Aethlon Medical, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2019, with fiscal 2018 as the comparable period. This is an annual report, not a standalone fourth-quarter report. Filed July 1, 2019.
Business context
Aethlon is a clinical-stage medical technology company developing the Hemopurifier, an extracorporeal device intended to remove certain viruses and tumor-derived exosomes from blood. The FDA designated it a Breakthrough Device for specified viral and advanced-cancer indications; this designation is not marketing approval. The company was preparing for an early cancer clinical trial and reported active discussions with FDA. Its majority-owned subsidiary, Exosome Sciences, Inc. (80%), researches exosomal biomarkers, including a candidate for CTE diagnosis.
Financial results and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue, all government contract and grant revenue | $229,625 | $149,625 |
| Operating expenses | $6,228,642 | $4,980,741 |
| Operating loss | $(5,999,017) | $(4,831,116) |
| Other expense | $220,487 | $868,721 |
| Net loss attributable to common stockholders | $(6,194,719) | $(5,679,558) |
| Basic and diluted loss per share | $(0.34) | $(0.46) |
| Cash used in operating activities | $(4,293,433) | $(3,910,680) |
Revenue increased $80,000, but remained very small relative to operating costs; the company reported no product-sales revenue. Operating expenses rose by $1.25 million, principally from professional fees, payroll and related expenses, and general and administrative costs. The filing attributes part of the payroll increase to $472,639 accrued for former executives’ separation payments. Lower other expense in FY2019 reflected the absence of FY2018 debt-extinguishment and warrant-exchange losses. Net loss widened, while loss per share improved as weighted-average shares increased to 18.1 million from 12.3 million.
Research and development expense was approximately $896,000, up from $586,000. Gross margin is not meaningful for the reported revenue profile; the filing does not provide a clear product-margin measure.
At March 31, 2019, cash was $3.83 million, working capital was $2.21 million, total assets were $4.12 million, and total liabilities were $1.82 million. Cash fell from $6.97 million a year earlier. Financing activities provided $1.15 million, compared with $9.35 million in FY2018. The company had approximately $992,591 of convertible-note principal outstanding, reported as $962,301 net of unamortized discount, plus $59,573 accrued interest; the notes were due July 1, 2019. The filing reports an accumulated deficit of $105.65 million and substantial doubt about the company’s ability to continue as a going concern.
Material changes, outlook and risks
- FY2019 financing included $1.05 million net from at-the-market share sales and approximately $312,000 from warrant exercises. Approximately $5.0 million remained available under the ATM program as of the filing date.
- The NCI breast-cancer grant totaled $298,444 through August 2019; $80,000 was recognized in FY2019 and a further $30,000 was invoiced and received in May 2019. The melanoma contract was completed.
- Management expected continued losses and negative cash flows and said further financing was necessary for operations and clinical development. It planned to use debt or equity financing, grant funding, and government-contract receipts; there is no assurance financing would be available.
- In May 2019, the company agreed to reduce the notes’ conversion price to $0.68 per share and made a $100,000 aggregate principal payment. It planned to repay the remaining debt in cash or satisfy some or all through conversion. Subsequent ATM sales raised $36,622 net at an average net price of $0.79 per share.
- On June 30, 2019, Aethlon entered a cross-license agreement with SeaStar Medical to jointly develop combined devices. Aethlon’s chairman was also SeaStar’s executive chairman and CEO.
- Key risks include the going-concern uncertainty, need for additional capital and potential dilution, clinical and regulatory uncertainty, limited commercialization and manufacturing capabilities, competition, patent risks, and reliance on third parties. In May 2019, Nasdaq notified the company that it did not meet the $1.00 minimum bid-price requirement.
- The company’s auditor issued an unqualified opinion on the financial statements but highlighted substantial doubt about the company’s ability to continue as a going concern. Management reported disclosure controls and internal control over financial reporting as effective at March 31, 2019.
Important facts for investors to verify
- Whether the July 1, 2019 convertible notes were repaid, converted, or otherwise amended, and the resulting debt, interest, and dilution.
- Cash runway, subsequent financing, and progress toward the company’s stated funding needs, including any later going-concern developments.
- Whether the company regained Nasdaq minimum-bid compliance and maintained its listing.
- FDA requirements, trial authorization and timing for the planned cancer program, and the distinction between Breakthrough Device designation and approval.
- Progress and remaining funding or milestones under the breast-cancer grant, and the commercial and financial terms of the SeaStar cross-license agreement.
- Potential dilution from warrants, options, restricted stock units, convertible notes, and future equity issuance.