Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2017; filed February 1, 2018. Comparisons are to the periods ended December 31, 2016, or to March 31, 2017 for balance-sheet items.
Business context
Aethlon is a development-stage medical technology company. Its Hemopurifier is an early clinical-stage device intended to remove viruses from blood; its majority-owned subsidiary, Exosome Sciences, Inc. (ESI), researches exosomal biomarkers, including a candidate related to CTE. Revenue remains limited to government contracts. The company reports Aethlon and ESI as its two segments.
Financial performance and liquidity
| Metric | Three months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2017 | Prior comparable period |
|---|---|---|---|
| Revenue | $74,813 | $74,813 | $0; $392,073, respectively |
| Operating expenses | $1.238 million | $3.635 million | $1.236 million; $4.986 million |
| Operating loss | $1.164 million | $3.560 million | $1.236 million; $4.594 million |
| Net loss attributable to common stockholders | $1.215 million | $4.361 million | $1.206 million; $5.590 million |
| Basic and diluted loss per share | $0.08 | $0.40 | $0.15; $0.72 |
Nine-month revenue came from an NIH contract milestone. The NIH award may provide up to $299,250 over nine months, with a possible additional $49,800 option; the first milestone generated $74,813. The prior-year nine-month revenue included final DARPA milestones and a Battelle subcontract. Product gross margin is not meaningful because the filing reports no product sales.
At December 31, cash was $5.611 million, working capital was $5.289 million, total assets were $5.751 million, and total liabilities were $1.147 million. Current liabilities were $336,406. Convertible notes, net of discount, were $810,866, classified as noncurrent; principal totaled $992,591, with $30,886 accrued interest. Cash was $1.560 million and working capital $985,496 at March 31, 2017.
For the nine months, operating cash use was $2.893 million, investing cash use was $23,705, and financing provided $6.968 million. Cash increased by $4.051 million. Financing was primarily from common-stock issuance. The October 2017 offering raised $6.0 million gross and $5.290 million net through 5,454,546 shares and an equal number of five-year warrants. In December, warrant exercises generated $240,460 before expenses.
Changes, outlook, and risks
- Nine-month operating expenses declined 27.1%, mainly reflecting lower stock-based compensation and professional fees. Operating loss improved by about $1.034 million, while net loss before noncontrolling interests improved by about $1.240 million.
- Quarterly operating expenses were nearly flat year over year; quarterly net loss before noncontrolling interests increased to $1.220 million from $1.213 million. Quarterly revenue was $74,813 versus none a year earlier.
- Nine-month other expense was $813,618, including $376,909 in debt-extinguishment losses, $130,214 in losses on share-for-warrant exchanges, and $306,495 in interest and other debt expense. Interest expense rose year over year, chiefly due to amortization of note discounts.
- Management expected cash on hand at December 31 to fund operations for at least 12 months from issuance of the interim statements. It also expects ongoing losses and negative cash flows, and says substantial additional financing will be needed beyond that period to support clinical trials and research. Financing may not be available on acceptable terms.
- After quarter-end, warrant exercises generated $937,970 before expenses, and ATM stock sales generated $454,654 net from 340,000 shares. Shares outstanding increased from 15,367,658 at December 31 to 16,580,326 at January 31, 2018.
- Key risks include FDA and other regulatory approval, clinical-trial outcomes and delays, additional capital needs, commercialization and market acceptance, competition, product liability, and intellectual-property protection; the filing notes some patents could expire before approvals. No pending or threatened legal proceedings were reported. No specific financial guidance was provided.
Important facts for investors to verify
- Reconcile the cash-flow comparison: the cash-flow statement reports nine-month operating cash use of $2.552 million for 2016, while MD&A cites $2.644 million.
- Review the timing and milestone conditions for the NIH award and the company’s progress toward further revenue-generating milestones.
- Assess cash runway against the stated need for additional financing, and monitor subsequent warrant exercises and ATM share sales.
- Evaluate dilution exposure: 7,864,321 warrants were outstanding at December 31, alongside convertible notes and equity awards; the filing excluded potential shares from diluted EPS as antidilutive.
- Track clinical, regulatory, manufacturing, and intellectual-property developments for the Hemopurifier and ESI programs.