Aethlon Medical, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended September 30, 2012; the quarter is the second quarter of the company’s fiscal 2013. Financial statements are unaudited. Aethlon is a development-stage medical-device company focused on its ADAPT platform and Hemopurifier; it also performs contract work for DARPA.
Financial performance and position
| Metric | Three months ended Sep. 30, 2012 | Six months ended Sep. 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $400,114 | $616,861 | $0 |
| Operating expenses | $1,199,908 | $2,408,444 | $882,957 and $1,915,436 |
| Operating loss | $799,794 | $1,791,583 | $882,957 and $1,915,436 |
| Net loss | $1,421,324 | $2,439,135 | $453,477 and $3,039,377 |
| Loss per share | $0.01 | $0.02 | $0.00 and $0.03 |
Quarterly expenses rose 35.9% year over year, mainly from DARPA-related professional and administrative costs, added scientific staff, and Gemini litigation fees. Quarterly net loss increased substantially, including a $326,138 derivative fair-value charge versus a $1,029,675 gain a year earlier. For the six-month period, net loss narrowed, principally alongside lower interest and debt-discount amortization expense and a smaller derivative-liability gain.
For the six months, operating cash use was $915,550, compared with $1,036,046 in 2011. Financing provided $1,043,390, including $1,073,000 from common-stock issuance; cash increased $127,840 to $271,747. No investing cash flow was reported.
At September 30, cash was $271,747, current assets $337,534, and current liabilities $8,946,076, yielding a working-capital deficit of approximately $8.61 million. Total assets were $474,723 and stockholders’ deficit was $8,471,353. Reported current liabilities included $2,392,179 of convertible notes, net of discounts; $452,114 of notes payable; and $3,194,394 of derivative liabilities. The filing states that approximately $2,291,916 of note principal was past due, with $787,267 in accrued interest associated with defaulted notes.
Changes, outlook, risks and unusual items
- DARPA exercised the second-year option in August 2012. The five-year contract has potential payments of up to $6,794,389, subject to milestones and options; years three through five remain optional. By September 30, Aethlon reported invoicing for and receiving eight milestone payments totaling $1,975,047. It recognized $616,861 of revenue in the six-month period.
- Management states that additional financing is necessary to fund operations and that resources, including funds raised after quarter-end, are insufficient for the next twelve months. The filing identifies substantial doubt about the company’s ability to continue as a going concern. Management is seeking equity or debt financing; there is no assurance it will be available.
- After quarter-end, the company raised $135,000 in an equity sale and reported further share conversions for debt. Common shares outstanding increased from 117,515,892 at March 31 to 153,743,553 at September 30; 156,956,675 were outstanding as of November 13. Dilution risk is also significant given 68,780,784 warrants and 21,095,798 options outstanding at September 30.
- Commercialization depends on regulatory progress: Aethlon says human trials and FDA approval are needed for Hemopurifier commercial viability, and it had submitted an Investigational Device Exemption. The company also describes potential future revenue from product collaborations, government awards, diagnostic tools, and possible Hemopurifier use in India; these are not assured results.
- Gemini Master Fund sued in July 2012 seeking damages and shares related to a promissory note and warrants. Aethlon disputes the claims and intends to defend the case; an adverse result could harm operations or dilute shareholders. The company had accrued $437,800 for registration-related liquidated damages.
- Management concluded disclosure controls and procedures were not effective at period-end. It reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Aethlon can obtain financing sufficient to meet near-term obligations, and the timing and terms of any financing.
- Amounts, maturity status, and potential conversion or dilution effects of defaulted notes, accrued interest, warrants, and other equity-linked obligations.
- Progress and payment conditions for DARPA milestones, including the exercised second-year option and the unexercised later-year options.
- Status and outcome of the Gemini litigation, registration-damage obligations, and any related insurance coverage.
- Regulatory and clinical progress for Hemopurifier, including the IDE and requirements for human trials and approvals.
- Remediation of ineffective disclosure controls and the reliability of future financial reporting.