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AEMD > SEC Filings for AEMD > Form 10-Q on 13-Aug-2013All Recent SEC Filings

Show all filings for AETHLON MEDICAL INC



Quarterly Report


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.


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.


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.


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 ( 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




We recorded government contract revenue of $195,596 in the three months ended June 30, 2013 compared to $216,747 in the three months ended June 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. Originally, only the base year (year one contract covering October 1, 2011 through September 30, 2012) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. Years three through five are subject to DARPA exercising their option to enter into contracts for those years.

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.

Operating Expenses

Consolidated operating expenses for the three months ended June 30, 2013 were $979,394 in comparison with $1,207,553 for the comparable quarter a year ago. This decrease of $228,159, or 18.9%, was due to decreases in professional fees of $153,051 and in payroll and related expenses of $95,464, which were partially offset by an increase in general and administrative expenses of $20,356.

The $153,051 decrease in our professional fees was primarily due to a reduction in our legal expenses of $115,947, approximately $98,000 of that decrease related to the cost of the Gemini litigation in the June 2012 period with no comparable expense in the June 2013 period since the cost of the Gemini litigation was covered by insurance in the June 2013 period. We also had a reduction in our investor relations expenses of $32,038 as we ceased to have a dedicated, full-time consultant in that function and of $30,074 in scientific consulting expense due to reduced activity in our Indian trial.

The $95,464 decrease in payroll and related expenses was primarily due to a reduction in stock-based compensation of $53,511 and a reduction in cash-based compensation of $41,953. The decrease in stock-based compensation was due to the completion of vesting on a number of our stock options. The decrease in cash-based compensation was due to the payment of bonuses to our senior management in the 2012 period with no comparable payments in the 2013 period.

The $20,356 increase in general and administrative expenses was primarily due to a $24,773 increase in our DARPA-related general and administrative expenses, which was partially offset by a decrease of $4,417 in our non-DARPA-related general and administrative expenses.

Other (Income) Expense

Other (income) expense consists primarily of the change in the fair value of our derivative liability, other expense and interest expense. Other (income) expense for the three months ended June 30, 2013 were other income of $480,300 in comparison with other expense of $25,978 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 June 30, 2013, the change in the estimated fair value of derivative liability was a gain of $609,125 and for the three months ended June 30, 2012, the change in estimated fair value was a gain of $687,600.

Interest Expense

Interest expense was $106,096 for the three months ended June 30, 2013 compared
to $688,645 in the corresponding prior period, a decrease of $582,549. The
various components of our interest expense are shown in the following table:

                                            Quarter Ended       Quarter Ended
                                               6/30/13             6/30/12            Change
Interest Expense                           $       103,200     $       192,576     $    (89,376 )
Amortization of Deferred Financing Costs               863              98,051          (97,188 )
Non-Cash Interest Expense                                -              11,846          (11,846 )
Amortization of Note Discounts                       2,033             386,172         (384,139 )
Total Interest Expense                     $       106,096     $       688,645     $   (582,549 )

As noted in the above table, the three most significant factors in the $582,549 decrease in interest expense were (a) the $384,139 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) the $97,188 reduction in the amortization of deferred financing costs that was largely the result of the completion of the deferred financing cost amortization on the relevant convertible notes and notes payable prior and (c) the reduction in interest expense largely due to the lower level of notes outstanding.


The three months ended June 30, 2013 also contained a $22,789 loss on settlement of accrued interest and damages. The three months ended June 30, 2012 contained a $24,978 loss on debt conversion that related to the conversion of $60,185 of a note payable to equity.

Net Loss

As a result of the increased expenses noted above, we recorded a consolidated net loss of approximately $303,000 and $1,017,000 for the quarters ended June 30, 2013 and 2012, respectively.

Basic and diluted loss per common share were ($0.00) for the three month period ended June 30, 2013 compared to ($0.01) for the period ended June 30, 2012.


At June 30, 2013, we had a cash balance of $31,653 and a working capital deficit of $8,949,996. This compares to a cash balance of $125,274 and a working capital deficit of $9,276,618 at March 31, 2013. Between July 1, 2013 and August 11, 2013, we raised $400,000 in a loan from two of our board members, raised $100,000 in equity and billed and subsequently received $404,362 under our DARPA contract. Our cash at June 30, 2013 plus additional funds raised to date subsequent to June 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. We recently signed an agreement with a broker-dealer to raise operating capital 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 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.

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; and

(4) Deriving revenues from a test market evaluation for the Hemopurifier® in India following the successful results to date in our Hepatitis-C-oriented clinical trial currently being conducted in that country. We will need to establish one or more distributors to supply Hemopurifiers® to the Indian market.

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 three months ended
                                    June 30,              June 30,
                                      2013                  2012
Cash (used in) provided by:
Operating activities              $        (222 )       $        (320 )
Investing activities                          -                     -
Financing activities                        128                   772
Net increase (decrease) in cash   $         (94 )       $         452

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 $222,000 in the three months ended June 30, 2013 compared to net cash used in operating activities of approximately $320,000 in the three months ended June 30, 2012, a decrease of $98,000. The $98,000 decrease was primarily due to our reduced operating loss.

NET CASH FROM INVESTING ACTIVITIES. We did not have any investing activities during either period.

NET CASH FROM FINANCING ACTIVITIES. Net cash generated from financing activities decreased from approximately $772,000 in the three months ended June 30, 2012 to $128,000 in the three months ended June 30, 2013. The primary financing activity in both periods was from the issuance of common stock. We raised $128,000 from the sale of common stock in the three months ended June 30, 2013 compared to $802,000 in the three months ended June 30, 2012.

An increase in working capital during the three months ended June 30, 2012 in the amount of approximately $327,000 changed our negative working capital position to approximately ($8,950,000) at June 30, 2013 from a negative working capital of approximately ($9,277,000) at March 31, 2013. The most significant factors in the increase in working capital noted above were a decrease in derivative liability of approximately $702,000, a reduction in our convertible notes payable of approximately $107,000 and a reduction in our notes payable of approximately $86,000. Those liability reductions were partially offset by the collection of approximately $209,000 in accounts receivable, a decrease of approximately $94,000 in cash and an increase of approximately $150,000 in our accounts payable.

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.


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, 2013.


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

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