10QSB: Optional form for quarterly and transition reports of small business issuers
Published on February 11, 2000
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, 1999
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
BISHOP EQUITIES, 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
(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 .
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Number of shares of common stock outstanding on December 31, 1999: 2,595,000
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Consolidated Balance Sheets (unaudited) at December 31, 1999
And March 31, 1999
Consolidated Statements of Operations (unaudited) for the three
and nine months ended December 31, 1999
Consolidated Statements of Cash Flows (unaudited) for the three and nine months
ended December 31, 1999
Consolidated Statement of Stockholders' Equity (Deficit)
Notes to Consolidated Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
SIGNATURES
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEET
SEE ACCOMPANYING NOTES
CONSOLIDATED STATEMENTS OF OPERATIONS
SEE ACCOMPANYING NOTES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
SEE ACCOMPANYING NOTES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SEE ACCOMPANYING NOTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
NOTE 1. SUMMARY of SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bishop
Equities, Inc. doing business as Aethlon Medical, Inc.) ("Bishop") and its
wholly owned subsidiaries, Hemex, Inc. ("Hemex") and Aethlon, Inc. ("Aethlon")
(collectively the "Company"). All significant intercompany balances and
transactions have been eliminated.
NATURE OF BUSINESS
Bishop, which was formerly a nonoperating public shell, is the parent
company of Hemex and Aethlon. Aethlon was incorporated on June 24, 1998 to
acquire proprietary medical device technologies with the ability to be developed
and commercialized on an international basis. Hemex was incorporated on January
31, 1984 and is a start-up research and development company involved in
developing the Hemopurifier, a medical device that removes toxic metals present
in the bloodstream.
To date the Company is in the initial stage of its operations and has not
yet engaged in any commercial activities.
ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
receipts and expenditures during the reporting period. Actual results could
differ from estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheets approximate fair value.
ACCOUNTING STANDARDS CHANGES
Effective with fiscal year 1998, the Company adopted SFAS 131, Disclosures
About Segments and Related Information, which establishes standards for the way
public companies report information about operating segments in both interim and
annual financial statements and related disclosures.
The Company is currently organized, managed and internally reported as one
segment. Segments are determined based on differences in products, production
processes, and internal reporting. The segment operates entirely within the
United States.
NET LOSS PER COMMON SHARE
In accordance with SFAS 128, dual presentation of basic and diluted
earnings per share is required on the face of the statement of operations. Net
loss per share is based on the weighted average number of common shares
outstanding during the periods presented. Outstanding stock options, warrants,
and convertible debentures have not been considered common stock equivalents
because their assumed exercise would be anti-dilutive.
EQUIPMENT AND DEPRECIATION
Equipment is recorded at cost. Depreciation has been determined using the
straight-line method over the estimated useful lives of the assets. Depreciation
expense for the nine months and three months ended December 31, 1999 was $7,319
and $2,555, respectively. Accumulated depreciation as of December 31, 1999
amounted to $131,139.
PATENTS AND AMORTIZATION
Three patents were acquired on December 31, 1994 from a stockholder in
exchange for a note payable in the amount of $80,140. The patents are being
amortized on the straight-line method over their remaining lives. The patents
expire between the years 2003 through 2005. Amortization for the nIne months and
three months ended December 31, 1999 was $6,129 and $2,043, respectively.
Accumulated amortization as of December 31, 1999 amounted to $40,856.
DEFERRED LOAN COSTS
Deferred debt expense reflects the fees paid to private placement firms in
connection with promissory notes sold. These costs are being amortized on a
straight-line basis over the one-year term of the related debt. Amortization
expense for the nine and three months ended December 31, 1999 was $12,126 and
$10,667, respectively. Accumulated amortization as of December 31, 1999 amounted
to $12,126.
RESEARCH, DEVELOPMENT, AND ORGANIZATIONAL COSTS
Research, development, and organizational costs are expensed as incurred.
INCOME TAXES
Income taxes are computed in accordance with SFAS 109, Accounting for
Income Taxes. Deferred taxes are provided on temporary differences arising from
assets and liabilities whose bases are different fro financial reporting and
income tax purposed. Differences in basis for which deferred taxes are provided
relate primarily to costs associated with research and development.
NOTE 2. FINANCIAL CONDITION
On March 10, 1999, Bishop acquired the outstanding stock of two privately
held development stage enterprises, Hemex and Aethlon, in order to pursue its
commitment to become a significant developer and supplier of medical device
technologies (see Note 3). Hemex has developed a proprietary and patented
technology for the extracorporeal removal of toxic materials from the blood, and
has completed its first clinical trial of one application of this technology.
Aethlon was formed as a medical device acquisition company, whose mission will
now be carried forward by Bishop. Management intends to seek other acquisitions
in related medical device technologies while in the near term concentrating on
the commercialization of the Hemex Hemopurifier (TM) product line. It is
expected that, subject to FDA approval, commercialization of this product will
begin on a limited basis in late 2001.
Since the acquisition of Hemex and Aethlon, the Company has undertaken an
offering of short-term debt in the amount of $750,000. The Company received
proceeds of $500,000 from this offering through December 31, 1999. The Company
has also received a letter from a major investment bank agreeing to use its best
efforts in leading the private placement of the Company's common stock in the
amount of $10 million beginning in the first quarter of 2000. Management
believes the financing provided by this offering, should it be completed, will
be sufficient to meet the Company's cash needs, including repayment of the
short-term financing and the commercialization of the Hemopurifier products, for
at least three years. Additional financing may be required in the case of
further acquisitions.
Management has several strategies for the conservation of capital while it
is a development stage enterprise. Management will invest principally in
research and product development, and to a lesser extent in marketing planning
and development. Strategic partnerships and subcontracting relationships are
planned for direct sales, distribution, and manufacturing activities related to
the Hemex product line. Careful management of general and administrative
expenses, including the use of part-time experts in specific functions, will
minimize the "burn rate" during the pre-revenue phase.
The Company has sustained substantial operating losses in recent years and
expects to do so for two additional years. Its current liabilities exceed its
current
assets by $1,657,000 at December 31, 1999. Management believes that the actions
described above will provide the basis for the Company to make the transition
from a Development Stage Enterprise and to commence operations, but there is no
assurance that its present plans will be succeed, enabling the Company to
continue to operate as a going concern.
NOTE 3. CAPITAL TRANSACTION
On March 10, 1999, Bishop (a nonoperating public shell) entered into a
merger agreement with Hemex and Aethlon whereby Bishop issued 1,350,000 and
733,500 shares of its common stock to Hemex and Aethlon, respectively, in
exchange for 100% of their outstanding shares. Hemex and Aethlon survived as the
operating entities and wholly-owned subsidiaries of Bishop. Bishop, which had
been doing business as Aethlon Medical, Inc., formally changed its name to
Aethlon Medical, Inc. in January, 2000.
As a result of the merger, the Hemex shareholders became the majority
owners of the Company and have effective operating control. Accordingly, the
transaction has been accounted for as a reverse acquisition whereby Hemex is
deemed to be the accounting acquirer of Bishop and Aethlon through the issuance
of stock for their net monetary assets, followed by a recapitalization. The
assets and liabilities of Aethlon and Bishop have been recorded at their
historical cost, which approximated their fair market value.
NOTE 4. LEASES
The Company rents laboratory space from the University of Buffalo
Foundation and office space in La Jolla, California and Williamsville, New York,
on a month-to-month basis. Total rent expense for the nine and three-month
periods ended December 31, 1999 was $32,688 and $6,497, respectively.
NOTE 5. DEFERRED COMPENSATION
The Company has deferred compensation agreements with two of its present
employees and two former employees, each of whom is a current stockholder. The
terms of the agreements require the Company to pay the individuals the amount
owed as soon as the Company has funds available. To facilitate the capital
transaction described in Note 3, the employees have agreed to accept a
discounted amount as full payment of the compensation originally deferred. As a
result, the deferred compensation liability presented in the accompanying
financial statements has been discounted by 40%, reflecting the amount of funds
management estimates will be available to satisfy the payment of the deferred
compensation. The difference between the full amount owed and the discounted
amount has been recorded as an increase in additional paid in capital. Deferred
compensation expense for the nine months ended December 31, 1999 was $15,827.
NOTE 6. NOTES PAYABLE
During the first fiscal quarter, the Company issued $60,000 in one-year
notes with interest payable quarterly at 12% per annum to certain stockholders.
These notes were convertible into notes to be offered under the private
placement debt offering described below, and, during the second fiscal
quarter, $25,000 of these notes were exchanged from notes from the debt
offering.
The Company entered into agreements to issue up to $750,000 of private
placement debt in units or $25,000. Each unit contains a 12% interest rate and
warrants to purchase 12,500 shares of common stock at a price of five dollars
per share for a five-year term. At December 31, 1999 notes aggregating $500,000
had been issued under this program. The warrants may be called by the Company
upon meeting certain per share market price goals. As of December 31, 1999 there
were warrants outstanding for 250,000 shares of stock. Fees paid in connection
with the placement of the debt are being amortized over the one-year term of the
notes.
In connection with the issuance of certain 10% demand notes during the
first and second fiscal quarters, the Company has agreed to issue 14,250
shares of the Company's common stock as additional compensation to the lender.
Outstanding notes payable at December 31, 1999 were as follows:
NOTE 7 INCOME TAXES
Under Internal Revenue Code Section 174, the Company has elected to
capitalize for income tax purposes all research and development expenditures
incurred in connection with its product development process. Net costs
associated with the research and development process amount to approximately
$3,989,000 at March 31, 1999. When the Company realizes benefits from such
expenditures, the costs will be amortized over a period of 60 months.
A valuation allowance has been provided for 100% of the resultant deferred
tax asset as realization of that asset is contingent upon Food and Drug
Administration approval of the Hemopurifier and the Company generation
sufficient taxable income to offset the amortization of deferred research and
development expenditures. At December 31, 1999 the deferred tax asset was
$917,000, comprised of $598,000 in Federal income tax and $319,000 in State
income tax, offset by the valuation allowance of $917,000.
NOTE 8 RELATED PARTY TRANSACTIONS
The officers of the Company and other related parties have paid expenses
on behalf of the Company in the past. The officers have also advanced the
Company funds to cover short-term working capital shortages. These
noninterest-bearing amounts have been included as accounts payable-related
parties in the accompanying financial statements.
NOTE 9 COMMITMENTS AND CONTINGENCIES
On April 1, 1999, the Company granted to its President an option to
purchase 412,500 shares of common stock at an exercise price of three dollars
per share. The option vests immediately and expires five years from the date of
grant.
NOTE 10 PRIOR PERIOD ADJUSTMENT
Prior to the business combination, an acquired subsidiary had incurred
additional professional fees in the amount of $69,000. The adjustment to reflect
this liability increased accounts payable-related parties and decreased
additional paid in capital related to the issuance of stock for the acquisition
of the subsidiary.
NOTE 11 SUBSEQUENT EVENT
On January 10, 2000, the Company acquired all the outstanding common
stock of Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of
outstanding common stock of the Company. Syngen become a wholly-owned
subsidiary of the Company. As a result of the acquisition, the Company
acquired the use of certain laboratory and office equipment utilized in DNA
diagnostics, oligonucleotide synthesis, and organic synthesis of fluorescent
dyes. The acquisition will be accounted for as a pooling of interests.
Complete financial information on the acquired company is not yet available.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FINANCIAL CONDITION
The Company experienced a net decrease in cash of $3,920 during the
third quarter of Fiscal Year 2000. Cash of $387,500 was provided by the proceeds
from a private placement of 12-month notes bearing interest of 12%. Cash of
$314,452 was used to fund certain current operating expenses related to the
reorganization of the Company after the acquisition of Aethlon, Inc. and Hemex,
Inc. in March, 1999, as well $45,250 of expenses related to the private
placement of one year notes.
During the third quarter the Company's accounts payable increased by
$68,297, principally for fees related to short-term interim financing.
The principal cash requirements for the balance of Fiscal Year 2000
will be (1) for completion of the reorganization of the Company, including
filling certain scientific and business positions, leasing a larger office and
laboratory facility for the Hemex, Inc. subsidiary, and the purchase of
laboratory and business equipment, (2) for expenses related to completion of the
aforementioned debt offering, as well as a planned private placement of the
Company's common stock in the amount of $10 million, and (3) for the preparation
for clinical trials and other expenses related to the development and
commercialization of the Hemex line of medical devices for the extracorporeal
removal of metal intoxicants from the blood.
The implementation of the Company's business plan is dependent upon its
ability to raise capital. The Company has undertaken a private placement of
$750,000 principal amount of 12-month notes bearing interest at 12% per annum,
of which $500,000 had been issued through December 31, 1999. The company has
also received a letter from an investment banker agreeing to use its best
efforts to sell up to $10 million of the Company's common stock in a private
placement anticipated to commence in March 2000. The Company believes that the
successful completion of these offerings will satisfy the Company's anticipated
cash requirements related to the development of the Company and of the Hemex
subsidiary business and products for three years; however, additional financing
may be required in the case of further acquisitions, or to develop other
technologies.
RESULTS OF OPERATIONS
The Company is in the initial stages of its operations and has not yet
engaged in any commercial activities. As a development stage enterprise, the
company had no revenue in the quarter ended December 31, 1999. From inception,
revenue has been $1,568,000, of which $1,424,000 was grant income.
Expenses in the quarter ended December 31, 1999 were $326,512. Expenses
for the first nine months of Fiscal Year 2000 were $761,528, and from inception
to December 31, 1999 were $5,770,597.
The net loss for the quarter and nine months ended December 31, 1999
was $326,593 or $.13 per common share and $761,756 or $.29 per common share,
respectively. The loss from inception to December 31, 1999 was $4,208,790 or
$3.00 per common share.
YEAR 2000 MATTERS
The inability of computers, software, and other equipment utilizing
microprocessors to recognize and properly process date fields containing a two
digit year reference such as "00" for the year 2000 is commonly referred to as
the Year 2000 issue. Any of the Company's computer programs that utilize two
digit years may recognize "00" as
the year 1900 rather than the year 2000. Such recognition problems could cause
disruptions of operations, including the inability to perform essential business
tasks.
The Company has identified all significant applications that could require
modification to address the Year 2000 issue. Testing of these applications is
complete, and no modification has been found necessary.
The Company has no third party vendors whose inability to comply with the Year
2000 issue would disrupt the management and operations of the Company.
FORWARD LOOKING STATEMENT
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 Bishop Equities, 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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
None
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.
BISHOP EQUITIES, INC
Date: February 14, 2000
/s/ James A. Joyce
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James A. Joyce, Chairman of the Board
EXHIBIT INDEX
27. Financial Data Schedule.