Aethlon Medical, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended March 31, 2016; comparisons are with the year ended March 31, 2015. The company develops the Hemopurifier, an investigational device intended to remove viruses, toxins and cancer-associated exosomes from blood, and conducts exosome diagnostics research through its majority-owned subsidiary, Exosome Sciences, Inc. Reported revenue came from U.S. government contracts, not product sales.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $886,572 | $762,417 |
| Operating expenses | $5,271,406 | $4,755,270 |
| Operating loss | $(4,384,834) | $(3,992,853) |
| Net loss attributable to common stockholders | $(4,872,329) | $(6,797,157) |
| Basic and diluted loss per share | $(0.66) | $(1.22) |
| Cash used in operating activities | $(4,329,307) | $(5,049,414) |
- Revenue increased 16.3% year over year to $886,572. DARPA revenue was $863,011, up from $630,887; Battelle subcontract revenue was $23,561, down from $131,530. The business remains highly dependent on government contracts.
- Operating expenses rose $516,136, chiefly from higher professional fees. Research and development expense was approximately $782,000, versus $1,028,000.
- The common-stockholder net loss narrowed by $1.925 million. FY2015 included a $2.754 million debt-conversion loss that did not recur; FY2016 other expense was $573,782, primarily interest and debt-related charges. Operating loss increased despite the lower net loss.
- At March 31, 2016, cash was $2,123,737, working capital was $1,877,532, current assets were $2,404,143 and current liabilities were $526,611. Total liabilities were $1,054,391, including $527,780 of convertible-note principal; total stockholders’ equity was $1,502,366.
- Financing provided $5,606,755 of net cash in FY2016, principally from the June 2015 equity financing, which generated $5,591,988 net proceeds. Shares outstanding increased from 6,657,046 to 7,622,393 during the year.
Material changes and business developments
- The FDA-approved U.S. feasibility study is designed to enroll 10 HCV-infected patients with end-stage renal disease. It compares standard dialysis with Hemopurifier-assisted sessions and assesses safety and viral-load changes. The filing does not provide a clear enrollment or outcome update.
- The company reported prior small Indian HCV studies and a single HIV proof-of-principle treatment, but these are not substitutes for U.S. clinical evidence or FDA marketing approval. The Hemopurifier remains investigational; the company expects a PMA pathway for U.S. commercialization.
- DARPA revenue recognized rose to $863,011. The contract’s potential value was reduced by approximately $858,000 after a scope reduction; the company said up to $387,438 in additional DARPA revenue could be earned in FY2017, subject to milestones. Future Battelle work is at Battelle’s discretion.
- Exosome Sciences reported no revenue. Its research includes potential biomarkers for neurological disorders and cancer; a five-year UCI study is planned to examine plasma exosomes in up to 45 cancer patients.
- A 1-for-50 reverse stock split was completed in April 2015, and shareholders approved an increase in authorized common shares to 30 million in March 2016. The company also raised $6 million gross in June 2015 through common stock and warrants.
Liquidity, outlook and risks
- Going concern: The auditor’s report highlights substantial doubt about the company’s ability to continue as a going concern. Accumulated deficit was approximately $86.5 million. Management said existing cash and expected contract receipts would fund operations into the first quarter of FY2017, but additional financing was needed for the remainder of FY2017 and planned clinical and R&D work.
- Financing plans: A June 28, 2016 at-the-market agreement permits sales of up to $12.5 million of common stock, with a 3% sales commission; the company is not required to sell shares. This is potential financing, not cash already raised.
- Subsequent debt and warrant amendments: In June 2016, the November 2014 notes’ maturity was extended to July 1, 2017, conversion price lowered to $5.00, and aggregate principal increased to $692,811, including accrued interest and an extension fee. Certain warrant exercise prices were also reduced to $5.00. These terms may increase dilution.
- Management expects continuing operating losses and negative cash flows. No product-sales guidance or profitability timeline is provided. Commercialization depends on clinical results, regulatory clearance, financing, manufacturing capability, reimbursement and potential partners.
- Key risks include the need for repeated equity or debt financing and resulting dilution; concentration of revenue in DARPA; milestone and contract-cancellation risk; clinical and regulatory failure or delay; limited staff and reliance on third parties; competition; and product-liability exposure with limited insurance. The filing reports no pending litigation and no material off-balance-sheet arrangements.
- The filing reports effective disclosure controls and internal control over financial reporting as of March 31, 2016. The auditor did not express an opinion on internal-control effectiveness.
Important facts for investors to verify
- Current cash, spending rate, and whether the company has raised funds under the $12.5 million ATM program since the filing.
- Progress, enrollment, safety findings and results from the U.S. HCV feasibility study, and the FDA’s requirements for subsequent trials and approval.
- Whether DARPA milestones and any anticipated FY2017 contract revenue were achieved, and whether replacement revenue sources exist as contract work winds down.
- The current balance, maturity and conversion terms of the amended notes, and the number of shares potentially issuable under outstanding warrants, options and convertible securities.
- Reconciliation of contract disclosures: the financial statements and MD&A report FY2015 DARPA revenue of $630,887, while a milestone discussion elsewhere in the filing states $863,011 for FY2015. The filing text does not clearly reconcile this difference.