10QSB: Optional form for quarterly and transition reports of small business issuers
Published on February 19, 2008
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, 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
37,169,186 as of January 22, 2008.
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]
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 2007
(UNAUDITED) 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND NINE MONTHS ENDED DECEMBER 31, 2007 AND 2006
AND FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH
DECEMBER 31, 2007 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED DECEMBER 31, 2007 AND 2006 AND FOR THE PERIOD
JANUARY 31, 1984 (INCEPTION) THROUGH DECEMBER 31, 2007 (UNAUDITED) 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 17
ITEM 3. CONTROLS AND PROCEDURES 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 22
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 22
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 23
ITEM 5. OTHER INFORMATION 23
ITEM 6. EXHIBITS 24
2
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31,
2007
------------
ASSETS
Current assets
Cash $ 333,271
Deferred financing costs 55,000
Prepaid expenses and other current assets 5,000
------------
Total current assets 393,271
Property and equipment, net 10,425
Patents and patents pending, net 139,453
Other assets 13,200
------------
Total assets $ 556,349
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued liabilities $ 935,543
Due to related parties 1,083,999
Notes payable 502,500
Convertible notes payable, net of discount 815,711
Warrant obligation 731,274
------------
Total current liabilities 4,069,027
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per share;
100,000,000 shares authorized;
36,428,399 shares issued and outstanding 36,429
Additional paid-in capital 27,932,219
Deficit accumulated during development stage (31,481,326)
------------
(3,512,678)
------------
Total liabilities and stockholders' deficit $ 556,349
============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
December 31, 2007
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. (the "Company") is a development 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. In this regard, our 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. We have 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 are 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 we can market to the medical community. We
also expect to face similar regulatory challenges from foreign regulatory
agencies, should we attempt to commercialize and market the Hemopurifier(R)
outside of the United States. As a result, we have 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. We manufacture our products on a small scale for testing purposes but
have yet to manufacture our products on a large scale for commercial purposes.
All of our pre-clinical human blood studies have been conducted in our
laboratories under the direction of Dr. Richard Tullis, our 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 nine month periods ended December 31, 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.
6
NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying unaudited 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
($3,676,000) recurring losses from operations and a deficit accumulated during
the development stage of approximately ($31,481,000) at December 31, 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 through the public markets, specifically, through private
placement of common stock. The Company believes that its access to capital,
together with existing cash resources, will be sufficient to meet its liquidity
needs for fiscal 2008. However, no assurance can be given that the Company will
receive any funds in addition to the funds in its capital raising efforts.
The unaudited 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.
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 condensed
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 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 17,531,110 and 14,209,120 potentially dilutive common shares outstanding
for the three and nine months ended December 31, 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.
7
RESEARCH AND DEVELOPMENT EXPENSES
The Company incurred approximately $466,000 and $440,000 of research and
development expenses during the nine months ended December 31, 2007 and 2006,
respectively. For the fiscal quarter ended December 31, 2007 and 2006, the
Company incurred research and development expense of approximately $135,000 and
$105,000, 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.
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 nine months ended December
31, 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 No. 00-27, "APPLICATION OF
EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the estimated fair
value of the BCF is recorded, when applicable, 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.
8
DERIVATIVE LIABILITIES AND CLASSIFICATION
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," FSP EITF Issue No.
00-19-2, "ACCOUNTING FOR REGISTRATION PAYMENT ARRANGEMENTS," 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. Pursuant to EITF Issue No. 00-19, the classification
of an instrument indexed to the company's stock must be reassessed at each
balance sheet date. If the classification required under this Consensus changes
as a result of events during a reporting period, the instrument should be
reclassified as of the date of the event that caused the reclassification. There
is no limit on the number of times a contract may be reclassified.
In the fiscal year ending 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 Notes. In accordance with EITF Issue No. 00-19, the
value of the warrants was 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 Convertible Notes
had lapsed. In accordance with EITF Issue No. 00-19, the Company reclassified
the warrants from stockholders' equity and recorded a warrant liability which is
required to be revalued at the end of each reporting period. Such warrant
liability was revalued through September 30, 2007 (our latest reporting period)
and then on November 29, 2007. On November 29, 2007, the notes and warrant
agreements associated with the 10% Series A Convertible Notes were amended and
restated. For accounting purposes, such amendment was treated as an
extinguishment pursuant to EITF Issue No. 06-6 and the existing warrant
liability relieved. See Note 4 for further description.
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" ("SFAS No. 5"). Pursuant to SFAS No. 5, a liability related to
potential liquidated damages if such damages were determined to be both probable
and reasonably estimable. The Company had accrued liquidated damages on the 10%
Series A Convertible Notes. In connection with the amendment of these
instruments and related warrants on November 29, 2007, the liquidated damages
related to these Notes were settled. As of December 31, 2007, the Company has
accrued $26,000 in liquidated damages in connection with potential liquidated
damages related to the November 29, 2007 transaction. See Note 4 for further
description.
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. Accordingly, no share-based
compensation was recognized in the financial statements for periods prior to
April 1, 2006.
9
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. Such grants are recorded based on the grant date fair
value of the equity instruments.
In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option
Plan"), which was approved by its stockholders in December 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 December 31, 2007, the Company had granted 47,500 options
under the 2000 Stock Option Plan of which 15,000 had been forfeited. All of
these options vested prior to the adoption of SFAS 123-R. The Company has
reserved 467,500 shares for future issuance.
Share-based compensation resulting from the application of SFAS No. 123-R to
options granted resulted in an expense of $69,446 for the quarter ended December
31, 2007 and $422,397 for the nine month period ended December 31, 2007. The
Company uses 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 Nine Months Ended
December 31, 2007 December 31, 2007
Payroll and related $ 69,446 $ 422,397
========== =========
Net share-based compensation effect
in net loss from continuing operations $ 69,446 $ 422,397
========== =========
Basic and diluted loss per common share $ (0.00) $ (0.01)
========== =========
In accordance with SFAS No. 123-R, beginning on April 1, 2006, 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, if any, of adjusting the forfeiture rate for all expense
amortization is recognized in the period the forfeiture estimate is changed. The
effect of forfeiture adjustments for the three and nine month periods ended
December 31, 2007 was insignificant.
The following weighted average assumptions were used in the valuation of these
instruments.
Nine Months Ended
December 31
-----------------------------
2007 2006
---------- ----------
Annual dividends zero zero
Expected volatility 92% 89%
Risk free interest rate 4.72% 4.82%
Expected life 2.14 years 5.0 years
10
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
December 31, 2007 are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term in Years Value (1)
- ------------------------- ----------- -------- ------------- ----------
Vested (2) 9,702,393 $ 0.39 5.60 $3,492,861
Expected to vest 2,001,667 0.35 4.30 $ 800,667
----------- ----------
Total 11,704,060 $4,293,528
=========== ==========
(1) These amounts represent the difference between the exercise price and $0.75,
the closing market price of the Company's common stock on December 31, 2007 as
quoted on the Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all
in-the-money options outstanding.
(2) 4,278,375 options were granted prior to April 1, 2006 (the date of adoption
for SFAS 123-R) and were fully vested at the date of adoption.
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 -- -- --
---------- ----------
December 31, 2007 467,500 11,704,060 $ 0.38 $4,330,502
========== ========== ====== ==========
Options exerciseable at:
December 31, 2007 9,702,393 $ 0.38
========== ======
(1) Represents the difference between the exercise price and the March 31, 2007
or December 31, 2007 market price of the Company's common stock, which was $0.74
and $0.75, respectively.
At December 31, 2007, there were approximately $444,000 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted average period of 1.37 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.
11
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 its 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.
The Company is not currently under Internal Revenue Service (IRS), state, local
or foreign jurisdiction tax examinations.
For the quarter and nine-month periods ended December 31, 2007, the Company
recorded no income tax provision.
In December 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 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 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.
12
NOTE 4. NOTES PAYABLE
At December 31, 2007, the Company had $502,500 in principal amount of notes
payable outstanding with twelve 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 December 31, 2007 the Company had accrued interest
in the amount of $405,754 associated with these defaulted notes payable.
At December 31, 2007, the Company had $1,110,000 in principal amount of
convertible notes payable outstanding, net of a $961,000 discount, held by six
noteholders. The discount is comprised of $29,921 in unamortized BCF discount
and approximately $931,000 in unamortized discount attributable to the valuation
of warrant rights associated with the issuance of convertible notes.
10% SERIES A CONVERTIBLE NOTES AMENDMENT
On November 2007, the Company entered into Amended and Restated 10% Series A
Convertible Promissory Notes (the "Amended Notes") with the holders of certain
promissory notes previously issued by the Company (the "Prior Notes"), and all
amendments to the Prior Notes, including on March 5, 2007.
The Amended Notes, in the principal amount of $1,000,000, are convertible into
an aggregate of 5,000,000 shares of the Company's Common Stock and mature on
February 15, 2009. The Amended Notes provide for the payment of accrued and
default interest through December 31, 2007 in the aggregate amount of $295,248
to be paid in units ("Units") at a fixed rate of $0.20 per Unit, each Unit
consisting of one share of the Company's Common Stock and one Class A Common
Stock Purchase Warrant (the "Class A Warrant") to purchase one share of the
Company's Common Stock at a fixed exercise price of $0.20 per share. If the
Holders exercise the Class A Warrants on or before February 15, 2010, the
Company will issue them one Class B Common Stock Purchase Warrant (the "Class B
Warrant") for every two Class A Warrants exercised. The Class B Warrants will
have a fixed exercise price of $0.60 per share.
The Amended Notes also provided for the payment of liquidated damages through
November 29, 2007 in the aggregate amount $269,336 to be paid in units ("Damages
Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit consisting
of one share of the Company's Common Stock and one Class A-1 Common Stock
Purchase Warrant (the "Class A-1 Warrant") to purchase on share of the Company's
Common Stock at a fixed exercise price of $0.40 per share. If the Holders
exercise the Class A-1 Warrants on or before February 15, 2010, the Company will
issue them one Class B-1 Common Stock Purchase Warrant (the "Class B-1 Warrant")
for every two Class A-1 Warrants exercised. The Class B-1 Warrants will have a
fixed exercise price of $0.40 per share.
In addition, the Amended Notes provide for the issuance of Class A Principal
Common Stock Purchase Warrants (the "Class A Principal Warrant") to purchase an
aggregate of 5,000,000 shares of the Company's Common Stock on the same terms as
the Class A Warrants.
The following table summarizes the number of shares of the Company's Common
Stock issuable upon the conversion of the Amended Notes or the exercise of the
various warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
------------
Total 15,373,955
============
The Company is obligated to register the shares underlying the Class A Warrants,
the Class A-1 Warrants and the Class A Principal Warrants with the SEC by March
31, 2008, and the shares underlying the Class B Warrants and to register the
Class B-1 Warrants with the SEC by the 30th day following the issuance date of
such warrants.
13
For accounting purposes, the amendment of the 10% Series A Convertible Notes was
treated as an extinguishment pursuant to EITF Issue No. 06-6. The changes in the
note agreements, conversion feature and warrants were considered substantive as
prescribed in that consensus. Consequently, the Company recorded a loss on
extinguishment of $489,013 as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized note (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
------------
Loss on extinguishment $ 489,013
============
The new warrants issued in connection with the Amended Notes were evaluated
pursuant to EITF Issue No. 00-19 and classified as equity instruments. In
connection with the new warrants, the Company recorded $4,392,664 as an increase
to additional paid in capital, based on the estimated fair value at issuance.
The amended conversion feature contains a beneficial conversion at the date of
the Amended Notes; consequently, the Company recorded a discount of $1,000,000
against the notes and a corresponding increase in additional paid in capital.
Through December 31, 2007, the Company amortized approximately $69,000 of such
discount into interest expense.
$495,000 NOTE WITH WARRANTS FINANCING
On December 5, 2007, the Company entered into a Subscription Agreement with two
accredited investors pursuant to which the Company issued and sold promissory
notes in the principal amount of $495,000 and three-year warrants to purchase an
aggregate of 1,485,000 shares of the Registrant's common stock at a fixed
exercise price of $0.50 per share. The promissory notes bear interest compounded
monthly at the annual rate of eight percent (8%) and mature on September 5,
2008. The net proceeds to the Company were $450,000.
The warrants associated with this financing did not meet all of the conditions
required for equity classification under EITF Issue No. 00-19; consequently, the
warrants (with an estimated fair value of $693,050) were accounted for as
derivative liabilities at issuance. The Company revalued the warrants at
December 31, 2007 and the change in the estimated fair value of $38,224 was
recorded to earnings.
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.
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.
14
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 14,857 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 of 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 of 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 of 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 5,297 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.
In October 2007, the Company issued 4,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.65 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In December 2007, the Company issued 330,000 Units for cash proceeds of
$165,000. The Units were issued to accredited investors were comprised of two
shares of common stock and one three-year warrant to acquire common stock at an
exercise price of $0.50 per share. The offering price of each Unit was $1.00.
15
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.
OTHER
The Company has not filed its income tax returns for certain prior periods.
Whereas the Company is in the process of remediating this matter, it may be
subject to penalties; however, those amounts are not expected to be significant.
NOTE 7. SUBSEQUENT EVENTS
In January 2008, the Company issued 21,992 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 $15,000 based on the value of the services
provided.
In January 2008, the Company entered into a Subscription Agreement with an
accredited investor pursuant to which the Company issued and sold promissory
notes in the principal amount of $220,000 and three-year warrants to purchase an
aggregate of 660,000 shares of the Registrant's common stock at a fixed exercise
price of $0.50 per share. The promissory notes bear interest compounded monthly
at the annual rate of nine percent (9%) and mature on October 19, 2008. The
aggregate gross proceeds to the Company were $200,000.
In January 2008, the Company issued 200,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to an accredited investor in the
form of Units comprised of two shares of common stock and one three-year warrant
to acquire common stock at a fixed exercise price of $0.50 per share. The
offering price of each Unit was $1.00.
16
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.
17
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2006
Operating Expenses
Consolidated operating expenses for the three months ended December 31, 2007
were $526,975 in comparison with $464,994 for the comparable quarter a year ago.
The increase of $61,981, or 13% was due primarily to an increase in Payroll &
Related expenses of $64,834, which was largely due to an increase in non-cash
stock compensation expense of $69,446.
Other Expense
Other expenses increased by approximately $2,000,000 as compared to the
corresponding prior period. This increase was comprised of a loss on
extinguishment of debt of $489,013, a non-cash increase in the fair value of
warrant liability of approximately $633,000, and an increase of approximately
$876,000 in interest expense for amortization of note discounts prior to
extinguishment of the 10% Series A Convertible Notes, warrants and related
obligations (see Note 4 to the condensed consolidated financial statements).
Net Loss
As a result of the increased expenses noted above, the Company recorded a
consolidated net loss of approximately $2,603,000 and $541,000 for the quarters
ended December 31, 2007 and 2006, respectively.
Basic and diluted loss per common share were ($0.07) for the three month period
ended December 31, 2007 compared to ($0.02) for the same period ended December
31, 2006. This increase in loss per share was primarily a result of the higher
net loss during the three month period ended December 31, 2007, as compared to
the three month period ended December 31, 2006.
NINE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 2006
Operating Expenses
Consolidated operating expenses were approximately $2,088,000 for the nine
months ended December 31, 2007, versus approximately $1,504,000 for the
comparable period ended December 31, 2006. The increase of approximately
$584,000, or 39%, is a result of approximate increases in Professional expenses
of $74,000, Payroll expenses of $495,000 and General and Administrative expenses
$15,000.
The Professional Fees expense increase is comprised of increases in legal fees
of approximately $210,000 and $5,000 in accounting services, offset by
approximate decreases of $46,000 in scientific consulting fees, $78,000 in
investor relations expenses and $6,000 in directors' fees.
The General and Administrative expense increase is comprised of approximate
increases in lab supplies of $74,000, insurance expense of $14,000 and utilities
expense of $16,000 offset by decreases in financial conference expense
of approximately $36,000, travel expense of $26,000, rent expense of $15,000 and
a net reduction in all other general expenses of approximately $12,000.
The Payroll and related expense increase is comprised of approximately $103,000
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 $392,000.
Other Expense
Other expenses increased by approximately $1,023,000 as compared to the
prior period one year ago. This increase was comprised primarily of a loss on
extinguishment of debt of $489,013,and an increase of approximately $795,000 in
interest expense, related to amortization of note discounts, offset by a
non-cash decrease in the estimated fair value of the warrant liability of
approximately $281,000.
18
Net Loss
As a result of the increased expenses noted above, the Company recorded a
consolidated net loss of approximately $3,394,000 and $1,788,000 for
thenine-month periods ended December 31, 2007 and 2006, respectively.
Basic and diluted loss per common share were ($0.10) for the nine month period
ended December 31, 2007 compared to ($0.07) for the same period ended December
31, 2006. This increase in loss per share was attributable primarily to a higher
net loss during the nine month period ended December 31, 2007, as compared to
the nine-month period ended December 31, 2006.
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 December 31, 2007 was approximately
$333,000 compared to approximately $440,000, at March 31, 2007, representing a
decrease of approximately $107,000. During the nine months ended December 31,
2007, operating activities used net cash of approximately $1,079,000, while the
Company received approximately $983,000 from financing activities from the
issuance of common stock and convertible notes and utilized approximately
$11,000 in connection with patent costs and purchases of new equipment.
During the nine month period ended December 31, 2007, net cash used in operating
activities were approximately ($1,079,000) and resulted from the approximate net
loss of $3,394,000, the change in the estimated fair value of warrant liability
of approximately $3,958,000 and a reduction of accounts payable and accrued
expenses of approximately $439,000. These were offset principally by the
non-cash loss on debt extinguishment of approximately $491,000, amortization of
note discount of $911,000, fair market value of common stock of approximately
$197,000 issued in payment for services and approximately $422,000 in
stock-based compensation.
An increase in working capital during the nine months ended December 31, 2007 in
the amount of approximately $3,584,000 changed the Company's negative working
capital position to approximately ($3,676,000) at December 31, 2007 from a
negative working capital of approximately ($7,260,000) at March 31, 2007.
The Company's current deficit in working capital required 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.
19
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 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 dependent 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.
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.
20
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"), 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 concluded that, as of December 31, 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
During the quarter ended December 31, 2007, our chief financial officer resigned
and our chief executive officer assumed the role of principal accounting
officer. We also hired a part time senior vice president of finance to bolster
our financial staff following the departure of our former chief financial
officer.
There were no other significant changes made in our internal controls over
financial reporting during the three month period ended December 31, 2007 that
have materially affected or are reasonably likely to materially affect these
controls.
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.
21
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
On November 29, 2007, the Company entered into Amended and Restated 10% Series A
Convertible Promissory Notes (the "Notes") with the Holders. The Notes were
issued in exchange for the Prior Notes, and all amendments to the Prior Notes,
including the Allonges entered into between the Company and the Holders on March
5, 2007.
The Notes bear an aggregate principal amount of $1,000,000 and are convertible
into an aggregate of 5,000,000 shares of the Company's Common Stock and mature
on February 15, 2009. The Notes provide for the payment of accrued and default
interest through December 31, 2007 in the aggregate amount of $295,248 to be
paid in units ("Units") at a fixed rate of $0.20 per Unit, each Unit consisting
of one share of the Company's Common Stock and one Class A Common Stock Purchase
Warrant (the "Class A Warrant") to purchase one share of the Company's Common
Stock at a fixed exercise price of $0.20 per share. If the Holders exercise the
Class A Warrants on or before February 15, 2010, the Company will issue them one
Class B Common Stock Purchase Warrant (the "Class B Warrant") for every two
Class A Warrants exercised. The Class B Warrants will have an exercise price of
$0.60 per share.
The Notes also provide for the payment of liquidated damages through November
29, 2007 in the aggregate amount $269,336 to be paid in units ("Damages Units")
at a fixed rate of $0.40 per Damages Unit, each Damages Unit consisting of one
share of the Company's Common Stock and one Class A-1 Common Stock Purchase
Warrant (the "Class A-1 Warrant") to purchase on share of the Company's Common
Stock at an exercise price of $0.40 per share. If the Holders exercise the Class
A-1 Warrants on or before February 15, 2010, the Company will issue them one
Class B-1 Common Stock Purchase Warrant (the "Class B-1 Warrant") for every two
Class A-1 Warrants exercised. The Class B-1 Warrants will have a fixed exercise
price of $0.40 per share.
In addition, the Notes provide for the issuance of Class A Principal Common
Stock Purchase Warrants (the "Class A Principal Warrant") to purchase an
aggregate of 5,000,000 shares of the Company's Common Stock on the same terms as
the Class A Warrants. The shares underlying the Class A Warrants, the Class A-1
Warrants and the Class A Principal Warrants shall be registered with the SEC by
March 31, 2008, and the shares underlying the Class B Warrants and the Class B-1
Warrants shall be registered with the SEC by the 30th day following the issuance
date of such warrants. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
On December 5, 2007 the Company issued and sold promissory notes in the
principal amount of $495,000 (the "Notes") and three-year warrants to purchase
and aggregate of 1,485,000 shares of the Company's common stock at a fixed
exercise price of $.50 per share (the "Warrants"). The Notes bear interest
compounded monthly at an annual rate of eight percent (8%) per annum and mature
on September 5, 2008. The Company is required to file a registration statement
with the SEC covering the shares underlying the Warrants within 60 calendar days
of closing. In the event that, within 180 days of closing such registration
statement is not effective, the Company is obligated to penalties, payable in
cash, of 2% per month. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
In December 2007, the Company issued 330,000 Units of common stock for cash
proceeds of $165,000. 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 per share. The offering price
of each Unit was $1.00.
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In January 2008, the Company issued 200,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to an accredited investor in the
form of Units comprised of two shares of common stock and one three-year warrant
to acquire common stock at a fixed exercise price of $0.50 per share. The
offering price of each Unit was $1.00.
That 330,000 unit transaction in December coupled with the sale of 100,000 units
in January 2008 (see Note 7 Subsequent Events) completed a private placement of
1,000,000 Units, priced at $1.00 per unit, raising $980,000. Each Unit is
comprised of two shares of common stock and one warrant. The warrant has a fixed
exercise price of $0.50 per share and is exercisable for three years from
issuance. The Company is required to file a registration statement with the SEC
covering the shares underlying the units within 60 calendar days of closing. In
the event that, within 180 days of closing such registration is not effective,
or the underlying shares are not saleable under SEC Rule 144, the Company is
obligated to pay penalties, payable in additional shares, of 2% per month. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
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 December 31, 2007 the Company had accrued interest in the
amount of $405,754 associated with these notes and accrued liabilities payable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On January 8, 2008 the Company completed a private placement of 100,000 Units,
priced at $1.00 per unit, raising $100,000. Each Unit is comprised of two shares
of common stock and one warrant. The warrant has an exercise price of $0.50 and
is exercisable for three years from issuance. The Company is required to file a
registration statement with the SEC covering the shares underlying the units
within 60 calendar days of closing. In the event that, within 180 days of
closing such registration is not effective, or the underlying shares are not
saleable under SEC Rule 144, the Company is obligated to pay penalties, payable
in additional shares, of 2% per month. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
On January 18, 2008 the Company issued and sold promissory notes in the
principal amount of $220,000 (the "Notes") and three-year warrants to purchase
and aggregate of 660,000 shares of the Company's common stock at an exercise
price of $.50 per share (the "Warrants"). The Notes bear interest compounded
monthly at an annual rate of eight percent (8%) per annum and mature on October
18, 2008. The Company is required to file a registration statement with the SEC
covering the shares underlying the Warrants within 60 calendar days of closing.
In the event that, within 180 days of closing such registration statement is not
effective, the Company is obligated to penalties, payable in cash, of 2% per
month. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
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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)
10.32 Form of Registration Rights Agreement for Amended and Restated
Notes and Warrants (5)
10.33 Form of Class A Warrant (5)
10.34 Form of Class A Principal Warrant (5)
10.35 Form of Class A-1 Warrant (5)
10.37 Form of Class B Warrant (5)
10.38 Form of Class B-1 Warrant (5)
10.39 Form of Amended and Restated 10% Convertible Notes (5)
10.41 Form of Unit Offering Subscription Agreement (5)
10.42 Form of Common Stock Warrant (5)
10.43 Form of Unit Securities including Promissory Note and Common
Stock Purchase Warrant (5)
31.1* Certification of Principal Executive Officer and Principal Financial
Officer 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, Principal Executive Officer and
Principal Financial 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 Registration Statement on Form S-1 filed
February 11, 2008 and incorporated herein by reference.
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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: FEBRUARY 19, 2008 BY: /S/ JAMES A. JOYCE
---------------------------
JAMES A. JOYCE
CHAIRMAN, PRESIDENT, CHIEF
ACCOUNTING OFFICER AND
CHIEF EXECUTIVE OFFICER
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