Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2015; comparative periods ended December 31, 2014. The company develops medical-device technologies, including the Hemopurifier and ADAPT platform, and diagnostic approaches through majority-owned Exosome Sciences, Inc. (ESI). Revenue was generated from government contracts; ESI had no revenue.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Revenue | $301,033 | $33,434 | $681,907 | $563,805 |
| Operating expenses | $1,385,163 | $1,120,414 | $3,980,367 | $3,423,985 |
| Operating loss | $(1,084,130) | $(1,086,980) | $(3,298,460) | $(2,860,180) |
| Net loss attributable to common stockholders | $(1,217,168) | $(1,550,457) | $(3,624,808) | $(5,910,444) |
| Loss per share, basic and diluted | $(0.16) | $(0.26) | $(0.50) | $(1.12) |
- Quarterly revenue increased $267,599, primarily reflecting a $296,964 DARPA milestone, partly offset by lower Battelle subcontract revenue. Nine-month revenue rose $118,102: DARPA revenue increased $224,569 while Battelle revenue fell $106,467.
- Operating expenses rose 23.6% for the quarter and 16.2% for the nine months. Professional fees were the largest contributor to the increases. For the nine months, lower payroll costs partly offset higher professional and general and administrative expenses.
- Net loss improved versus the prior-year periods, but the nine-month comparison benefited substantially from the prior period’s $2.754 million loss on debt conversion and other nonrecurring debt-related charges. Interest expense increased to $402,837 from $293,522 for the nine months, mainly due to amortization of debt discounts.
- Operating margins were negative: operating losses substantially exceeded revenue in both reported periods. The filing does not present a gross margin measure.
Cash, liquidity, and debt
- At December 31, 2015, cash was $3.251 million, current assets $3.435 million, current liabilities $883,889, and working capital $2.551 million. At March 31, 2015, cash was $855,596 and working capital $630,420.
- Nine-month operating cash use was $3.202 million, compared with $3.152 million in the prior-year period; investing cash use was $9,307. Financing provided $5.607 million, mainly from the June 2015 equity financing. Cash increased $2.395 million to $3.251 million.
- The June 2015 sale of common stock and warrants generated $6.0 million gross and $5.592 million net proceeds. The financing increased shares outstanding and included warrants for 714,285 shares, plus a placement-agent warrant.
- Convertible notes had $527,780 principal outstanding, presented net of $93,137 unamortized discount as $434,643; accrued interest was $60,841. The notes bear 10% interest and mature June 1, 2016 following a November 2015 amendment. The company paid a $90,000 amendment fee, recorded as deferred financing cost.
Business developments, outlook, and risks
- The FDA had authorized a ten-patient U.S. feasibility study of the Hemopurifier for dialysis patients with Hepatitis C; the principal investigator had recently begun recruiting. Successful trial outcomes and at least one follow-on trial are needed for U.S. commercialization. Overseas marketing may also require human trials.
- DARPA extended its contract through September 30, 2016. The contract is milestone-based, and the agency reduced its scope in 2014, lowering potential payments over years three through five. The company cautioned that milestones may not be achieved or paid in full.
- Management said existing cash, the June financing, and expected government-contract revenue should fund operations through the fiscal year ending March 31, 2016, including current clinical-trial costs. Additional significant financing is needed for later trials and continued research and development; management expects negative cash flow and net losses to continue.
- Key risks include financing needs, clinical and regulatory uncertainty, market acceptance, competition, product liability, and intellectual-property protection. The filing notes that some patents may expire before regulatory approval.
- Management reported that disclosure controls and procedures were not effective at period-end. The filing reports no material change in internal control over financial reporting during the quarter and no pending or threatened legal proceedings.
- Executive retention bonuses totaling $200,000 were approved in October 2015. In January 2016, the company gave notice to terminate ESI’s New Jersey lease as part of consolidating laboratory operations in San Diego.
Important facts for investors to verify
- Reconcile the DARPA milestone and revenue disclosures: the notes report $669,292 invoiced for three milestones during the nine months, while MD&A states $372,328 for those milestones; reported nine-month DARPA revenue is $669,292.
- Confirm the contract’s remaining milestone schedule, scope, and expected payments through its September 2016 extension, including the filing’s differing figures for the scope reduction ($858,491 and $858,469).
- Assess whether available liquidity and prospective financing can support operations beyond March 31, 2016, clinical development, and planned manufacturing-related spending.
- Track recruitment and results for the ten-patient feasibility study, and the timing, cost, and regulatory requirements of follow-on trials.
- Evaluate dilution and share availability from the June 2015 financing, outstanding warrants and options, convertible notes, and management’s temporary exercise waivers tied to authorized-share capacity.
- Understand the remediation plan for ineffective disclosure controls and procedures.