10QSB: Optional form for quarterly and transition reports of small business issuers
Published on November 14, 2007
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____to_____
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
---------------------
(Exact name of registrant as specified in its charter)
NEVADA 13-3632859
---------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 BUNKER HILL ST, SUITE 4000, SAN DIEGO, CA 92109
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(858) 459-7800
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ].
The number of shares of common stock of the registrant outstanding was
33,944,216 as of November 9, 2007.
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X ]
Transitional Small Business Disclosure Format (check one): Yes [ ] No [ X ]
Documents incorporated by reference: None.
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
September 30,
2007
------------
ASSETS
Current assets
Cash $ 180,146
Prepaid expenses and other current assets 8,279
------------
Total current assets 188,425
Property and equipment, net 10,087
Patents and patents pending, net 141,616
Other assets 13,200
------------
Total assets $ 353,328
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued liabilities $ 1,451,349
Due to related parties 1,083,999
Notes payable 502,500
Convertible notes payable, net of discount 79,761
Warrant obligation 3,775,425
------------
Total current liabilities 6,893,034
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per share;
50,000,000 shares authorized;
33,944,216 shares issued and outstanding 33,945
Additional paid-in capital 22,304,592
Deficit accumulated during`
development stage (28,878,243)
------------
(6,539,706)
------------
Total liabilities and stockholders' deficit $ 353,328
============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. ("Aethlon" or the "Company") is a development stage
medical device company focused on expanding the applications of the Hemopurifier
(R) platform technology, which is designed to rapidly reduce the presence of
infectious viruses and other toxins from human blood. In this regard, the
Company's core focus is the development of therapeutic devices that treat acute
viral conditions, chronic viral diseases and pathogens targeted as potential
biological warfare agents. The Hemopurifier(R) combines the established
scientific principles of affinity chromatography and hemodialysis as a means to
mimic the immune system's response of clearing viruses and toxins from the blood
before cell and organ infection can occur. The Hemopurifier(R) cannot cure viral
conditions but can prevent virus and toxins from infecting unaffected tissues
and cells. The Company has completed pre-clinical blood testing of the
Hemopurifier(R) to treat HIV and Hepatitis-C, and have completed human safety
trials on Hepatitis-C infected patients in India and is in the process of
obtaining regulatory approval from the U.S. Food and Drug Administration ("FDA")
to initiate clinical trials in the United States.
The commercialization of the Hemopurifier(R) will likely require the completion
of human efficacy clinical trials. The approval of any application of the
Hemopurifier(R) in the United States will necessitate the approval of the FDA to
initiate human studies. Such studies could take years to demonstrate safety and
effectiveness in humans and there is no assurance that the Hemopurifier(R) will
be cleared by the FDA as a device the Company can market to the medical
community. The Company also expects to face similar regulatory challenges from
foreign regulatory agencies, should the Company attempt to commercialize and
market the Hemopurifier(R) outside of the United States. As a result, the
Company has not generated revenues from the sale of any Hemopurifier(R)
application. Additionally, there have been no independent validation studies of
our Hemopurifiers(R) to treat infectious disease. The Company manufactures its
products on a small scale for testing purposes but has yet to manufacture the
Company's products on a large scale for commercial purposes. All of the
Company's pre-clinical human blood studies have been conducted in our
laboratories under the direction of Dr. Richard Tullis, the Company's Chief
Science Officer.
The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its principal operations.
The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers under the symbol "AEMD.OB".
The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with GAAP for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended September 30, 2007 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2008. For further information, refer to the Company's Annual Report On
Form 10-KSB for the year ended March 31, 2007, which includes audited financial
statements and footnotes as of March 31, 2007 and for the years ended March 31,
2006 and 2007.
NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates, among other things, the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. The Company has experienced continuing losses from operations, is
in default on certain debt, has negative working capital of approximately
($6,705,000) recurring losses from operations and a deficit accumulated during
the development stage of approximately ($28,878,000) at September 30, 2007,
which among other matters, raises significant doubt about its ability to
continue as a going concern. The Company has not generated significant revenue
or any profit from operations since inception. A significant 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
intends to fund operations through debt and/or equity financing arrangements,
which management believes may be insufficient to fund its capital expenditures,
working capital and other cash requirements (consisting of accounts payable,
accrued liabilities, amounts due to related parties and amounts due under
various notes payable) for the fiscal year ending March 31, 2008. Therefore the
Company will be required to seek additional funds to finance its short-term
operations.
The Company is currently addressing its liquidity issue by exploring investment
capital opportunities. The Company believes that its access to capital, together
with existing cash resources, will be sufficient to meet its liquidity needs for
fiscal 2008. In August 2007, the Company raised $815,000 in a private placement
(see Note 5). The Company has in place an $8.4 million common stock purchase
agreement with Fusion Capital Fund II, LLC, which can provide working capital
pending successful registration of the shares underlying the agreement. The
Company's present working capital balance is insufficient tomeet its working
capital needs for fiscal 2008. However, no assurance can be given that the
Company will receive any additional funds through its capital raising efforts.
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.
6
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of the Company presented below is
designed to assist the reader in understanding the Company's consolidated
financial statements. Such financial statements and related notes are the
representations of Company management, who is responsible for their integrity
and objectivity. These accounting policies conform to GAAP in all material
respects, and have been consistently applied in preparing the accompanying
condensed consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its legal wholly-owned subsidiaries
Aethlon, Inc., Hemex, Inc. and Cell Activation, Inc.(collectively hereinafter
referred to as the "Company"). These subsidiaries are dormant and there exist no
material intercompany transactions or balances.
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 ("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. There
were 18,459,500 and 17,899,812 potentially dilutive common shares outstanding
for the three and six months ended September 30, 2007, respectively.
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 $331,000 and $335,000 of research and
development expenses during the six months ended September 30, 2007 and 2006,
respectively. For the fiscal quarter ended September 30, 2007 and 2006, the
Company incurred research and development expense of approximately $151,000 and
$177,000, respectively.
EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY OTHER THAN EMPLOYEES
The Company follows SFAS No. 123-R (as interpreted by Emerging Issues Task Force
("EITF") Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES") ("EITF No. 96-18") to account for transactions involving goods and
services provided by third parties where the Company issues equity instruments
as part of the total consideration. Pursuant to paragraph 7 of SFAS No. 123-R,
the Company accounts for such transactions using the fair value of the
consideration received (i.e. the value of the goods or services) or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The Company applies EITF No. 96-18, in transactions, when the value of the goods
and/or services are not readily determinable and (1) the fair value of the
equity instruments is more reliably measurable and (2) the counterparty receives
equity instruments in full or partial settlement of the transactions, using the
following methodology:
(a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
(b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the
date of the contract.
(c) For any transactions not meeting the criteria in (a) or (b) above, the
Company re-measures the consideration at each reporting date based on its
then current stock value.
7
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS No.144 ("SFAS 144"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. Management
believes that no impairment existed at or during the six months ended September
30, 2007.
BENEFICAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF 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.
DERIVATIVE LIABILITIES AND CLASSIFICATION OF WARRANT OBLIGATION
The Company evaluates free-standing instruments (or embedded derivatives)
indexed to its common stock to properly classify such instruments within equity
or as liabilities in its financial statements, pursuant to the requirements of
the EITF Issue No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS
INDEXED TO AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," EITF Issue No.
01-06, "THE MEANING OF INDEXED TO A COMPANY'S OWN STOCK," EITF Issue No. 05-04,
"THE EFFECT OF A LIQUIDATED DAMAGES CLAUSE ON A FREESTANDING FINANCIAL
INSTRUMENT SUBJECT TO EITF Issue No. 00-19," and SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as amended. The Company's policy
is to settle instruments indexed to its common shares on a first-in-first-out
basis.
In the fiscal year ended March 31, 2006, the Company was obligated to register
for resale the shares underlying warrants in connection with the issuance of its
10% Series A Convertible Promissory Notes. In accordance with EITF Issue No.
00-19, the value of the warrants were recorded as a liability until the
registration became effective on January 20, 2006. On or about March 13, 2007,
the Company determined that the effectiveness of the registration statement
underlying the conversion and warrant shares associated with the 10% Series A
Promissory Notes had lapsed on October 27, 2006. In accordance with EITF Issue
No. 00-19, the Company reversed the accounting effect of the prior registration
effectiveness and recorded a warrant liability which is required to be revalued
at the end of each reporting period. At September 30, 2007, the fair value of
the warrant liability was determined to be $3,775,425 and for the six months
ended September 30, 2007 a gain in the amount of approximately $914,000 was
recognized as other income as a result of the change in the fair value of such
liability since March 31, 2007.
REGISTRATION PAYMENT ARRANGEMENTS
The Company accounts for its liquidated damages on registration rights
agreements in accordance with FASB Staff Position EITF Issue No. 00-19-2
"ACCOUNTING FOR REGISTRATION PAYMENT ARRANGEMENTS" which specifies that the
contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement should be separately
recognized and measured in accordance with SFAS No. 5, "Accounting for
Contingencies." On September 30, 2007, the Company had recorded $238,249 of
accrued liquidated damages in accounts payable and accrued liabilities on the
accompanying condensed consolidated balance sheet.
8
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION
Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123-R,
"Share-Based Payment," ("SFAS No. 123-R"). SFAS No. 123-R requires employee
stock options and rights to purchase shares under stock participation plans to
be accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the award. The Company
previously accounted for awards granted under its equity incentive plan under
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations, and
provided the required pro forma disclosures prescribed by SFAS No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION," as amended. The exercise price of
options is generally equal to the market price of the Company's common stock
(defined as the closing price as quoted on the Over-the-Counter Bulletin Board
administered by Nasdaq) on the date of grant. Under the modified prospective
method of adoption for SFAS No. 123-R, the compensation cost recognized by the
Company beginning April 1, 2006 includes (a) compensation cost for all equity
incentive awards granted prior to, but not yet vested as of April 1, 2006, based
on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and (b) compensation cost for all equity incentive
awards granted subsequent to April 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123-R.
From time to time, the Company's Board of Directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of the Company's formal stock plans. The terms
of these grants are individually negotiated and generally expire within five
years from the grant date.
In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option
Plan"), which was approved by its stockholders in September 2000. The Stock
Option Plan provides for the issuance of up to 500,000 options to purchase
shares of common stock. Such options can be incentive options or nonstatutory
options, and may be granted to employees, directors and consultants. The Stock
Option Plan has limits as to the eligibility of those stockholders who own more
than 10% of Company stock, as defined. The options granted pursuant to the Stock
Option Plan may have exercise prices of no less than 100% of fair market value
of the Company's common stock at the date of grant (incentive options), or no
less than 75% of fair market value of such stock at the date of grant
(nonstatutory). At September 30, 2006, the Company had granted 47,500 options
under the 2000 Stock Option Plan of which 15,000 had been forfeited, with
467,500 available for future issuance. All of these options vested prior to the
adoption of FAS 123-R.
The effects of share-based compensation resulting from the application of SFAS
No. 123-R to options granted outside of the Company's Stock Option Plan resulted
in an expense of $69,446 for the quarter ended September 30, 2007 and $352,951
for the six month period ended September 30, 2007. This expense was recorded as
stock compensation included in payroll and related expenses in the accompanying
September 30, 2007 condensed consolidated statement of operations. Share-based
compensation recognized as a result of the adoption of SFAS No. 123-R as well as
pro forma disclosures according to the original provisions of SFAS No. 123 for
periods prior to the adoption of SFAS No. 123-R use the Binomial Lattice option
pricing model for estimating fair value of options granted.
The following table summarizes the effect of share-based compensation resulting
from the application of SFAS No. 123-R to options granted:
Three Months Ended Six Months Ended
September 30, 2007 September 30, 2007
------------------ ------------------
Payroll and related $ (69,446) $(352,951)
========== ==========
Net share-based compensation effect
in net loss from continuing operations $ (69,446) $(352,951)
========== ==========
Basic and diluted loss per common share $ (0.00) $ (0.01)
========== ==========
9
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In accordance with SFAS No. 123-R, the Company adjusts share-based compensation
on a quarterly basis for changes to the estimate of expected award forfeitures
based on actual forfeiture experience. The effect of adjusting the forfeiture
rate for all expense amortization after March 31, 2006 is recognized in the
period the forfeiture estimate is changed. The effect of forfeiture adjustments
for the six month period ended September 30, 2007 was insignificant.
The following weighted average assumptions were used in the valuation of these
instruments.
Six Months Ended
September 30
-----------------------------
2007 2006
---------- ----------
Annual dividends zero zero
Expected volatility 92% 72%
Risk free interest rate 4.72% 4.18%
Expected life 2.14 years 4.7 years
The expected volatility is based on the historic volatility. The expected life
of options granted is based on the "simplified method" described in the SEC's
Staff Accounting Bulletin No. 107 due to changes in the vesting terms and
contractual life of current option grants compared to the Company's historical
grants. Options outstanding that have vested and are expected to vest as of
September 30, 2007 are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term in Years Value (1)
- ------------------------- ----------- -------- ------------- ----------
Vested 9,702,393 $ 0.38 5.27 $2,817,804
Expected to vest 2,001,667 0.33 8.85 $ 572,317
----------- ----------
Total 11,704,060 $3,390,121
=========== ==========
(1) These amounts represent the difference between the exercise price and $0.62,
the closing market price of the Company's common stock on September 28, 2007 as
quoted on the Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all
in-the-money options outstanding.
10
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Additional information with respect to stock option activity is as follows:
Outstanding Options
-------------------------------------
Shares Weighted Aggregate
Available Number of Average Intrinsic
for Grant Shares Exercise Price Value (1)
- --------------------------- --------- ------ -------------- ----------
March 31, 2007 467,500 9,204,060 $ 0.38 $3,802,324
===========
Grants -- 2,500,000 $ 0.36
Exercises -- -- --
Cancellations -- -- --
---------- ---------- -------
September 30, 2007 467,500 11,704,060 $ 0.38 $2,808,974
========== ========== ======= ==========
Options exerciseable at:
March 31, 2007 8,369,060 $ 0.39
========== ======
September 30, 2007 9,702,393 $ 0.38
========== ======
(1) Represents the difference between the exercise price and the March 31, 2007
or September 28, 2007 market price of the Company's common stock, which was
$0.74 and $0.62, respectively.
At September 30, 2007, there was approximately $513,000 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted average period of 1.62 years
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.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "ACCOUNTING
FOR UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT No. 109."
FIN No. 48 establishes a single model to address accounting for certain tax
positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a
minimum recognition threshold a tax position is required to meet before being
recognized in the financial statements. FIN No. 48 also provides guidance on
derecognition measurement, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
The Company adopted the provisions of FIN No. 48 on April 1, 2007. Upon
adoption, the Company recognized no adjustment in the amount of unrecognized tax
benefits. As of the date of adoption the Company had no unrecognized tax
benefits. The Company's policy is to recognize interest and penalties that would
be assessed in relation to the settlement of unrecognized tax benefits as a
component of income tax expense. The Company has recognized approximately
$36,000 in penalties and interest upon the adoption of FIN No. 48.
The Company and it subsidiaries are subject to federal income tax. With few
exceptions, the Company is no longer subject to U.S. federal income tax
examination for years before 2000; state and local tax examinations before 2000.
However, to the extent allowed by law, the tax authorities may have the right to
examine prior periods where net operating losses were generated and carried
forward, and make adjustments up to the amount of the net operating loss
carryforward amount.
11
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
Note 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company is not currently under Internal Revenue Service (IRS), state, local
or foreign jurisdiction tax examinations.
For the quarter and six-month periods ended September 30, 2007, the Company
recorded no income tax provision.
In September 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS,"
which defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not
require any new fair value measurements. The guidance in SFAS No. 157 applies to
derivatives and other financial instruments measured at estimated fair value
under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Management has not yet evaluated
the effects of the adoption of SFAS No 157 on future consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, "THE FAIR VALUE OPTION FOR
FINANCIAL ASSETS AND FINANCIAL LIABILITIES." SFAS No. 159 allows entities to
choose, at specified election dates, to measure eligible financial assets and
liabilities at fair value that are not otherwise required to be measured at fair
value. If the Company elects the fair value option for an eligible item, changes
in that item's fair value in subsequent reporting periods must be recognized in
current earnings. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management has not yet evaluated the effects of the adoption
of SFAS No 159 on future consolidated financial statements.
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.
NOTE 4. NOTES PAYABLE
At September 30, 2007, the Company had $502,500 in principal amount of notes
payable outstanding with fourteen noteholders.
The Company is currently in default on $502,500 of amounts owed under various
unsecured notes payable and is currently seeking other financing arrangements to
retire all past due notes. At September 30, 2007 the Company had accrued
interest in the amount of $385,848 associated with these defaulted notes
payable.
On July 13, 2007, in exchange for $60,000, the Company issued the Phillip A Ward
Trust a 12% Convertible Note, with accrued interest due at Maturity on July 13,
2008. The face value of the note is convertible at a $0.50 conversion price into
120,000 restricted shares of common stock.
At September 30, 2007, the Company had $1,110,000 in principal amount of
convertible notes payable outstanding, net of $1,030,239 discount, held by six
noteholders. The $1,030,000 discount is comprised of $29,921 in unamortized BCF
discount and $1,000,000 in unamortized discount attributable to the valuation of
warrant rights associated with the issuance of convertible notes. At September
30, 2007, the Company had accrued interest in the amount of $243,623 Associated
with these convertible notes payable.
NOTE 5. EQUITY TRANSACTIONS
In April 2007, the Company issued 30,617 shares of restricted common stock as
the result of a cashless exercise of 80,000 warrants held by a former
noteholder.
In April 2007, the Company issued 15,152 shares of restricted common stock at
$0. 33 per share in payment of an option agreement valued at $5,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In April 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2007, the Company issued 3,937 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
12
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
Note 5. EQUITY TRANSACTIONS (continued)
In May 2007, the Company issued 13,124 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000 based on the value of the services.
In May 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2007, the Company issued 41,999 shares of restricted common stock at
between $0.30 and $0.74 per share in payment for investor relations services to
the Company valued at $20,000 based on the value of the services.
In June 2007, the Company issued 17,526 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $10,200 based on the value of the services.
In June 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2007, the Company issued 10,174 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.63 per share in payment for regulatory affairs consulting
services to the Company valued at $6,450 based on the value of the services.
In August 2007, the Company issued 1,630,000 shares of common stock for cash
proceeds of $815,000 ($757,950 net of commissions). The shares were issued to
accredited investors in the form of Units comprised of two shares of common
stock and one three-year warrant to acquire common stock at an exercise price of
$0.50. The offering price of each Unit was $1.00.
In August 2007, the Company issued 14,827 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.60 per share in payment of grant writing consulting services to
the Company valued at $10,500 based upon the value of the services.
In August 2007, the Company issued 71,045 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.24 per share in payment for outstanding liabilities
related to regulatory consulting services to the Company valued at $17,051
based upon the value of the services provided.
In August 2007, the Company issued 13,017 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.49 per share in payment for regulatory consulting services to
the Company valued at $6,413 based upon the value of the services provided.
In August 2007, the Company issued 103,106 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment of legal fees related to general
corporate legal services to the Company valued at $62,894 based upon the value
of the services provided.
In August 2007, the Company issued 21,020 shares of restricted common stock at
prices between $0.68 and $0.78 per share in payment for investor relations
services to the Company valued at $15,000 based on the value of the services.
In August 2007, the Company issued 8,264 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at prices between $0.68 and $0.78 per share in payment for regulatory
affairs consulting services to the Company valued at $6,000 based on the value
of the services.
In September 2007, the Company issued 14,000 shares of common stock to an
accredited investor at $0.50 per share in payment of commissions related to the
August Private Placement transaction valued at $7,000 based upon the value of
services provided.
In September 2007, the Company issued 5,294 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $3,600 based on the value of the services
provided.
13
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2007
(unaudited)
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
From time to time, claims are made against the Company in the ordinary course of
business, which could result in litigation. Claims and associated litigation are
subject to inherent uncertainties and unfavorable outcomes could occur, such as
monetary damages, fines, penalties or injunctions prohibiting the Company from
selling one or more products or engaging in other activities. The occurrence of
an unfavorable outcome in any specific period could have a material adverse
effect on the Company's results of operations for that period or future periods.
The Company is not presently a party to any pending or threatened legal
proceedings.
14
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
We are a developmental stage medical device company focused on expanding the
applications of our Hemopurifier(R) platform technology which is designed to
rapidly reduce the presence of infectious viruses and other toxins from human
blood. As such, we focus on developing therapeutic devices to treat acute viral
conditions brought on by pathogens targeted as potential biological warfare
agents and chronic viral conditions including HIV/AIDS and Hepatitis-C. The
Hemopurifier(R) combines the established scientific technologies of hemodialysis
and affinity chromatography as a means to mimic the immune system's response of
clearing viruses and toxins from the blood before cell and organ infection can
occur. The Hemopurifier(R) cannot cure these afflictions but can lower viral
loads and allow compromised immune systems to overcome otherwise serious or
fatal medical conditions.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
and must file reports, proxy statements and other information with the SEC. The
reports, information statements and other information we file with the
Commission can be inspected and copied at the Commission Public Reference Room,
450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The
Commission also maintains a Web site (http://www.sec.gov) that contains reports,
proxy, and information statements and other information regarding registrants,
like us, which file electronically with the Commission. the Company's
headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego, CA
92109. Our phone number at that address is (858) 459-7800. Its Web site is
maintained at http://www.aethlonmedical.com.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2006
Operating Expenses
Consolidated operating expenses for the three months ended September 30, 2007
were approximately $690,000 in comparison with approximately $535,000 for the
comparable quarter a year ago. The increase of approximately $155,000, or 29%
was comprised of increases in Payroll & Related and Professional expenses of
approximately $94,000 and $87,000, respectively, offset by a decrease in overall
General and Administrative expense of approximately $26,000.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Payroll & Related expenses increased by approximately $94,000 or 45% from the
prior period one year ago. The primary reason for this was the recognition of
increased stock option related expense. Professional expenses increased
approximately $88,000 or 53% due to increases in legal expense of approximately
$79,000, increases in patent related legal expense of approximately $7,000 and
net increases in other administrative expenses of approximately $2,000. General
and administrative expenses decreased approximately $26,000 or 16% as compared
to the prior quarter one year ago. This decrease was comprised of approximate
decreases in financial conference expense of $19,000, travel expense of $13,000
and all other administrative expense of $8,000, offset by an increase in lab
supplies of approximately $14,000.
Other Expense
Other expenses decreased by approximately $527,000 or 569% as compared to the
prior quarter one year ago. This decrease was comprised of a non-cash reduction
in the fair value of warrant liability of approximately $492,000, an approximate
$17,000 reduction in interest expense and a decrease of approximately $18,000 in
other expenses. Interest expense was reduced because the BCF associated with the
Company's 10% Series A Convertible Promissory Notes ("Notes") was fully
amortized to interest expense prior to the current fiscal quarter. The warrant
liability is also related to the Notes and it is required to be revalued at the
end of each reporting period until effective registration of the shares
underlying the Notes and related Warrants becomes effective.
Net Loss
The Company recorded a consolidated net loss of approximately $255,000 and
$628,000 for the quarters ended September 30, 2007 and 2006, respectively. The
decreased net loss of approximately 59% was primarily attributable to the change
in the fair value of the warrant liability offset by increased operating
expenses.
Basic and diluted loss per common share were ($0.01) for the three month period
ended September 30, 2007 compared to ($0.02) for the same period ended September
30, 2006. This reduction in loss per share was primarily a result of the greater
number of common shares outstanding during the three month period ended
September 30, 2007, as compared to the three month period ended September 30,
2006 and the significant benefit recognized attributable to the change in fair
value of the warrant liability.
SIX MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2006
Operating Expenses
Consolidated operating expenses were approximately $1,561,000 for the six months
ended September 30, 2007, versus approximately $1,039,000 for the comparable
period ended September 30, 2006. The increase of approximately $522,000, or 50%,
is a result of approximate increases in Professional expenses of $74,000,
Payroll expenses of $431,000 and General and Administrative expenses $17,000.
For the comparable six-month periods, Professional Fees increased approximately
$74,000 or 20%, Payroll expenses increased approximately $431,000 or 110% and
General and Administrative expenses increase approximately $17,000 or 6%.
The Professional expense increase is comprised of an increase in legal fees of
approximately $137,000, offset by approximate decreases of $29,000 in scientific
consulting fees, $26,000 in investor relations expenses, $6,000 in directors'
fees and $2,000 in accounting services as compared to the prior period.
The Payroll and related expense increase is comprised of approximately $77,000
of increases in payroll expense primarily a result of our having a full-time
President hired in the middle of the previous period and an approximate increase
in stock option compensation expense of $354,000.
The General and Administrative expense increase is comprised of approximate
increases in lab supplies of $53,000, insurance expense of $14,000 and utilities
expense of $12,000 offset by decreases in financial conference expense of
approximately $38,000, travel expense of $18,000 and a reduction in all other
general expenses of approximately $6,000.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Other Expense
Other expenses decreased by approximately $977,000 or 471% as compared to the
prior period one year ago. This decrease was comprised of a non-cash reduction
in the fair value of warrant liability of $914,000, an approximate $82,000
reduction in interest expense and an increase of approximately $18,000 in other
expenses. Interest expense was reduced because the BCF associated with the
Company's 10% Series A Convertible Promissory Notes ("Notes") was fully
amortized to interest expense prior to the current fiscal period. The warrant
liability is also related to the Notes and it is required to be revalued at the
end of each reporting period until effective registration of the shares
underlying the Notes and related Warrants becomes effective to the condensed
consolidated financial statements).
Net Loss
We recorded a consolidated net loss of $791,251 and $1,246,810 for the six-month
periods ended September 30, 2007 and 2006, respectively. The decrease in net
loss was primarily attributable to a net decrease the change in valuation of the
warrant liability.
Basic and diluted loss per common share were ($0.02) for the six month period
ended September 30, 2007 compared to ($0.05) for the same period ended September
30, 2006. This reduction in loss per share was attributable to both the greater
number of common shares outstanding during the six month period ended September
30, 2007, as compared to the six-month period ended September 30, 2006, and by
the decreased net loss for the six-month period ended September 30, 2007, as
compared to the equivalent period one year ago.
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has funded its capital requirements for the current
operations from net funds received from the public and private sale of debt and
equity securities, as well as from the issuance of common stock in exchange for
services. The Company's cash position at September 30, 2007 was approximately
$180,000 compared to approximately $440,000, at March 31, 2006, representing a
decrease of approximately $260,000. During the six months ended September 30,
2007, operating activities used net cash of approximately $1,067,000 while the
Company received gross proceeds of approximately $818,000 from the issuance of
common stock and convertible notes and purchased approximately $4,000 of new
equipment.
During the six month period ended September 30, 2007, net cash used in operating
activities primarily consisted of a change in the estimated fair value of
warrant liability of approximately $914,000 and approximate net loss of
$791,000. These were offset principally by the fair market value of common stock
of approximately $194,000 issued in payment for services and approximately
$353,000 in stock-based compensation and changes in other current balance sheet
accounts of approximately $85,000.
An increase in working capital during the six months ended September 30, 2007 in
the amount of approximately $555,000 decreased the Company's negative working
capital position to approximately ($6,705,000) at September 30, 2007 as compared
to a negative working capital of approximately ($7,260,000) at March 31, 2007.
The Company's 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.
The Company's operations to date have consumed substantial capital without
generating revenues, and will continue to require substantial capital funds to
conduct necessary research and development and pre-clinical and clinical testing
of Hemopurifier(R) products, and to market any of those products that receive
regulatory approval. The Company does not expect to generate revenue from
operations for the foreseeable future, and its ability to meet its cash
obligations as they become due and payable is expected to depend for at least
the next several years on its ability to sell securities, borrow funds or a
combination thereof. The Company's future capital requirements will depend upon
many factors, including progress with pre-clinical testing and clinical trials,
the number and breadth of our programs, the time and costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, and management's
ability to establish collaborative arrangements, effect successful
commercialization strategies, marketing activities and other arrangements. The
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future, and presently requires a minimum of $125,000
per month to sustain operations.
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.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
PLAN OF OPERATION
The Company is a development stage medical device company that has not yet
engaged in significant commercial activities. The primary focus of our resources
is the advancement of our proprietary Hemopurifier(R) platform treatment
technology, which is designed to rapidly reduce the presence of infectious
viruses and toxins in human blood. Our focus is to prepare our Hemopurifier(R)
to treat chronic viral conditions, acute viral conditions and viral-based
bioterror threats in human clinical trials.
The Company plans to continue research and development activities related to our
Hemopurifier(R) platform technology, with particular emphasis on the advancement
of our treatment for "Category A" pathogens as defined by the Federal Government
under Project Bioshield and the All Hazards Preparedness Act of 2006. The
Company has filed an Investigational Device Exemption ("IDE") with the FDA in
order to proceed with Human safety studies of the Hemopurifier(R). Such studies,
complemented by planned in-vivo and appropriate animal in-vitro studies should
allow the Company to proceed to Premarket Approval ("PMA") process. The PMA
process is the last major FDA hurdle in determining the safety and effectiveness
of Class III medical Devices (of which the Hemopurifier(R) is one).
Subject to the availability of sufficient funding and working capital,
management anticipates continuing to increase spending on research and
development over the next 12 months. Additionally, associated with the Company's
anticipated increase in research and development expenditures, we anticipate
purchasing additional amounts of equipment during this period to support our
laboratory and testing operations. Operations to date have consumed substantial
capital without generating revenues, and will continue to require substantial
and increasing capital funds to conduct necessary research and development and
pre-clinical and clinical testing of our Hemopurifier(R) products, as well as
market any of those products that receive regulatory approval. The Company does
not expect to generate revenue from operations for the foreseeable future, and
our ability to meet our cash obligations as they become due and payable is
expected to depend for at least the next several years on our ability to sell
securities, borrow funds or a combination thereof. Future capital requirements
will depend upon many factors, including progress with pre-clinical testing and
clinical trials, the number and breadth of our clinical programs, the time and
costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other proprietary rights, the time and costs involved in
obtaining regulatory approvals, competing technological and market developments,
as well as management's ability to establish collaborative arrangements,
effective commercialization, marketing activities and other arrangements. The
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Company to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of expenses during the reporting
period. On an ongoing basis, the Company evaluates estimates and assumptions
based upon historical experience and various other factors and circumstances.
Management believes the Company's estimates and assumptions are reasonable in
the circumstances; however, actual results may differ from these estimates under
different future conditions.
The Company believes that the estimates and assumptions that are most important
to the portrayal of the Company's financial condition and results of operations,
in that they require the most difficult, subjective or complex judgments, form
the basis for the accounting policies deemed to be most critical to us. These
critical accounting policies relate to stock purchase warrants issued with notes
payable, beneficial conversion feature of convertible notes payable, impairment
of intangible assets and long lived assets, stock compensation, classification
of warrant obligation, contingencies and litigation. We believe estimates and
assumptions related to these critical accounting policies are appropriate under
the circumstances; however, should future events or occurrences result in
unanticipated consequences, there could be a material impact on the Company's
future financial conditions or results of operations.
There have been no changes to the Company's critical accounting policies as
disclosed in its Form 10-KSB for the year ended March 31, 2007.
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 Management, including our
Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934) as of the end of the period covered by this
report (the "Evaluation Date"). Based upon that evaluation, the CEO and CFO
concluded that, as of September 30, 2007, 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.
Changes in Controls and Procedures
There were no significant changes made in our internal controls over financial
reporting during the three and six month periods ended September 30, 2007 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.
Limitations on the Effectiveness of Internal Control
Management, including the CEO, does not expect that our disclosure controls and
procedures or our internal control over financial reporting will necessarily
prevent all fraud and material errors. An internal control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations on all internal control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within Aethlon Medical have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, claims are made against the Company in the ordinary course of
business, which could result in litigation. Claims and associated litigation are
subject to inherent uncertainties and unfavorable outcomes could occur, such as
monetary damages, fines, penalties or injunctions prohibiting the Company from
selling one or more products or engaging in other activities. The occurrence of
an unfavorable outcome in any specific period could have a material adverse
effect on the Company's results of operations for that period or future periods.
The Company is not presently a party to any pending or threatened legal
proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In April 2007, the Company issued 30,617 shares of restricted common stock as
the result of a cashless exercise of 80,000 warrants held by a former
noteholder. The shares were issued without registration under the Securities Act
in reliance upon the exemption from registration set forth in Section 4(2).
In June 2007, the Company issued 41,999 shares of restricted common stock at
between $0.30 and $0.74 per share in payment for investor relations services to
the Company valued at $20,000 based on the value of the services. The shares
were issued without registration under the Securities Act in reliance upon the
exemption from registration set forth in Section 4(2).
On July 13, 2007 the Company entered into a twelve-month 12% Convertible Note
("Note") for $60,000 with an individual accredited investor. The Note accrues
interest at 12%, payable at maturity and is convertible into the Company's
Common Stock at a fixed conversion price of $0.50 per share.
In August 2007, the Company issued 1,630,000 shares of common stock for cash
proceeds of $815,000 ($757,950 net of commissions). The shares were issued to
accredited investors in the form of Units comprised of two shares of common
stock and one three-year warrant to acquire common stock at an exercise price of
$0.50. The offering price of each Unit was $1.00.
In August 2007, the Company issued 21,020 shares of restricted common stock at
prices between $0.68 and $0.78 per share in payment for investor relations
services to the Company valued at $15,000 based on the value of the services.
In September 2007, the Company issued 14,000 shares of common stock to an
accredited investor at $0.50 per share in payment of commissions related to the
August Private Placement transaction valued at $7,000 based upon the value of
services provided.
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 $502,500 have reached maturity and are past
due. The Company is continually reviewing other financing arrangements to retire
all past due notes. At September 30, 2007 the Company had accrued interest in
the amount of $385,848 associated with these notes and accrued liabilities
payable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
20
ITEM 6. EXHIBITS
(a) Exhibits. The following documents are filed as part of this report:
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated March 28,
2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated June 13,
2005 (3)
3.5 Certificate of Amendment of Articles of Incorporation dated March 6,
2007 (4)
10.1 Form of Common Stock Agreement by and between the Company and Fusion
Capital Fund II, LLC (5)
10.2 Form of Subscription Agreement by and between the Company and Fusion
Capital Fund II, LLC (5)
31.1 Certification of CEO pursuant to Securities Exchange Act rules 13a-15
and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.*
31.2 Certification of CFO pursuant to Securities Exchange Act rules 13a-15
and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.*
32.1 Certification of James A. Joyce, Chief Executive Officer pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of James W. Dorst, Chief Financial Officer (Principal
Accounting Officer) pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(1) December 18, 2000 and incorporated by reference
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 10,
2005 and incorporated by reference.
(4) Filed with the Company's Current Report on form 8-K dated March 7,
2007 and incorporated herein by reference.
(5) Filed with the Company's Current Report on Form 8-K filed August 17,
2007.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AETHLON MEDICAL, INC.
Date: November 14, 2007
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
21