Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2014 (fiscal 2015 second quarter); unaudited. Aethlon is a development-stage medical-device company focused on therapeutic blood filtration, with majority-owned subsidiary Exosome Sciences, Inc. (ESI) developing exosome-based diagnostics.
Financial results
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $479,075 (2014); $644,887 (2013) | $530,371 (2014); $840,483 (2013) |
| Operating expenses | $1,080,267; $874,683 | $2,303,571; $1,854,075 |
| Operating loss | $601,192; $229,796 | $1,773,200; $1,013,592 |
| Net loss attributable to common stockholders | $847,409; $3,349,670 | $4,503,350; $3,653,168 |
| Loss per share, basic and diluted | $0.00; $0.02 | $0.02; $0.02 |
All revenue came from government contracts: DARPA and its systems-integration subcontractor Battelle. There was no product-sales revenue. Gross margin is not separately reported, so the filing text does not provide a clear value.
- Six-month revenue declined 37% year over year, mainly because DARPA milestone revenue fell by $364,016; Battelle revenue increased by $53,904.
- Six-month operating expenses rose 24%, including increased payroll and expenses at ESI. ESI had no revenue and reported a six-month operating loss of $445,674.
- Six-month net loss increased by about $939,000. It included $2,531,123 of debt-conversion losses, while 2013 included a $2,382,877 derivative-liability fair-value loss. In the September quarter, the prior-year derivative loss drove much of the comparison: 2014 common-stockholder loss was lower despite higher operating expenses.
Cash, liquidity and debt
- Cash was $526,187 at September 30, down from $1,250,279 at March 31. Operating cash use was $1,394,366 for the six months, versus $744,520 a year earlier; financing provided $670,274, primarily from stock issuance.
- Working capital deficit was approximately $2.496 million, compared with $14.169 million at March 31. The improvement largely reflected removal of $10.679 million of derivative liabilities through reclassification to equity, not cash generation.
- Total liabilities were $4.378 million, including $3.388 million of current liabilities. The balance sheet reported $190,000 of notes payable and $1.474 million of convertible notes, in addition to $888,778 due to related parties and other current obligations. Certain notes were past due or in default; the filing cites $473,422 of past-due principal and $471,041 of accrued interest associated with defaulted notes.
- Management disclosed substantial doubt about the company’s ability to continue as a going concern. It stated in MD&A that available cash and post-quarter financing were insufficient for the next twelve months and that significant additional financing was needed. The company expected to rely on equity and debt financing, government-contract receipts, or both.
Business developments, outlook and risks
- The Hemopurifier had FDA authorization for a U.S. investigational feasibility study involving ten HCV-infected end-stage renal disease patients. Further successful clinical studies and regulatory approvals are necessary before U.S. commercialization; the filing provides no earnings guidance or commercialization timetable.
- DARPA’s five-year contract had potential payments of $6.794 million, subject to milestones and an option for year five. In February 2014, DARPA reduced the scope for years three through five, reducing potential payments by $858,491. Management said lower costs were expected to almost entirely offset the reduced revenue under its assumptions; achievement and payment of milestones are not assured.
- After quarter-end, the company reported $1,080,951 raised through private equity transactions and $415,000 in net proceeds from convertible-note financing through November 7, alongside $247,361 collected under the DARPA contract. Subsequent events also included repayment of certain notes, additional stock and warrant transactions, and conversions of debt to equity. These activities involved substantial potential dilution.
- The company reported 262.7 million shares outstanding at quarter-end and 295.2 million as of November 7, 2014. Convertible securities, options and warrants add further potential dilution.
- Management said disclosure controls and procedures were not effective as of quarter-end. The filing also identifies risks involving further financing, clinical and regulatory outcomes, patent protection, contract milestones, and market acceptance. Some patents could expire before approvals are obtained. No pending or threatened legal proceedings were reported other than ordinary-course claims.
Important facts for investors to verify
- Current cash, cash burn and financing runway, including the amount and terms of subsequent equity and debt financing.
- Status and funding requirements for the Hemopurifier clinical study, and progress toward required regulatory approvals.
- DARPA milestone performance, remaining contract scope, and whether the year-five option will be exercised.
- Past-due debt, accrued interest, covenant or default status, and the terms and dilution effects of conversions, warrants and other securities.
- Remediation of ineffective disclosure controls and the company’s ability to maintain reporting controls while operating with limited liquidity.