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AEMD > SEC Filings for AEMD > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for AETHLON MEDICAL INC

Form 10-Q for AETHLON MEDICAL INC


13-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.

FORWARD LOOKING STATEMENTS

All statements, other than statements of historical fact, included in this Form 10-Q are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("the Securities Act"), and Section 21E of the Exchange Act. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of Aethlon Medical, Inc. ("we", "us" or "the Company") to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements contained in this Form 10-Q. Such potential risks and uncertainties include, without limitation, completion of our capital-raising activities, FDA approval of our products, other regulations, patent protection of our proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological change, and other risk factors detailed herein and in other of our filings with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons actual results could differ from those projected in such forward-looking statements.

THE COMPANY

We are a medical device company focused on creating innovative devices that address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles from the entire circulatory system without loss of essential blood components. Approval to embark on human trials is still needed to reach commercial viability of the Hemopurifier® and approval by the U.S. Food and Drug Administration ("FDA"). Successful outcomes of human trials will be required by the regulatory agencies of certain foreign countries where we intend to sell this device. We have submitted an Investigational Device Exemption ("IDE") to the FDA. Some of our patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology. . On September 30, 2011, we entered into a contract with the United States of America, issued by SPAWAR Systems Center Pacific, pursuant to a contract award from the Defense Advanced Research Projects Agency ("DARPA"). Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange Act and must file reports, proxy statements and other information with the SEC. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, like us, which file electronically with the Commission. Our headquarters are located at 8910 University Center Lane, Suite 660, San Diego, CA 92122. Our phone number at that address is (858) 459-7800. Our Web site is http://www.aethlonmedical.com.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2011

Revenues

We recorded government contract revenue of $400,114 in the three months ended September 30, 2012. This revenue arose from work performed under our government contract. On September 30, 2011, we entered into a contract with the United States of America, issued by SPAWAR Systems Center Pacific, pursuant to a contract award from the Defense Advanced Research Projects Agency ("DARPA"). Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA is a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years, including payments of up to $1,975,047 in the first year. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract, we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts. Assuming all such work is performed according to the contract terms, we will receive up to $1,975,047 of contract payments during the first twelve months of the contract with the aggregate payment amounts in years two through five varying between approximately $775,000 and $1.6 million. Originally, only the base year (year one contract) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. DARPA has the option to enter into the contract for years three through five. The milestones are comprised of planning, engineering and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants under the contract. There can be no assurance that we alone, or with third party participants, will meet such milestones to the satisfaction of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues during any year of the contract term. We commenced work under the contract in October 2011.

As of September 30, 2012, we have invoiced for and received eight milestone payments under the DARPA contract totaling $1,975,047.

Operating Expenses

Consolidated operating expenses for the three months ended September 30, 2012 were $1,199,908 in comparison with $882,957 for the comparable quarter a year ago. This increase of $316,951, or 35.9%, was due to increases in professional fees of $208,998, in general and administrative expenses of $64,105 and in payroll and related expenses of $43,848.

The $208,998 increase in our professional fees was primarily due to DARPA contract related professional fees of $164,485. Other significant factors in the increase were $38,514 of legal fees related to the Gemini litigation and $15,617 of legal fees related to work on resolving our DTC chill and $15,000 of business development expense, all with no comparable expense in the prior period.

The $64,105 increase in general and administrative expenses was primarily due to $81,393 in DARPA-related general and administrative expenses.

The $43,848 increase in payroll and related expenses was primarily due to increased payroll of $51,250 due to hiring three additional scientists for work under our DARPA contract, which was partially offset by a reduction in stock-based compensation of $12,420.

Other Expense (Income)

Other expense (income) consist primarily of the change in the fair value of our derivative liability, other expense and interest expense. Other expense (income) for the three months ended September 30, 2012 were other expense of $621,530 in comparison with other income of $429,480 for the comparable quarter a year ago.

Change in Fair Value of Derivative Liability

Both periods include changes in the fair value of derivative liability. For the three months ended September 30, 2012, the change in the estimated fair value of derivative liability was a charge of $326,138 and for the three months ended September 30, 2011, the change in estimated fair value was a gain of $1,029,675.

Interest Expense



Interest expense was $224,374 for the three months ended September 30, 2012
compared to $600,226 in the corresponding prior period, a decrease of $375,852.
The various components of our interest expense are shown in the following table:



                                            Quarter Ended       Quarter Ended
                                               9/30/12             9/30/11            Change
Interest Expense                           $       126,100     $       121,703     $      4,397
Amortization of Deferred Financing Costs            22,739              78,101          (55,362 )
Amortization of Note Discounts                      75,535             400,422         (324,887 )
Total Interest Expense                     $       224,374     $       600,226     $   (375,852 )

As noted in the above table, the two most significant factors in the $375,852 decrease in interest expense were (a) the $324,887 reduction in the amortization of debt discounts that was largely the result of the completion of the discount amortization on the majority of our convertible notes prior and (b) a $55,362 reduction in the amortization of deferred offering costs that also was largely the result of the completion of the amortization on those costs.

Other

The three months ended September 30, 2012 contained a $71,080 loss on debt conversion that related to the conversion to equity of $53,516 in principal and accrued interest related to a note payable.

Net Loss

As a result of the increased expenses noted above, we recorded a consolidated net loss of approximately $1,421,000 and $453,000 for the quarters ended September 30, 2012 and 2011, respectively.

Basic and diluted loss per common share were ($0.01) for the three month period ended September 30, 2012 compared to ($0.00) for the period ended September 30, 2011.

SIX MONTHS ENDED SEPTEMBER 30, 2012 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2011

Revenues

We recorded government contract revenue of $616,861 in the six months ended September 30, 2012. This revenue arose from work performed under our government contract. On September 30, 2011, we entered into a contract with the United States of America, issued by SPAWAR Systems Center Pacific, pursuant to a contract award from the Defense Advanced Research Projects Agency ("DARPA"). Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA is a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years, including payments of up to $1,975,047 in the first year. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract, we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts. Assuming all such work is performed according to the contract terms, we will receive up to $1,975,047 of contract payments during the first twelve months of the contract with the aggregate payment amounts in years two through five varying between approximately $775,000 and $1.6 million. Originally, only the base year (year one contract) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. DARPA has the option to enter into the contract for years three through five. The milestones are comprised of planning, engineering and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants under the contract. There can be no assurance that we alone, or with third party participants, will meet such milestones to the satisfaction of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues during any year of the contract term. We commenced work under the contract in October 2011.

As of September 30, 2012, we have invoiced for and received eight milestone payments under the DARPA contract totaling $1,975,047.

Operating Expenses

Consolidated operating expenses for the six months ended September 30, 2012 were $2,408,444 in comparison with $1,915,436 for the comparable period a year ago. This increase of $493,008, or 25.7%, was due to increases in professional fees of $317,926, in general and administrative expenses of $127,071 and in payroll and related expenses of $48,011.

The $317,926 increase in our professional fees was primarily due to DARPA contract related professional fees of $256,895. Other significant factors in the increase were $135,721 of legal fees related to the Gemini litigation and $17,753 of legal fees related to work on resolving our DTC chill both with no comparable expense in the prior period.

The $127,071 increase in general and administrative expenses was primarily due to $143,698 in DARPA-related general and administrative expenses.

The $48,011 increase in payroll and related expenses was primarily due to increased payroll of $102,537 due to hiring three additional scientists for work under our DARPA contract, which was partially offset by a reduction in stock-based compensation of $52,567.

Other Expense (Income)

Other expense (income) consist primarily of the change in the fair value of our derivative liability, other expense and interest expense. Other expense (income) for the six months ended September 30, 2012 were other expense of $647,552 in comparison with other expense of $1,123,941 for the comparable period a year ago.

Change in Fair Value of Derivative Liability

Both periods include changes in the fair value of derivative liability. For the six months ended September 30, 2012, the change in the estimated fair value of derivative liability was a gain of $361,462 and for the six months ended September 30, 2011, the change in estimated fair value was a gain of $1,521,502.

Interest Expense

Interest expense was $913,062 for the six months ended September 30, 2012 compared to $2,286,140 in the corresponding prior period, a decrease of $1,373,078. The various components of our interest expense are shown in the following table:

                                            6 Months Ended       6 Months Ended
                                               9/30/12              9/30/11             Change
Interest Expense                           $        318,719     $        224,917     $     93,802
Amortization of Deferred Financing Costs            120,790              186,699          (65,909 )
Non-Cash Interest Expense                            11,846              538,736         (526,890 )
Amortization of Note Discounts                      461,707            1,335,788         (874,081 )
Total Interest Expense                     $        913,062     $      2,286,140     $ (1,373,078 )

As noted in the above table, the two most significant factors in the $1,373,078 decrease in interest expense were (a) the $874,081 reduction in the amortization of debt discounts that was largely the result of the completion of the discount amortization on the majority of our convertible notes prior and (b) a $526,890 reduction in our non-cash interest expense that primarily related to a $538,736 adjustment to derivative liabilities that related to the fair value of the April 2011 convertible notes in the September 2011 period with no comparable expense in the September 2012 period.

Other

The six months ended September 30, 2011 also contained a $360,186 charge relating to the extinguishment of a convertible note and warrant and to the formation of a new note in that amount of $360,185 as a result of that extinguishment. The six months ended September 30, 2012 contained a $96,059 loss on debt conversion that related to the conversion to equity of $113,701 in principal and accrued interest related to a note payable.

Net Loss

As a result of the increased expenses noted above, we recorded a consolidated net loss of approximately $2,439,000 and $3,039,000 for the six month periods ended September 30, 2012 and 2011, respectively.

Basic and diluted loss per common share were ($0.02) for the six month period ended September 30, 2012 compared to ($0.03) for the period ended September 30, 2011.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, we had a cash balance of $271,747 and a working capital deficit of $8,608,542. This compares to a cash balance of $143,907 and a working capital deficit of $9,438,279 at March 31, 2012. Between October 1, 2012 and November 13, 2012, we have raised $135,000 from private equity transactions. Our cash at September 30, 2012 plus additional funds raised to date subsequent to September 30, 2012 are not sufficient to meet our funding requirements during the next twelve months. Significant additional financing must be obtained in order to provide a sufficient source of operating capital and to allow us to continue to operate as a going concern. In addition, our current financial resources are insufficient to fund our capital expenditures, working capital and other cash requirements (consisting of accounts payable, accrued liabilities, amounts due to related parties and amounts due under various notes payable) for the fiscal year ending March 31, 2013.

We do not expect revenue from operations will be sufficient to satisfy our funding requirements in the near term, and accordingly, our ability to continue operations and meet our cash obligations as they become due and payable is expected to depend for at least the next several years on our ability to sell securities, borrow funds or a combination thereof. Future capital requirements will depend upon many factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, as well as our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing negative cash flows and net losses for the foreseeable future.

Should the U.S. Government elect not to exercise the options for years three through five of our DARPA contract, the effects may be material to us. The loss of revenues from the DARPA contract would have a material impact on our revenues, operating cash flows and liquidity.

Beyond the immediate future, we currently believe that the following four areas may generate revenue for us:

(1) Developing future products using the Aethlon ADAPTTM system with drug industry collaborators. Revenues in this area could come from product development fees, fees from research, regulatory and manufacturing support or from downstream royalties;

(2) Applying for and winning additional U.S. Government grant or contract income;

(3) Licensing or selling our ELLSA research diagnostic tools that identify and quantify exosomes; and

(4) Commercializing the Hemopurifier® in India following a successful result in our Hepatitis-C-oriented clinical trial currently being conducted at the Medanta Medicity Institute (Medicity) in that country. Medicity's Institutional Review Board has agreed to allow compassionate usage of the Hemopurifier® for individuals who previously failed or subsequently relapsed standard-of-care drug regimens. In addition to offering Hemopurifier® therapy to the citizens of India, HCV-infected individuals from the United States, European Union and other regions of the world may pursue treatment through the expanded access program at Medicity. Details related to treatment protocol, inclusion criteria, patient approval processes and therapy pricing are anticipated to be finalized with Medicity later on in 2012.

One area of expense that increased over the six months ended September 30, 2012 was in legal fees related to litigation (see note 13 to our financial statements). We incurred $135,721 related to that litigation over the six month period. We have been informed by our insurance carrier that they will cover our legal fees related to that litigation once we have met our $150,000 deductible amount. We met that deductible threshold in October and as a result of the insurance coverage, we expect the operation expenses related to that litigation to decrease in future periods.

Cash Flows



Cash flows from operating, investing and financing activities, as reflected in
the accompanying Condensed Consolidated Statements of Cash Flows, are summarized
as follows (in thousands):



                                         (In thousands)
                                    For the six months ended
                               September 30,        September 30,
                                   2012                  2011
Cash (used in) provided by:
Operating activities          $          (915 )     $       (1,036 )
Investing activities                        -                   (2 )
Financing activities                    1,043                1,068
Net increase in cash          $           128       $           30

NET CASH FROM OPERATING ACTIVITIES. We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was approximately $915,000 in the six months ended September 30, 2012 compared to net cash used in operating activities of approximately $1,036,000 in the six months ended September 30, 2011, a decrease of $120,000. The $120,000 decrease was primarily due to receipts under our DARPA contract in the September 2012 period, which were offset for the most part by expenses under that contract.

NET CASH FROM INVESTING ACTIVITIES. During the six months ended September 30, 2012, we did not have any investing activities. During the six months ended September 30, 2011, we used approximately $2,000 in cash for purchases of equipment.

NET CASH FROM FINANCING ACTIVITIES. Net cash generated from financing activities decreased from $1,068,000 in the six months ended September 30, 2011 to approximately $1,043,000 in the six months ended September 30, 2012. Included in net cash provided by financing activities in the 2012 period was $1,073,000 in proceeds from the issuance of common stock which was partially offset by approximately $30,000 in repayments of notes payable and related accrued interest in cash. In the 2011 period, we received $873,000 in proceeds from the issuance of convertible notes payable and $200,000 from the collection of notes receivable associated with certain convertible note transactions.

An increase in working capital during the six months ended September 30, 2012 in the amount of approximately $825,000 changed our negative working capital position to approximately ($8,608,000) at September 30, 2012 from a negative working capital of approximately ($9,438,000) at March 31, 2012. The most significant factors in the increase in working capital noted above were a decrease in current liabilities of approximately $1,188,000 and an increase in cash of approximately $128,000, which were partially offset by the collection of accounts receivable of $400,114.

At the date of this filing, we plan to invest significantly into purchases of our raw materials and into our contract manufacturing arrangement subject to successfully raising additional capital.

CRITICAL ACCOUNTING POLICIES

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require the most difficult, subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical accounting policies relate to revenue recognition, measurement of stock purchase warrants issued with notes payable, beneficial conversion feature of convertible notes payable, impairment of intangible assets and long lived assets, stock compensation, and the classification of warrant obligations, and evaluation of contingencies. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations.

There have been no changes to our critical accounting policies as disclosed in our Form 10-K for the year ended March 31, 2012.

OFF-BALANCE SHEET ARRANGEMENTS

We have no obligations required to be disclosed herein as off-balance sheet arrangements.

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