Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2017; comparative results are for the three months ended June 30, 2016. Filed August 10, 2017.
Business context
Aethlon is a clinical-stage medical device company developing the Hemopurifier for viral and other blood-borne conditions, and majority-owns Exosome Sciences, which is developing exosome-based diagnostics. The Hemopurifier remained under an FDA-approved clinical study; the company said completion and FDA acceptance of study documentation would be needed before it could pursue pivotal studies. The DARPA contract ended in September 2016, and the related Battelle subcontract ended in March 2017.
Financial results and position
| Metric | Three months ended June 30, 2017 | Prior comparable period / balance-sheet date |
|---|---|---|
| Revenue | $0 | $4,635 in 2016 |
| Operating expenses | $1.160 million | $1.136 million in 2016 |
| Operating loss | $1.160 million | $1.132 million in 2016 |
| Net loss before noncontrolling interests | $1.846 million | $2.137 million in 2016 |
| Net loss attributable to common stockholders | $1.842 million; $0.21 per share | $2.129 million; $0.28 per share in 2016 |
| Net cash used in operating activities | $1.075 million | $0.828 million in 2016 |
| Cash | $327,206 | $1.560 million at March 31, 2017 |
| Working capital | Negative $42,649 | $985,496 at March 31, 2017 |
Gross margin is not meaningful given no revenue in the quarter. Operating expenses rose 2.1% year over year: payroll increased $285,240, partly offset by lower professional fees and general and administrative expenses. Stock-based compensation was $280,911, versus $50,710 a year earlier. Other expense was $685,302, including $376,909 in debt-extinguishment losses, $119,789 on share-for-warrant exchanges, and $188,604 in interest and other debt expense.
At June 30, total assets were $509,151 and total liabilities were $1.459 million, including $1.051 million of convertible notes, net of discount. Note principal totaled $1.293 million, with $37,721 accrued interest. Stockholders’ deficit was $950,065. Cash decreased $1.232 million during the quarter; investing activities used $23,705 and financing activities used $134,226.
Material changes and financing
- June amendments extended both the November 2014 and December 2016 10% convertible notes to July 1, 2019 and reduced their conversion prices from $4.00 to $3.00 per share. The amendments generated a combined $376,909 extinguishment loss.
- During the quarter, the company issued 69,341 restricted shares in exchanges for cancellation of 100,118 warrants, recording a $119,789 loss. It also issued 15,000 shares for investor-relations services.
- ATM sales raised $1,903 net during the quarter. Subsequent to quarter-end through August 10, ATM sales raised a further $40,377 net.
- On July 31, 2017, the company filed an S-1 to raise up to $7.5 million through common stock and warrants.
Outlook, risks and unusual items
Management stated that June 30 cash would not fund operations for at least 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. Additional financing is necessary; if financing is unavailable on acceptable terms, the company may delay, reduce, or curtail operations and clinical or research work. Management expects continued losses and negative cash flows. No specific earnings or revenue guidance was provided.
On August 1, Nasdaq staff determined to delist the shares for failure to meet the $35 million minimum market-value-of-listed-securities requirement. Aethlon requested a hearing on August 8, which stayed suspension or delisting pending the hearing process; it planned to present a compliance plan and seek additional time. Other disclosed risks include FDA and other regulatory approval, clinical-trial outcomes, financing, patent protection, product liability, market acceptance, and competition. The company reported no pending or threatened legal proceedings and said disclosure controls were effective.
Data caution: The segment disclosure contains an apparent inconsistency: its table reports 2017 total revenue of $392,073, while the consolidated statements and MD&A report no revenue. The filing text does not explain the discrepancy.
Important facts for investors to verify
- Whether the company secured sufficient financing after the filing, including the outcome and terms of the proposed $7.5 million offering and ATM sales.
- The Nasdaq hearing outcome and whether Aethlon satisfied continued-listing requirements.
- Clinical-study progress, FDA acceptance of study documentation, and any path or timetable to pivotal trials.
- The segment revenue discrepancy and the company’s remaining cash runway and cash needs.
- Potential dilution and obligations from convertible notes, warrants, equity awards, and future financings.