Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2011, the company’s fiscal second quarter and first half of fiscal 2012. The company is a development-stage medical-device business developing the ADAPT platform and Hemopurifier; it reported no revenue from planned principal operations in either 2011 period.
Financial results and position
| Metric | Three months ended September 30, 2011 | Six months ended September 30, 2011 | Comparable 2010 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Operating expenses | $883,000 | $1.915 million | $1.410 million and $2.572 million, respectively |
| Operating loss | $883,000 | $1.915 million | $1.410 million and $2.572 million, respectively |
| Net loss | $453,000 | $3.039 million | $2.742 million and $6.237 million, respectively |
| Loss per share, basic and diluted | $0.00, rounded | $0.03 | $0.04 and $0.09, respectively |
Margins are not meaningful because the company had no current-period revenue. The quarter’s net loss included a $1.030 million noncash gain from the change in fair value of derivative liabilities; the six-month gain was $1.522 million.
- Cash and liquidity: Cash was $45,579 at September 30, versus $15,704 at March 31. Current assets were $174,185 and current liabilities $6.662 million, resulting in negative working capital of approximately $6.488 million.
- Cash flow: Six-month operating cash use was $1.036 million, investing cash use $1,735, and financing cash provided $1.068 million. Cash increased by $29,875 during the period.
- Debt and obligations: Current liabilities included $594,796 of notes payable, $2.335 million of convertible notes net of discounts, $1.342 million of derivative liabilities, and $617,570 due to related parties. The filing reports substantial past-due debt; its disclosures give slightly different aggregate defaulted principal amounts, approximately $1.843 million in the liquidity note and $1.853 million in Part II.
- Equity and dilution: Shares outstanding were 100.996 million at September 30, up from 77.467 million at March 31; 108.472 million were outstanding as of November 15. During the six months, 17.439 million shares were issued for debt conversions and 3.700 million for net warrant cashless exercises.
Changes versus the prior comparable periods
Six-month operating expenses declined 26% year over year and net loss narrowed to $3.039 million from $6.237 million. Quarterly operating expenses fell 37% and quarterly net loss declined to $453,000 from $2.742 million. Management attributed much of the expense reduction to lower noncash stock-option expense compared with 2010. Six-month professional fees rose, primarily due to scientific consulting and costs associated with an HCV clinical trial in India. The prior-year six-month net loss included a $2.227 million debt-extinguishment loss and $68,703 of settlement-related expense, with no comparable 2011 charges.
Outlook, risks, and unusual items
- Going concern and funding: Management reported recurring losses, debt defaults, negative working capital, and an accumulated development-stage deficit of $51.511 million, raising substantial doubt about the company’s ability to continue as a going concern. It said resources were insufficient for fiscal 2012 requirements and additional debt or equity financing would be needed. Management estimated a minimum cash requirement of $180,000 per month and expected continued losses and negative cash flows.
- DARPA contract: A September 30 award provides for up to $6.794 million over five years to develop a device targeting sepsis. Payments depend on fixed-price milestones, government reviews, and potentially third-party contributions; full payment is not assured. Work began in October, and the company reported receiving an initial $358,284 payment after quarter-end. Management anticipated increased R&D spending over the next 12 months, subject to working capital and contract funding.
- Additional financing: After quarter-end, the company reported $175,000 in net bridge-financing proceeds, with a potential total of up to $1 million, not guaranteed. A November financing raised $200,000 for a $210,000 principal debenture bearing 20% interest and maturing in April 2012, with conversion and warrant provisions that may dilute shareholders.
- Regulatory and commercial risks: The company had submitted an IDE to the FDA but still needed authorization for human trials and subsequent regulatory approvals. It did not expect operating revenue for the foreseeable future. Management also cited financing access, product acceptance, competition, product liability, technological change, and potential patent expirations as risks.
- Defaults and contingencies: Numerous notes were past due, including convertible notes, and the company had accrued $437,800 for registration-related liquidated damages. The Barsell lawsuit over notes was settled in August; the company agreed to make monthly repayments in cash or stock, at its election, and the case was dismissed without prejudice.
- Controls: Management concluded disclosure controls and procedures were not effective as of period-end. It reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Current cash runway, financing availability and terms, and the status and amounts of all defaulted debt and accrued interest.
- Progress against DARPA milestones, future contract payments, and whether contract costs can be funded as incurred.
- FDA response to the IDE, required clinical work, and the timing and cost of human trials and other approvals.
- Actual dilution from note conversions, warrants, and subsequent financing, including the share count after November 15.
- The final amounts and settlement terms for registration damages and the Barsell repayment obligation.
- Remediation of the ineffective disclosure controls and the reasons management’s reported defaulted-debt totals differ.