SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2004
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____to_____
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
---------------------
(Exact name of registrant as specified in its charter)
NEVADA 13-3632859
------------------------------ -------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 Bunker Hill St, Ste 4000, San Diego, CA 92109
-------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(858)-459-7800
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of common stock of the registrant outstanding as of August
16, 2004 was 13,389,621.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 2004 (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE
THREE MONTHS ENDED JUNE 30, 2004 AND 2003 AND FOR THE PERIOD JANUARY
31, 1984 (INCEPTION) THROUGH JUNE 30, 2004
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE
THREE MONTHS ENDED JUNE 30, 2004 AND 2003 AND FOR THE PERIOD JANUARY
31, 1984 (INCEPTION) THROUGH JUNE 30, 2004
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3. CHANGES IN CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
PART I.
FINANCIAL INFORMATION
All references to "us", "we", "our" "Aethlon", "Aethlon Medical", or
"the Company" refer to Aethlon Medical, Inc., its predecessors and its
subsidiaries.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
June 30,
2004
(Unaudited)
-------------
ASSETS
Current assets
Cash $ 349,750
Prepaid expenses 35,310
-------------
385,060
Property and equipment, net 16,506
Patents and patents pending, net 231,466
Other assets 20,410
-------------
$ 653,442
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued
liabilities $ 1,633,314
Due to related parties 1,617,144
Notes payable 487,500
Convertible notes payable 125,000
-------------
3,862,958
Commitments and Contingencies
Stockholders' Deficit
Common stock,par value $0.001 per
share; 25,000,000 shares authorized;
13,389,621 shares issued
and outstanding 13,390
Additional paid-in capital 14,403,745
Deficit accumulated during
development stage (17,626,651)
-------------
(3,209,516)
-------------
$ 653,442
=============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2004 and 2003
and For the Period January 31, 1984 (Inception) Through June 30, 2004
JANUARY 31,
1984
(INCEPTION)
THROUGH
JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004
(unaudited) (unaudited) (unaudited)
------------- ------------- -------------
REVENUES
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
------------- ------------- -------------
-- -- 1,533,568
EXPENSES
Professional fees 215,120 55,232 3,981,746
Payroll and related 183,542 102,654 5,754,052
General and administrative 59,709 78,805 3,542,150
Impairment -- -- 1,231,531
------------- ------------- -------------
458,371 236,691 14,509,479
OPERATING LOSS (458,371) (236,691) (12,975,911)
OTHER (INCOME) EXPENSE
Interest and other debt expenses 22,968 181,501 4,530,549
Interest income -- -- (17,415)
Other -- -- 137,607
------------- ------------- -------------
22,968 181,501 4,650,741
------------- ------------- -------------
NET LOSS ($ 481,339) ($ 418,192) (17,626,652)
============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE ($ 0.04) ($ 0.06)
============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,389,621 7,316,279
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS For the Three Months Ended June 30, 2004 and 2003 and
For the Period January 31, 1984 (Inception) Through June 30, 2004
January 31, 1984
(Inception)
Through
June 30, June 30, June 30,
2004 2003 2004
(unaudited) (unaudited) (unaudited)
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (481,339) $ (418,192) $(17,626,652)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 8,135 39,387 918,050
Gain on sale of property and equipment -- -- (13,065)
Fair market value of warrants issued in connection with
accounts payable and debt -- -- 2,715,736
Fair market value of common stock, warrants and
options issued for services 129,000 2,500 2,397,592
Beneficial conversion feature of convertible
notes payable -- 150,000 809,800
Impairment of patents and patents pending -- -- 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (29,728) -- 126,227
Other assets (5) -- (20,410)
Accounts payable and accrued liabilities 44,933 12,128 1,817,604
Due to related parties (56,313) 60,506 1,617,144
------------- ------------- -------------
Net cash used in operating activities (385,317) (153,671) (5,809,220)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (2,052) (2,661) (216,218)
Acquisition of patents and patents pending -- -- (352,833)
Proceeds from sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------- ------------- -------------
Net cash used in investing activities (2,052) (2,661) (541,258)
(continued)
5
The accompanying notes are an integral part of these condensed consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2004 and 2003 and For the
Period January 31, 1984 (Inception) Through June 30, 2004
January 31,
1984
(Inception)
Through
June 30, June 30, June 30,
2004 2003 2004
(unaudited) (unaudited) (unaudited)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ -- $ -- $ 1,480,000
Principal payments of notes payable (12,500) (160,000) (37,500)
Proceeds from issuance of convertible notes payable -- 150,000 833,000
Net proceeds from issuance of common stock 748,000 160,000 4,424,728
------------ ------------ ------------
Net cash provided by financing activities 735,500 150,000 6,700,228
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH 348,131 (6,332) 349,750
CASH - beginning of period 1,619 6,332 --
------------ ------------ ------------
CASH - end of period $ 349,750 $ -- $ 349,750
============ ============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
We are a development stage therapeutic device company focused on expanding the
applications of our Hemopurifier (TM) 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 HIV/AIDS, Hepatitis-C, and pathogens targeted as potential biological
warfare agents. In pre-clinical testing, we have published that our
HIV-Hemopurifier removed 55% of HIV from human blood in three hours and in
excess of 85% of HIV in twelve hours. Additionally, the HIV-Hemopurifier
captured 90% of gp120, a toxic protein that depletes human immune cells, during
a one-hour pre-clinical blood study. We have also published pre-clinical blood
studies of our HCV-Hemopurifier, which documented the ability to capture 58% of
the Hepatitis-C virus from infected blood in two hours.
The Company is in the development stage on the Hemopurifier and significant
research and testing are still needed to reach commercial viability. Any
resulting medical device or process will require approval by the U.S. Food and
Drug Administration ("FDA"), and the Company has not yet begun efforts to obtain
FDA approval on its current lead product candidate, which may take several
years. Since many of the Company's patents were issued in the 1980's, they are
scheduled to expire in the near future. Thus, such patents may expire before FDA
approval, if any, is obtained.
The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States ("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".
The accompanying unaudited condensed consolidated financial statements of
Aethlon Medical, Inc. (the "Company") have been prepared in accordance with GAAP
for interim financial information and with the instructions to Form 10-QSB.
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-month period ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2005. For further
information, refer to the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2004, which includes audited financial statements and footnotes
as of and for the years ended March 31, 2004 and 2003.
NOTE 2. 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 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. ("Cell") (collectively
hereinafter referred to as the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
7
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
STOCK BASED COMPENSATION
------------------------
At June 30, 2004, the Company has two stock-based employee compensation plans.
The Company accounts for those plans under the recognition and measurement
principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and related Interpretations.
No stock-based employee compensation cost is reflected in net loss, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as
amended to stock-based employee compensation.
2004 2003
---------- ----------
Net loss:
As reported $(481,339) $(418,192)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- (13,000)
---------- ----------
Pro forma $(481,339) $(431,192)
========== ==========
Basic and diluted net loss per share:
As reported $ (0.04) $ (0.06)
========== ==========
Pro forma $ (0.04) $ (0.06)
========== ==========
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 Statement of Financial Accounting Standards 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.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and the accompanying
notes. The amounts of assets and liabilities reported on our balance sheet and
the amounts of revenues and expenses reported for each of our fiscal periods are
affected by estimates and assumptions, which are used for, but not limited to,
the accounting for the issuance of various equity instruments and convertible
notes payable. Actual results could differ from these estimates. The following
critical accounting policies are significantly affected by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements:
8
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
ACCOUNTING FOR TRANSACTIONS INVOLVING STOCK COMPENSATION
Financial Accounting Standards Board ("FASB") Interpretation No. 44
("FIN 44"), "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION,
AN INTERPRETATION OF APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain provisions cover specific events that occur after either December
15, 1998, or January 12, 2000.
Under Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES," compensation expense is the excess, if any, of the
estimated fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Compensation expense,
if any, is recognized over the applicable service period, which is usually the
vesting period.
Statement of Financial Accounting Standards ("SFAS") 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION," if fully adopted, changes the method of
accounting for employee stock-based compensation plans to the fair value based
method. For stock options and warrants, fair value is estimated using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option or warrant, stock volatility and
the annual rate of quarterly dividends. Compensation expense, if any, is
recognized over the applicable service period, which is usually the vesting
period. The adoption of the accounting methodology of SFAS 123 is optional and
we have elected to continue accounting for stock-based compensation issued to
employees using APB 25; however, pro forma disclosures, as we adopted the cost
recognition requirement under SFAS 123, are required to be presented.
SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123," was issued in December 2002
and is effective for fiscal years ending after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
We granted warrants in connection with the issuance of certain notes
payable. Under Accounting Principles Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force Issue No. 98-5 ("EITF Issue No. 98-5"), "ACCOUNTING FOR CONVERTIBLE
SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE
CONVERSION RATIO" and Emerging Issues Task Force Issue No. 00-27, "APPLICATION
OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.
9
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. The Company
adopted SFAS 144 on January 1, 2002. The provisions of this pronouncement
relating to assets held for disposal generally are required to be applied
prospectively after the adoption date to newly initiated commitments to sell or
otherwise dispose of such asset, as defined, by management. As a result,
management cannot determine the potential effects that adoption of SFAS 144 will
have on the Company's financial statements with respect to future disposal
decisions, if any. Management believes that no impairment exists at June 30,
2004.
INCOME TAXES
Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
difference between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. The Company records a valuation allowance for deferred tax
assets when, based on management's best estimate of taxable income (if any) in
the foreseeable future, it is more likely than not that some portion of the
deferred tax assets may not be realized.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources and would be
considered material to investors.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the June 30, 2003 financial
statement presentation to correspond to the June 30, 2004 format.
NOTE 3. CONVERTIBLE PROMISSORY NOTES
In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares by an accredited individual investor.
In June 2004, the Company repaid a $12,500 10% convertible note, including
accrued interest to an accredited individual investor.
The Company is currently in default on approximately $612,500 of amounts owed
under various notes payable and accrued liabilities and is currently seeking
other financing arrangements to retire all past due notes.
10
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 4. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business. The Company has
experienced a loss of approximately $17.1 million for the period from January
31, 1984 (Inception) through June 30, 2004. The Company has not generated
significant revenue or any profit from operations since inception. A substantial
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.
Our current plan of operation is to fund our anticipated increased research and
development activities and operations for the near future through the $673,000
private placement of common stock and the common stock purchase agreement with
Fusion Capital Fund II, LLC in May 2004, whereby Fusion Capital has committed to
purchase up to an additional $6,000,000 of our common stock over a 30-month
period, commencing, at our election, after the Securities and Exchange
Commission has declared effective a registration statement covering such shares,
filed on July 7, 2004. At the date of this Form 10-QSB, such registration
statement is not yet effective.
However, no assurance can be given that we will receive any additional funds
under our agreement with Fusion Capital. Based on our projections of additional
employees for operations and to complete research, development and testing
associated with our Hemopurifier(TM) products, we anticipate that these funds
will satisfy our cash requirements, including this anticipated increase in
operations, in excess of the next twelve months. However, due to market
conditions, and to assure availability of funding for operations in the long
term, we may arrange for additional funding, subject to acceptable terms, during
the next twelve months.
The 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. The Company's continuation as
a going concern is dependent upon its ability to obtain additional financing as
may be required, and generate sufficient revenue and operating cash flow to meet
its obligations on a timely basis.
NOTE 5. COMMITMENTS AND CONTINGENCIES
REGISTRATION RIGHTS AGREEMENTS
------------------------------
In June 2004, the Company completed a $673,000 private placement of common stock
with accredited investors, including Fusion Capital Fund II, LLC, a
Chicago-based investor. In connection with the private placement, the Company
entered into a common stock purchase agreement with Fusion Capital, whereby
Fusion Capital has committed to purchase up to an additional $6,000,000 of the
Company's common stock over a 30-month period, commencing, at the Company's
election, after the SEC has declared effective a registration statement covering
such shares. The funds the Company has received in connection with this
financing, together with any additional funds the Company may receive from
Fusion Capital under the common stock purchase agreement, will be used to fund
the Company's research and development activities and anticipated operations for
the future.
The Company is obligated under various agreements to register its common stock,
including the common stock underlying certain warrants and options. The Company
is subject to penalties for failure to register such securities, the amount of
which could be material to the Company's financial position, results of
operations and cash flows. The Company filed a registration statement on Form
SB-2 with the Securities and Exchange Commission in December 2000 to register
the necessary securities. However, such registration statement was never
declared effective and subsequently abandoned. Management is currently unaware
of any potential claims related to the lack of registration. However, as the
underlying securities are no longer restricted under Rule 144 of the Securities
Act of 1933, the Company no longer plans on filing a registration statement in
connection with this transaction.
11
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
NOTE 6. COMMON STOCK and WARRANT TRANSACTIONS
In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000.
In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000.
In April 2004, the Company issued 50,000 shares of restricted common stock at
$0.44 per share to Fusion Capital Fund II, LLC, an accredited institutional
investor, for a financing commitment to provide $6,000,000 under a registered
private placement. In connection with the $6,000,000 financing the Company paid
a fee to Fusion Capital in the amount of 418,604 shares to purchase common stock
of the Company at $0.44 per share.
In May 2004, the Company issued 568,181 shares of restricted common stock to
Fusion Capital at $0.44 per share for cash totaling $250,000. As the shares were
issued in connection with an equity financing, no related expense was recorded
in the condensed consolidated financial statements.
In May 2004, the Company issued 847,727 shares of restricted common stock to 14
accredited individual investors at $0.44 per share for cash totaling $373,000.
In May 2004, the Company issued 1,529,545 warrants to purchase common stock at
$0.76 per share, which vested upon grant and are exercisable through May 2007,
for the funds the Company received in connection with the Fusion Capital and
accredited individual investor financing in May.
In May 2004, the Company issued 225,000 shares at $0.44 per share to legal
counsel for legal services in the amount of approximately $99,000.
NOTE 7. SUBSEQUENT EVENTS
On July 7, 2004, the Company filed a registration statement with the SEC
covering a $673,000 private placement of common stock with accredited investors,
including Fusion Capital Fund II, LLC, a Chicago-based investor. In connection
with the private placement, the Company entered into a common stock purchase
agreement with Fusion Capital, whereby Fusion Capital has committed to purchase
up to an additional $6,000,000 of the Company's common stock over a 30-month
period, commencing, at the Company's election, after the SEC has declared
effective such registration statement that also covers such shares. The funds
the Company has received in connection with this financing, together with any
additional funds the Company may receive from Fusion Capital under the common
stock purchase agreement, will be used to fund the Company's research and
development activities and anticipated operations for the future.
In July 2004, the Company repaid a $10,000 10% convertible note, including
accrued interest, to an accredited individual investor.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of Aethlon Medical's 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-QSB. 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-QSB 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. ("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-QSB. Such potential risks and
uncertainties include, without limitation, completion of the Company's
capital-raising activities, FDA approval of the Company's products, other
regulations, patent protection of the Company's proprietary technology, product
liability exposure, uncertainty of market acceptance, competition, technological
change, and other risk factors detailed herein and in other of the Company's
filings with the Securities and Exchange Commission. The forward-looking
statements are made as of the date of this Form 10-QSB, and the Company assumes
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 is a development stage therapeutic device company that has not
yet engaged in significant commercial activities. The primary focus of our
resources is the advancement of our proprietary Hemopurifier(TM) platform
treatment 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 HIV/AIDS,
Hepatitis-C, and pathogens targeted as potential biological warfare agents. Our
main focus during fiscal 2004 is to prepare our HIV-Hemopurifier to treat
HIV/AIDS and pathogens targeted as potential biological warfare agents for
animal clinical trials, and to initiate the pre-clinical human blood studies of
our HCV-Hemopurifier for treating Hepatitis-C. See Item 1, Note 1 "NATURE OF
BUSINESS".
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,
450 Fifth Street, N.W. 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 3030 Bunker Hill Street, Suite 4000, San Diego, California 92109. Our
telephone number is 858/459-7800. Our Web site is maintained at
http://www.aethlonmedical.com.
Our common stock is traded on the OTCBB under the symbol "AEMD".
13
CRITICAL ACCOUNTING POLICIES
----------------------------
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us 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 our 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 stock purchase warrants issued with notes payable,
beneficial conversion feature of convertible notes payable, impairment of
intangible assets and long lived assets, contingencies and litigation. 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 conditions or results of operations.
RESULTS OF OPERATIONS
---------------------
THE THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2003.
OPERATING EXPENSES
------------------
Consolidated operating expenses were $458,371 for the three months ended June
30, 2004, versus $236,691 for the comparable period ended June 30, 2003. This
increase of 289% in operating expenses is principally attributable to increased
professional fees and payroll and related expenses due to increased legal and
accounting expenses associated with increased financing and investor relations
activities and increased administrative and laboratory staff.
NET LOSS
--------
We recorded a consolidated net loss of $481,339 and $418,192 for the quarters
ended June 30, 2004 and 2003, respectively. The increase in net loss of 15.1%
was primarily attributable to increased operating expenses.
Basic and diluted loss per common share were ($0.04) for the three month period
ended June 30, 2004 compared to ($0.06) for the same period ended June 30, 2003.
This reduction in loss per share was primarily attributable to the greater
number of common shares outstanding during the three month period ended June 30,
2004, as compared to the three month period ended June 30, 2003, partially
offset by the increased net loss for the three month period ended June 30, 2004,
as compared to the three month period ended June 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
To date, we have funded our 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. Our cash position at June 30, 2004 was $349,750 as compared to $1,619,
at March 31, 2004, representing an increase of $348,131, due to funds received
from the private sale of common stock for cash to Fusion Capital and other
qualified individual investors.
During the three months ended June 30, 2004, operating activities used net cash
of $385,317. We received $780,000 from the sale of common stock and repaid
convertible notes totaling $12,500.
During the three month period ended June 30, 2004, net cash used in operating
activities primarily consisted of net loss of $481,339. Net loss was offset
principally by depreciation of $8,135 plus the fair market value of common stock
of $129,000, less net changes in prepaid expenses of ($29,728) and less the
combined accounts payable and amounts due to related parties of ($11,380).
14
An increase in working capital in the amount of $303,979 reduced our negative
working capital position to ($3,477,898) at June 30, 2004 as compared to a
negative working capital of ($3,929,637) at March 31, 2004.
Our 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. We are seeking to
fund these and other operating needs in the next 12 months from funds to be
obtained through an additional acquisition of $6,000,000 of our common stock
that Fusion Capital Fund II, LLC has committed to purchase over a 30-month
period, commencing, at our election, after the Securities and Exchange
Commission has declared effective a registration statement, filed on July 7,
2004, covering such shares, or from the proceeds of additional private
placements or public offerings of debt or equity securities, or both.
We expect to raise additional capital within the next three months from the
registration of $6,000,000 of our common stock that Fusion Capital has committed
to purchase up to that amount over a 30-month period, commencing, at our
election, after the Securities and Exchange Commission has declared effective a
registration statement, to fund research and development and other activities.
Our operations to date have consumed substantial capital without generating
revenues, and we will continue to require substantial and increasing capital
funds to conduct necessary research and development and pre-clinical and
clinical testing of our Hemopurifier products, and to market any of those
products that receive regulatory approval. We do 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 expected to depend for at least
the next several years on our ability to sell securities, borrow funds or a
combination thereof. Our 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 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.
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.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
34Act) as of the end of the period covered by this report (the "Evaluation
Date"). Based upon that evaluation, the CEO and CFO concluded that, as of June
30, 2004, our disclosure controls and procedures were effective in timely
alerting them to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic filings with the SEC.
Based on their most recent evaluation as of the Evaluation Date, the CEO and the
CFO have also concluded that there are no significant deficiencies in the design
or operation of internal control over financial reporting which are reasonably
likely to adversely affect the Company's ability to record, process, summarize
and report financial information, and such officers have identified no material
weaknesses in internal controls.
Changes in Controls and Procedures
There were no significant changes made in our internal controls over financial
reporting during the quarter ended June 30, 2004 that have materially affected
or are reasonably likely to materially affect these controls. Thus, no
corrective actions with regard to significant deficiencies or material
weaknesses were necessary.
15
Limitations on the Effectiveness of Internal Control
Our management, including the CEO, does not expect that our disclosure controls
and procedures or our internal control over financial reporting will necessarily
prevent all fraud and material errors. An internal control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations on all internal control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within Aethlon Medical have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In April 2004, the Company issued 50,000 shares of restricted common stock at
$0.44 per share to Fusion Capital Fund II, LLC, an accredited institutional
investor, for a financing commitment to provide $6,000,000 under a registered
private placement. In connection with the $6,000,000 financing the Company paid
a fee to Fusion Capital in the amount of 418,604 shares to purchase common stock
of the Company at $0.44 per share. This transaction was exempt from registration
pursuant to Rule 506 promulgated under regulation D of the Securities Act of
1933.
In May 2004, the Company issued 568,181 shares of restricted common stock to
Fusion Capital at $0.44 per share for cash totaling $250,000. As the shares were
issued in connection with an equity financing, no related expense was recorded
in the condensed consolidated financial statements. This transaction was exempt
from registration pursuant to Rule 506 promulgated under regulation D of the
Securities Act of 1933.
In May 2004, the Company issued 847,727 shares of restricted common stock to 14
accredited individual investors at $0.44 per share for cash totaling $373,000.
This transaction was exempt from registration pursuant to Rule 506 promulgated
under regulation D of the Securities Act of 1933.
In May 2004, the Company issued 1,529,545 warrants to purchase common stock at
$0.76 per share, which vested upon grant and are exercisable through May 2007,
for the funds the Company received in connection with the Fusion Capital and an
accredited individual investor financing in May. This transaction was exempt
from registration pursuant to Rule 506 promulgated under regulation D of the
Securities Act of 1933.
In May 2004, the Company issued 225,000 shares at $0.44 per share to legal
counsel for legal services in the amount of approximately $99,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of the date of this report, various promissory and convertible notes payable
in the aggregate principal amount of $612,500 have reached maturity and are past
due. The Company is currently seeking other financing arrangements to retire all
past due notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as part of this report:
31.1 Certification of our Chief Executive Officer and President, pursuant to
Securities Exchange Act rules 13a-14(a) and 15d-14(a) as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2 Certification of our Chief Financial Officer, pursuant to Securities
Exchange Act rules 13a-14(a) and 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Statement of our Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2 Statement of our Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
In accordance with Item 601(b)(32)(ii) of Regulation S-B and SEC
Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal
Control Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed
to accompany this Form 10-QSB and will not be deemed "filed" for purpose of
Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the Registrant specifically incorporates
it by reference
(b) Reports on Form 8-K filed during the quarter ended June 30, 2004.
On June 7, 2004, the Company filed a report on Form 8-K indicating that it has
completed a $673,000 private placement of common stock with accredited
investors, including Fusion Capital Fund II, LLC, a Chicago based institutional
investor, and that it entered into a common stock purchase agreement with Fusion
Capital, whereby Fusion Capital has committed to purchase up to $6,000,000
of Aethlon's common stock.
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AETHLON MEDICAL, INC
Date: August 16, 2004
BY: /S/ JAMES A. JOYCE BY: /S/ EDWARD C. HALL
--------------------------- ---------------------------
JAMES A. JOYCE EDWARD C. HALL
CHAIRMAN, PRESIDENT AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER
AETHLON MEDICAL, INC.
19