Business context and reporting period
Aethlon Medical, Inc. is a development-stage medical-device company focused on its ADAPT platform and Hemopurifier. This unaudited Form 10-Q covers the three and six months ended September 30, 2013, the company’s fiscal second quarter and first half of fiscal 2014. Revenue came from government contracts, not commercial product sales.
In June 2013, the FDA approved an Investigational Device Exemption allowing a U.S. feasibility study of the Hemopurifier in 10 end-stage renal disease patients with hepatitis C. The company also conducts work under a DARPA contract to develop a device intended to reduce sepsis.
Financial performance and liquidity
Amounts below are in U.S. dollars. The filing does not report gross profit or gross margin separately.
| Metric | Three months ended Sept. 30, 2013 | Six months ended Sept. 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Government contract revenue | $644,887 | $840,483 | $400,114; $616,861 |
| Operating expenses | $874,683 | $1,854,075 | $1,199,908; $2,408,444 |
| Operating loss | $(229,796) | $(1,013,592) | $(799,794); $(1,791,583) |
| Net loss | $(3,349,670) | $(3,653,168) | $(1,421,324); $(2,439,135) |
| Loss per share, basic and diluted | $(0.02) | $(0.02) | $(0.01); $(0.02) |
Six-month operating cash use was $744,520, compared with $915,550 a year earlier. Financing provided $628,000, including $400,000 borrowed from directors and $228,000 from stock issuance. Cash fell to $8,754 from $125,274 at March 31, 2013.
At September 30, current assets were $283,743 and current liabilities were $11,958,642, yielding a working-capital deficit of $11,674,899. Total assets were $411,190 and stockholders’ deficit was $11,547,452. Notes payable were $590,000 and convertible notes, net of discounts, were $2,244,373; accrued interest and other obligations add substantially to liabilities. The company reported $2,067,916 of note principal past due, with $1,052,865 accrued interest associated with defaulted notes.
Material changes versus the prior comparable periods
- Revenue increased 61% for the quarter and 36% for the six-month period. The six-month total included $808,739 from DARPA and $31,744 from a new Battelle subcontract.
- Operating expenses declined 27% for the quarter and 23% for the half, mainly due to lower professional fees and compensation, including reduced stock-based compensation.
- Net loss increased despite lower operating expenses. A $2,382,877 six-month charge from the fair-value remeasurement of derivative liabilities (versus a $361,462 gain in 2012) was the principal unusual driver. This charge was noncash.
- Operating cash use improved, but financing inflows were lower than in 2012. The working-capital deficit widened by about $2.4 million, largely reflecting the increase in derivative liabilities.
- Common shares issued and outstanding rose from 173,674,201 at March 31 to 191,758,061 at September 30. The filing reports 199,021,247 shares outstanding as of November 14, 2013.
Outlook, management commentary, risks and contingencies
- Going concern and funding: Management says resources are insufficient for fiscal 2014 requirements and that substantial additional financing is necessary. The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Management expected financing efforts, existing cash and anticipated contract receipts to help meet fiscal 2014 needs, but gave no assurance funds would be raised. It expects continuing losses and negative cash flows.
- Funding after quarter-end: The company disclosed subsequent private placements and contract receipts. The detailed subsequent-event disclosures describe $230,000 and $412,000 gross equity raises, with placement-agent fees and warrants; the liquidity discussion separately cites $492,460 raised in equity and $472,460 net proceeds from $642,000 gross proceeds through the filing date. These figures are not clearly reconciled in the filing.
- Contracts: The DARPA award has potential payments of $6,794,389 over five years; years four and five remain options. Payments depend on milestone achievement, and management warns that failure to meet milestones or non-exercise of later options could materially affect revenue and liquidity. Battelle subcontract revenue is subject to Battelle’s direction and approval.
- Clinical and regulatory risks: U.S. commercialization requires successful clinical studies and further regulatory approval. Foreign sales also require trials or approvals. The filing warns that some patents may expire before product approval and identifies financing, product liability, market acceptance, competition and regulatory matters as risks.
- Debt and dilution: Multiple notes are past due or in default. Certain director notes could be extended or converted into shares and warrants. Note conversions, equity financings and warrants may substantially dilute existing holders.
- Legal and reporting matters: Gemini Master Fund litigation seeks damages and delivery of shares; the case was in late discovery, with no trial date set. An adverse outcome could harm operations and dilute shareholders. Management concluded disclosure controls and procedures were not effective as of period-end.
- Other subsequent events: The company reported $233,271 collected under government contracts in October through November 13, 2013, and additional director lending to its subsidiary. These events do not resolve the stated need for substantial financing.
Most important facts for investors to verify
- Whether the company raised sufficient financing to fund operations, and how the differing post-quarter fundraising figures reconcile.
- Cash runway, obligations on overdue notes, and the status or terms of any extensions, repayments or conversions.
- Progress and results of the 10-patient U.S. feasibility study, and the timing and funding required for follow-on trials and approvals.
- DARPA milestone performance, future contract options, and the scale and continuation of Battelle subcontract work.
- The outcome and potential financial or share-dilution impact of the Gemini litigation, and the company’s remediation of ineffective disclosure controls.
- Changes in derivative-liability valuations and the resulting effects on reported net losses and the working-capital deficit.