10QSB: Optional form for quarterly and transition reports of small business issuers
Published on August 19, 2002
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-21846
AETHLON MEDICAL, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 13-3632859
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State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7825 FAY AVENUE, SUITE 200, LA JOLLA, CA 92037
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(Address of principal executive offices) (Zip Code)
(858) 456-5777
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(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 No X .
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The number of shares of common stock of the registrant outstanding as of
June 30, 2002 was 5,360,821.
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements 3
Condensed Consolidated Balance Sheets at June 30, 2002
(unaudited) and March 31, 2002 3
Condensed Consolidated Statements of Operations (unaudited)
for the three months ended June 30, 2002 and June 30, 2001 4
Condensed Consolidated Statements of Cash Flows (unaudited)
for the three months ended June 30, 2002 and June 30, 2001 5
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. Management's Discussion and Analysis or Plan of Operation 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 2. Changes in Securities 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
2
PART I
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and March 31, 2002
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June 30, March 31,
2002 2002
(Unaudited)
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ASSETS
Current Assets
Cash $ 507 $ 10,667
Prepaid expenses 94,540 140,788
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95,047 151,455
Furniture and Equipment, net 31,717 37,182
Patents and Patents Pending, net 568,099 560,790
Employment Contract, net 190,419 222,156
Other Assets 1,955 1,955
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$ 887,237 $ 973,538
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued
liabilities $ 1,100,926 $ 1,160,219
Due to related parties 1,172,573 1,073,355
Notes payable 472,500 572,500
Convertible notes payable 445,000 365,000
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3,190,999 3,171,074
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per
share; 25,000,000 shares
authorized; 5,360,821 and 5,170,697
shares issued and outstanding
at June 30, 2002 and March 31, 2002,
respectively 5,361 5,171
Additional paid-in capital 7,708,847 7,391,382
Stock options and warrants 3,546,596 3,571,310
Deficit accumulated during
development stage (13,564,566) (13,165,399)
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(2,303,762) (2,197,536)
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$ 887,237 $ 973,538
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2002 and
2001 and For the Period January 31, 1984
(Inception) Through June 30, 2002
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(Unaudited)
4
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AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2002 and
2001 and For the Period January 31, 1984
(Inception) Through June 30, 2002
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(Unaudited)
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AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2002 and
2001 and For the Period January 31, 1984
(Inception) Through June 30, 2002
- --------------------------------------------------------------------------------
(Unaudited)
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AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
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NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. (the "Company") engages in the research and
development of a medical device known as the Hemopurifier(TM) that removes
harmful substances from the blood. 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-month
period ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ending March 31, 2003. For further information,
refer to the Company's Annual Report on Form 10-KSB for the year ended March 31,
2002, which includes audited financial statements and footnotes as of and for
the years ended March 31, 2002 and 2001.
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
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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.
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Loss per Common Share
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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.
Recent Accounting Pronouncements
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In July 2001, the FASB issued Statements No. 141, " Business Combinations "
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 is effective for fiscal years beginning after June 30, 2001 and
requires that all business combinations be accounted for by the purchase method.
SFAS 142 provides that all existing and newly acquired goodwill and certain
intangible assets will no longer be amortized but will be tested for impairment
at least annually and written down only when impaired. Additionally, the FASB
has recently issued Statements No. 143, " Accounting for Asset Retirement
Obligations " ("SFAS 143") and No. 144, " Accounting for the Impairment or
Disposal of Long-Lived Assets " ("SFAS 144"). SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs, and is
effective for financial statements issued for fiscal years beginning after June
15, 2002. For the three-month period ended June 30, 2002, the Company adopted
SFAS 141, 142 and 144. There was no significant effect on the Company's June 30,
2002 financial statements. Management does not expect that the requirements of
SFAS 143 will have a significant impact on the Company's future financial
statements.
Reclassifications
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Certain reclassification have been made to the June 30, 2001 financial
statement presentation to correspond to the June 30, 2002 format.
NOTE 3. DEBT-TO-EQUITY CONVERSION PROGRAM
In March 2002, the Company extended an offer to certain note holders and
vendors to convert past due amounts into restricted common stock and warrants to
purchase common stock of the Company. The offer entailed the conversion of
liabilities at a conversion of one share and one-half of a warrant for every
$1.25 converted. The warrants have an exercise price of $2.00 per share and
expire three years from the date of issuance.
During the quarter ended June 30, 2002, note holders and vendors
representing liabilities in the aggregate amounts of approximately $238,000
converted their debt in exchange for 190,124 shares of Common Stock and 95,061
warrants to purchase common stock. Such warrants were valued using the
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Black-Scholes option pricing model at approximately $31,000 for the quarter
ended June 30, 2002. The conversion rate exceeded the estimated market value of
the Company's common stock.
NOTE 4. NOTES PAYABLE
At June 30, 2002, all outstanding promissory notes in the aggregate
principal amount of $472,500 were past due and in default.
On May 31, 2002, the Company issued notes to two investors in the total
amount of $25,000, bearing interest at 10% per annum. Principal and interest
thereon became due June 9, 2002 and are now in default.
The Company is currently seeking other financing arrangements to retire all
past due notes.
NOTE 5. CONVERTIBLE NOTES PAYABLE
On April 18, 2002, the Company issued a convertible note in the amount of
$50,000 to an investor bearing interest at 8% per annum, with principal and
interest thereon due July 19, 2002. On May 3, 2002, the Company issued a
convertible note in the amount of $30,000 to an investor bearing interest a 10%
per annum, with principal and interest thereon due June 2, 2002, and is now in
default.
Both notes may be converted to common stock of the Company at any time at
the option of the respective holder. The conversion price is the lower rate of
$1.25 per share or the offering terms set for any private equity offering
initiated during the term of these notes. A beneficial conversion feature
approximating $80,000 was recorded during the quarter ended June 30, 2002.
The Company is seeking other financing arrangements to retire these notes,
should the investors choose not to convert.
NOTE 6. 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 $13.6 million for the period
from January 31, 1984 (Inception) through June 30, 2002. 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 until such time that
revenues achieve profitability levels.
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
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continuation as a going concern is dependent upon its ability to obtain
additional financing as may be required, and generate sufficient revenue and
operated cash flow to meet its obligations on a timely basis.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Registration Rights Agreements
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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 condition, 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 cash to fund registration expenses becomes available. The Company
may incur additional charges in exchange for further waivers through the date of
an effective registration statement.
Delinquent SEC Filing
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The Company's March 31, 2002 Form 10-KSB did not contain certain disclosure
items in its Management's Discussion and Analysis or Plan or Operation section
including Executive Compensation, Security Ownership of Certain Beneficial
Owners and Management and Certain Relationships and Related Transactions. Such
filing delinquencies constitute securities laws non-compliance and, among other
actions enforceable by the SEC, could result in de-listing of the Company's
common stock from the 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 delinquencies are cured.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Results of Operations
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Aethlon Medical is a development stage therapeutic device company that has
not yet engaged in significant commercial activities. We are continuing to
devote a significant portion of our resources to the advancement of our research
and development efforts and are developing new treatments for the removal of
targeted viruses and other intoxicants from the blood based on our proprietary
Hemopurifier(TM) platform. Our main focus during fiscal 2002 was to further
advance the HIV-Hemopurifier, AEMD-45.
We recorded a consolidated net loss of $399,167 or $(0.08) per share and
$659,582 or $(0.19) per share for the quarters ended June 30, 2002 and 2001,
respectively.
Consolidated operating expenses were $317,524 for the three months ended June
30, 2002, versus $506,195 for the comparable period in fiscal year 2001. This
decrease in operating expenses is attributable to decreased professional fees,
amortization and other expenses partially offset by higher personnel expenses.
We continue to carefully control costs and are pursuing various funding
alternatives to support our business plan going forward.
Liquidity and Capital Resources
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During the fiscal year ended March 31, 2001, we financed our operations
through the private placement of approximately $1,365,000 of notes bearing
interest at 12% per annum and convertible notes in the amount of $395,000
bearing interest at 8% per annum. During fiscal 2002, all of the 12% notes
matured, increasing the interest to 15% per annum.
In March 2002, the Company extended an offer to the 12% note holders and
certain vendors to convert past due amounts into restricted common stock and
warrants to purchase common stock of the Company. During the year ended March
31, 2002, note holders and vendors representing liabilities in the aggregate
amount of approximately $1,020,000 converted their debt and approximately
$238,000 in additional liabilities were converted subsequent to year end.
During the fourth quarter of fiscal year 2001, we entered into a
Subscription Agreement under which we received gross proceeds of approximately
$856,000, of which $712,000, net of $44,000 in issuance costs, were received
during the first half of fiscal year 2002. The proceeds were used in part to
fund operating expenses as well as to reduce existing accounts payable and
related party liabilities.
During fiscal year 2002 and the first quarter of fiscal year 2003, we
continued to issue promissory notes and convertible notes totaling $283,000.
Additional funds in the aggregate amount of $200,000 were generated in
January and February 2002, through the exercise of an option to purchase common
stock of the Company by a consultant.
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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 report, we do not have plans to purchase significant
amounts of equipment or hire significant numbers of employees prior to
successfully raising additional capital.
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 Securities Exchange Act of 1934 ("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.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
The Company issued 190,124 unregistered shares of common stock during
the quarter ended June 30, 2002. Such stock, generally referred to as
"Rule 144 stock," were not registered under the Securities Act of
1933, as amended, in reliance upon an exemption from its registration
requirements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At August 19, 2002, various promissory and convertible notes payable in
the aggregate principal amount of $917,500 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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as part of this report:
99.1 Certification of the Chief Executive Officer pursuant
to 18 U.S.C.ss.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 June 30, 2002.
None
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AETHLON MEDICAL, INC
Date: August 19, 2002
By: /s/ JAMES A. JOYCE
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James A. Joyce
Chairman, President and CEO
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