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, 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, 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 as of
November 12, 2004 was 14,186,932.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2004 (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2004
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2004
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
2
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
September 30,
2004
(Unaudited)
-------------
ASSETS
Current assets
Cash $ 4,429
Prepaid expenses 16,524
-------------
20,953
Property and equipment, net 29,098
Patents and patents pending, net 225,619
Other assets 35,455
-------------
$ 311,125
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued
liabilities $ 1,425,997
Due to related parties 1,710,238
Notes payable 477,500
-------------
3,613,735
Commitments and Contingencies
Stockholders' Deficit
Common stock,par value $0.001 per
share; 25,000,000 shares authorized;
14,126,932 shares issued
and outstanding 14,127
Additional paid-in capital 14,558,521
Deficit accumulated during
development stage (17,875,258)
-------------
(3,302,610)
-------------
$ 311,125
=============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
3
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended September 30, 2004 and 2003 and For
the Period January 31, 1984 (Inception) Through September 30, 2004
(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,
2004 2003 2004 2003 2004
------------- ------------- ------------- ------------- -------------
REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research
and development -- -- -- -- 35,810
------------- ------------- ------------- ------------- -------------
-- -- -- -- 1,533,568
EXPENSES
Professional fees 251,831 80,932 466,952 136,164 4,133,578
Payroll and related 200,912 107,478 384,455 210,131 5,954,965
General and administrative 109,204 76,726 168,912 155,532 3,651,353
Impairment -- -- -- -- 1,231,531
------------- ------------- ------------- ------------- -------------
561,947 265,136 1,020,319 501,827 14,971,427
OPERATING LOSS (561,947) (265,136) (1,020,319) (501,827) (13,437,859)
OTHER EXPENSE (INCOME)
Interest and other
debt expenses (213,342) 21,994 (190,374) 203,495 4,317,207
Interest income -- -- -- -- (17,415)
Other -- -- -- -- 137,607
------------- ------------- ------------- ------------- -------------
(213,342) 21,994 (190,374) 203,495 4,437,399
------------- ------------- ------------- ------------- -------------
NET LOSS $ (348,605) $ (287,130) $ (829,945) $ (705,322) $ (17,875,258)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE ($ 0.03) ($ 0.04) ($ 0.06) ($ 0.09)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,604,294 7,753,547 12,906,408 7,536,108
============= ============= ============= =============
The accompanying notes are an integral part of
these unaudited condensed consolidated financial statements.
4
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2004 and 2003 and For the
Period January 31, 1984 (Inception) Through September 30, 2004
(Unaudited)
January 31, 1984
Six Months Six Months (Inception)
Ended Ended Through
September 30, September 30, September 30,
2004 2003 2004
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (829,945) $ (705,322) $(17,875,258)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 17,623 78,993 927,538
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 and interest 259,512 22,500 2,428,104
Beneficial conversion feature of convertible
notes payable -- 150,000 809,800
Impairment of patents pending -- -- 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (10,942) (1,909) 145,013
Other assets (15,050) -- (35,455)
Accounts payable and accrued liabilities (162,384) 29,093 1,610,287
Due to related parties 36,781 118,909 1,710,238
------------- ------------- -------------
Net cash used in operating activities (704,405) (307,736) (6,128,308)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (18,285) (2,659) (232,451)
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 (18,285) (2,659) (557,491)
(continued)
5
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2004 and 2003 and For the
Period January 31, 1984 (Inception) Through September 30, 2004
(Unaudited)
January 31,1984
Six Months Six Months (Inception)
Ended Ended Through
September 30, September 30, September 30,
2004 2003 2004
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ -- $ -- $ 1,480,000
Principal payments on notes payable (22,500) (160,000) (212,500)
Net proceeds from issuance of convertible
notes payable -- 150,000 998,000
Net proceeds from issuance of common stock 748,000 315,000 4,424,728
------------ ------------ ------------
Net cash provided by financing activities 725,500 305,000 6,690,228
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH 2,810 (5,395) 4,429
CASH - beginning of period 1,619 6,332 --
------------ ------------ ------------
CASH - end of period $ 4,429 $ 937 $ 4,429
============ ============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
6
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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(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. We have also published pre-clinical blood
studies of our HCV-Hemopurifier(TM), 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(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 ("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. 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 September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2005.
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
September 30, 2004
STOCK BASED COMPENSATION
------------------------
At September 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.
Six Months Ended September 30, 2004 2003
------------ ------------
Net loss:
As reported $ (829,945) $ (705,322)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- (26,000)
------------ ------------
Pro forma $ (829,945) $ (731,322)
============ ============
Basic and diluted net loss per share:
As reported $ (0.06) $ (0.09)
============ ===========
Pro forma $ (0.06) $ (0.10)
============ ============
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
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 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,"
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
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. Management
believes that no impairment exists at September 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 September 30, 2003 financial
statement presentation to correspond to the September 30, 2004 format.
NOTE 3. CONVERTIBLE PROMISSORY NOTES
In July 2004, the Company repaid a $10,000 10% convertible note, including
accrued interest, to an accredited individual investor.
The Company is currently in default on approximately $477,500 of amounts owed
under various notes payable and accrued liabilities. The Company is continually
reviewing other financing arrangements to retire all past due notes.
10
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 $17.9 million for the period from January
31, 1984 (Inception) through September 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.
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. An Amended registration statement on Form SB-2 was filed with the
SEC on October 28, 2004. The registration statement is currently under review by
the SEC, but management estimates that the registration statement should be
effective by December 2004.
11
NOTE 6. COMMON STOCK and WARRANT TRANSACTIONS
In July 2004, the Company issued 10,715 shares of restricted
common stock at $0.70 per share to an
accredited individual for employee placement services in the amount of $7,500.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In July 2004, the Company issued 6,850 shares of restricted
common stock at $0.73 per share to an
accredited individual for investor relations services in the amount of $5,000.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In August 2004, the Company issued 46,364 shares of restricted
common stock at $0.55 per share to an
accredited individual for employee placement services in the amount of $25,500.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In August 2004, the Company issued 165,492 and 28,377 shares of restricted
common stock at $0.25 and $0.45 per share, respectively to our legal counsel for
legal services in the amounts of approximately $41,400 and $12,800,
respectively. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In September 2004, we issued 479,513 shares of restricted common stock to LH
Financial (Esquire Trade and Finance), an accredited institutional investor, in
conjunction with the conversion of $125,000 in principal amount of notes, plus
accrued interest, at $0.34 per share, in accordance with their convertible note
agreement. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.
NOTE 7. SUBSEQUENT EVENTS
In October 2004, the Company issued two $40,000 10% one-year notes plus 160,000
warrants to purchase restricted common stock at $0.50 per share and 88,888
warrants to purchase restricted common stock at $0.90 per share to two
accredited individual investors for cash in the total amount of $80,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In October 2004, the Company issued a $50,000 10% one-year note plus 100,000
warrants to purchase restricted common stock at $0.50 per share and 55,555
warrants to purchase restricted common stock at $0.90 per share to an accredited
individual investor for cash in the amount of $50,000. This transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
In November 2004, the Company issued 60,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of 60,000
warrants at $0.25 per share for consideration of a $15,000 reduction in the
principal amount of a 10% one year note. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and their explanatory notes appearing elsewhere in this
10QSB.
Certain statements contained herein that are not related to historical
results, including, without limitation, statements regarding the Company's
business strategy and objectives, future financial position, expectations about
pending litigation and estimated cost savings, are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") and
involve risks and uncertainties. Although we believe that the assumptions on
which these forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, regulatory policies, competition from other similar businesses, and
market and general economic factors. All forward-looking statements contained in
this prospectus are qualified in their entirety by this statement.
PLAN OF OPERATION
We are 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 toxins in human blood. Our main focus during fiscal year 2004 was to
prepare our HIV-Hemopurifier to treat HIV/AIDS, and our HCV-Hemopurifier to
treat Hepatitis-C for human clinical trials. We are also working to advance
pathogen filtration devices to treat infectious agents that may be used in
biological warfare and terrorism. See "NATURE OF BUSINESS AND BASIS OF
PRESENTATION" above.
We plan 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. We
plan to continue our pre-clinical trials for both our HIV/AIDS Hemopurifier(TM)
products as well as for our biodefense Hemopurifier(TM) products. We plan to
start small human clinical trials for HIV patients in fiscal year 2005. We also
plan to implement a regulatory strategy for the use of our Hemopurifier(TM) for
biodefense treatments in fiscal year 2005 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.
Subject to our financing with Fusion Capital (see "Liquidity and
Capital Resources"), we expect 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. An important part of this
will include our cooperative agreement with the National Center for Biodefense
at George Mason University to jointly pursue business and funding opportunities
within the federal government.
13
Accordingly, due to this increase in activity during the next twelve
months, we anticipate increasing our spending on research and development during
the next twelve months. Additionally, associated with our anticipated increase
in research and development expenditures, we anticipate purchasing significant
amounts of equipment and tenant improvements, during this period to support our
laboratory and testing operations.
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(TM) products, as well as 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, as well as our
ability to establish collaborative arrangements, effective commercialization,
marketing activities and other arrangements. We expect to continue to incur
increasing negative cash flows and net losses for the foreseeable future.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
Operating Expenses
Consolidated operating expenses were $561,947 for the three months
ended September 30, 2004, versus $265,136 for the comparable period ended
September 30, 2003. This increase of 112% 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 $348,605 and $287,130 for the
quarters ended September 30, 2004 and 2003, respectively. The increase in net
loss of 21.4% was primarily attributable to increased operating expenses, offset
partially by a reversal of approximately $228,000 in over-accrued interest
expense.
Basic and diluted loss per common share were ($0.03) for the three
month period ended September 30, 2004 compared to ($0.04) for the same period
ended September 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 September 30, 2004, as compared to the three month period
ended September 30, 2003, partially offset by the increased net loss for the
three month period ended September 30, 2004, as compared to the three month
period ended September 30, 2003.
SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2003
Operating Expenses
Consolidated operating expenses were $1,020,319 for the six months
ended September 30, 2004, versus $501,827 for the comparable period ended
September 30, 2003. This increase of 103% 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.
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Net Loss
We recorded a consolidated net loss of $829,945 and $705,322 for the
six-month periods ended September 30, 2004 and 2003, respectively. The increase
in net loss of 17.7% was primarily attributable to increased operating expenses,
offset partially by a reversal of approximately $228,000 in over-accrued
interest expense in the quarter ended September 30, 2004.
Basic and diluted loss per common share were ($0.06) for the six month
period ended September 30, 2004 compared to ($0.09) for the same period ended
September 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 September 30, 2004, as compared to the three month period ended September
30, 2003, partially offset by the increased net loss for the three month period
ended September 30, 2004, as compared to the three month period ended September
30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our cash position at September 30, 2004 was $4,429 compared to $1,619,
at March 31, 2004, representing an increase of $2,810, due to the substantially
complete use of funds for operations in this period from funds received from the
private sale of common stock for cash to Fusion Capital and other accredited
individual investors in May.
During the six months ended September 30, 2004, operating activities
used net cash of $704,405. We received $748,000 from the issuance of common
stock and repaid convertible notes totaling $22,500.
During the six month period ended September 30, 2004, net cash used in
operating activities primarily consisted of net loss of $829,945. Net loss was
offset principally by depreciation of $17,623 plus the fair market value of
common stock of $221,143 in payment for services, $38,369 in interest due to
conversion of notes payable less a reduction in accounts payable and other
liabilities of $162,384, primarily attributable to a reversal of approximately
$228,000 in over-accrued interest expense in the quarter ended September 30,
2004, plus net changes in other operating assets and liabilities of $10,789.
An increase in working capital during the six months in the amount of
$336,855, reduced our negative working capital position to ($3,592,782) at
September 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.
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(TM) 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.
15
Our 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 with Fusion Capital in May 2004, whereby
Fusion Capital has committed to buy up to an additional $6,000,000 of our common
stock over a 30-month period, commencing, at our election, after the SEC has
declared effective a registration statement covering such shares. 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.
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.
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,
CA 92109. Our phone number at that address is (858) 459-7800. Our Web site is
maintained at http://www.aethlonmedical.com.
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 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, 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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2004, the Company issued 10,715 shares of restricted
common stock at $0.70 per share to an
accredited individual for employee placement services in the amount of $7,500.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In July 2004, the Company issued 6,850 shares of restricted
common stock at $0.73 per share to an
accredited individual for consulting services on opportunities
for our Hemopurifier within the Biodefense marketplacein the amount of $5,000.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In August 2004, the Company issued 46,364 shares of restricted
common stock at $0.55 per share to an
accredited individual for employee placement services in the amount of $25,500.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In August 2004, the Company issued 165,492 and 28,377 shares of restricted
common stock at $0.25 and $0.45 per share, respectively to our legal counsel for
legal services in the amounts of approximately $41,400 and $12,800,
respectively. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In September 2004, we issued 479,513 shares of restricted common stock to LH
Financial (Esquire Trade and Finance), an accredited institutional investor, in
conjunction with the conversion of $125,000 in principal amount of notes, plus
accrued interest, at $0.34 per share, in accordance with their convertible note
agreement. This transaction was exempt from registration pursuant to Regulation
D promulgated under 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 $477,500 have reached maturity and are past
due. The Company is continually reviewing 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
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 Edward C. Hall, 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.
17
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 15, 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.
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