Form: 10QSB

Optional form for quarterly and transition reports of small business issuers

February 20, 2001

10QSB: Optional form for quarterly and transition reports of small business issuers

Published on February 20, 2001



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, 2000

OR

/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the transition period from __________ to __________

Commission file number 0-21846

AETHLON MEDICAL, INC.
---------------------
(Exact name of registrant as specified in its charter)


NEVADA 13-3632859
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)



7825 FAY AVENUE, SUITE 200, LA JOLLA, CA 92037
- ------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)


(858) 456-5777
--------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /.

Number of shares of common stock outstanding
on December 31, 2000 2,771,652


PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Consolidated Balance Sheets at December 31, 2000 (unaudited)
and March 31, 2000

Consolidated Statements of Operations (unaudited) for the three and nine months
ended December 31, 2000 and December 31, 1999

Consolidated Statements of Cash Flows (unaudited) for the nine months ended
December 31, 2000 and December 31, 1999

Consolidated Statement of Stockholders' Deficiency (unaudited)

Notes to Consolidated Financial Statements

ITEM 2. Management's Discussion and Analysis or Plan of Operation


PART II. OTHER INFORMATION

SIGNATURES


2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


3

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS



December 31,
2000 March 31,
(unaudited) 2000
ASSETS

CURRENT ASSETS
Cash $1,622 $217,017
Accounts receivable 32,043 61,495
Prepaid expenses 24,349 36,940
Employee advances - 15,800
----------------------------------

Total current assets 58,014 331,252

PROPERTY AND EQUIPMENT, NET 33,984 41,535

OTHER ASSETS
Patents and trademarks, net 407,795 177,065
Deferred debt expense, net 134,745 273,738
Goodwill, net 1,558,091 495,088
Other 1,330 1,330
----------------------------------

Total other assets 2,101,961 947,221
----------------------------------

Total assets $2,193,959 $1,320,008
==================================

LIABILITIES AND STOCKHOLDERS' DEFICIENCY

CURRENT LIABILITIES
Accounts payable:
Trade $756,044 $740,562
Related parties 236,217 234,324
Notes payable, net of discount 1,220,238 526,708
Accrued liabilities 346,661 201,631
Deferred compensation 329,835 329,835
----------------------------------

Total current liabilities 2,888,995 2,033,060

Convertible notes, 8 %, due November 1, 2002,
net of discount 223,134 -

STOCKHOLDERS' DEFICIENCY
Common stock - $.001 par value
25,000,000 shares authorized; 2,771,652 and
2,672,500 shares issued and outstanding 2,772 2,673
Additional paid in capital - common stock 4,242,132 3,290,865
Additional paid in capital - warrants and options 1,865,187 739,826
Deficit accumulated during development stage (7,028,261) (4,746,416)
----------------------------------

Total stockholders' deficiency (918,170) (713,052)
----------------------------------

Total liabilities and stockholders' deficiency $2,193,959 $1,320,008
==================================


See accompanying notes.


4

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)





Cumulative During
Three months ended Nine months ended Development Stage
December 31 December 31 January 31, 1984
--------------------------------------------------------- To
2000 1999 2000 1999 December 31, 2000

REVENUE
Grant income $ - $ - $ - $ - $ 1,430,799
Subcontract income - - - - 73,746
Sale of research and development - - - - 35,810
Other income 500 - 22,979 - 53,976
Interest income - - - - 17,415
----------- ----------- ----------- ----------- -----------

Total revenue 500 - 22,979 - 1,611,746

EXPENSES
Interest and debt expense 508,101 101,474 1,175,248 128,738 1,691,094
Personnel costs 179,774 110,247 525,480 314,940 3,830,605
Professional and consulting fees 112,883 67,647 213,123 208,436 784,361
Amortization-goodwill 42,454 - 127,361 - 140,056
Rent and office expense 40,139 19,575 101,467 53,733 593,181
Insurance 10,028 13,138 43,491 19,409 133,977
Laboratory supplies 24,475 - 38,206 - 140,589
Travel and meetings 6,525 9,538 26,403 19,009 170,558
Miscellaneous 8,142 295 25,544 3,815 130,474
Depreciation 4,092 2,555 11,925 7,319 146,843
Amortization-patents 2,043 2,043 6,129 6,129 49,028
Equipment and maintenance 827 - 6,307 - 171,629
R & D consultation - - - - 240,463
Subcontract expense - - - - 195,964
Contractual costs - - - - 192,112
Dues and subscriptions - - - - 13,596
----------- ----------- ----------- ----------- -----------

Total expenses 939,483 326,512 2,300,694 761,528 8,624,530

LOSS BEFORE INCOME TAXES (938,983) (326,512) (2,277,705) (761,528) (7,012,784)

PROVISION FOR INCOME TAXES 2,675 81 4,140 228 15,477
----------- ----------- ----------- ----------- -----------

NET LOSS $ (941,658) $ (326,593) $(2,281,845) $ (761,756) $(7,028,261)
=========== =========== =========== =========== ===========

PER SHARE - BASIC AND DILUTED:
Net loss $ (0.34) $ (0.13) $ (0.82) $ (0.29)

Weighted average number of
common shares outstanding 2,771,652 2,595,000 2,771,652 2,595,000


See accompanying notes.


5

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



Cumulative During
Nine months ended Development Stage
December 31 January 31, 1984
-------------------------- To
2000 1999 December 31, 2000

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,281,845) $ (761,756) $(7,028,261)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 11,925 7,319 146,843
Amortization-patents & goodwill 133,490 6,129 189,083
Amortization-debt expense & note discount 1,048,359 12,126 1,319,517
Services paid by issuance of warrants 8,373 - 13,373
Deferred compensation forgiven - - 217,223
(Increase) decrease in assets:
Accounts receivable and advances 45,252 (15,800) 30,623
Prepaid expenses 18,981 (32,349) (17,959)
Other assets - (1,330) (1,329)
Increase (decrease) in liabilities:
Accounts payable 61,482 169,318 659,466
Accrued liabilities 145,030 117,847 413,899
Deferred compensation - 15,827 329,834
----------- ----------- -----------

Net cash used by operating activities (808,953) (482,669) (3,727,688)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (6,478) (7,922) (177,382)
Sale of equipment 4,000 - 4,000
Purchase of patents - - (120,564)
Cash of acquired company 2,286 - 10,728
----------- ----------- -----------

Net cash used by investing activities (192) (7,922) (283,218)

CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 687,500 597,000 1,804,500
Deferred debt costs (93,750) (59,000) (208,500)
Repayment of notes payable (25,000) (64,500)
Loans from stockholders - - 370,384
Advances from affiliate - - 122,100
Proceeds from issuance of common stock - - 1,988,544
----------- ----------- -----------

Net cash provided by financing activities 593,750 513,000 4,012,528

NET INCREASE IN CASH (215,395) 22,409 1,622
CASH, BEGINNING 217,017 3,052 -
----------- ----------- -----------

CASH, END $ 1,622 $ 25,461 $ 1,622

SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest $ 100,774 $ 4,703 $ 143,081
Income taxes $ 2,783 - 9,945

SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans converted to common stock of Hemex $ - $ - $ 435,094
Net assets of entities acquired in exchange
for the issuance of common stock and options $ 1,200,000 $ - $ 1,839,014
Patent acquired for 12,500 shares of common stock $ - $ - $ 100,000
Patent costs included in liabilities $ 95,817 $ - $ 95,817
Debt placement fees paid by issuance of warrants $ 52,207 $ - $ 298,320
Allocation of note proceeds to note discount $ 384,245 $ - $ 1,119,071
Beneficial conversion feature on note $ 150,000 $ - $ 150,000


See accompanying notes.


6

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)



PAID IN
CAPITAL-
COMMON STOCK PAID IN WARRANTS ACCUMULATED
SHARES AMOUNT CAPITAL and OPTIONS DEFICIT TOTAL


BALANCE AT MARCH 31, 2000 2,672,500 $ 2,673 $ 3,290,865 $ 739,826 $ (4,746,416) $ (713,052)

Issuance of common stock and options
for acquisition of Cell Activation 99,152 99 801,267 398,634 1,200,000

Warrants to acquire common stock
issued with promissory notes 218,780 218,780

Warrants issued as compensation for
sale of promissory notes 328,318 328,318

Warrants to acquire common stock
issued with convertible note 165,466 165,466

Beneficial conversion feature on note 150,000 150,000

Options granted to directors for fees 14,163 14,163

Net loss for the nine months
ended December 31, 2000 (2,281,845) (2,281,845)
--------- -------- ------------ ------------ ------------ -----------


BALANCE AT DECEMBER 31, 2000 2,771,652 $ 2,772 $ 4,242,132 $ 1,865,187 $ (7,028,261) $ (918,170)
========= ======== ============ ============ ============ ===========


See accompanying notes.


7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000


NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Aethlon
Medical, Inc. (the "Company") have been prepared in accordance with generally
accepted accounting principles 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 generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended December 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2001. For further
information, refer to the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000, which includes audited financial statements and footnotes
as of and for the years ended March 31, 2000 and 1999.

The consolidated financial statements include the accounts of Aethlon
Medical, Inc. and its wholly owned subsidiaries, Hemex, Inc., Aethlon, Inc.,
Syngen Research, Inc., and Cell Activation, Inc. Syngen Research and Cell
Activation are doing business as Aethlon Laboratories, Inc. All significant
intercompany balances and transactions have been eliminated.

NOTE 2. CAPITAL TRANSACTION

On April 10, 2000, the Company acquired all the outstanding common
stock of Cell Activation, Inc. ("Cell") in exchange for 99,152 shares of common
stock of the Company. In addition, all the outstanding stock options of Cell
were exchanged for options to purchase 50,848 shares of common stock of the
Company for $.3933 per share. The options expire in 2007. The acquisition has
been accounted for using the purchase method of accounting whereby the results
of operations of Cell since the date of acquisition have been included in the
accompanying Statement of Operations.

The purchase price for Cell was $1,200,000 which was allocated between
the shares and options based on the estimated fair value of each component of
the consideration. Thus the value allocated to the 99,152 shares of stock was
$801,366, and the value allocated to the options for 50,848 shares of stock was
$398,634. The excess of the purchase price over the tangible assets acquired has
been allocated $141,041 to patents and trademarks and $1,190,364 to goodwill.
Patents will be amortized over their life from date of issuance, and goodwill
will be amortized over ten years. Had the Cell acquisition taken place on April
1, 1999, the impact on the Company's results of operations for the three and
nine months ended December 31, 1999 would not have been material.


8

NOTE 3. NOTES PAYABLE

During the quarter ended December 31, 2000, the Company issued a
two-year 8% convertible note in the principal amount of $375,000. A
detachable warrant to purchase 119,048 shares of the Company's common stock
was issued in connection with this note. Aethlon has allocated the proceeds
from the note to the warrant and the note on a pro-rata basis based on the
estimated fair value of each financial instrument separately. The fair value
of the warrant was estimated using the Black-Scholes pricing model, and
present value calculations were made to estimate the fair value of the note
without the warrant. Of the note proceeds, $165,466 was allocated to the
warrant and recorded as note discount. The note discount is being amortized
as additional interest and debt expense over the two-year term of the related
note. The note is convertible into common stock of the Company at $3.15 per
share or, if less, at 75% of the average of the three lowest closing bid
prices for the Company's stock during the ten trading days prior to
conversion. The Company has determined that the intrinsic value to the
investor of this beneficial conversion feature is $150,000, and this amount
has been charged to interest expense and added to additional paid-in capital.

At December 31, 2000 outstanding 12% promissory notes in the aggregate
principal amount of $525,000 have reached their one-year maturity, and interest
on such notes for periods after maturity is accruing at the annual rate of 15%.

NOTE 4. OTHER OPTIONS AND WARRANTS

On November 6, 2000, the Company approved the issuance of options for
200,000 shares of its common stock to the Company's general counsel. The options
are exercisable at $3.25 per share and expire on December 31, 2005. Under an
agreement between the Company and its general counsel, any proceeds from the
sale of shares obtained through exercise of these options in excess of the
exercise price will be applied to reduce the outstanding legal fees of general
counsel. In accordance with this agreement, no expense has been recorded by the
Company with respect to these options.

On December 29, 2000, the Company issued warrants for 35,250 shares of
its common stock as compensation for the sale of promissory notes. The warrants
are exercisable at $5.00 per share and expire on various dates between November
4, 2004 and September 14, 2005.

At December 31, 2000, there were options and warrants outstanding for a
total of 1,736,194 shares of common stock at exercise prices from $.3933 to
$6.00, averaging $3.86.


9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

PLAN OF OPERATION

The Company is in the initial stages of its operations and has not yet
engaged in significant commercial activities. During the fiscal year ending
March 31, 2001, the Company plans to continue its research and development
activities relating to the Hemopurifier-TM-, with particular priority on the
Hemopurifier-TM- for the removal of HIV virus from the blood.

The implementation of the Company's business plan is dependent upon its
ability to raise equity capital. During the fiscal year ended March 31, 2000 and
the nine months ended December 31, 2000, the Company financed its research and
development activities through the private placement of approximately $1,365,000
principal amount of 12-month notes bearing interest at 12% per annum. The
Company has entered into an agreement with an investment banking firm under
which the firm will use its best efforts to sell $10 million of the Company's
common stock in a private placement offering. The Private Placement Memorandum
was issued in July 2000 but was withdrawn in September pending revisions in the
business plan. The Company expects to re-issue the Memorandum during the fiscal
year beginning April 1, 2001.

On November 1, 2000, the Company entered into a Subscription Agreement
under which up to $5,000,000 in convertible notes may be issued to a financial
institution. Under this arrangement, a note for $375,000 was issued on November
1, 2000 and a second note for $200,000 was issued on February 12, 2001. There is
no assurance that the terms and conditions prescribed in the Subscription
Agreement for the issuance of additional convertible notes will be satisfied.

The Company believes that the successful completion of the $10 million
stock offering will satisfy the Company's anticipated capital requirements
related to the development of its business for three years; however, additional
financing may be required in the case of further acquisitions or to successfully
develop other technologies. At the present time, the Company has no plans to
purchase significant amounts of equipment or hire significant numbers of
additional employees prior to the successful completion of the private placement
of its common stock.

Presently Aethlon has no internal source of cash resources and has no
expectation for internally generated cash over the next twelve months. Aethlon's
ongoing research and development activities over the next twelve months will be
dependent upon funding from the aforementioned private placement of equity, the
sale of additional convertible notes, or other sources of capital.


10

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.


11

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

(a) Exhibits - None

(b) No Reports on Form 8-K were filed during the quarter ended December
31, 2000.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

AETHLON MEDICAL, INC

Date: February 20, 2000
/s/ Franklyn S. Barry, Jr.
--------------------------

Franklyn S. Barry, Jr., President


12