Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2012; unaudited. The company develops medical devices based on its ADAPT platform, including the Hemopurifier. Commercial use requires clinical and regulatory approvals. Reported revenue came solely from a DARPA government contract.
Financial performance
| Metric | Three months ended Dec. 31, 2012 | Three months ended Dec. 31, 2011 | Nine months ended Dec. 31, 2012 | Nine months ended Dec. 31, 2011 |
|---|---|---|---|---|
| Revenue | $208,781 | $958,075 | $825,642 | $958,075 |
| Operating expenses | $1,145,620 | $1,299,403 | $3,554,064 | $3,214,839 |
| Operating loss | $936,839 | $341,328 | $2,728,422 | $2,256,764 |
| Net income (loss) | $313,944 | $(574,718) | $(2,125,191) | $(3,614,095) |
| Basic and diluted earnings (loss) per share | $0.00 | $(0.01) | $(0.01) | $(0.04) |
Quarterly revenue fell about 78% year over year; nine-month revenue fell about 14%. The quarterly profit was primarily due to a $1.384 million gain from revaluing derivative liabilities, rather than operating performance. The filing reports no gross margin value.
Liquidity, cash flow and debt
- At December 31, 2012, cash was $107,970, current assets were $172,383 and current liabilities were $7,628,043; working capital was negative $7,455,660. Stockholders’ deficit was $7,320,979.
- Operating cash outflow for the nine months was $1,577,327, versus $1,101,086 in the prior-year period. Financing provided $1,541,390, including $1,571,000 from common-stock issuance. Cash declined $35,937 to $107,970.
- Convertible notes, net of discounts, were $2,394,874; notes payable were $370,025. The filing says $2,291,916 of note principal was past due, with $875,488 of related accrued interest. Several obligations were in default.
- Common shares outstanding increased from 117.5 million at March 31 to 163.5 million at December 31. The filing also reports 71.8 million warrants outstanding and 21.1 million options outstanding, creating potential dilution.
Changes, outlook and material risks
- Nine-month operating expenses rose 10.6%, mainly from higher professional fees and payroll associated with DARPA work. The nine-month net loss narrowed, in part because interest and debt-discount amortization were lower.
- DARPA exercised the contract’s second-year option in August 2012. The five-year contract has potential payments of $6.79 million, but years three through five remain optional. The company reported nine milestone payments invoiced and received, totaling $2,183,831. Further revenue depends on milestone performance and government decisions.
- Management stated that cash and funds raised after quarter-end were insufficient for the next 12 months and that substantial additional financing was needed. A liquidity note also said management believed financing efforts and anticipated DARPA receipts could meet fiscal 2013 needs, while warning that fundraising was not assured. The filing states that these conditions raise significant doubt about the company’s ability to continue as a going concern.
- The Hemopurifier still required human trials and FDA approval for commercial viability; the company had submitted an Investigational Device Exemption. Patent expiry, clinical and regulatory outcomes, market acceptance, competition and access to capital were identified risks.
- Gemini Master Fund sued, alleging note default and failure to issue shares upon conversions and warrant exercises. The company said it would defend the suit; an adverse outcome could affect operations and dilute shareholders.
- Management concluded disclosure controls and procedures were not effective. No material change in internal control over financial reporting was reported during the quarter.
- Subsequent events included $205,000 raised from equity sales by February 2013, additional share issuances, and the lifting of a DTC deposit restriction in January 2013.
Key facts for investors to verify
- Current cash needs, financing availability and the assumptions behind management’s fiscal 2013 liquidity assessment.
- Status and terms of past-due debt, accrued interest, extensions and any further conversions into shares.
- Progress on DARPA milestones and whether the government exercises the remaining contract options.
- Clinical-trial and FDA/foreign regulatory status for the Hemopurifier, and the remaining path to commercialization.
- Potential dilution from outstanding warrants, options, convertible debt and subsequent equity issuances.
- Developments and potential exposure in the Gemini litigation, and remediation of ineffective disclosure controls.