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 December 31, 2003
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.)
7825 FAY AVENUE, SUITE 200, LA JOLLA, CA 92037
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(858) 456-5777
---------------
(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
February 12, 2004 was 9,122,711.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2003 (UNAUDITED)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) FOR THE
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002 AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH DECEMBER 31, 2003
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) FOR THE
THREE AND NINE MONTHS ENDED DECEMBER 31, 2003 AND 2002 AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH DECEMBER 31, 2003
NOTES TO 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. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
PART I.
FINANCIAL INFORMATION
All references to "us", "we", "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
December 31,
2003
(Unaudited)
-------------
ASSETS
Current assets
Cash $ 5,560
Prepaid expenses 6,401
-------------
11,961
Property and equipment, net 19,028
Patents and patents pending, net 243,163
Other assets 8,905
-------------
$ 283,057
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued
liabilities $ 1,707,415
Due to related parties 1,594,234
Notes payable 392,500
Convertible notes payable 560,000
-------------
4,254,149
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per
share; 25,000,000 shares authorized;
8,826,627 shares issued
and outstanding 8,827
Additional paid-in capital 12,680,007
Deficit accumulated during
development stage (16,659,926)
-------------
(3,971,092)
-------------
$ 283,057
=============
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 and Nine Months Ended December 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through December 31, 2003
(Unaudited)
January 31, 1984
Three Months Three Months Nine Months Nine Months (Inception)
Ended Ended Ended Ended through
December 31, December 31, December 31, December 31, December 31,
2003 2002 2003 2002 2003
------------- ------------- ------------- ------------- -------------
REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research
and development -- -- -- -- 35,810
------------- ------------- ------------- ------------- -------------
-- -- -- -- 1,533,568
EXPENSES
Personnel 101,212 103,635 311,344 401,018 5,464,368
Professional fees 5,386 165,654 141,551 500,823 3,568,390
Impairment -- -- -- -- 1,231,531
Other expenses 82,082 86,181 237,610 247,452 3,481,775
------------- ------------- ------------- ------------- -------------
188,680 355,470 690,505 1,149,293 13,746,064
OPERATING LOSS (188,680) (355,470) (690,505) (1,149,293) (12,212,496)
OTHER EXPENSE (INCOME)
Interest and other
debt expenses 139,409 50,849 342,906 304,493 4,327,238
Interest income -- (42) -- (42) (17,415)
Other -- -- -- (1,616) 137,607
------------- ------------- ------------- ------------- -------------
139,409 50,807 342,906 302,835 4,447,430
------------- ------------- ------------- ------------- -------------
NET LOSS (328,089) (406,277) (1,033,411) (1,452,128) (16,659,926)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE ($ 0.04) ($ 0.07) ($ 0.13) ($ 0.27)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,211,717 5,586,904 7,762,130 5,433,046
============= ============= ============= =============
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 Nine Months Ended December 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through December 31, 2003
(Unaudited)
January 31, 1984
Nine Months Nine Months (Inception)
Ended Ended Through
December 31, December 31, December 31,
2003 2002 2003
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,033,411) $ (1,452,128) $(16,659,926)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 118,865 118,897 901,780
Gain on sale of property and equipment -- -- (13,065)
Fair market value of warrants issued in connection with
accounts payable and debt -- (24,714) 2,715,736
Fair market value of common stock, warrants and
options issued for services 2,500 159,000 2,132,934
Beneficial conversion feature of convertible
notes payable 150,000 245,700 635,000
Impairment of patents pending -- -- 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses 3,909 117,017 155,136
Other assets (3,300) (2,150) (8,905)
Accounts payable and accrued liabilities 176,213 179,442 1,810,486
Due to related parties 179,235 296,175 1,594,234
------------- ------------- -------------
Net cash used in operating activities (405,989) (362,761) (5,287,836)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (4,783) 1,197) (214,167)
Acquisition of patents and patents pending -- (19,995) (352,833)
Proceeds from sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------- ------------- -------------
Net cash used in investing activities (4,783) (21,192) (539,207)
(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 Nine Months Ended December 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through December 31, 2003
(Unaudited)
January 31,1984
Nine Months Nine Months (Inception)
Ended Ended Through
December 31, December 31, December 31,
2003 2002 2003
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ -- $ 255,000 $ 1,480,000
Principal payments on notes payable (160,000) (25,000) (170,000)
Net proceeds from issuance of convertible
notes payable 150,000 -- 948,000
Net proceeds from issuance of common stock 420,000 74,000 3,574,603
------------ ------------ ------------
Net cash provided by financing activities 410,000 304,000 5,832,603
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH (772) (9,442) 5,560
CASH - beginning of period 6,332 10,667 --
------------ ------------ ------------
CASH - end of period $ 5,560 $ 1,225 $ 5,560
============ ============ ============
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
December 31, 2003
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. (the "Company") is a development stage therapeutic device
company focused on expanding the applications of its Hemopurifier (TM) platform
technology, which is designed to rapidly reduce the presence of infectious
viruses and other toxins from human blood. In this regard, Aethlon Medical's
core focus is the development of therapeutic devices that treat
HIV/AIDS, Hepatitis-C, and pathogens used in biological warfare and terrorism.
In pre-clinical testing, the Company's HIV-Hemopurifier removed 55% of HIV from
human blood in three hours and in excess of 85% in twelve hours. This same
treatment cartridge was able to remove 90% of toxic proteins that deplete immune
cells in one hour. In January of 2003, the Company completed early stage blood
studies of its HCV-Hemopurifier, which documented the ability to remove 58
percent of the Hepatitis-C virus from infected blood in two hours. The Company
is in the development stage on the Hemopurifier and significant research and
testing are still needed to reach commercial viability. Any resulting medical
device or process will require approval by the U.S. Food and Drug Administration
("FDA"), and the Company has not yet begun efforts to obtain FDA approval on its
current lead product candidate, which may take several years. Since many of the
Company's patents were issued in the 1980's, they are scheduled to expire in the
near future. Thus, such patents may expire before FDA approval, if any, is
obtained.
The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States ("GAAP"), and has not
generated revenues from its principal operations.
The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers under the symbol "AEMD".
The accompanying unaudited condensed consolidated financial statements of
Aethlon Medical, Inc. (the "Company") have been prepared in accordance with GAAP
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three and
nine-month periods ended December 31, 2003 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2004. For further
information, refer to the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2003, which includes audited financial statements and footnotes
as of and for the years ended March 31, 2003 and 2002.
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
December 31, 2003
STOCK BASED COMPENSATION
------------------------
At December 31, 2003, 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.
2003 2002
------------ ------------
Net loss:
As reported $(1,033,411) $(1,452,128)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- (9,000)
------------ ------------
Pro forma $(1,033,411) $(1,461,128)
============ ============
Basic and diluted net loss per share:
As reported $ (0.13) $ (0.27)
============ ============
Pro forma $ (0.13) $ (0.27)
============ ============
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. The
total potential common shares that have not been included in such computation
are approximately 1,260,000 (using the treasury stock method) at December 31,
2003.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and is
effective (except for certain mandatorily redeemable noncontrolling interests)
for financial instruments entered into or modified after May 31, 2003.
Otherwise, this pronouncement is effective for public companies at the beginning
of the first interim period beginning after June 15, 2003. The Company adopted
SFAS No. 150 on the aforementioned effective dates. The adoption of this
pronouncement did not have a material impact on the Company's results of
operations or financial condition.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
8
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the December 31, 2002 financial
statement presentation to correspond to the December 31, 2003 format.
NOTE 3. CONVERTIBLE PROMISSORY NOTES
CONVERTIBLE PROMISSORY NOTES
-----------------------------
At December 31, 2003, the Company had outstanding convertible notes totaling
$560,000.
In April 2003, the Company issued a convertible note in the amount of $150,000,
bearing interest at 9% per annum, with principal and interest due in June 2003,
which is in default. The convertible note may be converted to common stock of
the Company at the conversion price of $0.25 per share at any time at the option
of the noteholder. The Company has recorded a beneficial conversion feature
("BCF") of $150,000 in connection with the issuance of the note and amortized
such amount to interest expense during the nine month period ended December 31,
2003.
In December 2003, a noteholder converted $100,000 of convertible notes and
accrued interest in the amount of $15,416 for 461,667 shares of common stock and
461,667 one-year warrants to purchase common stock at $0.25 per share.
In January 2004, two noteholders converted $35,000 of convertible notes and
accrued interest in the amount of approximately $4,521 for 158,084 shares of
common stock and 158,084 one-year warrants to purchase common stock at $0.25 per
share.
In February 2004, a noteholder converted $25,000 of 15% promissory notes for
100,000 shares of common stock and 100,000 one-year warrants to purchase common
stock at $0.25 per share.
As of the date of this report, various promissory and convertible notes payable
in the aggregate principal amount of $892,500 have reached maturity and are past
due. The Company is currently seeking other financing arrangements to retire all
past due notes.
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 $16.7 million for the period from January
31, 1984 (Inception) through December 31, 2003. 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.
Such factors indicate that the Company may be unable to continue as a going
concern for a reasonable period of time. Management is in discussions with
potential investors to pursue additional capital infusions into the Company,
which management believes are necessary at least until such time that the
Company generates sufficient revenues and achieves profitability and positive
cash flow.
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.
9
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE 5. COMMITMENTS AND CONTINGENCIES
REGISTRATION RIGHTS AGREEMENTS
------------------------------
The Company is obligated under various agreements to register its common stock,
including the common stock underlying certain warrants and options. The Company
is subject to penalties for failure to register such securities, the amount of
which could be material to the Company's financial position, results of
operations and cash flows. The Company filed a registration statement on Form
SB-2 with the Securities and Exchange Commission in December 2000 to register
the necessary securities. However, such registration statement was never
declared effective. Management is currently unaware of any potential claims
related to the lack of registration and plans to file a revised registration
statement as funds to cover registration expenses become available. The Company
may incur additional charges in exchange for further waivers through the date of
an effective registration statement.
DELINQUENT SEC FILING
---------------------
The Company's March 31, 2002 Form 10-KSB did not contain certain disclosure
items in its Executive Compensation, Security Ownership of Certain Beneficial
Owners and Management and Certain Relationships and Related Transactions. Such
sections were intended to be incorporated by reference in the Company's proxy
statement, which was not filed. The failure to file the proxy statement with the
disclosures required in Form 10-KSB constitutes non-compliance with the periodic
reporting requirements of the Securities and Exchange Act of 1934 (the "Exchange
Act") and, among other things, could result in de-listing of the Company's
common stock from the Over-the-Counter Bulletin Board ("OTCBB").
In addition, any owners of the Company's restricted securities who are otherwise
eligible to sell such securities under Rule 144 may be temporarily unable to do
so until such filing delinquency is cured. The Company intends to file an
amendment to its Annual Report on Form 10-KSB for the year ended March 31, 2002
to cure such delinquency.
NOTE 6. STOCK TRANSACTIONS
In October 2003, the Company issued 80,000 shares of restricted common stock at
$0.25 per share for cash totaling $20,000 in connection with the exercise of
warrants.
In November 2003, the Company issued 100,000 shares of restricted common stock
at $0.25 per share for cash totaling $25,000 in connection with the exercise of
warrants.
In November 2003, the Company issued 100,000 shares of restricted common stock
at $0.25 per share for cash totaling $25,000. In connection with the issuance of
such shares, the Company granted the stockholder 100,000 one-year warrants to
purchase common stock of the Company at $0.25 per share.
In December 2003, the Company cancelled 50,000 shares of restricted common stock
in conjunction with the mutual cancellation of fund-raising activities that were
not rendered. The stock was valued at $20,000 based on the market price at
issuance and common stock has been reduced by such amount in the accompanying
financial statements.
In December 2003, the Company issued 20,000 shares of restricted common stock at
$0.25 per share for cash totaling $5,000. In connection with the issuance of
such shares, the Company granted the stockholders 20,000 one-year warrants to
purchase common stock of the Company at $0.25 per share.
In December 2003, the Company issued 120,000 shares of restricted common stock
at $0.25 per share for cash totaling $30,000 in connection with the exercise of
warrants.
In December 2003, the Company issued 461,667 shares of restricted common stock
at $0.25 per share in connection with the conversion of $100,000 10% convertible
notes plus accrued interest of $15,417. In connection with the issuance of such
shares, the Company granted the noteholder 461,667 one-year warrants to purchase
common stock of the Company at $0.25 per share.
10
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003
NOTE 7. SUBSEQUENT EVENTS
On January 20, 2004 the Company entered into a Subscription Agreement
(Agreement) with Lion Share Group, Inc. (Lion Share), a Bahamas corporation,
under which the Company will issue and sell, and Lion Share will purchase, up to
5,000,000 shares of the Company's common stock, in installment closings, in
certain amounts, per share purchase prices, purchase price amounts, and on
certain dates, as set forth in the Agreement.
On January 16, 2004, a judgement lien in the amount of $55,000 was filed against
the Company for repayment of a past due note. The Company is in active
negotiations with the noteholder to settle the claim.
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 disease and toxins in the body. Our main focus during fiscal 2004 is
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 used in biological
warfare and terrorism. See Item 1, "NATURE OF BUSINESS".
Our principal executive office is located at 7825 Fay Avenue, Suite 200, La
Jolla, California 92037. Our telephone number is 858/456-5777, and our website
is www.aethlonmedical.com.
We file annual, quarterly, special reports, proxy statements and other
information with the Securities Exchange Commission (SEC). Reports, proxy
statements and other information filed with the SEC can be inspected and copied
at the public reference facilities of the SEC at 450 Fifth Street NW,
Washington, DC 20549. Such material may also be accessed electronically by means
of the SEC's website at www.sec.gov.
Our common stock, par value $0.001 per share, 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.
RESULTS OF OPERATIONS
---------------------
THE THREE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2002.
OPERATING EXPENSES
------------------
Consolidated operating expenses were $ 188,680 for the three months ended
December 31, 2003, versus $355,470 for the comparable period ended December 31,
2002. This decrease of 46.9% in operating expenses is principally attributable
to decreased professional fees due to reduced professionals associated with
strategic and financial planning activities. Subject to obtaining the necessary
funds, the Company expects future costs to increase due to test and support
expenses associated with obtaining regulatory approval of its Hemopurifier.
NET LOSS
--------
We recorded a consolidated net loss of $328,089 and $406,277 for the quarters
ended December 31, 2003 and 2002, respectively. The decrease in net loss of
19.2% was primarily attributable to reduced operating expenses, partially offset
by increased interest expense.
Basic and diluted loss per common share were ($0.04) for the three month period
ended December 31, 2003 compared to ($0.07) for the same period ended December
31, 2002. This reduction in loss per share was primarily attributable to the
decrease in net loss, as well as greater number of common shares outstanding
during the three month period ended December 31, 2003, as compared to the three
month period ended December 31, 2002.
THE NINE MONTHS ENDED DECEMBER 31, 2003 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 2002.
OPERATING EXPENSES
------------------
Consolidated operating expenses were $690,505 for the nine months ended December
31, 2003, versus $1,149,293 for the comparable period ended December 31, 2002.
This decrease of 40% in operating expenses is principally attributable to
decreased professional fees and personnel expenses due to reduced professionals
associated with strategic and financial planning activities and reduced staff.
Subject to obtaining the necessary funds, the Company expects future costs to
increase due to test and support expenses associated with obtaining regulatory
approval of its Hemopurifier.
NET LOSS
--------
We recorded a consolidated net loss of $1,033,411 and $1,452,128 for the nine
Month periods ended December 31, 2003 and 2002, respectively. The decrease in
net loss of 28.8% was primarily attributable to reduced operating expenses,
offset partially by slightly higher interest expense.
Basic and diluted loss per common share were ($0.13) for the nine month period
ended December 31, 2003 compared to ($0.27) for the same period ended December
31, 2002. This reduction in loss per share was primarily attributable to the
decrease in net loss, as well as greater number of common shares outstanding
during the nine month period ended December 31, 2003, as compared to the nine
month period ended December 31, 2002.
13
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 December 31, 2003 was $5,560 as compared to
$6,332, at March 31, 2003, representing a decrease of $772.
During the nine months ended December 31, 2003, operating activities used net
cash of $405,989. In our financing activities, we received $420,000 from the
sale of common stock and exercise of warrants. We received $150,000 from the
issuance of a convertible note and we repaid in full a secured promissory note
in the amount of $160,000.
During the nine month period ended December 31, 2003, net cash used in operating
activities primarily consisted of net loss of $1,033,411. Net loss was offset
principally by depreciation and amortization of $118,865, a beneficial
conversion feature of $150,000, increase in accounts payable and accrued
liabilities of $176,213 and an increase in amounts due to related parties of
$179,235.
Changes in current assets and current liabilities of ($234,713) resulted in a
negative working capital position of ($4,242,188) at December 31, 2003, as
compared to a negative working capital of ($4,007,475) at March 31, 2003.
Our current deficit in working capital requires 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 a corporate acquisition of or merger with another entity with
greater financial resources, or from the proceeds of additional private
placements or public offerings of debt or equity securities, or both.
Due to the our recurring losses during the development stage, and continued need
for capital, our independent certified public accountants have included an
explanatory paragraph in their audit report in the Company's Form 10-KSB at
March 31, 2003, stating that these factors raise substantial doubt about the
Company's ability to continue as a going concern.
We expect to raise additional capital within the next three months to fund
research and development and other activities. Our operations to date have
consumed substantial capital without generating revenues, and we will continue
to require substantial and increasing capital funds to conduct necessary
research and development and pre-clinical and clinical testing of our
Hemopurifier products, and to market any of those products that receive
regulatory approval. We do not expect to generate revenue from operations for
the foreseeable future, and our ability to meet our cash obligations as they
become due and payable is expected to depend for at least the next several years
on our ability to sell securities, borrow funds or a combination thereof. Our
future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our
programs, the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other proprietary rights, the time
and costs involved in obtaining regulatory approvals, competing technological
and market developments, and our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other
arrangements. We expect to continue to incur increasing negative cash flows and
net losses for the foreseeable future.
Management does not believe that inflation has had or is likely to have any
material impact on the Company's limited operations.
At the date of this filing, we do not have plans to purchase significant amounts
of equipment or hire significant numbers of employees prior to successfully
raising additional capital.
14
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 34
Act) as of a date (the "Evaluation Date") within 90 days prior to the filing
date of this report. Based upon that evaluation, the CEO and CFO concluded that,
as of December 31, 2003, 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.
There were no significant changes made in our internal control over financial
reporting during the quarter ended December 31, 2003 that are reasonably likely
to significantly affect these controls. Thus, no corrective actions with regard
to significant deficiencies or material weaknesses were necessary.
15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On January 16, 2004, a judgement lien in the amount of $55,000 was filed against
the Company for repayment of a past due note. The Company is in active
negotiations with the noteholder to settle the claim.
ITEM 2. CHANGES IN SECURITIES
In October 2003, the Company issued 80,000 shares of restricted common stock at
$0.25 per share for cash totaling $20,000 in connection with the exercise of
warrants.
In November 2003, the Company issued 100,000 shares of restricted common stock
at $0.25 per share for cash totaling $25,000 in connection with the exercise of
warrants.
In November 2003, the Company issued 100,000 shares of restricted common stock
at $0.25 per share for cash totaling $25,000. In connection with the issuance of
such shares, the Company granted the stockholder 100,000 one-year warrants to
purchase common stock of the Company at $0.25 per share.
In December 2003, the Company cancelled 50,000 shares of restricted common stock
in conjunction with the mutual cancellation of fund-raising activities that were
not rendered. The stock was valued at $20,000 based on the market price at
issuance and common stock has been reduced by such amount in the accompanying
financial statements.
In December 2003, the Company issued 20,000 shares of restricted common stock at
$0.25 per share for cash totaling $5,000. In connection with the issuance of
such shares, the Company granted the stockholders 20,000 one-year warrants to
purchase common stock of the Company at $0.25 per share.
In December 2003, the Company issued 120,000 shares of restricted common stock
at $0.25 per share for cash totaling $30,000 in connection with the exercise of
warrants.
In December 2003, the Company issued 461,667 shares of restricted common stock
at $0.25 per share in connection with the conversion of $100,000 10% convertible
notes plus accrued interest of $15,417. In connection with the issuance of such
shares, the Company granted the noteholder 461,667 one-year warrants to purchase
common stock of the Company at $0.25 per share.
In January 2004, the Company issued 158,084 shares of restricted common stock at
$0.25 per share in connection with the conversion of $35,000 principal amount of
10% convertible notes plus accrued interest of $4,521. In connection with the
issuance of such shares, the Company granted the noteholder 158,084 one-year
warrants to purchase common stock of the Company at $0.25 per share.
In January 2004, the Company issued 12,000 shares of restricted common stock in
payment for services of $4,825.
In February 2004, the Company issued 100,000 shares of restricted common stock
at $0.25 per share in connection with the conversion of $25,000 principal amount
of 15% promissory notes. In connection with the issuance of such shares, the
Company granted the noteholder 100,000 one-year warrants to purchase common
stock of the Company at $0.25 per share
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 $892,500 have reached maturity and are past
due. The Company is currently seeking other financing arrangements to retire all
past due notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as part of this report:
10.1 Subscription Agreement with the Lion Share Group, Inc., dated January 20,
2004.
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.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2003.
None
(c) Previously filed documents:
Articles of Incorporation of Aethlon Medical, Inc.
By-Laws of Aethlon Medical, Inc.
Form of Promissory Note
Registration Rights Agreement
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: February 17, 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
18