross margin.
- Six-month operating cash use was $1.764 million, versus $2.238 million in the prior-year period. Investing cash use was $2,961; financing provided $199,269, versus $5.592 million in the prior-year period.
- Cash fell to $556,352 from $2.124 million at March 31, 2016. Current assets were $816,540 and current liabilities $1.084 million, producing negative working capital of $267,681. Management attributes the current-liability classification of $605,815 in convertible notes partly to their July 1, 2017 maturity.
- Total liabilities were $1.084 million; the notes had $662,811 principal and $605,815 net carrying value at September 30. The notes bear 10% interest and were extended to July 1, 2017, with conversion price reduced to $5 per share.
Material changes and unusual items
- Quarterly operating expenses rose 99.1%; six-month expenses rose 44.5%. The principal driver was stock-based compensation of $1.574 million for the six months, including $1.523 million in the quarter, following officer and director RSU grants. Cash-based payroll declined.
- Six-month other expense increased to $1.041 million from $253,933, including a $616,889 debt-extinguishment loss and $345,841 warrant-repricing expense. These were largely noncash accounting charges. Interest expense decreased to $78,743 from $253,933.
- In June 2016, Aethlon established an at-the-market (ATM) stock-sale program for up to $12.5 million. It raised net proceeds of $266,612 during the quarter through 50,163 shares. From October 1 through November 8, it raised a further $61,265 net through 13,261 shares.
- On the June note amendment, $80,000 of extension fees was added to principal rather than paid in cash; the aggregate note principal also reflected accrued interest and a $30,000 conversion during the six-month period. Separately, 264,000 warrants were repriced from $15 to $5 per share.
Outlook, risks and contingencies
- Management states that recurring losses, limited working capital and an accumulated deficit of approximately $90.9 million raise substantial doubt about the company’s ability to continue as a going concern. It expects to need significant additional capital for operations, clinical trials and product development.
- Management plans to seek equity and/or debt financing, ATM proceeds and government grants, and believes expected financing and contract receipts can meet liquidity needs through September 30, 2017. It cautions that funding is not assured; failure to obtain capital could impede research, FDA-clearance work and planned trials.
- The FDA-approved investigational device exemption permits a 10-patient U.S. feasibility study of the Hemopurifier in HCV-infected dialysis patients. The principal investigator had recently begun recruiting patients. Successful trials and regulatory approvals remain necessary for commercialization; timing, cost and outcome are uncertain.
- The DARPA contract generated the final two milestone invoices, totaling $387,438, in September 2016. Aethlon collected $193,719 in October for one invoiced milestone; the filing does not state that all amounts due had been collected.
- Key risks identified include financing availability, FDA and other regulatory approval, clinical-trial outcomes, patent protection, product liability, market acceptance, competition and technology change. The company reported no pending or threatened legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Cash runway, ATM capacity remaining, subsequent share issuance and the terms and availability of additional financing.
- Convertible-note principal, maturity, conversion terms and any further amendments or conversions.
- Enrollment and progress of the Hemopurifier feasibility study, clinical milestones, and the regulatory path and costs for U.S. commercialization.
- Whether government-contract receipts continue after the final DARPA milestones and how Aethlon will replace that revenue source.
- Timing and dilution effects of outstanding RSUs, warrants and other potential common shares; the filing excluded 3,289,606 potential shares from diluted loss per share as antidilutive.