Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2015 (fiscal 2016 second quarter); filed November 16, 2015. The company develops medical devices based on its ADAPT platform, including the Hemopurifier, and diagnostic programs through majority-owned Exosome Sciences, Inc. Hemopurifier remained in clinical development, with an FDA-authorized 10-patient feasibility study underway.
Financial performance
| Metric | Three months ended Sep. 30, 2015 | Three months ended Sep. 30, 2014 | Six months ended Sep. 30, 2015 | Six months ended Sep. 30, 2014 |
|---|---|---|---|---|
| Revenue | $188,366 | $479,075 | $380,874 | $530,371 |
| Operating expenses | $1,312,727 | $1,080,267 | $2,595,206 | $2,303,571 |
| Operating loss | $(1,124,361) | $(601,192) | $(2,214,332) | $(1,773,200) |
| Net loss attributable to common stockholders | $(1,224,606) | $(847,409) | $(2,407,642) | $(4,503,350) |
| Loss per share, basic and diluted | $(0.16) | $(0.16) | $(0.34) | $(0.92) |
- All reported revenue was government contract revenue, principally from DARPA and a Battelle subcontract. The company reported no ESI revenue.
- Gross profit and gross margin are not separately reported; revenue was far below operating expenses.
- Six-month operating cash use was $2.24 million, versus $1.39 million a year earlier. Financing provided $5.59 million, compared with $0.67 million in the prior period; cash rose to $4.21 million from $0.86 million at March 31, 2015.
- At September 30, working capital was $3.72 million. Current liabilities were $0.83 million, including $341,505 in net current convertible notes; the notes had $527,780 principal and $47,647 accrued interest. The notes bore 10% interest and were originally due April 1, 2016.
Changes versus comparable periods
- Quarterly revenue fell $290,709, or about 61%, and six-month revenue fell $149,497, or about 28%, reflecting lower contract milestone revenue.
- Quarterly operating expenses increased 21.5%; six-month expenses increased 12.7%. Clinical-trial costs and legal/professional fees related largely to financing registrations contributed to increases. Lower payroll costs, including reduced stock compensation and ESI headcount, partly offset six-month expense growth.
- Quarterly net loss attributable to common stockholders worsened to $1.22 million from $0.85 million. Six-month net loss improved to $2.41 million from $4.50 million, mainly because the 2014 period included substantial debt-settlement and warrant-extension charges; 2015 had no comparable charges.
- In June 2015, the company raised $6.0 million gross, or $5.59 million net, by selling 952,383 shares and warrants for 714,285 shares at $6.30 per unit. Common shares outstanding rose to 7,615,636 by September 30 from 6,657,046 at March 31.
Outlook, risks and notable items
- Management said existing funds and expected government-contract revenue should fund operations, including current clinical trials, through the fiscal year ending March 31, 2016. It also said significant additional financing would be needed for further U.S. trials and ongoing research beyond that year, and expects continued losses and negative cash flows.
- DARPA’s fixed-price contract had potential payments of $6.79 million over five years, but the 2014 scope reduction lowered potential payments by approximately $858,000. Milestone acceptance and payment are not assured; contract revenue depends on achieving milestones.
- FDA market clearance requires successful feasibility and follow-on trials. The company also cited regulatory, patent-expiration, financing, product-liability, market-acceptance, competition and technology risks. Some patents may expire before approvals are obtained.
- After quarter-end, the company appointed a new principal investigator for its U.S. feasibility study; management said no significant other study changes were expected. It approved retention bonuses totaling $200,000 for three executives.
- On November 12, 2015, the company amended the convertible-note terms, extending maturity to June 1, 2016 and making other temporary share-reservation and warrant-exercise changes; it paid an investor a $90,000 fee.
- Management concluded disclosure controls and procedures were not effective as of September 30, 2015. The company reported no pending or threatened legal proceedings and no off-balance-sheet arrangements.
Investor verification priorities
- Cash use, operating runway, and the timing and terms of any additional financing, including potential share and warrant dilution.
- Clinical-trial enrollment, milestones and results, and regulatory requirements for Hemopurifier commercialization.
- DARPA and Battelle milestone progress, remaining contract scope and potential payments.
- Convertible-note amendment terms, accrued interest, the $90,000 fee, and repayment or conversion obligations.
- Remediation plans for ineffective disclosure controls and the costs of executive retention bonuses.