SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 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, Ste 4000, San Diego, CA 92109
-------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(858)-459-7800
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of common stock of the registrant outstanding as of August
10, 2005 was 18,885,253.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 2005 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2005 AND 2004 AND FOR THE PERIOD
JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2005 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
THREE MONTHS ENDED JUNE 30, 2005 AND 2004 AND FOR THE PERIOD
JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2005 5-6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 12
ITEM 3. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS 17
2
PART I.
FINANCIAL INFORMATION
All references to "us", "we", "our" "Aethlon", "Aethlon Medical", or
"the Company" refer to Aethlon Medical, Inc., its predecessors and its
subsidiaries.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30,
2005
------------
ASSETS
Current assets
Cash $ 7,048
Prepaid expenses 14,576
------------
21,624
Property and equipment, net 24,580
Patents, net 213,737
Other assets 31,025
------------
$ 290,966
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued
liabilities $ 1,334,921
Due to related parties 1,580,190
Notes payable, net of discount 574,938
Convertible notes payable, net of discount 15,000
------------
3,505,049
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per
share; 50,000,000 shares authorized;
18,839,618 shares issued
and outstanding 18,840
Additional paid-in capital 16,711,343
Deficit accumulated during
development stage (19,944,266)
------------
(3,214,083)
------------
$ 290,966
============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2005 and 2004 and
For the Period January 31, 1984 (Inception) Through June 30, 2005
(UNAUDITED)
JANUARY 31,
1984
(INCEPTION)
THROUGH
JUNE 30, JUNE 30, JUNE 30,
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 386,270 215,120 4,772,811
Payroll and related 179,090 183,542 6,749,924
General and administrative 169,709 59,709 4,115,288
Impairment -- -- 1,231,531
------------ ------------ ------------
735,069 458,371 16,869,554
------------ ------------ ------------
OPERATING LOSS (735,069) (458,371) (15,335,986)
OTHER (INCOME) EXPENSE
Interest and other debt expense 66,933 22,968 4,488,088
Interest income -- -- (17,415)
Other -- -- 137,607
------------ ------------ ------------
66,933 22,968 4,608,280
------------ ------------ ------------
NET LOSS $ (802,002) $ (481,339) $(19,944,266)
============ ============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.05) $ (0.04)
============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 17,701,182 13,389,621
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2005 and 2004 and
For the Period January 31, 1984 (Inception) Through June 30, 2005
(UNAUDITED)
January 31, 1984
(Inception)
Through
June 30, June 30, June 30,
2005 2004 2005
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (802,002) $ (481,339) $(19,944,266)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,972 8,135 955,723
Amortization of deferred consulting fees 30,000 -- 60,000
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 208,085 129,000 2,715,704
Intrinsic value of stock options issued to directors -- -- 424,262
Amortization of debt discounts 39,489 888,098
Impairment of patents -- -- 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (4,388) (29,728) 146,961
Other assets 6,225 (5) (31,025)
Accounts payable and accrued liabilities 194,754 44,933 1,760,482
Due to related parties 12,688 (56,313) 1,580,190
------------ ------------ ------------
Net cash used in operating activities (309,177) (385,317) (7,292,446)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment -- (2,052) (244,236)
Acquisition of patents -- -- (352,833)
Proceeds from sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------ ------------ ------------
Net cash used in investing activities -- (2,052) (569,276)
(continued)
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2005 and 2004 and
For the Period January 31, 1984 (Inception) Through June 30, 2005
(UNAUDITED)
January 31, 1984
(Inception)
Through
June 30, June 30, June 30,
2005 2004 2005
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ 100,000 $ -- $ 1,710,000
Principal payments of notes payable -- (12,500) (212,500)
Proceeds from issuance of convertible notes payable 30,000 -- 1,028,000
Net proceeds from issuance of common stock 177,600 748,000 5,343,270
------------ ------------ ------------
Net cash provided by financing activities 307,600 735,500 7,868,770
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (1,577) 348,131 7,048
CASH - beginning of period 8,625 1,619 --
------------ ------------ ------------
CASH - end of period $ 7,048 $ 349,750 $ 7,048
============ ============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. and Subsidiaries (the "Company") is a development-stage
therapeutic device medical device company whose primary focus is the
commercialization of its Hemopurifier(TM) treatment technology which mimics the
immune response of clearing circulating viruses and toxins before the occurrence
of cell and organ infection.
The Company plans to commercialize the Hemopurifier(TM) as a treatment for
chronic infectious diseases such as HIV/AIDS and Hepatitis-C, and as a first
line of defense in treating drug and vaccine resistant pathogens considered to
be material threats as biological warfare agents.
To date, Aethlon has conducted and published studies that demonstrated the
ability of the Hemopurifier(TM) to capture HIV, gp120 (an HIV surface protein
that destroys immune cells), Hepatitis-C, and various pox-viruses related to
human smallpox. The Company has also performed studies in animals to demonstrate
the safety of the Hemopurifier. The first human studies of the Hemopurifier are
expected to begin in the Fall of 2005.
The Company is still developing the Hemopurifier and significant research and
testing may be required to reach commercial viability. The Hemopurifier will
also require market clearance from the U.S. Food and Drug Administration ("FDA")
before product sales can begin in the United States. The Company has yet to
initiate a clinical trial required to obtain market clearance from the FDA for
any therapeutic indication of the Hemopurifier. The Company may also face
similar regulatory hurdles prior to the commercialization of the Hemopurifier in
markets outside of the United States. Additionally, it is likely that some of
the Company's patents will expire before such regulatory approval can be
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 and with the instructions to Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended June 30,
2005 are not necessarily indicative of the results that may be expected for the
year ending March 31, 2006. For further information, refer to the Company's
Annual Report on Form 10-KSB for the year ended March 31, 2005, which includes
audited financial statements and footnotes as of March 31, 2005 and for the
years ended March 31, 2004 and 2005.
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 $19,944,000 for the period from
January 31, 1984 (Inception) through June 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 our existing financing agreement with
Fusion Capital Fund II, LLC.
No assurance can be given that the Company will receive any additional
funds under the Company's agreement with Fusion Capital however, the Company
anticipates that the Fusion financing agreement will satisfy its cash
requirements for the foreseeable future. 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 revenue and operating cash
flow to meet its obligations on a timely basis.
7
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 inactive 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.
STOCK BASED COMPENSATION
------------------------
At June 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 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 ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," as amended, to stock-based employee compensation.
2005 2004
---------- ----------
Net loss:
As reported $(802,002) $(481,339)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- --
---------- ----------
Pro forma $(802,002) $(481,339)
========== ==========
Basic and diluted net loss per share:
As reported $ (0.05) $ (0.04)
========== ==========
Pro forma $ (0.05) $ (0.04)
========== ==========
The Company accounts for stock-based compensation to non-employees in accordance
with the fair value recognition requirements of SFAS No. 123 and Emerging Issues
Task Force 96-18 "Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling, Goods or
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.
8
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 $306,000 and $58,000 of research and
development expenses during the three months ended June 30, 2005 and 2004,
respectively, which are included in operating expenses in the accompanying
consolidated statements of operations.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
-------------------------------------------
The Company follows 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, if any.
Management noted no impairment indicators requiring review for impairment at or
during the three months ended at June 30, 2005.
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.
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.
9
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
NOTE 4. NOTES PAYABLE
On May 16, 2005 the Company issued Fusion Capital ("Fusion") a $30,000
Convertible Promissory Note (the "Convertible Note") with an interest rate of
fifteen percent (15%) per annum that matures 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 Note and the
Warrant have piggyback registration rights. 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 recorded 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 $15,000 for the three months ended June 30, 2005.
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 $24,489 for the three months ended June 30, 2005.
The Company is currently in default on approximately $427,500 of
amounts owed under various unsecured notes payable and accrued liabilities and
is currently seeking other financing arrangements to retire all past due notes.
At June 30, 2005 the Company had accrued interest in the amount of $182,437
associated with these notes and accrued liabilities payable.
NOTE 5. COMMON STOCK and WARRANT TRANSACTIONS
In April 2005, the Company issued 9,740 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.308 per share in payment for scientific consulting
services to the Company valued at $3,000.
In April 2005, the Company issued 25,134 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.2984 per share in payment for regulatory affairs
consulting services to the Company valued at $7,500.
In April 2005, the Company issued 31,424 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.2514 per share in payment for regulatory affairs
consulting services to the Company valued at $7,900.
During the quarter ended June 30, 2005, the Company issued 635,633
shares of common stock at prices between $0.250 to and $0.280 per share to
Fusion Capital under its $6,000,000 common stock purchase agreement for cash
proceeds totaling $160,000. These shares are registered pursuant to the
Company's Form SB-2 registration statement effective December 7, 2004.
During the quarter ended June 30, 2005, the Company issued 95,420
shares of common stock pursuant to the Company's S-8 registration statement
covering the Company's 2003 Consulting Stock Plan at $0.262 per share in payment
for regulatory affairs consulting services to the Company valued at $25,000.
10
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
NOTE 5. COMMON STOCK and WARRANT TRANSACTIONS (continued)
In May 2005, the Company issued 33,228 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.254 per share in payment for regulatory affairs
consulting services to the Company valued at $8,440.
In May 2005, the Company issued 24,000 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.25 per share in payment for investor relations
consulting services to the Company valued at $6,000.
In May 2005 the Company issued 100,000 shares of common stock and a
warrant to purchase 400,000 shares of common stock at a purchase price of $0.176
per share to an accredited investor for $17,600. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
In May 2005, the Company issued 21,008 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.238 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000.
In June 2005, the Company issued 836,730 shares of restricted common
stock and a three-year warrant to purchase 418,365 shares of the Company's
restricted common stock at an exercise price of $0.25 to legal counsel as an
inducement to settle accrued past due legal services payable in the amount of
$167,346 which had been expensed in the prior fiscal year. At the time of the
settlement, the shares of the Company's restricted common stock were valued at
$209,183 and, using a Black-Scholes option pricing model, the warrant was valued
at $100,408. The non-cash additional consideration of $142,245 has been recorded
as professional fees expense during the quarter ended June 30, 2005.
In June 2005, the Company issued 12,605 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.238 per share in payment for scientific consulting
services to the Company valued at $3,000.
During the quarter ended June 30, 2005, the Company expensed $30,000 of
deferred consulting fees, which were included in additional paid-in capital at
March 31, 2005, as the related consulting services were completed.
NOTE 6. SUBSEQUENT EVENTS
In July 2005 the Company issued a $105,000 convertible promissory note
to an accredited investor Bearing interest at 10% and maturing on January 2,
2006. At the option of the holder the note converts to common stock at a
conversion price of $0.20 per share. Upon conversion a warrant to purchase
105,000 common shares at $0.20 per share will be issued to holder.
In July 2005, the Company issued 10,869 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 10,870 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 2,156 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 July 2005, the Company issued 21,740 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 two $25,000 convertible promissory
notes (total $50,000) to two related accredited investors bearing interest at
10% and maturing on January 2, 2006. At the option of the holder the note
converts to common stock at a conversion price of $0.20 per share. Upon
conversion a warrant to purchase 50,000 common shares at $0.20 will be issued to
holder.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of Aethlon Medical's financial condition and
results of operations should be read in conjunction with, and is qualified in
its entirety by the condensed consolidated financial statements and notes
thereto, included in Item 1 in this Quarterly Report on Form 10-QSB. This item
contains forward-looking statements that involve risks and uncertainties. Actual
results may differ materially from those indicated in such forward-looking
statements.
FORWARD LOOKING STATEMENTS
--------------------------
All statements, other than statements of historical fact, included in
this Form 10-QSB are, or may be deemed to be, "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended
("the Securities Act"), and Section 21E of the Exchange Act. Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors which may cause the actual results, performance,
or achievements of Aethlon Medical, Inc. ("the Company") to be materially
different from any future results, performance, or achievements expressed or
implied by such forward looking statements contained in this Form 10-QSB. Such
potential risks and uncertainties include, without limitation, completion of the
Company's capital-raising activities, FDA approval of the Company's products,
other regulations, patent protection of the Company's proprietary technology,
product liability exposure, uncertainty of market acceptance, competition,
technological change, and other risk factors detailed herein and in other of the
Company's filings with the Securities and Exchange Commission. The
forward-looking statements are made as of the date of this Form 10-QSB, and the
Company assumes no obligation to update the forward-looking statements, or to
update the reasons actual results could differ from those projected in such
forward-looking statements.
THE COMPANY
-----------
Aethlon Medical is a development stage therapeutic device company that
has not yet engaged in significant commercial activities. The primary focus of
our resources is the advancement of our proprietary Hemopurifier(TM) platform
treatment technology, which is designed to rapidly reduce the presence of
infectious viruses and other toxins from human blood. In this regard, our core
focus is the development of therapeutic devices that treat HIV/AIDS,
Hepatitis-C, and pathogens targeted as potential biological warfare agents. Our
main focus during fiscal 2006 is to prepare our HIV-Hemopurifier to treat
HIV/AIDS and pathogens targeted as potential biological warfare agents for
animal clinical trials, and to initiate the pre-clinical human blood studies of
our HCV-Hemopurifier for treating Hepatitis-C.
WHERE YOU CAN FIND MORE INFORMATION
-----------------------------------
We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with
the SEC. The reports, information statements and other information we file with
the Commission can be inspected and copied at the Commission Public Reference
Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at (800)
SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy, and information statements and other information
regarding registrants, like us, which file electronically with the Commission.
Our headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109. Our telephone number is 858/459-7800. Our Web site is
maintained at http://www.aethlonmedical.com.
Our common stock is traded on the OTCBB under the symbol "AEMD".
CRITICAL ACCOUNTING POLICIES
----------------------------
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of expenses during the reporting
period. On an ongoing basis, we evaluate estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe
our estimates and assumptions are reasonable in the circumstances; however,
actual results may differ from these estimates under different future
conditions.
12
We believe that the estimates and assumptions that are most important
to the portrayal of our financial condition and results of operations, in that
they require our most difficult, subjective or complex judgments, form the basis
for the accounting policies deemed to be most critical to us. These critical
accounting policies relate to stock purchase warrants issued with notes payable,
beneficial conversion feature of convertible notes payable, impairment of
intangible assets and long lived assets, contingencies and litigation. We
believe estimates and assumptions related to these critical accounting policies
are appropriate under the circumstances; however, should future events or
occurrences result in unanticipated consequences, there could be a material
impact on our future financial conditions or results of operations. The reader
should refer to the Company's Critical Accounting Policies as reflected in the
10-KSB for the year ended March 31, 2005.
RESULTS OF OPERATIONS
---------------------
THE THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2004.
OPERATING EXPENSES
------------------
Consolidated operating expenses were $735,069 for the three months
ended June 30, 2005, versus $458,371 for the comparable period ended June 30,
2004. This increase of 60% in operating expenses is a result of increased
Professional Fees which include higher legal fees and an overall increase in
laboratory expenses associated with developing protocols for the ongoing testing
of our Hemopurifier(TM) technology. In addition we recognized a $142,245
non-cash legal expense a result of a negotiated settlement of an existing
obligation. General and Administrative expenses increased due to increases in
rent expense and laboratory supplies associated with increased testing activity
of our Hemopurifier(TM) platform technology.
PLAN OF OPERATION
-----------------
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 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 June 30, 2005 the Company had received $640,000 from this
agreement. 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. 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.
We are 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 during fiscal year 2005 was to
prepare our HIV-Hemopurifier(TM) to treat HIV/AIDS, and our HCV-Hemopurifier(TM)
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" included in the financial statements in this Form 10-QSB.
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
conduct human clinical trials for HIV and HCV patients by early fall of 2005. We
also plan 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.
13
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.
Accordingly, due to this increase in activity during the next twelve
months, we anticipate continuing to increase our spending on research and
development during this period. Additionally, associated with our anticipated
increase in research and development expenditures, we anticipate purchasing
additional amounts of equipment during this period to support our laboratory and
testing operations.
NET LOSS
--------
We recorded a consolidated net loss of $802,002 and $481,339 for the
quarters ended June 30, 2005 and 2004, respectively. The increase in net loss of
67% was primarily attributable to increased operating expenses and interest
expense. Interest expense increased a result of the recognition of the cost of
warrants issued in conjunction with notes payable in comparison to the prior
year quarter.
Basic and diluted loss per common share were ($0.05) for the three
month period ended June 30, 2005 as compared to ($0.04) for the same period
ended June 30, 2004. This increase in loss per share was attributable to the
increase in net loss as compared to the prior quarter one year ago offset by the
effect of a greater number of common shares outstanding during the current
quarter.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
To date, we have funded our capital requirements for the current
operations from net funds received from the public and private sale of debt and
equity securities, as well as from the issuance of common stock in exchange for
services. Our cash position at June 30, 2005 was $7,048 as compared to $8,625 at
March 31, 2005, representing a decrease of $1,577.
During the three months ended June 30, 2005, operating activities used
net cash of $309,177. We received $307,600 from the sale of common stock and
issuance of additional notes payable.
During the three month period ended June 30, 2005, net cash used in
operating activities primarily consisted of net loss of $802,002. Net loss was
offset principally by the fair market value of common stock and warrants issued
in exchange for services of $208,085 and amortization of debt discounts totaling
$39,489, plus net changes in prepaid expenses of ($4,388) and less the combined
accounts payable and amounts due to related parties of $207,442.
Decreases in working capital in the amount of $134,915 increased our
negative working capital position to ($3,483,425) at June 30, 2005 as compared
to a negative working capital of ($3,348,510) at March 31, 2005.
Our current deficit in working capital required us to obtain funds in
the short-term to be able to continue in business, and in the longer term to
fund research and development on products not yet ready for market. We are
seeking to fund these and other operating needs in the next 12 months from funds
to be obtained through our facility from Fusion Capital Fund II, LLC, as well as
from the proceeds of additional private placements or public offerings of debt
or equity securities, or both.
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
14
the next several years on our ability to sell securities, borrow funds or a
combination thereof. Our future capital requirements will depend upon many
factors, including progress with pre-clinical testing and clinical trials, the
number and breadth of our programs, the time and costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, and our ability to
establish collaborative arrangements, effective commercialization, marketing
activities and other arrangements. We expect to continue to incur increasing
negative cash flows and net losses for the foreseeable future.
Management does not believe that inflation has had or is likely to have
any material impact on the Company's limited operations.
At the date of this filing, we do not have plans to purchase
significant amounts of equipment or hire significant numbers of employees prior
to successfully raising additional capital.
Off-Balance Sheet Arrangements
------------------------------
There are no guarantees, commitments, lease and debt agreements or
other agreements that could trigger an adverse change in our credit rating,
earnings, cash flows or stock price, including requirements to perform under
standby agreements.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
of the 34Act) as of the end of the period covered by this report (the
"Evaluation Date"). Based upon that evaluation, the CEO and CFO concluded that,
as of June 30, 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. Based on their most recent evaluation as of the Evaluation Date, the
CEO and the CFO have also concluded that there are no significant deficiencies
in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information, and such officers have
identified no material weaknesses in internal controls.
Changes in Controls and Procedures
----------------------------------
There were no significant changes made in our internal controls over
financial reporting during the quarter ended June 30, 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
----------------------------------------------------
Our management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Aethlon Medical have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April 2005, the Company issued 394,235 shares of common stock at
prices between $0.250 to and $0.280 per share to Fusion Capital under its
$6,000,000 common stock purchase agreement. Fusion advanced the Company $100,000
in April 2005 for the purchase of additional shares under such agreement. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In May 2005 the Company issued Fusion Capital ("Fusion) a $30,000
Convertible Promissory Note (the "Note") with an interest rate of fifteen
percent (15%) per annum that matures on August 15, 2005. The 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 Note and the Warrant have piggyback registration rights.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
In May 2005 the Company issued 100,000 shares of common stock and a
warrant to purchase 400,000 shares of common stock at a purchase price of $0.176
per share to an accredited investor for $17,600. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
We relied on the exemption from registration as set forth in Section
4(2) of the Securities Act of 1933 for the issuance of securities described
above as transactions by an issuer not involving any public offering. The
recipients of securities in each transaction made representations that they were
accredited investors within the meaning of Regulation D under the Securities
Act. They also represented their intentions to acquire the securities for
investment purposes without a view to distribution and had access to information
concerning the Company and our business prospects, as required by the Securities
Act of 1933, as amended. In addition, there was no general solicitation or
advertising for the acquisition of these securities.
There were no underwritten offerings employed in connection with any of
these transactions.
In June 2005, the Company issued 241,398 shares of common stock at
$0.250 per share to Fusion Capital under its $6,000,000 common stock purchase
agreement. Fusion advanced the Company $60,000 in April 2005 for the purchase of
additional shares under such agreement. These shares are registered pursuant to
the Company's Form SB-2 registration statement effective December 7, 2004.
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 $427,500 have reached maturity and
are past due. The Company is currently seeking other financing arrangements to
retire all past due notes. At June 30, 2005 the Company had accrued interest in
the amount of $182,437 associated with these notes and accrued liabilities
payable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 2005, Aethlon Medical, Inc. (the "Company") held a special
meeting of stockholders at the Company's executive offices for the following
purposes: (1) to ratify the appointment of Squar, Milner, Reehl & Williamson,
L.L.P ("Squar Milner"), as the Company's independent auditors for the fiscal
year ending March 31, 2005 and (2) to approve an amendment to the Company's
Articles of Incorporation to increase the number of authorized shares of the
Company's common stock from 25,000,000 to 50,000,000.
16
Stockholders holding an aggregate of 10,624,365 shares of common stock
of the Company voted in favor to ratify the appointment of Squar Milner as the
Company's independent auditors and stockholders holding an aggregate of
10,238,794 shares of common stock of the Company voted in favor of approving the
amendment to the Company's Articles of Incorporation to increase the number of
authorized shares of common stock from 25,000,000 to 50,000,000. The number of
shares voted in favor of the two proposals was sufficient for the approval of
both proposals. The number of shares voting against and/or abstaining from the
vote were as follows: Proposal 1: 80,776 shares; Proposal 2: 469,347 shares.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The following documents are filed as part of this report:
3.1.1 Certificate of Amendment to Articles of Incorporation. Incorporated by
reference to Exhibit 3.1 in the Registrant's Report on Form 8-K filed
on June 10, 2005.
3.1.2 Bylaws of the Registrant. Filed with Registrant's Annual Report on Form
10 KSB for the year ended March 31, 1999.
4.1 Form of Stock Purchase Agreement. Incorporated by reference to Exhibit
4.1 in the Registrant's Report on Form 8-K filed on June 9, 2004.
4.2 Form of Registration Rights Agreement. Incorporated by reference to
Exhibit 4.2 in the Registrant's Report on Form 8-K filed on June 9,
2004.
4.3 Form of Securities Purchase Agreement. Incorporated by reference to
Exhibit 4.3 in the Registrant's Report on Form 8-K filed on June 9,
2004.
4.4 Form of Warrant Agreement. Incorporated by reference to Exhibit 4.4 in
the Registrant's Report on Form 8-K filed on June 9, 2004.
31.1 Certification of our Chief Executive Officer and President, pursuant to
Securities Exchange Act rules 13a-14(a) and 15d-14(a) as adopted
pursuant to Section 302 of the Sarbanes Oxley Act of 2002.
31.2 Certification of our Chief Financial Officer, pursuant to Securities
Exchange Act rules 13a-14(a) and 15d-14(a) as adopted pursuant to
Section 302 of the Sarbanes Oxley Act of 2002.
32.1 Statement of our Chief Executive Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2 Statement of our Chief Financial Officer under Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
In accordance with Item 601(b)(32)(ii) of Regulation S-B and SEC
Release Nos. 33-8238 and 34-47986, Final Rule: Management's Reports on Internal
Control Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibit 32.1 hereto are deemed
to accompany this Form 10-QSB and will not be deemed "filed" for purpose of
Section 18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the Registrant specifically incorporates
it by reference
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: August 15, 2005
BY: /S/ JAMES A. JOYCE BY: /S/ JAMES W. DORST
--------------------------- ---------------------------
JAMES A. JOYCE JAMES W. DORST
CHAIRMAN, PRESIDENT AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER
AETHLON MEDICAL, INC.
18