Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended December 31, 2016, the third quarter of fiscal 2017. The filing was signed February 10, 2017.
Business context
Aethlon is a development-stage medical-device company focused on its ADAPT platform and Hemopurifier, intended to remove harmful particles from circulation. Its majority-owned subsidiary, Exosome Sciences, Inc. (ESI), is developing diagnostic approaches. The company had no product revenue; reported revenue came from government contracts. The DARPA contract was completed after the company invoiced its final two milestones during the nine-month period.
Financial performance and position
| Metric | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2016 | Comparable 2015 period |
|---|---|---|---|
| Revenue | $0 | $392,073 | $301,033 quarterly; $681,907 nine-month |
| Operating expenses | $1,235,546 | $4,986,147 | $1,385,163 quarterly; $3,980,367 nine-month |
| Operating loss | $1,235,546 | $4,594,074 | $1,084,130 quarterly; $3,298,460 nine-month |
| Net loss attributable to common stockholders | $1,205,731, or $0.15 per share | $5,590,333, or $0.72 per share | $1,217,168, or $0.16 per share quarterly; $3,624,808, or $0.50 per share nine-month |
Nine-month revenue declined 42.5% year over year. Nine-month operating expenses rose 25.3%, mainly reflecting $1.88 million of stock-based compensation, substantially above the prior-year $152,133. Nine-month net loss before noncontrolling interests was $5.61 million versus $3.70 million. There was no gross margin to assess in the quarter because revenue was zero.
For the quarter, operating expenses decreased 10.8%, but the absence of prior-year government-contract revenue contributed to a larger operating loss. Net loss attributable to common stockholders was slightly lower than the prior-year quarter.
- Cash and liquidity: Cash was $628,615 at December 31, 2016, down from $2.12 million at March 31, 2016. Working capital was $286,939, compared with $1.85 million at fiscal year-end.
- Cash flow: Nine-month operating cash use was $2.55 million versus $3.20 million in 2015; investing cash use was $2,961. Financing provided $1.06 million, compared with $5.61 million in the prior-year period. Ending cash decreased by $1.50 million.
- Debt: Convertible-note principal totaled $1.34 million; the balance-sheet carrying amount, net of $928,813 in unamortized discounts, was $414,398. The notes bear 10% interest. The December 2016 financing generated $600,000 in cash for $680,400 principal, with conversion at $4.00 per share and warrants for 127,575 shares.
- Balance sheet: Total assets were $789,597 and total liabilities were $788,514, leaving total equity of $1,083. Accounts receivable was zero at period-end.
Material changes, outlook and risks
- Nine-month other expense rose to $1.02 million from $402,837, including $558,198 net loss on debt extinguishment and $345,841 expense from warrant repricing. Interest expense fell to $115,308 from $402,837, largely due to lower amortization of debt discounts and financing costs.
- The company raised $554,306 net through its at-the-market (ATM) equity program during the nine months and $577,460 net from the December convertible-note financing. From January 1 through February 10, 2017, it raised a further $256,226 net through ATM sales, issuing 64,395 shares.
- Management said additional debt or equity financing and/or government grants would be needed to fund operations and development. It believed expected financing, together with available cash, could meet liquidity needs through December 31, 2017, but gave no assurance that financing would be available. The filing states that recurring losses, limited working capital and the accumulated deficit of approximately $92.1 million raise substantial doubt about the company’s ability to continue as a going concern.
- The company expects continued negative cash flows and net losses. No specific revenue, earnings or cash-flow guidance was provided. It said further capital is needed for U.S. clinical trials, research and development, and planned manufacturing-related purchases.
- The FDA had authorized a ten-patient U.S. feasibility study of Hemopurifier therapy in dialysis patients with hepatitis C; successful completion and at least one follow-on human trial would be required for U.S. commercialization. The filing reports that the principal investigator had begun recruiting patients. Regulatory approval, trial execution, patent protection, financing, market acceptance and competition remain risks.
- On February 1, 2017, Nasdaq notified Aethlon that it had not met the $35 million market value of listed securities requirement for 30 consecutive business days. The company had until July 31, 2017 to regain compliance; the notice did not immediately delist the shares.
- The company reported no pending or threatened legal proceedings, no off-balance-sheet arrangements, and no material changes in internal control over financial reporting. Management concluded disclosure controls were effective.
Investor verification priorities
- Confirm subsequent financing availability, cash runway and the company’s ability to meet its stated liquidity needs; assess dilution from ATM sales, convertible notes, warrants and equity awards.
- Track Hemopurifier feasibility-trial recruitment, completion and FDA requirements, as well as whether any follow-on studies are funded.
- Verify Nasdaq compliance status and the timing and conditions of any cure.
- Review the final DARPA-related revenue recognized and the replacement sources of funding now that the contract is complete.
- Check the terms and potential dilution of the amended November 2014 notes and December 2016 notes, including conversion prices, maturities and associated warrants.