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AEMD > SEC Filings for AEMD > Form 10-Q on 14-Nov-2013All Recent SEC Filings

Show all filings for AETHLON MEDICAL INC

Form 10-Q for AETHLON MEDICAL INC


14-Nov-2013

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

Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") is 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.

In June 2013, the U.S. Food and Drug Administration ("FDA") approved our Investigational Device Exemption ("IDE") application to initiate a ten patient human clinical trial in one location in the United States. Successful outcomes of that human trial as well as at least one follow-on human trial will be required by the FDA in order to commercialize our products in the US. The regulatory agencies of certain foreign countries where we intend to sell this device will also require one or more human clinical trials.

Some of our patents may expire before we receive FDA approval to market our products in the United States or we receive approval to market our products in a foreign country. 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.

In prior periods, Aethlon was classified as a development stage enterprise under accounting principles generally accepted in the United States of America ("GAAP") as it had not generated revenues from its planned principal operations. In the fiscal year ended March 31, 2012, we began to generate revenues from a government contract and have emerged from the development stage.

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, 2013 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2012

Revenues

We recorded government contract revenue of $644,887 and $400,114 in the three months ended September 30, 2013 and 2012, respectively. This revenue arose from work performed under our government contract with DARPA and our subcontract with Battelle as follows:

                                               Three Months      Three Months       Change in
                                               Ended 9/30/13     Ended 9/30/12       Dollars
DARPA Contract                                 $     613,143     $     400,114     $    213,029
Battelle Subcontract                                  31,744                 -           31,744
Total Government Contract Revenue              $     644,887     $     400,114     $    244,773

DARPA - 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. Originally, only the base year (year one contract) was effective for the parties, however, DARPA subsequently exercised the option on the second and third years of the contract. DARPA has the option to enter into the contract for years four and 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, 2013, we have invoiced for fifteen milestone payments under the DARPA contract totaling $3,396,912.

Battelle -- We entered into a subcontract agreement with Battelle Memorial Institute ("Battelle") in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original DARPA contract and we are one of several subcontractors on that systems integration project. The Battelle subcontract is under a time and materials basis and we began generating revenues under the subcontract in the three months ended September 30, 2013. Our expected revenue from the subcontract will be at the discretion of Battelle. The Battelle subcontract is our first cost-reimbursable contract.

Our revenue under this contract will be a function of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost of any consultants hired by us to perform work on the project. Each payment will require approval by the program manager at Battelle.

Operating Expenses

Consolidated operating expenses for the three months ended September 30, 2013 were $874,683 in comparison with $1,199,908 for the comparable quarter a year ago. This decrease of $325,225, or 27.1%, was due to decreases in payroll and related expenses of $154,621, in professional fees of $123,488 and in general and administrative expenses of $47,116.

The $154,621 decrease in payroll and related expenses was primarily due to a decrease in stock based compensation of $151,383, which in turn was due to the completion of the vesting of our CEO's restricted stock grant and of the vesting of a number of existing stock option grants.

The $123,488 decrease in our professional fees was due to a reduction of DARPA contract related professional fees of $72,015 and a reduction of non-DARPA related professional fees of $51,473. The primary drivers in the decrease in non-DARPA related professional fees were the lack of legal fees related to the Gemini litigation and to work on resolving our DTC suspension as our insurance carrier has covered the litigation costs in the 2013 period and we successfully resolved the DTC suspension in the fiscal year ended March 31, 2013.

The $47,116 decrease in general and administrative expenses was due to a reduction of non-DARPA related general and administrative expenses of $35,395 and to a reduction of DARPA contract related general and administrative expenses of $11,721.

Other Expense (Income)

Other expense (income) consists 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, 2013 were other expense of $3,119,874 in comparison with other expense of $621,530 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, 2013, the change in the estimated fair value of derivative liability was a charge of $2,992,002 and for the three months ended September 30, 2012, the change in estimated fair value was a charge of $326,138.

Interest Expense



Interest expense was $110,405 for the three months ended September 30, 2013
compared to $224,374 in the corresponding prior period, a decrease of $113,969.
The various components of our interest expense are shown in the following table:



                                                Quarter Ended       Quarter Ended
                                                   9/30/13             9/30/12           Change
Interest Expense                               $       108,723     $       126,100     $  (17,377 )
Amortization of Deferred Financing Costs                     -              22,739        (22,739 )
Amortization of Note Discounts                           1,682              75,535        (73,853 )
Total Interest Expense                         $       110,405     $       224,374     $ (113,969 )

As noted in the above table, the two most significant factors in the $113,969 decrease in interest expense were (a) the $73,853 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 $22,739 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, 2013 contained $17,467 in losses on debt conversion compared to a $71,080 loss on debt conversion in the three months ended September 30, 2012.

Net Loss

As a result of the increased expenses noted above, we recorded a consolidated net loss of approximately $3,350,000 and $1,421,000 for the quarters ended September 30, 2013 and 2012, respectively.

Basic and diluted loss per common share were ($0.02) for the three month period ended September 30, 2013 compared to ($0.01) for the period ended September 30, 2012.

SIX MONTHS ENDED SEPTEMBER 30, 2013 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2012

Revenues

We recorded government contract revenue of $840,483 and $616,861 in the six months ended September 30, 2013 and 2012, respectively. This revenue arose from work performed under our government contract with DARPA and our subcontract with Battelle as follows:

                                                Six Months       Six Months
                                                  Ended            Ended          Change in
                                                 9/30/13          9/30/12          Dollars
DARPA Contract                                 $    808,739     $    616,861     $    191,878
Battelle Subcontract                                 31,744                -           31,744
Total Government Contract Revenue              $    840,483     $    616,861     $    223,622

DARPA - 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. Originally, only the base year (year one contract) was effective for the parties, however, DARPA subsequently exercised the option on the second and third years of the contract. DARPA has the option to enter into the contract for years four and 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, 2013, we have invoiced for fifteen milestone payments under the DARPA contract totaling $3,396,912.

Battelle -- We entered into a subcontract agreement with Battelle Memorial Institute ("Battelle") in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original DARPA contract and we are one of several subcontractors on that systems integration project. The Battelle subcontract is under a time and materials basis and we began generating revenues under the subcontract in the three months ended September 30, 2013. Our expected revenue from the subcontract will be at the discretion of Battelle. The Battelle subcontract is our first cost-reimbursable contract.

Our revenue under this contract will be a function of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost of any consultants hired by us to perform work on the project. Each payment will require approval by the program manager at Battelle.

Operating Expenses

Consolidated operating expenses for the six months ended September 30, 2013 were $1,854,075 in comparison with $2,408,444 for the comparable period a year ago. This decrease of $554,369, or 23.0%, was due to decreases in professional fees of $276,539, in payroll and related expenses of $250,086 and general and administrative expenses of $27,744.

The $276,539 decrease in our professional fees was primarily due to a reduction of non-DARPA related professional fees of $242,752 and a reduction in DARPA contract related professional fees of $33,787. The primary drivers in the decrease in non-DARPA related professional fees were the lack of legal fees related to the Gemini litigation and to work on resolving our DTC suspension as our insurance carrier has covered the litigation costs in the 2013 period and we successfully resolved the DTC suspension in the fiscal year ended March 31, 2013.

The $250,086 decrease in payroll and related expenses was primarily due to a decrease in stock based compensation of $204,894, which in turn was due to the completion of the vesting of our CEO's restricted stock grant and of the vesting of a number of existing stock option grants. The $45,192 reduction in cash based compensation was primarily driven by a $32,000 reduction in bonus payments to our management team.

The $27,744 decrease in general and administrative expenses was driven by a $40,795 reduction of non-DARPA related general and administrative expenses, which was partially offset by a $13,051 increase in DARPA-related general and administrative expenses.

Other Expense (Income)

Other expense (income) consists 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, 2013 were other expense of $2,639,576 in comparison with other expense of $647,552 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, 2013, the change in the estimated fair value of derivative liability was a charge of $2,382,877 and for the six months ended September 30, 2012, the change in estimated fair value was a gain of $361,462.

Interest Expense



Interest expense was $216,502 for the six months ended September 30, 2013
compared to $913,062 in the corresponding prior period, a decrease of $696,560.
The various components of our interest expense are shown in the following table:



                                            6 Months Ended       6 Months Ended
                                               9/30/13              9/30/12             Change
Interest Expense                           $        211,924     $        318,719     $   (106,795 )
Amortization of Deferred Financing Costs                863              120,790         (119,927 )
Non-Cash Interest Expense                                 -               11,846          (11,846 )
Amortization of Note Discounts                        3,715              461,707         (457,992 )
Total Interest Expense                     $        216,502     $        913,062     $   (696,560 )

As noted in the above table, the three most significant factors in the $696,560 decrease in interest expense were (a) the $457,992 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, (b) a $119,927 reduction in the amortization of deferred offering costs that also was largely the result of the completion of the amortization on those costs and (c) the $106,795 reduction in interest expense due to ongoing conversions of our convertible notes into equity.

Other

The six months ended September 30, 2013 contained $40,257 in losses on debt conversion compared to a $96,059 loss on debt conversion in the six months ended September 30, 2012.

Net Loss

As a result of the increased expenses noted above, we recorded a consolidated net loss of approximately $3,653,000 and $2,439,000 for the six month periods ended September 30, 2013 and 2012, respectively.

Basic and diluted loss per common share were ($0.02) for the six month period ended September 30, 2013 compared to ($0.02) for the period ended September 30, 2012.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2013, we had a cash balance of $8,754 and a working capital deficit of $11,674,899. This compares to a cash balance of $125,274 and a working capital deficit of $9,276,618 at March 31, 2013. Between October 1, 2013 and November 13, 2013, we raised $492,460 in equity and received a total of $233,271 under our DARPA and Battelle contracts. Our cash at September 30, 2013 plus additional funds raised to date subsequent to September 30, 2013 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 August 2013, we signed an agreement with a broker-dealer to raise operating capital, of which the $642,000 in gross proceeds ($472,460 in net proceeds) raised through the date of this filing is the initial portion, to cover near term operating requirements and the expected costs of our US safety trial. The agreement also calls for the broker-dealer to then raise a larger financing (see note 2) to meet future growth initiatives. Any securities offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The engagement agreement is on a best efforts basis and there can be no assurance that the broker-dealer can raise working capital for us on acceptable terms or at all.

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 four and five of our DARPA contract, the effects would 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.

DARPA recently awarded a related contract to Battelle Memorial Institute ("Battelle") to be the systems integrator for the various components being developed under the original contract, including our two components of the project. We agreed to become a subcontractor to Battelle under that systems integrator contract. That subcontract will be under a cost plus basis and we expect to begin generating revenues under the subcontract during the fiscal year ending March 31, 2014. Any revenues we derive under the subcontract will be at the direction of Battelle.

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 through our recently launched ESI subsidiary; 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.

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,
                                       2013                  2012
Cash (used in) provided by:
Operating activities              $          (745 )     $         (915 )
Investing activities                            -                    -
Financing activities                          628                1,043
Net (decrease) increase in cash   $          (117 )     $          128

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 $745,000 in the six months ended September 30, 2013 compared to net cash used in operating activities of approximately $915,000 in the six months ended September 30, 2012, a decrease of $171,000. The $171,000 decrease was primarily due to an increase in our government contract revenue of approximately $224,000 and a reduction in our operating expenses of approximately $554,000 which were partially offset by a reduction in our non-cash stock based compensation expense of approximately $205,000 and a reduction in our accounts receivable of approximately $412,000.

NET CASH FROM INVESTING ACTIVITIES. During the six months ended September 30, 2013, we did not have any investing activities. During the six months ended September 30, 2012, we did not have any investing activities.

NET CASH FROM FINANCING ACTIVITIES. Net cash generated from financing activities decreased from approximately $1,043,000 in the six months ended September 30, 2012 to approximately $628,000 in the six months ended September 30, 2013. Included in net cash provided by financing activities in the 2013 period was $400,000 in notes payable from two directors and $228,000 in proceeds from the issuance of common stock. In the 2012 period, we received $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.

A decrease in working capital during the six months ended September 30, 2013 in the amount of approximately $2,398,000 changed our negative working capital position to approximately ($11,675,000) at September 30, 2013 from a negative working capital of approximately ($9,277,000) at March 31, 2013. The most significant factor in the increase in working capital noted above was an . . .

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