Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2015 (the first quarter of fiscal 2016). Comparisons are with the three months ended June 30, 2014, unless otherwise noted.
Business context
Aethlon is a medical-device company developing its ADAPT platform, including the Hemopurifier, for cancer, infectious disease and other serious conditions. Its majority-owned Exosome Sciences subsidiary is developing diagnostic approaches. Revenue was generated from government contracts; Exosome Sciences had no revenue.
Financial performance and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $192,508 | $51,296 |
| Operating expenses | $1,282,479 | $1,223,304 |
| Operating loss | $(1,089,971) | $(1,172,008) |
| Interest and other debt expense | $126,688 | $78,654 |
| Net loss before noncontrolling interests | $(1,216,659) | $(3,704,292) |
| Net loss attributable to common stockholders | $(1,183,036) | $(3,655,941) |
| Basic and diluted loss per share | $(0.18) | $(0.80) |
| Net cash used in operating activities | $(798,006) | $(763,749) |
Revenue increased $141,212, mainly because Aethlon recognized $186,164 for a DARPA milestone; Battelle subcontract revenue declined $44,952. Operating expenses rose 4.8% year over year: higher professional fees and general and administrative costs were partly offset by lower payroll costs. The substantially smaller net loss primarily reflects the absence of the prior-year $2.45 million loss on settlement of notes.
Cash was $5,649,578 at June 30, 2015, versus $855,596 at March 31, 2015. Working capital was $4,909,902, versus $630,420 at March 31. Financing activities provided $5,591,988 in the quarter, while operations used $798,006. No capital expenditures were reported.
Total liabilities were $896,613 at June 30, 2015. Convertible notes had $527,780 principal outstanding, reported net of $279,413 unamortized discount as a $248,367 current liability, plus $34,453 accrued interest. The notes bear 10% interest and mature April 1, 2016.
The filing does not report a gross margin, and the available statements do not provide a clear basis for calculating a meaningful product margin.
Material changes and financing
- On June 25, 2015, the company sold $6 million of units for $5,591,988 net proceeds. The units comprised 952,383 restricted shares and warrants to purchase 714,285 shares; the placement agent also received a warrant for 32,371 shares. Warrants have a five-year term and a $6.30 exercise price.
- The company completed a 1-for-50 reverse stock split on April 14, 2015. At June 30, 2015, 7,610,344 common shares were outstanding, compared with 6,657,046 at March 31, 2015.
- Operating loss improved modestly year over year, while operating cash use increased by approximately $34,000.
Outlook, risks and other notable disclosures
- Management said existing cash, together with expected government-contract revenue, should fund operations and current clinical trials through the fiscal year ending March 31, 2016. The company expects continued losses and negative cash flow and says significant additional financing will be needed for later trials and research and development.
- The FDA-authorized U.S. Hemopurifier feasibility study is intended to enroll ten dialysis patients with hepatitis C. The principal investigator had recently begun recruiting. Successful trials, including at least one follow-on trial, are required before U.S. commercialization; foreign approvals may also require trials.
- DARPA reduced the scope of contract work for years three through five, reducing potential payments by approximately $858,000. DARPA had exercised options through year four; year five remained optional. Management warned that failure to exercise that option could materially affect revenue, operating cash flow and liquidity.
- Management cited risks including financing needs, clinical and regulatory outcomes, patent protection, product liability, market acceptance, competition and technology changes. Some patents may expire before regulatory approval.
- Disclosure controls and procedures were reported as ineffective at quarter-end. Management reported no material change in internal control over financial reporting during the quarter.
- The company reported no pending or threatened legal proceedings. It disclosed employment and facility lease commitments, including laboratory leases expiring in October 2015, for which management planned renewal.
Key facts for investors to verify
- Whether cash burn and current trial costs remain within management’s stated funding horizon, and when additional capital may be required.
- Clinical-trial enrollment, progress and regulatory milestones for the Hemopurifier, and the implications of potential patent expirations.
- DARPA’s year-five option decision, remaining contract milestones and government-contract revenue expectations.
- The dilution and potential share issuance associated with the June financing warrants, other outstanding warrants and convertible notes.
- Management’s plans and progress for addressing ineffective disclosure controls.