Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2013. The filing was signed February 11, 2014. Aethlon is a development-stage medical-device company developing its ADAPT platform; reported revenue came from government contracts, not commercial product sales.
Business context and developments
- The FDA approved an Investigational Device Exemption in June 2013 for a planned U.S. feasibility study of the Hemopurifier involving ten end-stage renal disease patients infected with hepatitis C. Successful trials and additional regulatory approvals are still required before commercialization.
- Exosome Sciences, Inc. (ESI) began operations in October 2013, pursuing exosome-based diagnostic strategies. ESI raised $1.5 million by selling shares to outside investors; Aethlon’s ownership fell to 80%.
- Aethlon’s DARPA contract supports development of a therapeutic device related to sepsis. DARPA finalized a scope reduction on February 10, 2014, reducing potential payments by $858,491 over contract years three through five. Management said lower costs were expected to almost entirely offset the revenue reduction based on then-current assumptions.
Key financial results
| Metric | Three months ended Dec. 31, 2013 | Three months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2012 |
|---|---|---|---|---|
| Revenue | $76,313 | $208,781 | $916,796 | $825,642 |
| Operating expenses | $1,308,655 | $1,145,620 | $3,162,730 | $3,554,064 |
| Operating loss | $1,232,342 | $936,839 | $2,245,934 | $2,728,422 |
| Net loss (profit) attributable to common stockholders | $(2,230,550) | $313,944 profit | $(5,883,718) | $(2,125,191) |
| Loss per share | $(0.01) | $0.00 | $(0.03) | $(0.01) |
| Operating cash used | Not reported by quarter | $1,583,872 | $1,577,327 |
- Revenue composition: Nine-month 2013 revenue included $808,739 from DARPA and $108,057 from the Battelle subcontract. Third-quarter revenue was $76,313, all reported under Battelle; no DARPA revenue was recorded in that quarter.
- Balance sheet at Dec. 31, 2013: Cash was $1,854,941; total assets were $2,105,008; current liabilities were $12,649,912; and working capital deficit was $10,731,262. Accumulated deficit was $67,210,799.
- Debt and obligations: Notes payable were $390,000 and convertible notes payable, net, were approximately $2,244,942. The filing states that $2,067,916 of note principal was past due, with $1,061,046 of accrued interest associated with defaulted notes. Derivative liabilities were $5,576,065.
- Cash flows and financing: Nine-month investing cash use was $61,493; financing provided $3,375,032, principally from equity issuance and director loans. Cash increased by $1,729,667 to $1,854,941. Aethlon’s December-quarter stock-and-warrant offering generated $1,795,900 gross and $1,447,032 net proceeds; ESI’s share sales generated $1.5 million.
Material changes versus comparable periods
- Third-quarter revenue decreased $132,468 year over year, while operating expenses rose $163,035. The quarter shifted from a $313,944 profit attributable to common stockholders to a $2,230,550 loss; the prior-year quarter included a much larger noncash gain on derivative revaluation.
- Nine-month revenue increased $91,154 and operating expenses declined $391,334. Nevertheless, the net loss attributable to common stockholders increased to $5,883,718 from $2,125,191, mainly reflecting a $2,304,702 noncash charge from the change in fair value of derivative liabilities, the $1 million Gemini litigation provision, and other items. The prior-year period had a $1,745,718 derivative fair-value gain.
- Working capital deficit widened by approximately $1.45 million from March 31, 2013. Management attributed the largest factor to a roughly $1.99 million increase in derivative liabilities, substantially driven by the higher share price.
Outlook, risks and unusual items
- Going concern and liquidity: The company reported recurring losses, defaulted debt, negative working capital and an accumulated deficit, raising significant doubt about its ability to continue as a going concern. Management said current resources might not cover the next twelve months and that additional debt or equity financing was necessary. There is no assurance that financing will be available on acceptable terms or at all.
- Management expected existing cash, additional capital and anticipated DARPA receipts to meet fiscal 2014 liquidity needs, but also said parent-company operations would depend on securities sales and/or borrowing for at least the next several years. Management expected negative cash flows and net losses to continue.
- DARPA milestone payments depend on achieving and obtaining acceptance of specified milestones; years four and five remain options. Battelle work is time-and-materials and revenue depends on Battelle’s direction and approval.
- The company accrued $1 million for possible settlement of Gemini Master Fund litigation. Gemini seeks monetary damages and shares; cross-motions for summary judgment had been filed, no trial date was set, and settlement discussions were ongoing. An adverse outcome could harm operations and dilute shareholders.
- Disclosure controls and procedures were reported as not effective at period end. Management reported no material change in internal control over financial reporting during the quarter.
- Other risks cited include clinical and regulatory approval, patent protection, product liability, market acceptance, competition and the need for further funding. No formal financial guidance was provided.
Most important facts for investors to verify
- Whether Aethlon can raise sufficient capital to fund operations and clinical work, and the resulting dilution and financing terms.
- Current status, timing, costs and results of the planned Hemopurifier feasibility study and subsequent regulatory steps.
- Actual financial and milestone effects of the finalized DARPA scope reduction, plus continuation of DARPA options and Battelle work.
- Status and potential resolution of the Gemini litigation, including whether the $1 million accrual is adequate and whether settlement involves equity issuance.
- Repayment, conversion or extension of past-due notes, and changes in derivative liabilities and their noncash effects on reported earnings.
- Progress at ESI, including its cash needs and Aethlon’s continuing 80% ownership; also monitor share-count growth and potential dilution from outstanding options, warrants and convertible securities.