Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2014; filed August 14, 2014. Aethlon develops therapeutic filtration devices, including the Hemopurifier, and its subsidiary Exosome Sciences, Inc. (ESI) is developing exosome-based diagnostics. Revenue was government-contract revenue; the company had no commercial product revenue reported.
Financial results and liquidity
| Metric | Three months ended June 30, 2014 | Comparable 2013 period |
|---|---|---|
| Revenue | $51,296 | $195,596 |
| Operating expenses | $1,223,304 | $979,394 |
| Operating loss | $1,172,008 | $783,798 |
| Net loss before noncontrolling interests | $3,704,292 | $303,498 |
| Net loss attributable to common stockholders | $3,655,941 | $303,498 |
| Basic and diluted loss per share | $0.02 | $0.00 |
| Cash used in operations | $763,749 | $221,621 |
| Cash from financing activities | $320,800 | $128,000 |
At June 30, cash was $807,330, total assets were $1,144,448, and total liabilities were $4,665,304. Working capital was negative $2,725,823; stockholders’ deficit totaled $3,520,856. The filing does not present a gross margin. No investing cash flows were reported.
Material changes and unusual items
- Revenue fell $144,300, or approximately 74%, as no DARPA milestone was invoiced in the quarter; $51,296 came from the Battelle subcontract. Operating expenses rose 24.9%, mainly reflecting ESI payroll and professional fees, as well as higher stock-based compensation.
- The quarter included a $2,453,630 loss on settlement of notes, primarily associated with shares and warrants issued in connection with conversions and restructurings. This contributed substantially to the increase in reported net loss.
- The company converted $660,000 of past-due convertible-note principal and accrued interest into equity and restructured or extended other notes. The $10,679,067 derivative liability was reclassified to equity after holders waived anti-dilution protections; it was not a cash inflow.
- Quarter-end shares outstanding were 253,395,651, up from 224,973,980 at March 31, 2014. The filing reported 261,096,690 shares outstanding as of August 12, 2014.
Outlook, risks and contingencies
- Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It said cash and funds raised to date were not sufficient for the next 12 months and that significant additional financing was needed. The company planned to seek equity or debt financing and government grants; there was no assurance funding would be available.
- Management expected continued negative cash flows and losses and did not expect operating revenue to meet near-term funding needs. The company also needs capital to complete its approved U.S. human feasibility trial of the Hemopurifier, planned for ten HCV-infected end-stage renal disease patients.
- DARPA reduced the scope of contract years three through five in February 2014, reducing potential payments by $858,491. Years four and five remained at DARPA’s option; failure to exercise them could materially affect revenue, operating cash flow and liquidity. Management said the scaled-back work was expected to reduce costs nearly enough to offset lower anticipated revenue.
- At June 30, $472,656 of note principal was past due, with $487,273 of accrued interest associated with defaulted notes reported in accrued liabilities. The filing also identifies past-due debt and debt defaults as liquidity concerns.
- After quarter-end, the company reported collecting $197,362 under DARPA and $22,496 under the Battelle subcontract, raising $259,474 through warrant exercises, and completing further share issuances and debt conversions.
- Management concluded disclosure controls and procedures were not effective at quarter-end. The company disclosed no other pending or threatened legal proceedings, apart from ordinary-course claims, and no off-balance-sheet arrangements.
Key facts for investors to verify
- Available cash, subsequent financing and the company’s ability to fund operations for the next 12 months, given the going-concern warning.
- Terms, maturity status and accrued interest of past-due obligations, plus the effect of note conversions and restructurings on dilution.
- DARPA contract options, remaining milestones and payments after the scope reduction, and continuation of Battelle subcontract revenue.
- Progress, funding and regulatory requirements for the Hemopurifier feasibility study and ESI’s diagnostic programs.
- Remediation of ineffective disclosure controls and any further changes to financing, share count or liabilities after August 12, 2014.