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 September 30, 2005
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, SUITE 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 was
19,427,201 as of November 9, 2005.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2005 (UNAUDITED) 1
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
AND FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2005 2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED) AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2005 3
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 10
ITEM 3. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS 18
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30,
2005
------------
ASSETS
Current assets
Cash $ 75,275
Prepaid expenses 10,233
------------
85,508
Property and equipment, net 19,016
Patents and patents pending, net 209,932
Other assets 33,275
------------
$ 347,731
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued liabilities $ 1,403,550
Due to related parties 1,263,135
Notes payable, net of discount 606,404
Convertible notes payable, net of discount 65,140
Warrant liability 286,377
------------
3,624,606
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per share;
50,000,000 shares authorized;
19,239,829 shares issued and outstanding 19,240
Additional paid-in capital 17,321,472
Deficit accumulated during
development stage (20,617,587)
------------
(3,276,875)
------------
$ 347,731
============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
1
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS For the Three and Six Months Ended September
30, 2005 and 2004 and For
the Period January 31, 1984 (Inception) Through September 30, 2005
(Unaudited)
January 31, 1984
Three Months Three Months Six Months Six Months (Inception)
Ended Ended Ended Ended through
September 30, September 30, September 30, September 30, September 30,
2005 2004 2005 2004 2005
------------- ------------- ------------- ------------- --------------
REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research and development -- -- -- -- 35,810
------------- ------------- ------------- ------------- --------------
-- -- -- -- 1,533,568
EXPENSES
Professional Fees 268,746 251,831 655,016 466,952 5,041,557
Payroll and related 168,131 200,912 347,221 384,455 6,918,055
General and administrative 117,509 109,204 287,218 168,912 4,232,797
Impairment -- -- -- -- 1,231,531
------------- ------------- ------------- ------------- --------------
554,386 561,947 455 1,020,319 17,423,940
------------- ------------- ------------- ------------- --------------
OPERATING LOSS (554,386) (561,947) (1,289,455) (1,020,319) (15,890,372)
------------- ------------- ------------- ------------- --------------
OTHER EXPENSE (INCOME)
Interest and other debt expenses 115,185 (213,342) 182,118 (190,374) 4,603,273
Interest income -- -- -- -- (17,415)
Other 3,750 -- 3,750 -- 141,357
------------- ------------- ------------- ------------- --------------
118,935 (213,342) 185,868 (190,374) 4,727,215
------------- ------------- ------------- ------------- --------------
NET LOSS $ (673,321) $ (348,605) $ (1,475,323) (829,945) (20,617,587)
============= ============= ============= ============= ==============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.04) $ (0.03) $ (0.08) $ (0.06)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,045,651 13,604,294 18,373,416 12,906,408
============= ============= ============= =============
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2005
(Unaudited)
JANUARY 31, 1984
SIX MONTHS ENDED SIX MONTHS ENDED (INCEPTION)
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 THROUGH
(UNAUDITED) (UNAUDITED) SEPTEMBER 30,2005
-------------------- -------------------- --------------------
Cash flows from operating activities:
Net loss $ (1,475,323) $ (829,945) $ (20,617,587)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 15,341 17,623 965,093
Amortization of deferred consulting fees 30,000 -- 60,000
Gain of 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 296,241 259,512 2,803,860
Change in fair value of warrant liability 3,750 -- 3,750
Intrinsic value of stock options issued to
directors -- -- 424,262
Amortization of debt discount 121,095 -- 969,704
Beneficial conversion feature of convertible
notes payable -- -- 334,304
Impairment of patents and patents pending -- -- 897,227
Impairment of goodwill -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (45) (10,942) 151,304
Other assets 3,975 (15,050) (33,275)
Accounts payable and accrued
liabilities 263,383 (162,384) 1,895,609
Due to related parties (4,367) 36,781 1,496,636
-------------------- -------------------- --------------------
Net cash used in operating activities (745,950) (704,405) (7,729,219)
-------------------- -------------------- --------------------
Cash flows from investing activities:
Purchases of property and equipment -- (18,285) (244,236)
Patents and patents pending -- -- (352,833)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
-------------------- -------------------- --------------------
Net cash used in investing activities -- (18,285) (569,276)
-------------------- -------------------- --------------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable 100,000 -- 1,710,000
Principal repayments of notes payable -- (22,500) (212,500)
Proceeds from the issuance of convertible notes
payable 535,000 -- 1,533,000
Proceeds from the issuance of common stock 177,600 748,000 5,343,270
-------------------- -------------------- --------------------
Net cash provided by financing activities 812,600 725,500 8,373,770
-------------------- -------------------- --------------------
Net increase in cash 66,650 2,810 75,275
Cash at beginning of period 8,625 1,619 --
-------------------- -------------------- --------------------
Cash at end of period $ 75,275 $ 4,429 $ 75,275
==================== ==================== ====================
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. (the "Company") is a development stage therapeutic device
company focused on expanding the applications of its Hemopurifier (TM) platform
technology, which is designed to rapidly reduce the presence of infectious
viruses and other toxins from human blood. In this regard, the Company's 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, the Company has published that its HIV-Hemopurifier(TM)
removed 55% of HIV from human blood in three hours and in excess of 85% of HIV
in twelve hours. Additionally, the HIV-Hemopurifier(TM) captured 90% of gp120, a
toxic protein that depletes human immune cells, during a one-hour pre-clinical
blood study.
The Company is in the development stage on the Hemopurifier(TM) 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 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 six month periods ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2006.
NOTE 2. 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 $20.6 million for the period from January
31, 1984 (Inception) through September 30, 2005. 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.
The Company's current plan of operation is to fund the Company's anticipated
increased research and development activities and operations for the near future
utilizing its existing financial agreement with Fusion Capital Fund II, LLC
("Fusion Capital") as well as the remaining $295,000 under the 10% Series A
Convertible Promissory Notes (see Note 4, Notes Payable).
No assurance can be given that the Company will receive any additional funds
under its agreement with Fusion Capital. Based on the Company's projections of
additional employees for operations and to complete research, development and
testing associated with its Hemopurifier(TM) products, the Company anticipates
that these funds will satisfy its 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, the Company 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.
4
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2005
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 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.
STOCK BASED COMPENSATION
------------------------
At September 30, 2005, 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 or greater than
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards "SFAS" No. 123, "ACCOUNTING FOR STOCK BASED
COMPENSATION", ("SFAS 123") as Amended, to stock-based employee compensation for
the period indicated.
Six Months Ended September 30, 2005 2004
----------- -----------
Net loss:
As reported $ 1,475,323 $ 829,945
Pro forma compensation expense 57,000 --
----------- -----------
Pro forma $ 1,532,323 $ 829,945
=========== ===========
Basic and diluted net loss per share:
As reported $ (0.08) $ (0.06)
=========== ===========
Pro forma $ (0.08) $ (0.06)
=========== ===========
The Company accounts for stock-based compensation to non-employees in accordance
with the fair value recognition requirements of SFAS 123 No. and Emerging Issues
Task Force 96-18 "ACCOUNTING FOR EQUITY INVESTMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS AND
SERVICES."
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.
5
PATENTS
The Company capitalizes the cost of patents, some of which were acquired, and
amortizes such costs over the shorter of the remaining legal life or their
estimated economic life, upon issuance of the patent.
RESEARCH AND DEVELOPMENT EXPENSES
The Company incurred approximately $478,203 and $153,095 of research and
development expenses during the six months ended September 30, 2005 and 2004,
respectively. For the fiscal quarter ended September 30, 2005 and 2004, the
Company incurred research and development expense of approximately $235,806 and
$124,080, respectively.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS No.144 ("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. Management
believes that no impairment existed at or during the six months ended September
30, 2005.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company 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. Such discounts are amortized to interest expense over the
term of the notes.
DERIVATIVES
The Company has an obligation to register for resale the shares underlying
warrants in connection with the issuance of its 10% Series A Convertible
Promissory Notes (see Note 4). In accordance with Emerging Issues Task Force
("EITF") No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO,
AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," the value of the warrants is
recorded as a liability until such registration is effective. The Company will
be required to re-measure the fair value of these warrants at the end of each
quarter until a registration statement for the common shares underlying the
warrants is declared effective, at which time the fair value of the warrant is
adjusted and any remaining associated liability is then reclassified to equity.
BENEFICAL 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 EITF Issue No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF 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.
6
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.
Under APB 25, 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.
SFAS 123, 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 the Company 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," 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.
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.
NOTE 4. NOTES PAYABLE
On May 16, 2005, the Company issued Fusion Capital a $30,000 Convertible
Promissory Note (the "Convertible Note") with an interest rate of fifteen
percent (15%) per annum that matured on August 15, 2005 (the "Maturity Date").
The Convertible Note is convertible into shares of restricted common stock at
any time at the election of Fusion at a conversion price equal to $0.20 per
share for any conversion occurring on or prior to the Maturity Date, or at a
price equal to the lesser of (i) 75% of the average of the three (3) lowest
closing sale prices of the common shares during the twelve (12) trading days
prior to the submission of a conversion notice or (ii) $0.20 per share, for any
conversion occurring after the Maturity Date. In addition, the Company issued
Fusion a five-year warrant to purchase 300,000 shares of the Company's common
stock at an exercise price of $0.25 per share (the "Warrant"). The warrant has
been valued using a Black-Scholes option pricing model and an associated
discount of $19,655, which will accrete to interest expense over the term of the
Convertible Note, has been recorded. The convertible feature of the Convertible
Note provides for a rate of conversion that is below market value. Pursuant to
EITF 98-5 and EITF 00-27, the Company has estimated the fair value of such
Beneficial Conversion Feature ("BCF") to be $10,345 and records such amount as a
debt discount. Such discount is being accreted to interest expense over the term
of the Convertible Note. Total interest expense on the Convertible Note for
amortization of the above debt discount and BCF totaled $30,000 for the six
months ended September 30, 2005.
7
On May 27, 2005, the Company issued a promissory note (the "Note") to an
accredited investor in an amount of $100,000 with 12% interest maturing on
December 1, 2005. In conjunction with the issuance of the Note, the Company also
issued a 12-month warrant to acquire 400,000 shares of Common Stock at $0.25 per
share. Accordingly, this warrant has been valued using a Black Scholes option
pricing model and an associated discount of $41,860, which will accrete to
interest expense over the term of the Note, has been recorded. Such interest
expense totaled $31,466 for the six months ended September 30, 2005.
From July 11, 2005 through September 30, 2005 the Company received cash
investments of $455,000 from an accredited investor (Ellen R. Weiner Family
Revocable Trust) based on agreed-upon terms reached on the cash receipt dates.
Such investments were documented on November 2, 2005 in a 10% Series A
Convertible Note ("Note"). The Note accrues interest at a rate of ten percent
(10%) per annum and matures on January 2, 2007. The Note is convertible into
shares of restricted common stock at any time at the election of the holder at a
conversion price equal to $0.20 per share for any conversion occurring on or
prior to the maturity date. In addition, upon conversion, the Company is
obligated to issue a three-year Warrant (the "Warrant") to purchase a number of
shares equal to the number of shares into which the Note was converted at an
exercise price of $0.20. The Warrant has been valued using a Binomial Lattice
option pricing model and an associated discount of $253,875, measured at the
commitment dates, will be expensed as future conversions occur. The convertible
feature of the Convertible Note provides for a rate of conversion that is below
market value. Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated
the fair value of such Beneficial Conversion Feature ("BCF") to be $201,125 and
records such amount as a debt discount. Such discount is being accreted to
interest expense over the term of the Convertible Note. Total interest expense
on the Convertible Note for amortization of the above debt discount and BCF
totaled $31,297 for the three months ended September 30, 2005.
From August 8, 2005 through September 30, 2005 the Company received cash
investments of $50,000, from an accredited investor (Allan S. Bird) based on
agreed upon terms on the cash receipt dates. Such investments were documented on
November 2, 2005 in a 10% Series A Convertible Note ("Note"). The Note accrues
interest at a rate of ten percent (10%) per annum and matures on January 2,
2007. The Note is convertible into shares of restricted common stock at any time
at the election of the holder at a conversion price equal to $0.20 per share for
any conversion occurring on or prior to the maturity date. In addition, upon
conversion, the Company is obligated to issue a three-year Warrant (the
"Warrant") to purchase a number of shares equal to the number of shares into
which the Note was converted at an exercise price of $0.20. The Warrant has been
valued using a Binomial Lattice option pricing model and an associated discount
of $28,750, measured at the commitment dates, will be expensed as future
conversions occur. The convertible feature of the Convertible Note provides for
a rate of conversion that is below market value. Pursuant to EITF 98-5 and EITF
00-27, the Company has estimated the fair value of such Beneficial Conversion
Feature ("BCF") to be $21,250 and records such amount as a debt discount. Such
discount is being accreted to interest expense over the term of the Convertible
Note. Total interest expense on the Convertible Note for amortization of the
above debt discount and BCF totaled $3,639 for the three months ended September
30, 2005.
The Company is currently in default on approximately $457,500 of amounts owed
under various notes payable and accrued liabilities and is currently seeking
other financing arrangements to retire all past due notes. At September 30, 2005
the Company had accrued interest in the amount of $210,155 associated with these
notes and accrued liabilities payable.
8
NOTE 5. COMMITMENTS AND CONTINGENCIES
REGISTRATION RIGHTS AGREEMENTS
In June 2004, the Company completed a private placement of common stock with
accredited investors, including Fusion Capital Fund II, LLC. 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,
commencing, at the Company's election, after the Securities and Exchange
Commission ("SEC") has declared effective a registration statement covering such
shares. The SEC declared the registration statement effective on December 7,
2004. On September 7, 2005, the Company was obligated to file a post-effective
amendment to its registration statement to update the financial statements. At
September 30, 2005, the Company had not yet filed such post-effective amendment
to its registration statement. In accordance with the Registration Rights
Agreement with Fusion Capital, the Company may accrue liquidated damages equal
to 2% of the aggregate amount paid by Fusion Capital for the shares held by
Fusion Capital during such period that the registration statement ceases to
remain effective. As of November 9, 2005, Fusion Capital does not own any
Purchase Shares of the Company's common stock, thus there are no liquidated
damages owed to Fusion Capital as of the date of this report.
NOTE 6. EQUITY TRANSACTIONS
On September 9, 2005, the Company granted 2,857,143 options to James A. Joyce,
its Chief Executive Officer, in exchange for $300,000 of accrued related-party
liabilities. The fair value of such options approximated the value of the
accrued related-party liability.
In July 2005, the Company issued 43,479 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company.
In July 2005, the Company issued 2,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.232 per share in payment for regulatory affairs consulting
services to the Company.
In August 2005, the Company issued 37,863 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.226 per share in payment for regulatory affairs consulting
services to the Company.
In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.230 per share in payment for regulatory affairs consulting
services to the Company.
In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.234 per share in payment for regulatory affairs consulting
services to the Company.
In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.212 per share in payment for regulatory affairs consulting
services to the Company.
In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.206 per share in payment for regulatory affairs consulting
services to the Company.
NOTE 7. SUBSEQUENT EVENTS
In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.236 per share in payment for regulatory affairs consulting
services to the Company.
In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.216 per share in payment for regulatory affairs consulting
services to the Company.
9
In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.384 per share in payment for regulatory affairs consulting
services to the Company.
In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company.
In November 2005, the Company issued 13,298 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.376 per share in payment for regulatory affairs consulting
services to the Company.
The Company is required to file a registration statement on Form SB-2 the later
of November 30, 2005 or 30 days after the date the Company completes an
additional financing of at least $1.0 million but in no event later than
December 31, 2005 for the purposes of registering the resale of the shares of
common stock issuable upon conversion of the Promissory Notes and exercise of
the Warrants.
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
The Company is a development stage therapeutic device company that has not yet
engaged in significant commercial activities. The primary focus of the Company's
resources is towards the advancement of its 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, the
Company's core focus is the development of therapeutic devices that treat
HIV/AIDS, Hepatitis-C, and pathogens targeted as potential biological warfare
agents. The Company's emphasis during fiscal 2006 is to prepare its
HIV-Hemopurifier to treat HIV/AIDS and pathogens targeted as potential
biological warfare agents for animal clinical trials, and to complete the
pre-clinical human blood studies of its HCV-Hemopurifier for treating
Hepatitis-C.
10
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. the Company's
headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego, CA
92109. Our phone number at that address is (858) 459-7800. Its Web site is
maintained at http://www.aethlonmedical.com.
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, the Company evaluates estimates and assumptions based upon
historical experience and various other factors and circumstances. Management
believes the Company's estimates and assumptions are reasonable in the
circumstances; however, actual results may differ from these estimates under
different future conditions.
The Company believes that the estimates and assumptions that are most important
to the portrayal of the Company's 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 stock purchase warrants issued with notes
payable, beneficial conversion feature of convertible notes payable, impairment
of intangible assets and long lived assets, stock compensation, 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 the Company's future financial conditions or results of
operations.
There have been no changes to our critical accounting policies as disclosed in
our Form 10-KSB for the year ended March 31, 2005.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS No.144 ("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. Management
believes that no impairment existed at or during the six months ended September
30, 2005.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company 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. Such discounts are amortized to interest expense over the
term of the notes.
11
DERIVATIVES
The Company has an obligation to register for resale the shares underlying
warrants in connection with the issuance of its 10% Series A Convertible
Promissory Notes. In accordance with Emerging Issues Task Force ("EITF") No.
00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND
POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," the value of the warrants is
recorded as a liability until such registration is effective. The Company will
be required to re-measure the fair value of these warrants at the end of each
quarter until a registration statement for the common shares underlying the
warrants is declared effective. The Company will be required to re-measure the
fair value of these warrants at the end of each quarter until a registration
statement for the common shares underlying the warrants is declared effective,
at which time the fair value of the warrant is adjusted and any remaining
associated liability is then reclassified to equity.
BENEFICAL 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 EITF Issue No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF 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.
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.
Under APB 25 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.
SFAS 123, 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," 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.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
Operating Expenses
Consolidated operating expenses for the three months ended September 30, 2005
were $554,386, almost unchanged in comparison with $561,947 for the comparable
quarter one year ago. The reduction of $7,561 was comprised of increases in
Professional Fees and General and Administrative expenses of $16,915 and $8,305,
respectively, offset by a decrease in overall Payroll and Related expenses of
$32,781.
Net Loss
The Company recorded a consolidated net loss of $673,320 and $348,605 for the
quarters ended September 30, 2005 and 2004, respectively. The increased net loss
was primarily attributable to a $328,527 increase in recorded interest expense.
This increase is a result of a large credit ($244,500) to correct for
over-accrued interest expense taken in the prior quarter one year ago offset by
an increase in interest expense attributable to amortization of warrant value
and BCF recorded in association with convertible notes payable incurred in the
first and second quarters of the Company's fiscal year.
Basic and diluted loss per common share were ($0.04) for the three
month period ended September 30, 2005 compared to ($0.03) for the same period
ended September 30, 2004. This reduction in loss per share was primarily a
result of the greater number of common shares outstanding during the three month
period ended September 30, 2005, as compared to the three month period ended
September 30, 2004, offset by the increased net loss for the three month period
ended September 30, 2005, as compared to the three month period ended September
30, 2004.
SIX MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2004
Operating Expenses
Consolidated operating expenses were $1,289,455 for the six months ended
September 30, 2005, versus $1,020,319 for the comparable period ended September
30, 2004. This increase of $269,136 results from a $188,064 increase in
Professional Fees and a $118,306 increase in General and Administrative expenses
offset by a $37,234 reduction in Payroll and Related expenses. The increase in
Professional Fees is a result of additional work required to prepare for and
initiate human safety trials on HCV infected patients, while the increase in
General and Administrative expense included increases in Lab Supplies of
$80,714, insurance expense of $23,964, rent expense of $37,980 offset by
decreases in other General and Administrative expenses.
Net Loss
We recorded a consolidated net loss of $1,475,323 and $829,945 for the six-month
periods ended September 30, 2005 and 2004, respectively. The increase in net
loss was primarily attributable to increased operating expenses, offset
partially by a reversal of approximately $244,500 in over-accrued interest
expense in the quarter ended September 30, 2004 and an additional non-cash
expense of $3,750 related to the revaluation of warrants issued with convertible
debt combined with actual increases in interest expense attributable to the
amortization of warrant value and BCF recorded in association with convertible
notes payable incurred during the six month period ending September 30, 2005.
Basic and diluted loss per common share were ($0.08) for the six month period
ended September 30, 2005 compared to ($0.06) for the same period ended September
30, 2004. This reduction in loss per share was attributable to both the greater
number of common shares outstanding during the six month period ended September
30, 2005, as compared to the six month period ended September 30, 2004,
partially offset by the increased net loss for the six month period ended
September 30, 2005, as compared to the equivalent period one year ago.
13
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 September 30, 2005 was $75,275 compared
to $8,625, at March 31, 2005, representing an increase of $66,650. During the
six months ended September 30, 2005, operating activities used net cash of
$745,950. The Company received $177,600 from the issuance of common stock,
$535,000 from proceeds for the issuance of convertible notes payable and
$100,000 from the issuance of notes payable.
During the six month period ended September 30, 2005, net cash used in operating
activities primarily consisted of net loss of $1,475,323. Net loss was offset
principally by depreciation and amortization of $15,341 plus the fair market
value of common stock of $296,241 in payment for services, $121,095 of
amortization of debt discount, $121,095 in amortization of discount associated
with note issuances and an increases in accounts payable and other current
balance sheet accounts of $262,946.
An decrease in working capital during the six months in the amount of $190,588
increased the Company's negative working capital position to ($3,539,098) at
September 30, 2005 as compared to a negative working capital of ($3,348,510) at
March 31, 2005.
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 and increasing
capital funds to conduct necessary research and development and pre-clinical and
clinical testing of Hemopurifier(TM) 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.
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.
PLAN OF OPERATION
The Company's current plan of operation is to fund our anticipated increased
research and development activities and operations for the near future through
the common stock purchase agreement in place with Fusion Capital, whereby Fusion
Capital has committed to buy up to an additional $6,000,000 of our common stock
over a 30-month period, that commenced, at our election, after the SEC declared
effective a registration statement under Form SB-2 on December 7, 2004 covering
such shares. Through September 30, 2005 the Company had received $700,001 from
this agreement. 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 and equipment 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. In
addition, on November 2, 2005 the Company entered into an agreement with
accredited investors to issue up to $1.0 million in 10% Series A Convertible
Promissory Notes and has issued $705,000 under this arrangement. The Company
plans to utilize the remaining $295,000 under this facility to provide for
ongoing general working capital requirements. 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.
14
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(TM) platform treatment
technology, which is designed to rapidly reduce the presence of infectious
viruses and toxins in human blood. Our main focus is to prepare our
Hemopurifier(TM) to treat HIV/AIDS, Hepatitis-C and Flu Viruses in human
clinical trials. The Company is also working to advance pathogen filtration
devices to treat infectious agents that may be used in biological warfare and
terrorism.
The Company plans to continue our research and development activities related to
our Hemopurifier(TM) platform technology, with particular emphasis on the
advancement of our lead product candidates for the treatment of HIV/AIDS, HCV
and Flu Viruses. The Company also plans to implement a regulatory strategy for
the use of our Hemopurifier(TM) for biodefense treatments in fiscal year 2006
pursuant to a recent rule implemented by the FDA for medical countermeasures to
weapons of mass destruction. Under this rule, in situations where it is deemed
unethical to conduct efficacy studies in humans, a treatment can be reviewed for
approval on the basis of efficacy in the most relevant animal species and safety
data in humans.
The Company expects to add additional employees in the next twelve months, as
required to support our increased research and development effort that will
include expanding our goal beyond treating infectious diseases HIV/AIDS and
Hepatitis-C and new applications to combat infectious agents that may be used in
biological warfare and terrorism. This will involve designing Hemopurifier(TM)
products that can be rapidly deployed by armed forces as wearable post-exposure
treatments on the battlefield, as well as dialysis-based treatments for civilian
populations. This will entail developing the new treatment device based on the
same proprietary Hemopurifier(TM) filtration technology that is utilized in
advancing our HIV/AIDS, and Hepatitis-C treatments.
Accordingly, due to this increase in activity during the next twelve months,
Management anticipates continuing to increase spending on research and
development during this period. 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(TM) 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 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
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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has 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.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of 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
Securities Exchange Act of 1934) 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 September 30, 2005, 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.
15
Changes in Controls and Procedures
There were no significant changes made in our internal controls over financial
reporting during the quarter ended September 30, 2005 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. On August 1, 2005 the Company hired a new full-time
Chief Financial Officer.
Limitations on the Effectiveness of Internal Control
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
On August 26, 2005 the Company received a Complaint for Damages for
Breach of Written Contracts from the Regents of the University of California.
The complaint asks for payment of $135,555.05 plus interest, costs and
attorney's fees. The underlying obligation of $135,555.05 is carried on the
Company's balance sheet as a current liability. At the time of this filing we
have a verbal agreement to dismiss this claim pending the negotiation of a
settlement agreement. We have agreed with the Regents to pay the underlying
liability without interest but including attorney fees (estimated at
approximately $5,000). The obligation is expected to be settled by issuing
shares of restricted common stock at market for an amount equal to the
obligation.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On November 2, 2005 (the "Closing Date"), the Company entered into two
10% Series A Convertible Promissory Notes for an aggregate $705,000
(individually, a "Promissory Note" and collectively, the "Promissory Notes")
with Allan S. Bird and Ellen R. Weiner Family Revocable Trust (individually, a
"Holder" and collectively the "Holders"), each qualified as an "accredited
investor" as that term is defined in the Securities Act of 1933, as amended (the
"Act"). The Promissory Notes formalized a series of prior cash investments by
the Holders which, at the time such investments were made, the conversion prices
represented an average discount of 13.15% to the market price of the Company's
common stock (please see Note 3). An associated Registration Rights Agreement
between the Company and the Holders, dated November 2, 2005 (the "Registration
Rights Agreement") provides for the issuance of up to $1,000,000 under this
financing.
The Promissory Notes bear an interest rate of 10 percent (10%) per
annum on the unpaid principal balance and mature on January 2, 2007 (the
"Maturity Date"). The Notes are convertible into shares of restricted common
stock at any time at the election of the Holders at a conversion price equal to
an individually negotiated amount per share for any conversion occurring on or
prior to the Maturity Date (the "Conversion Price"). Additionally, upon
conversion the Promissory Notes, the Company will issue to the Holders
three-year warrants to purchase the same number of shares of common stock into
which each Promissory Note is converted at an exercise price equal to the
Conversion Price per share (each a "Warrant" and collectively, the "Warrants").
This transaction was exempt from registration under Rule 506 promulgated under
Regulation D 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 $457,500 have reached maturity and
are past due. The Company is continually reviewing other financing arrangements
to retire all past due notes. At September 30, 2005 the Company had accrued
interest in the amount of $210,155 associated with these notes and accrued
liabilities payable.
17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) Exhibits. The following documents are filed as part of this report:
31.1 Certification of CEO pursuant to Securities Exchange Act rules 13a-15
and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO pursuant to Securities Exchange Act rules 13a-15
and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certification of James A. Joyce, Chief Executive Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of James W. Dorst, Chief Financial Officer (Principal
Accounting Officer) pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
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: November 14, 2005
BY: /S/ JAMES A. JOYCE BY: /S/ JAMES W. DORST
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JAMES A. JOYCE JAMES W. DORST
CHAIRMAN, PRESIDENT AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER
AETHLON MEDICAL, INC.
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