NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. (the "Company") is a development stage medical device
company focused on expanding the applications of our Hemopurifier (R) platform
technology, which is designed to rapidly reduce the presence of infectious
viruses and other toxins from human blood. In this regard, our core focus is the
development of therapeutic devices that treat acute viral conditions, chronic
viral diseases and pathogens targeted as potential biological warfare agents.
The Hemopurifier(R) combines the established scientific principles of affinity
chromatography and hemodialysis as a means to mimic the immune system's response
of clearing viruses and toxins from the blood before cell and organ infection
can occur. The Hemopurifier(R) cannot cure viral conditions but can prevent
virus and toxins from infecting unaffected tissues and cells. We have completed
pre-clinical blood testing of the Hemopurifier(R) to treat HIV and Hepatitis-C,
and have completed human safety trials on Hepatitis-C infected patients in India
and are in the process of obtaining regulatory approval from the U.S. Food and
Drug Administration ("FDA") to initiate clinical trials in the United States.
The commercialization of the Hemopurifier(R) will likely require the completion
of human efficacy clinical trials. The approval of any application of the
Hemopurifier(R) in the United States will necessitate the approval of the FDA to
initiate human studies. Such studies could take years to demonstrate safety and
effectiveness in humans and there is no assurance that the Hemopurifier(R) will
be cleared by the FDA as a device we can market to the medical community. We
also expect to face similar regulatory challenges from foreign regulatory
agencies, should we attempt to commercialize and market the Hemopurifier(R)
outside of the United States. As a result, we have not generated revenues from
the sale of any Hemopurifier(R) application. Additionally, there have been no
independent validation studies of our Hemopurifiers(R) to treat infectious
disease. We manufacture our products on a small scale for testing purposes but have yet to manufacture our products on a large scale for commercial purposes.
All of our pre-clinical human blood studies have been conducted in our
laboratories under the direction of Dr. Richard Tullis, our Chief Science
Officer.
The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its principal operations.
The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers under the symbol "AEMD.OB".
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with GAAP for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and nine month periods ended December 31, 2007 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2008. For further information, refer to the Company's Annual Report On
Form 10-KSB for the year ended March 31, 2007, which includes audited financial
statements and footnotes as of March 31, 2007 and for the years ended March 31,
2006 and 2007.
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NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates, among other things, the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. The Company has experienced continuing losses from operations, is
in default on certain debt, has negative working capital of approximately
($3,676,000) recurring losses from operations and a deficit accumulated during
the development stage of approximately ($31,481,000) at December 31, 2007, which
among other matters, raises significant doubt about its ability to continue as a
going concern. The Company has not generated significant revenue or any profit
from operations since inception. A significant amount of additional capital will
be necessary to advance the development of the Company's products to the point
at which they may become commercially viable. The Company intends to fund
operations through debt and/or equity financing arrangements, which management
believes may be insufficient to fund its 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, 2008. Therefore the Company will
be required to seek additional funds to finance its short-term operations.
The Company is currently addressing its liquidity issue by exploring investment
capital opportunities through the public markets, specifically, through private
placement of common stock. The Company believes that its access to capital,
together with existing cash resources, will be sufficient to meet its liquidity
needs for fiscal 2008. However, no assurance can be given that the Company will
receive any funds in addition to the funds in its capital raising efforts.
The unaudited condensed consolidated financial statements do not include any
adjustments relating to the recoverability of assets that might be necessary
should the Company be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of the Company presented below is
designed to assist the reader in understanding the Company's condensed
consolidated financial statements. Such financial statements and related notes
are the representations of Company management, who is responsible for their
integrity and objectivity. These accounting policies conform to GAAP in all
material respects, and have been consistently applied in preparing the
accompanying condensed consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its legal wholly-owned subsidiaries
Aethlon, Inc., Hemex, Inc. and Cell Activation, Inc. (collectively hereinafter
referred to as the "Company"). These subsidiaries are dormant and there exist no
material intercompany transactions or balances.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year in
accordance with SFAS No. 128, "EARNINGS PER SHARE."
Securities that could potentially dilute basic loss per share (prior to their
conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive. There
were 17,531,110 and 14,209,120 potentially dilutive common shares outstanding
for the three and nine months ended December 31, 2007, respectively.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its capital requirements for the current
operations from net funds received from the public and private sale of debt and
equity securities, as well as from the issuance of common stock in exchange for
services. The Company's cash position at December 31, 2007 was approximately
$333,000 compared to approximately $440,000, at March 31, 2007, representing a
decrease of approximately $107,000. During the nine months ended December 31,
2007, operating activities used net cash of approximately $1,079,000, while the
Company received approximately $983,000 from financing activities from the
issuance of common stock and convertible notes and utilized approximately
$11,000 in connection with patent costs and purchases of new equipment.
During the nine month period ended December 31, 2007, net cash used in operating
activities were approximately ($1,079,000) and resulted from the approximate net
loss of $3,394,000, the change in the estimated fair value of warrant liability
of approximately $3,958,000 and a reduction of accounts payable and accrued
expenses of approximately $439,000. These were offset principally by the
non-cash loss on debt extinguishment of approximately $491,000, amortization of
note discount of $911,000, fair market value of common stock of approximately
$197,000 issued in payment for services and approximately $422,000 in
stock-based compensation.
An increase in working capital during the nine months ended December 31, 2007 in
the amount of approximately $3,584,000 changed the Company's negative working
capital position to approximately ($3,676,000) at December 31, 2007 from a
negative working capital of approximately ($7,260,000) at March 31, 2007.
The Company's current deficit in working capital required us to obtain funds in
the short-term to be able to continue in business, and in the longer term to
fund research and development on products not yet ready for market.
The Company's operations to date have consumed substantial capital without
generating revenues, and will continue to require substantial capital funds to
conduct necessary research and development and pre-clinical and clinical testing
of Hemopurifier(R) products, and to market any of those products that receive
regulatory approval. The Company does not expect to generate revenue from
operations for the foreseeable future, and its ability to meet its cash
obligations as they become due and payable is expected to depend for at least
the next several years on its ability to sell securities, borrow funds or a
combination thereof. The Company's future capital requirements will depend upon
many factors, including progress with pre-clinical testing and clinical trials,
the number and breadth of our 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, and management's
ability to establish collaborative arrangements, effect successful
commercialization strategies, marketing activities and other arrangements. The
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future, and presently requires a minimum of $125,000
per month to sustain operations.
Management does not believe that inflation has had or is likely to have any
material impact on the Company's limited operations.
At the date of this filing, we do not have plans to purchase significant amounts
of equipment or hire significant numbers of employees prior to successfully
raising additional capital.
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PLAN OF OPERATION
The Company is a development stage medical device company that has not yet
engaged in significant commercial activities. The primary focus of our resources
is the advancement of our proprietary Hemopurifier(R) platform treatment
technology, which is designed to rapidly reduce the presence of infectious
viruses and toxins in human blood. Our focus is to prepare our Hemopurifier(R)
to treat chronic viral conditions, acute viral conditions and viral-based
bioterror threats in human clinical trials.
The Company plans to continue research and development activities related to our
Hemopurifier(R) platform technology, with particular emphasis on the advancement
of our treatment for "Category A" pathogens as defined by the Federal Government
under Project Bioshield and the All Hazards Preparedness Act of 2006. The
Company has filed an Investigational Device Exemption ("IDE") with the FDA in
order to proceed with Human safety studies of the Hemopurifier(R). Such studies,
complemented by planned in-vivo and appropriate animal in-vitro studies should
allow the Company to proceed to Premarket Approval ("PMA") process. The PMA
process is the last major FDA hurdle in determining the safety and effectiveness
of Class III medical Devices (of which the Hemopurifier(R) is one).
Subject to the availability of working capital, management anticipates
continuing to increase spending on research and development over the next 12
months. Additionally, associated with the Company's anticipated increase in
research and development expenditures, we anticipate purchasing additional
amounts of equipment during this period to support our laboratory and testing
operations. Operations to date have consumed substantial capital without
generating revenues, and will continue to require substantial and increasing
capital funds to conduct necessary research and development and pre-clinical and
clinical testing of our Hemopurifier(R) products, as well as market any of those
products that receive regulatory approval. The Company does not expect to
generate revenue from operations for the foreseeable future, and our ability to
meet our cash obligations as they become due and payable is dependent 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
management's ability to establish collaborative arrangements, effective
commercialization, marketing activities and other arrangements. The Company
expects to continue to incur increasing negative cash flows and net losses for
the foreseeable future.
