10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on August 13, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
o | 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 000-21846
AETHLON MEDICAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA | 13-3632859 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
8910 UNIVERSITY CENTER LANE, SUITE 660, SAN DIEGO, CA 92122
(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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES S NO £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x
As of August 13, 2013, the registrant had outstanding 190,011,783 shares of common stock, $.001 par value.
PART I. | FINANCIAL INFORMATION | 3 |
ITEM 1. | FINANCIAL STATEMENTS | 3 |
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2013 (UNAUDITED) AND MARCH 31, 2013 | 3 | |
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED JUNE 30, 2013 AND 2012 (UNAUDITED) | 4 | |
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2013 AND 2012 (UNAUDITED) | 5 | |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) | 7 | |
ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 20 |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 24 |
ITEM 4. | CONTROLS AND PROCEDURES | 24 |
PART II. | OTHER INFORMATION | 25 |
ITEM 1. | LEGAL PROCEEDINGS | 25 |
ITEM 1A. | RISK FACTORS | 25 |
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 25 |
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES | 26 |
ITEM 4. | MINE SAFETY DISCLOSURES | 26 |
ITEM 5. | OTHER INFORMATION | 26 |
ITEM 6. | EXHIBITS | 27 |
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2013 |
March 31, 2013 |
|||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash | $ | 31,653 | $ | 125,274 | ||||
Accounts receivable | – | 208,781 | ||||||
Deferred financing costs | – | 863 | ||||||
Prepaid expenses and other current assets | 33,852 | 29,602 | ||||||
Total current assets | 65,505 | 364,520 | ||||||
Property and equipment, net | – | 145 | ||||||
Patents and patents pending, net | 119,362 | 121,653 | ||||||
Deposits | 10,376 | 10,376 | ||||||
Total assets | $ | 195,243 | $ | 496,694 | ||||
LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 972,420 | $ | 822,832 | ||||
Due to related parties | 798,778 | 736,070 | ||||||
Notes payable | 235,296 | 321,381 | ||||||
Convertible notes payable, net of discounts | 2,260,164 | 2,367,631 | ||||||
Derivative liabilities | 2,886,257 | 3,588,239 | ||||||
Accrued liquidated damages | 437,800 | 437,800 | ||||||
Other current liabilities | 1,424,786 | 1,367,185 | ||||||
Total current liabilities | 9,015,501 | 9,641,138 | ||||||
Commitments and Contingencies (Note 13) | ||||||||
Stockholders' Deficit | ||||||||
Common stock, par value $0.001 per share; 500,000,000 shares authorized as of June 30, 2013 and March 31, 2013; 182,552,460 and 173,674,201 shares issued and outstanding as of June 30, 2013 and March 31, 2013, respectively | 182,555 | 173,685 | ||||||
Additional paid-in capital | 52,776,011 | 52,157,196 | ||||||
Accumulated deficit | (61,778,824 | ) | (61,475,325 | ) | ||||
Total stockholders’ deficit | (8,820,258 | ) | (9,144,444 | ) | ||||
Total liabilities and stockholders' deficit | $ | 195,243 | $ | 496,694 |
See accompanying notes.
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AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended June 30, 2013 and 2012
(Unaudited)
Three Months Ended June 30, 2013 |
Three Months Ended June 30, 2012 |
|||||||
REVENUES | ||||||||
Government contract revenue | $ | 195,596 | $ | 216,747 | ||||
OPERATING EXPENSES | ||||||||
Professional fees | 324,070 | 477,121 | ||||||
Payroll and related | 458,631 | 554,095 | ||||||
General and administrative | 196,693 | 176,337 | ||||||
Total operating expenses | 979,394 | 1,207,553 | ||||||
OPERATING LOSS | (783,798 | ) | (990,806 | ) | ||||
OTHER EXPENSE (INCOME) | ||||||||
Gain on change in fair value of derivative liability | (609,125 | ) | (687,600 | ) | ||||
Interest and other debt expenses | 106,096 | 688,645 | ||||||
Interest income | (60 | ) | (45 | ) | ||||
Loss on settlement of notes | 22,789 | 24,978 | ||||||
Total other (income) expense | (480,300 | ) | 25,978 | |||||
NET LOSS | $ | (303,498 | ) | $ | (1,016,784 | ) | ||
BASIC AND DILUTED LOSS PER COMMON SHARE | $ | (0.00 | ) | $ | (0.01 | ) | ||
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED |
176,221,634 | 126,315,501 |
See accompanying notes.
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AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended June 30, 2013 and 2012
(Unaudited)
Three Months Ended June 30, 2013 |
Three Months Ended June 30, 2012 |
|||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (303,498 | ) | $ | (1,016,784 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 2,436 | 2,752 | ||||||
Stock based compensation | 115,788 | 169,299 | ||||||
Non cash interest expense | – | 11,846 | ||||||
Fair market value of common stock, warrants and options issued for services | 21,750 | 124,182 | ||||||
Change in fair value of derivative liabilities | (609,125 | ) | (687,600 | ) | ||||
Loss on settlement of note | 22,789 | 24,978 | ||||||
Amortization of debt discount and deferred financing costs | 2,896 | 484,223 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 208,781 | 400,114 | ||||||
Prepaid expenses and other current assets | (4,250 | ) | (32,851 | ) | ||||
Accounts payable and other current liabilities | 258,104 | 209,602 | ||||||
Due to related parties | 62,708 | (10,000 | ) | |||||
Net cash used in operating activities | (221,621 | ) | (320,239 | ) | ||||
Cash flows from investing activities: | – | – | ||||||
Purchases of property and equipment | – | – | ||||||
Net cash used in investing activities | – | – | ||||||
Cash flows from financing activities: | ||||||||
Principal repayments of notes payable | – | (29,610 | ) | |||||
Proceeds from the issuance of common stock | 128,000 | 802,000 | ||||||
Net cash provided by financing activities | 128,000 | 772,390 | ||||||
Net (decrease) increase in cash | (93,621 | ) | 452,151 | |||||
Cash at beginning of period | 125,274 | 143,907 | ||||||
Cash at end of period | $ | 31,653 | $ | 596,058 |
See accompanying notes.
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AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the Three Months Ended June 30, 2013 and 2012
(Unaudited)
Three Months Ended June 30, 2013 |
Three Months Ended June 30, 2012 |
|||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | – | $ | 2,821 | ||||
Income taxes | $ | – | $ | – | ||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||
Debt and accrued interest converted to common stock | 246,500 | 767,467 | ||||||
Reclassification of accounts payable to convertible note payable | 47,000 | – | ||||||
Reclassification of note payable to convertible note payable | – | 75,000 | ||||||
Reclassification of warrant derivative liability into equity | 92,857 | 26,543 |
See accompanying notes.
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AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2013
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") is a medical device company focused on creating innovative devices that address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles from the entire circulatory system without loss of essential blood components. On June 25, 2013, the United States Food and Drug Administration (FDA) approved an Investigational Device Exemption (IDE) that allows us to initiate human feasibility studies of the Aethlon Hemopurifier® in the United States. Under the feasibility study protocol, we will enroll ten end-stage renal disease patients who are infected with the Hepatitis C virus (HCV) to demonstrate the safety of Hemopurifier therapy. Successful completion of this study will allow us the opportunity to initiate pivotal studies that are required for market clearance to treat HCV and other disease conditions in the United States.
Successful outcomes of human trials will also be required by the regulatory agencies of certain foreign countries where we intend to sell this device. Some of our patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology.
Our common stock is quoted on the Over-the-Counter Bulletin Board administered by the Financial Industry Regulatory Authority ("OTCBB") under the symbol "AEMD.OB."
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and applicable sections of Regulation S-X. 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 necessary to make the financial statements not misleading have been included. The condensed consolidated balance sheet as of March 31, 2013 was derived from our audited financial statements. Operating results for the three months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending March 31, 2014. For further information, refer to our Annual Report on Form 10-K for the year ended March 31, 2013, which includes audited financial statements and footnotes as of March 31, 2013 and for the years ended March 31, 2013 and 2012.
NOTE 2. LIQUIDITY
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. We have experienced continuing losses from operations, are in default on certain debt, have negative working capital of approximately $8,950,000, recurring losses from operations and an accumulated deficit of approximately $61,779,000 at June 30, 2013, which among other matters, raises significant doubt about our ability to continue as a going concern. We have 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 our products to the point at which they may become commercially viable. We intend to fund operations, 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, 2014 through debt and/or equity financing arrangements as well as through the receipts under our original DARPA contract and the related subcontract with Battelle (See Note 12).
We are currently addressing our liquidity issue by seeking additional investment capital through private placements of common stock and debt and by applying for additional grants issued by government agencies in the United States.
We recently signed an agreement with a broker-dealer to raise operating capital to cover near term operating requirements and the expected costs of our US safety trial. The agreement also calls for the broker-dealer to raise additional working capital in a larger transaction for future growth initiatives (see note 2). Any securities offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The engagement agreement is on a best efforts basis and there can be no assurance that the broker-dealer can raise working capital for us on acceptable terms or at all.
We believe that our cash on hand and funds expected to be received from additional private investment and/or government grants will be sufficient to meet our liquidity needs for fiscal 2014. However, no assurance can be given that we will receive any funds in addition to the funds we have received to date.
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The unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability of assets that might be necessary should we be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies presented below is designed to assist the reader in understanding our condensed consolidated financial statements. Such financial statements and related notes are the representations of our management, who are 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 wholly-owned subsidiary, Exosome Sciences, Inc. (collectively hereinafter referred to as the "Company" or "Aethlon"). There exist no material intercompany transactions or balances between Aethlon and its subsidiary.
LOSS PER COMMON SHARE
Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of computation. Diluted loss per common share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued, and if the additional common shares were dilutive. As we had net losses for all periods presented, basic and diluted loss per common share are the same, since additional potential common shares have been excluded as their effect would be antidilutive.
The potentially dilutive common shares outstanding for the quarters ended June 30, 2013 and 2012, which include common shares underlying outstanding stock options, warrants and convertible debentures, were 138,279,424 and 135,921,754, respectively.
PATENTS
We capitalize the cost of patents, some of which were acquired, and amortize such costs over the estimated useful life, upon issuance of the patent.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses during the three month periods ended June 30, 2013 and 2012, which are included in various operating expense line items in the accompanying condensed consolidated statements of operations. Our research and development expenses in those periods were as follows:
June 30, | June 30, | |||||||
2013 | 2012 | |||||||
Three months ended | $ | 337,920 | $ | 291,866 | ||||
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain convertible notes and related warrants at June 30, 2013 and March 31, 2013 are $2,886,257 and $3,588,239, respectively, based upon a third party valuation report that we commissioned. Warrants classified as derivative liabilities are reported at their estimated fair value, with changes in fair value being reported in current period results of operations.
EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY PARTIES OTHER THAN EMPLOYEES
We account for transactions involving goods and services provided by third parties where we issue equity instruments as part of the total consideration 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.
In transactions, when the value of the goods and/or services is 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, we use the following methodology:
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(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, we re-measure the consideration at each reporting date based on its then current stock value.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
We review our long-lived assets 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. We believe that no impairment occurred at or during the three months ended June 30, 2013 and 2012.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of conversion that is below the market value of our common stock. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). We record the estimated fair value of the BCF, when applicable, in the condensed consolidated financial statements as a discount from the face amount of the notes. Such discounts are accreted to interest expense over the term of the notes using the effective interest method.
DERIVATIVE LIABILITIES AND CLASSIFICATION
We evaluate free-standing derivative instruments (or embedded derivatives) to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is 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.
On April 1, 2009 we adopted new guidance, as codified in Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815-40, Derivatives and Hedging, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock (previously EITF 07-5), that requires us to apply a two-step model in determining whether a financial instrument or an embedded feature is indexed to our own stock and thus enables it to qualify for equity classification. We have identified several convertible debt or warrant agreements in which the embedded conversion feature or exercise price contains certain provisions that may result in an adjustment of the conversion or exercise price, which results in the failure of the these instruments to be considered to be indexed to our stock. Accordingly, under this guidance, we are required to record the estimated fair value of these instruments as derivative liabilities (see Note 9).
We re-measure the estimated fair value of derivative liabilities at each reporting period and record changes in fair value in other expense (income) in the current statement of operations.
REGISTRATION PAYMENT ARRANGEMENTS
We account for contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction agreements, and any such contingent obligations are recognized only when it is determined that it is probable that the Company will become obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated (see Note 7).
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation plans are accounted for under the fair value method. Accordingly, share-based compensation is measured when all granting activities have been completed, generally the grant date, based on the fair value of the award. 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 OTCBB) on the date of grant. Compensation cost recognized by the Company 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 the then current accounting standards, 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 subsequent accounting standards. We use a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 10).
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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. We record a valuation allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is more likely than not that some portion of the deferred tax assets may not be realized.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
There were no recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, or the Securities and Exchange Commission during the three months ended June 30, 2013 or that were issued in prior periods but do not become effective until future periods that in the opinion of management had, or are expected to have a material impact on our present or future consolidated financial statements.
NOTE 4. NOTES PAYABLE
Notes payable consist of the following:
June 30, 2013 | March 31, 2013 | |||||||||||||||
Principal Balance | Accrued Interest | Principal Balance | Accrued Interest | |||||||||||||
12% Notes payable, past due | $ | 185,000 | $ | 333,000 | $ | 185,000 | $ | 326,062 | ||||||||
10% Note payable, past due | 5,000 | 6,000 | 5,000 | 5,875 | ||||||||||||
Tonaquint Note | 45,296 | 543 | 131,381 | 1,629 | ||||||||||||
Total | $ | 235,296 | $ | 339,543 | $ | 321,381 | $ | 333,566 |
During the three month periods ended June 30, 2013 and 2012, we recorded interest expense of $9,891 and $13,029, respectively, related to the contractual interest rates of our notes payable.
12% NOTES
From August 1999 through May 2005, we entered into various borrowing arrangements for the issuance of notes payable from private placement offerings (the "12% Notes"). On April 21, 2010, a holder of $100,000 of the 12% Notes converted his principal balance and $71,758 of accrued interest into 687,033 shares of common stock at an agreed conversion price of $0.25 per share. We incurred a loss upon this conversion of $68,703 since the closing price of our common stock was $0.35 at the date of conversion. At June 30, 2013, the 12% Notes were past due, in default, and bearing interest at the default rate of 15%.
10% NOTES
At June 30, 2013, one 10% Note in the amount of $5,000, which is past due and in default, remained outstanding and it bears interest at the default rate of 15%.
Management's plans to satisfy the remaining outstanding balance on these 12% and 10% Notes include converting the notes to common stock at market value or repayment with available funds.
TONAQUINT NOTE
On June 28, 2011, in conjunction with our satisfying all balances owed under a convertible note, we entered into a Termination Agreement with Tonaquint, Inc. under which both parties agreed that in consideration of the termination of a warrant, the waiving of all fees, penalties, the creation of the selling program and other factors, we agreed to issue an unsecured non-convertible promissory note (the "New Note") in the principal amount of $360,186, which provides for annual interest at a rate of 6%, payable monthly in either cash or our stock, at our option. The New Note originally had a maturity date of April 30, 2012.
We subsequently extended the note initially to July 31, 2012 and then to July 31, 2013 and subsequently to August 31, 2013 (see Note 14) and converted $236,305 of the principal of the note into common stock (see Note 6). We also recorded into principal $7,500 of the lender’s legal fees related to documentation of the extension agreement. During the three months ended June 30, 2013, we recorded a loss on conversion of $22,789 on those partial conversions.
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NOTE 5. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consist of the following at June 30, 2013:
Principal | Unamortized Discount |
Net Amount |
Accrued Interest |
|||||||||||||
Amended and Restated Series A 12% Convertible Notes, past due | $ | 885,000 | $ | – | $ | 885,000 | $ | 442,500 | ||||||||
December 2006 10% Convertible Notes, past due | 17,000 | – | 17,000 | 16,525 | ||||||||||||
2008 10% Convertible Notes, past due | 25,000 | – | 25,000 | 16,354 | ||||||||||||
October & November 2009 10% Convertible Notes, past due | 50,000 | – | 50,000 | 21,722 | ||||||||||||
April 2010 10% Convertible Note | 75,000 | (2,251 | ) | 72,749 | 25,823 | |||||||||||
September 2010 10% Convertible Notes, past due | 308,100 | – | 308,100 | 63,946 | ||||||||||||
April 2011 10% Convertible Notes, past due | 400,400 | – | 400,400 | 115,115 | ||||||||||||
July and August 2011 10% Convertible Notes, $257,656 past due | 357,655 | – | 357,655 | 80,867 | ||||||||||||
September 2011 Convertible Notes, past due | 22,260 | – | 22,260 | – | ||||||||||||
Law Firm Note Number 1 | 75,000 | – | 75,000 | 4,792 | ||||||||||||
Law Firm Note Number 2 | 47,000 | – | 47,000 | 170 | ||||||||||||
Total – Convertible Notes | $ | 2,262,415 | $ | (2,251 | ) | $ | 2,260,164 | $ | 787,814 |
All of the convertible notes payable in the above table are presently past due or will be due within one year of the June 30, 2013 balance sheet date. As a result, we expect to amortize all of the remaining discounts during the fiscal year ending March 31, 2014.
During the three months ended June 30, 2013, we recorded interest expense of $89,260 related to the contractual interest rates of our convertible notes and interest expense of $2,033 related to the amortization of debt discounts on the convertible notes for a total of $91,293.
Convertible notes payable consisted of the following at March 31, 2013:
Principal | Unamortized Discount |
Net Amount |
Accrued Interest |
|||||||||||||
Amended and Restated Series A 12% Convertible Notes, past due | $ | 885,000 | $ | – | $ | 885,000 | $ | 398,250 | ||||||||
2008 10% Convertible Notes, past due | 25,000 | – | 25,000 | 15,417 | ||||||||||||
December 2006 10% Convertible Notes, past due | 17,000 | – | 17,000 | 15,888 | ||||||||||||
October & November 2009 10% Convertible Notes | 50,000 | (389 | ) | 49,611 | 20,000 | |||||||||||
April 2010 10% Convertible Note | 75,000 | (3,895 | ) | 71,105 | 23,938 | |||||||||||
September 2010 10% Convertible Notes, past due | 308,100 | – | 308,100 | 52,393 | ||||||||||||
April 2011 10% Convertible Notes, past due | 400,400 | – | 400,400 | 100,100 | ||||||||||||
July and August 2011 10% Convertible Notes, $257,656 past due | 357,655 | – | 357,655 | 68,704 | ||||||||||||
September 2011 Convertible Notes, past due | 178,760 | – | 178,760 | – | ||||||||||||
Law Firm Note | 75,000 | – | 75,000 | 3,854 | ||||||||||||
Total – Convertible Notes | $ | 2,371,915 | $ | (4,284 | ) | $ | 2,367,631 | $ | 698,544 |
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated 12% Series A Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of certain promissory notes previously issued by the Company (“Amended Series A 10% Convertible Notes” or the "Prior Notes"), and all amendments to the Prior Notes.
The Amended and Restated Notes, in the principal amount of $900,000 matured on December 31, 2010. In connection with the restructuring we paid $54,001 of accrued and default interest through the date of the restructuring, liquidated damages of $205,000 and $54,003 of prepaid interest through the expiration date in the aggregate amount of $313,004 through the issuance of units ("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of one share of our common stock and one common stock purchase warrant to purchase one share of our common stock at a fixed exercise price of $0.20 per share as prescribed in the Amended and Restated Note Agreement. The noteholders have antidilution price protection on the Amended and Restated Notes.
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In addition to the extension of the expiration date of the Amended and Restated Notes to December 31, 2010, we agreed to increase the annual interest rate from ten percent to twelve percent. We also agreed to change the exercise prices on all of the warrants held by the noteholders to $0.20 per share, to change certain formerly contingent warrants to non-contingent warrants and to extend the expiration date of their warrants to February 2016.
As of December 31, 2010, the Amended and Restated Notes matured and as of March 31, 2013 remain in default. We are accruing interest at the revised default rate of 20% following the expiration date of December 31, 2010.
During the fiscal year ended March 31, 2013, the holders of $15,000 of the Amended and Restated Notes converted their principal and related accrued interest into common stock per the conversion formula.
We have begun discussions with the noteholders regarding an extension to the notes but there can be no assurance that we will be able to do so on terms that we deem acceptable or at all. We are recording interest at the default rate of 20%.
DECEMBER 2006 10% CONVERTIBLE NOTES
At June 30, 2013, one note representing $17,000 of the December 2006 10% Notes remained outstanding and in default. This note is convertible into our common stock at $0.17 per share. We are recording interest at the default rate of 15%.
2008 10% CONVERTIBLE NOTES
One 2008 10% Convertible Note in the amount of $25,000 which matured in January 2010 remained outstanding at June 30, 2013. This note is convertible into our common stock at $0.50 per share. We are recording interest at the default rate of 15%.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale to accredited investors of 10% convertible notes ("October & November 2009 10% Convertible Notes"). The October & November 2009 10% Convertible Notes matured at various dates between April 2011 and May 2011 and are convertible into our common stock at a fixed conversion price of $0.25 per share prior to maturity. The investors also received matching three year warrants to purchase unregistered shares of our common stock at a price of $0.25 per share. We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. We are amortizing this discount using the effective interest method over the term of the notes.
Deferred financing costs of $20,250 incurred in connection with this financing were issued in the form of a convertible note with warrants on the same terms as those received by the investors. We capitalized the $20,250 of deferred financing costs and amortized them over the term of the notes using the effective interest method.
Prior to March 31, 2012, $355,000 of the October and November 2009 financing had been converted to common stock. On March 31, 2012, we agreed to extend the expiration date and to change the exercise price of certain warrants of one of the note holders by two years in exchange for the extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same two year period. We recorded a charge of $77,265 relating to this modification.
In July 2012, we issued 461,409 shares of common stock to the holder of the $25,000 note in exchange for the value of the principal and related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and one-half of a stock purchase warrant on June 29, 2012 (see Note 6). The 461,409 share issuance was priced based on 80% of the trailing five day average before issuance to be consistent with the equity unit structure. As part of that structure, the noteholder also received seven year warrants to purchase 230,705 share of common stock at a price of $0.107 per share. The $16,149 value of the warrant was calculated using the binomial lattice valuation methodology. We recorded a loss on conversion of $45,796 on the conversions in the quarter ended September 30, 2012.
We are recording interest at the default rate of 15%.
APRIL 2010 10% CONVERTIBLE NOTE
In April 2010, we raised $75,000 from the sale to an accredited investor of a 10% convertible note. The convertible note matured in October 2011 and is convertible into our common stock at a fixed conversion price of $0.25 per share prior to maturity. The investor also received three year warrants to purchase 300,000 unregistered shares of our common stock at a price of $0.25 per share.
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We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. We amortized this discount using the effective interest method over the term of the note.
On March 31, 2012, we agreed to extend the expiration date and to change the exercise price of certain warrants of the note holder by two years in exchange for his extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note by that same two year period. We recorded a charge of $77,265 relating to this modification in the quarter ended March 31, 2012.
SEPTEMBER 2010 10% CONVERTIBLE NOTES
On September 3, 2010, we entered into a Subscription Agreement with three accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial closing under the Subscription Agreement resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $743,600, (ii) five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of $0.31125 per share, and (iii) five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of $0.43575 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on September 3, 2011. The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.30 nor less than $0.20. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
There were no conversions on the September 2010 10% Convertible Notes during the three months ended June 30, 2013. We are recording interest at the default rate of 15%.
APRIL 2011 10% CONVERTIBLE NOTES
In April 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $385,000. The closing under the Subscription Agreement resulted in the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of $385,000, (ii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.125 per share, and (iii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.175 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on April 1, 2012. The aggregate gross cash proceeds to us were $350,000, the balance of the principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.20 nor less than $0.10. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
In addition, we issued (i) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.125 per share, and (ii) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.175 per share to the Purchasers. These warrants were issued as an antidilution adjustment under certain common stock purchase warrants held by the Purchasers that were acquired from us in September 2010.
We are recording interest at the default rate of 15%.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised $357,656 in 10% convertible notes. Those notes had a fixed conversion price of $0.09 per share and carried an interest rate of 10%. The convertible notes matured in July and August 2012. We also issued those investors five year warrants to purchase 3,973,957 shares of common stock at $0.125 per share.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a $257,926 discount against the principal of the notes. We amortized this discount using the effective interest method over the term of the note.
Effective July 14, 2012, holders of three notes totaling $100,000 agreed to extend the expiration date of their notes to July 13, 2013. Subsequent to June 30, 2013, the holders of the three notes agreed to extend their notes to July 16, 2014.
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At June 30, 2013, the outstanding principal balance was $357,655, of which $257,655 was in default. Following the expiration of the maturity dates on the $257,655 of notes that are now in default, we began to accrue interest at the default interest rate of 15%.
SEPTEMBER 2011 CONVERTIBLE NOTES
On September 23, 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $253,760. The warrants carried a five-year term to purchase an aggregate of 3,625,143 shares of our common stock at an exercise price of $0.10 per share. The convertible promissory notes do not bear an interest rate and mature on September 23, 2012. The aggregate net cash proceeds to us were $175,000, the balance of the principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock at a price per share equal to $0.07. Subject to adjustments as described in the notes, the conversion price may not be more than $0.07. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a $168,804 discount against the principal of the notes. We amortized this discount using the effective interest method over the term of the note.
The following conversions of the September 2011 Convertible Notes have taken place during the fiscal years ended March 31, 2013 and 2012:
Fiscal Year Ended March 31, 2013 |
Fiscal Year Ended March 31, 2012 |
|||||||
Principal converted | $ | 60,000 | $ | 15,000 | ||||
During the three months ended June 30, 2013, $156,500 of the September 2011 Convertible Notes were converted into our common stock per the conversion formulae in the notes.
At June 30, 2013, the outstanding principal balance was in default and there was no accrued interest as these notes do not bear interest.
LAW FIRM NOTE NUMBER 1
On March 22, 2012, we entered into a Promissory Note with our corporate law firm for the amount of $75,000, which represented the majority of the amount we owed to that firm. The Promissory Note originally had a maturity date of December 31, 2012 and bears interest at five percent per annum. The note is convertible at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date prior to conversion with a floor price on such conversions of $0.08 per share. This ability of the holder to convert became exercisable upon the amendment of the Articles of Incorporation increasing the authorized shares of our common stock to a number greater than 250,000,000. As that increase in the authorized number of shares of our common stock was approved by our stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June 30, 2012. During the quarter ended June 30, 2013, the parties agreed to extend the Maturity Date of the Note to October 1, 2013.
LAW FIRM NOTE NUMBER 2
On June 4, 2013, we entered into a Promissory Note with our corporate law firm for the amount of $47,000, which represented approximately 50% of the amount we owed to that firm for services in 2012. The Promissory Note has a maturity date of October 1, 2014 and bears interest at five percent per annum. The note is convertible at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date prior to conversion with a floor price on such conversions of $0.07 per share.
NOTE 6. EQUITY TRANSACTIONS
In May 2013, we issued to a scientific advisory board member and a scientific consultant a three year option to purchase 125,000 shares of our common stock at a price of $0.11 per share.
In June 2013, we completed a unit subscription agreement with three accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased $128,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a price per share of $0.081 and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the Subscription Amount divided by (b) $0.081 (the "Warrant Shares") at an exercise price of $0.121 per Warrant Share. This resulted in the issuance of 1,580,248 shares of Common Stock and 790,124 Warrant Shares.
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In June 2013, we issued to our CEO the remaining 3,400,000 shares under his restricted share grant, all of which were vested.
During the three months ended June 30 2013, we issued 3,448,337 shares of restricted common stock to the holders of three notes issued by the Company in exchange for the partial conversion of principal and interest in an aggregate amount of $246,500 at an average conversion price of $0.07 per share.
During the three months ended June 30, 2013, we issued 222,734 shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $0.10 per share in payment for legal services valued at $21,750 based on the value of the services provided.
NOTE 7. ACCRUED LIQUIDATED DAMAGES
We account for contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction agreements, and any such contingent obligations are recognized only when it is determined that it is probable that we will become obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated.
We have entered into registration payment arrangements in connection with certain financing arrangements, pursuant to which we raised an approximate aggregate amount of $2,020,000, that require us to register the shares of common stock underlying the convertible debt and warrants issued in these financing transactions. Under these agreements we are liable for liquidated damages to the investors if we fail to file and/or maintain effective registration statements covering the specified underlying shares of common stock as noted below:
• | With respect to a $1,000,000 financing agreement – damages accrue at a rate of 1% - 1.5% per month until such time as the underlying shares of common stock would have been eligible for sale under Rule 144. | |
• | With respect to financing agreements totaling $715,000 – damages accrue at a rate of 2% per month, subject to an aggregate maximum liquidated damages amount of $150,000. | |
• | With respect to equity investments totaling $305,000 – damages accrue at a rate of 2% per month until the expiration dates of warrants issued in connection with this financing, which range from December 31,2010 through February 8, 2011 and are payable in common stock. |
Since we have either failed to file, or failed to maintain the registration obligations under these agreements, as of June 30, 2013 we have accrued estimated aggregate liquidated damages of $437,800 in connection with the liquidated damage provisions of these agreements, which we believe represents our maximum exposure under these provisions. Accordingly, we do not expect to accrue any further liquidated damages in connection with these agreements. The actual amount of liquidated damages paid, if any, may differ from our estimates as it is our intention to negotiate with the investors the settlement of liquidated damages due and, as such, the ultimate amounts we may actually pay may be less than the amount currently accrued.
NOTE 8. OTHER CURRENT LIABILITIES
At June 30, 2013 and March 31, 2013, our other current liabilities were comprised of the following items:
June 30, 2013 |
March 31, 2013 |
|||||||
Accrued interest | $ | 1,127,357 | $ | 1,032,110 | ||||
Accrued legal fees | 179,465 | 179,465 | ||||||
Other | 117,964 | 155,610 | ||||||
Total other current liabilities | $ | 1,424,786 | $ | 1,367,185 |
As of the date of this report, various promissory and convertible notes payable in the aggregate principal amount of $2,155,415 (as identified in Notes 4 and 5 above) have reached maturity and are past due. We are continually reviewing other financing arrangements to retire all past due notes. At June 30, 2013, we had accrued interest in the amount of $1,076,433 associated with these defaulted notes in accrued liabilities payable (see Notes 4 and 5).
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NOTE 9. FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES" (“ASC 820”) in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories: We measure the fair value of applicable financial and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
Our fair value measurements at the June 30, 2013 reporting date are classified based on the valuation technique level noted in the table below:
Description | June 30, 2013 |
Quoted Prices in Active Markets for (Level 1) |
Significant Other Observable (Level 2) |
Significant Unobservable (Level 3) |
||||||||||||
Derivative Liabilities | $ | 2,886,257 | $ | – | $ | – | $ | 2,886,257 | ||||||||
Total Assets | $ | 2,886,257 | $ | – | $ | – | $ | 2,886,257 |
The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection with our warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
Three Months Ended June 30, 2013 | |
Risk free interest rate | 0.04% - 0.75% |
Average expected life | 0.25 – 3.2 years |
Expected volatility | 58.0% - 102.8% |
Expected dividends | None |
The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the three months ended June 30, 2013:
April 1, 2013 |
Recorded New Derivative Liabilities |
Change in estimated fair value recognized in results of operations | Reclassification of Derivative Liability to Paid in capital |
June 30, 2013 |
||||||||||||||||
Derivative liabilities | $ | 3,588,239 | $ | – | $ | (609,125 | ) | $ | (92,857 | ) | $ | 2,886,257 |
The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the three months ended June 30, 2012:
April 1, 2012 |
Recorded New Derivative Liabilities |
Change in estimated fair value recognized in results of operations | Reclassification of Derivative Liability to Paid in capital |
June 30, 2012 |
||||||||||||||||
Derivative liabilities | $ | 3,588,615 | $ | – | $ | (687,600 | ) | $ | (26,543 | ) | $ | 2,874,472 |
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NOTE 10. STOCK COMPENSATION
The following tables summarize share-based compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the three months ended June 30, 2013 and 2012:
June 30, 2013 | June 30, 2012 | |||||||
Vesting of stock options | $ | 50,387 | $ | 52,794 | ||||
Incremental fair value of option modifications | 957 | 19,838 | ||||||
Vesting expense associated with CEO restricted stock grant | 64,444 | 96,667 | ||||||
Total stock-based compensation expense | $ | 115,788 | $ | 169,299 | ||||
Basic and diluted loss per common share | $ | (0.00 | ) | $ | (0.00 | ) |
All of the stock-based compensation expense recorded during the three months ended June 30, 2013 and 2012, which totaled $115,788 and $169,299, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations. Stock-based compensation expense recorded during the three months ended June 30, 2013 had no impact on basic and diluted loss per common share and the stock-based compensation expense recorded during the three months ended June 30, 2012 also had no impact on basic and diluted loss per common share .
We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect 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 months ended June 30, 2013 was insignificant.
In the three months ended June 30, 2013, In May 2013, we granted to a scientific advisory board member and a scientific consultant a three year option to purchase 125,000 shares of our common stock at a price of $0.11 per share.
The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to stock option grants utilizing the Binomial Lattice option pricing models at, and during the three months ended June 30, 2013:
Risk free interest rate | 0.38% |
Average expected life | 3 years |
Expected volatility | 94.6% |
Expected dividends | None |
The expected volatility is based on the historic volatility. The expected life of options granted is based on the "simplified method" as described in the SEC's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical grants.
We did not issue any stock option grants in the three months ended June 30, 2012.
Options outstanding that have vested and are expected to vest as of June 30, 2013 are as follows:
Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term in Years | ||||||||||
Vested | 20,204,123 | $ | 0.28 | 3.86 | ||||||||
Expected to vest | 1,016,675 | $ | 0.25 | 7.88 | ||||||||
Total | 21,220,798 |
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A summary of stock option activity during the three months ended June 30, 2013 is presented below:
Amount | Range of Exercise Price |
Weighted Average Exercise Price |
||||||||||
Stock options outstanding at March 31, 2013 | 21,095,798 | $0.076 - $0.41 | $ | 0.28 | ||||||||
Exercised | – | – | ||||||||||
Granted | 125,000 | 0.11 | $ | 0.11 | ||||||||
Cancelled/Expired | – | – | ||||||||||
Stock options outstanding at June 30, 2013 | 21,220,798 | $0.076 - $0.41 | $ | 0.28 | ||||||||
Stock options exercisable at June 30, 2013 | 20,204,123 | $0.076 - $0.41 | $ | 0.28 |
At June 30, 2013, there was approximately $97,091 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 0.21 years.
On June 30, 2013, our stock options had a negative intrinsic value since the closing price on that date of $0.10 per share was below the weighted average exercise price of our stock options
NOTE 11. WARRANTS
A summary of warrant activity during the three months ended June 30, 2013 is presented below:
Amount | Range of Exercise Price |
Weighted Average Exercise Price |
||||||||||
Warrants outstanding at March 31, 2013 | 75,647,294 | $0.07 - $0.25 | $ | 0.11 | ||||||||
Exercised | – | – | ||||||||||
Issued | 790,124 | $ | 0.12 | $ | 0.12 | |||||||
Cancelled/Expired | – | – | ||||||||||
Warrants outstanding at June 30, 2013 | 76,437,418 | $0.07 - $0.25 | $ | 0.11 | ||||||||
Warrants exercisable at June 30, 2013 | 76,437,418 | $0.07 - $0.25 | $ | 0.11 |
The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models at, and during the three months ended June 30, 2013:
Risk free interest rate | 1.53% |
Average expected life | 7 years |
Expected volatility | 91.2% |
Expected dividends | None |
NOTE 12. DARPA CONTRACT AND RELATED REVENUE RECOGNITION
As discussed in Note 1, we entered into a government contract with DARPA on September 30, 2011 and commenced work on such contract in October 2011. Originally, only the base year (year one contract) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. Years three through five are subject to DARPA exercising their option to enter into contracts for those years.
As a result of achieving five contract milestones between October 1, 2011 and March 31, 2012, we reported $1,358,189 in contract revenue for the fiscal year ended March 31, 2012. As a result of achieving six milestones in the fiscal year ended March 31, 2013, we reported $1,230,004 in contract revenue for that fiscal year.
Originally, only the base year (year one contract covering October 1, 2011 through September 30, 2012) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. Years three through five are subject to DARPA exercising their option to enter into contracts for those years.
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In the quarter ended June 30, 2013, we invoiced the US Government for the twelfth milestone under our DARPA contract in the amount of $195,596 and received that payment. The details of that milestone were as follows:
Milestone 2.3.2.2 – Formulate initial design based on work from previous phase. Begin to build and test selected instrument design and tubing sets. The milestone payment was $195,596. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that we were able to build and test selected instrument design and tubing sets. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
In the quarter ended June 30, 2012, we invoiced the US Government for the sixth milestone under our DARPA contract in the amount of $216,747 and received that payment. The details of that milestone were as follows:
Milestone 2.2.2.3 - Perform preliminary quantitative real time PCR to measure viral load, and specific DNA or RNA targets. The milestone payment was $216,747. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that we were able to measure viral load of one or more targets as part of our submission for approval. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
In a related matter, DARPA recently awarded a related contract for $22,830,840 to Battelle Memorial Institute (“Battelle”) to be the systems integrator for the various components being developed under the original contract, including our two components of the project. We agreed to become a subcontractor to Battelle under that systems integrator contract. That subcontract will be under a time and materials basis and we expect to begin generating revenues under the subcontract during the fiscal year ending March 31, 2014. We did not record any revenue from that subcontract in the three months ended June 30, 2013. Our expected revenue from the subcontract will be at the discretion of Battelle.
We have not placed a reserve for doubtful accounts on receivables under our DARPA contract since they represent a credit risk related to the U.S. government.
NOTE 13. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
From time to time, claims are made against us 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 us 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 our results of operations for that period or future periods. Other than as mentioned here, we are not presently a party to any pending or threatened legal proceedings.
On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands company ("Gemini"), filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012 (the "Complaint"). In the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's common stock. The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to Gemini on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal and interest under the note into shares of the Company's common stock. The Complaint also alleges that the Company failed to issue shares upon the presentation of an exercise notice under a warrant originally issued to Gemini on November 22, 2010. The lawsuit also alleges that the Company should have issued shares pursuant to the exercise of a warrant issued in 2009. The Company believes that it has defenses to the claims asserted and it continues to vigorously defend the lawsuit, which is in the late discovery stage. No trial date has yet been set. There can be no assurances, however, that the litigation will be decided in the Company's favor as to all, or any part, of Gemini's Complaint. An adverse decision in the litigation could have an adverse effect on the Company's operations and could be dilutive to the Company's shareholders.
LEASES
We currently rent approximately 2,300 square feet of executive office space at 8910 University Center Lane, Suite 660, San Diego, CA 92122 at the rate of $6,475 per month on a four year lease that expires in September 2013. We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $2,917 per month on a two year lease that expires in October 2014.
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NOTE 14. SUBSEQUENT EVENTS
Management has evaluated events subsequent to June 30, 2013 through the date that the accompanying condensed consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
In July 2013, we invoiced DARPA for milestones 13 and 14 under our contract for a total of $404,362 and collected that amount.
In July 2013, we borrowed $400,000 from two of our directors under 90 day notes bearing 10% interest (the “Notes”). If we do not pay back those loans by October 9, 2013, then the notes will bear interest at a penalty rate of 12% and the noteholders will have the right at their discretion (i) to convert their principal and accrued interest into shares of common stock at $0.088 per share (the “Conversion Price”) and (ii) receive warrants to purchase common stock equal to 50% of the principal converted under the Notes, with an exercise price of $0.132 per share. That potential conversion price and warrant exercise price were based on the same pricing mechanism that we have used in prior equity unit financings since March 2012 (see Note 6) which are based on 80% of the then current market price of our common stock and with the warrant exercise price based on 120% of the same then current market price. We have reserved 6,931,818 shares of common stock to support the conversion in full of the Notes and accrued interest as well as the exercise in full of the warrants (should such conversion and/or issuance occur).
Subsequent to June 30, 2013, we issued 2,795,367 shares of restricted common stock to the holders of five notes issued by the Company in exchange for the partial conversion of principal and interest in an aggregate amount of $173,960 at an average conversion price of $0.06 per share.
Subsequent to June 30, 2013, our compensation committee approved the issuance of four stock option grants to four of our executives. The options carried an exercise price of $0.10 per share, have a ten year life and vest over the following schedule: 25% on July 1, 2014, 25% on July 1, 2015, 25% on July 1, 2016 and 25% on July 1, 2017. The numbers of shares underlying each of the stock option grants were as follows: 2,000,000 shares to our chief executive officer and 500,000 shares each to our president, chief science officer and chief financial officer.
Subsequent to June 30, 2013, we invoiced Battelle for $20,340 under our subcontract.
In July 2013, we issued 514,453 shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $0.11 per share in payment for legal and internal controls services valued at $54,256 based on the value of the services provided.
In August 2013, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased $100,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a price per share of $0.111 and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the Subscription Amount divided by (b) $0.111 (the "Warrant Shares") at an exercise price of $0.167 per Warrant Share. This resulted in the issuance of 900,901 shares of Common Stock and 450,451 Warrant Shares.
In August 2013, 13 warrant holders exercised 6,274,394 warrants to receive 3,248,601 shares in cashless transactions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our 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-Q. 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-Q 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. ("we", "us" or "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-Q. Such potential risks and uncertainties include, without limitation, completion of our capital-raising activities, FDA approval of our products, other regulations, patent protection of our proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological change, and other risk factors detailed herein and in other of our filings with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons actual results could differ from those projected in such forward-looking statements.
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THE COMPANY
Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") is a medical device company focused on creating innovative devices that address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles from the entire circulatory system without loss of essential blood components.
In June 2013, the U.S. Food and Drug Administration ("FDA") approved our Investigational Device Exemption ("IDE") application to initiate a ten patient human clinical trial in one location in the United States. Successful outcomes of that human trial as well as at least one follow-on human trial will be required by the FDA in order to commercialize our products in the US. The regulatory agencies of certain foreign countries where we intend to sell this device will also require one or more human clinical trials.
Some of our patents may expire before we receive FDA approval to market our products in the United States or we receive approval to market our products in a foreign country. However, we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology.
In prior periods, Aethlon was classified as a development stage enterprise under accounting principles generally accepted in the United States of America ("GAAP") as it had not generated revenues from its planned principal operations. In the fiscal year ended March 31, 2012, we began to generate revenues from a government contract and have emerged from the development stage.
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, 100 F Street, N.E., 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. Our headquarters are located at 8910 University Center Lane, Suite 660, San Diego, CA 92122. Our phone number at that address is (858) 459-7800. Our Web site is http://www.aethlonmedical.com.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2013 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2012
Revenues
We recorded government contract revenue of $195,596 in the three months ended June 30, 2013 compared to $216,747 in the three months ended June 30, 2012. This revenue arose from work performed under our government contract. On September 30, 2011, we entered into a contract with the United States of America, issued by SPAWAR Systems Center Pacific, pursuant to a contract award from the Defense Advanced Research Projects Agency (“DARPA”). Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers.
The award from DARPA is a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years, including payments of up to $1,975,047 in the first year. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract, we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts. Originally, only the base year (year one contract covering October 1, 2011 through September 30, 2012) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. Years three through five are subject to DARPA exercising their option to enter into contracts for those years.
The milestones are comprised of planning, engineering and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants under the contract. There can be no assurance that we alone, or with third party participants, will meet such milestones to the satisfaction of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues during any year of the contract term.
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Operating Expenses
Consolidated operating expenses for the three months ended June 30, 2013 were $979,394 in comparison with $1,207,553 for the comparable quarter a year ago. This decrease of $228,159, or 18.9%, was due to decreases in professional fees of $153,051 and in payroll and related expenses of $95,464, which were partially offset by an increase in general and administrative expenses of $20,356.
The $153,051 decrease in our professional fees was primarily due to a reduction in our legal expenses of $115,947, approximately $98,000 of that decrease related to the cost of the Gemini litigation in the June 2012 period with no comparable expense in the June 2013 period since the cost of the Gemini litigation was covered by insurance in the June 2013 period. We also had a reduction in our investor relations expenses of $32,038 as we ceased to have a dedicated, full-time consultant in that function and of $30,074 in scientific consulting expense due to reduced activity in our Indian trial.
The $95,464 decrease in payroll and related expenses was primarily due to a reduction in stock-based compensation of $53,511 and a reduction in cash-based compensation of $41,953. The decrease in stock-based compensation was due to the completion of vesting on a number of our stock options. The decrease in cash-based compensation was due to the payment of bonuses to our senior management in the 2012 period with no comparable payments in the 2013 period.
The $20,356 increase in general and administrative expenses was primarily due to a $24,773 increase in our DARPA-related general and administrative expenses, which was partially offset by a decrease of $4,417 in our non-DARPA-related general and administrative expenses.
Other (Income) Expense
Other (income) expense consists primarily of the change in the fair value of our derivative liability, other expense and interest expense. Other (income) expense for the three months ended June 30, 2013 were other income of $480,300 in comparison with other expense of $25,978 for the comparable quarter a year ago.
Change in Fair Value of Derivative Liability
Both periods include changes in the fair value of derivative liability. For the three months ended June 30, 2013, the change in the estimated fair value of derivative liability was a gain of $609,125 and for the three months ended June 30, 2012, the change in estimated fair value was a gain of $687,600.
Interest Expense
Interest expense was $106,096 for the three months ended June 30, 2013 compared to $688,645 in the corresponding prior period, a decrease of $582,549. The various components of our interest expense are shown in the following table:
Quarter Ended | Quarter Ended | |||||||||||
6/30/13 | 6/30/12 | Change | ||||||||||
Interest Expense | $ | 103,200 | $ | 192,576 | $ | (89,376 | ) | |||||
Amortization of Deferred Financing Costs | 863 | 98,051 | (97,188 | ) | ||||||||
Non-Cash Interest Expense | – | 11,846 | (11,846 | ) | ||||||||
Amortization of Note Discounts | 2,033 | 386,172 | (384,139 | ) | ||||||||
Total Interest Expense | $ | 106,096 | $ | 688,645 | $ | (582,549 | ) |
As noted in the above table, the three most significant factors in the $582,549 decrease in interest expense were (a) the $384,139 reduction in the amortization of debt discounts that was largely the result of the completion of the discount amortization on the majority of our convertible notes prior, (b) the $97,188 reduction in the amortization of deferred financing costs that was largely the result of the completion of the deferred financing cost amortization on the relevant convertible notes and notes payable prior and (c) the reduction in interest expense largely due to the lower level of notes outstanding.
Other
The three months ended June 30, 2013 also contained a $22,789 loss on settlement of accrued interest and damages. The three months ended June 30, 2012 contained a $24,978 loss on debt conversion that related to the conversion of $60,185 of a note payable to equity.
Net Loss
As a result of the increased expenses noted above, we recorded a consolidated net loss of approximately $303,000 and $1,017,000 for the quarters ended June 30, 2013 and 2012, respectively.
Basic and diluted loss per common share were ($0.00) for the three month period ended June 30, 2013 compared to ($0.01) for the period ended June 30, 2012.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2013, we had a cash balance of $31,653 and a working capital deficit of $8,949,996. This compares to a cash balance of $125,274 and a working capital deficit of $9,276,618 at March 31, 2013. Between July 1, 2013 and August 11, 2013, we raised $400,000 in a loan from two of our board members, raised $100,000 in equity and billed and subsequently received $404,362 under our DARPA contract. Our cash at June 30, 2013 plus additional funds raised to date subsequent to June 30, 2013 are not sufficient to meet our funding requirements during the next twelve months. Significant additional financing must be obtained in order to provide a sufficient source of operating capital and to allow us to continue to operate as a going concern. We recently signed an agreement with a broker-dealer to raise operating capital to cover near term operating requirements and the expected costs of our US safety trial. The agreement also calls for the broker-dealer to then raise a larger financing (see note 2) to meet future growth initiatives. Any securities offered will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. The engagement agreement is on a best efforts basis and there can be no assurance that the broker-dealer can raise working capital for us on acceptable terms or at all.
We do not expect revenue from operations will be sufficient to satisfy our funding requirements in the near term, and accordingly, our ability to continue operations and meet our cash obligations as they become due and payable is expected to depend for at least the next several years on our ability to sell securities, borrow funds or a combination thereof. Future capital requirements will depend upon many factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, competing technological and market developments, as well as our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing negative cash flows and net losses for the foreseeable future.
Should the U.S. Government elect not to exercise the options for years three through five of our DARPA contract, the effects may be material to us. The loss of revenues from the DARPA contract would have a material impact on our revenues, operating cash flows and liquidity.
DARPA recently awarded a related contract to Battelle Memorial Institute (“Battelle”) to be the systems integrator for the various components being developed under the original contract, including our two components of the project. We agreed to become a subcontractor to Battelle under that systems integrator contract. That subcontract will be under a cost plus basis and we expect to begin generating revenues under the subcontract during the fiscal year ending March 31, 2014. Any revenues we derive under the subcontract will be at the direction of Battelle.
Beyond the immediate future, we currently believe that the following four areas may generate revenue for us:
(1) | Developing future products using the Aethlon ADAPTTM system with drug industry collaborators. Revenues in this area could come from product development fees, fees from research, regulatory and manufacturing support or from downstream royalties; |
(2) | Applying for and winning additional U.S. Government grant or contract income; |
(3) | Licensing or selling our ELLSA research diagnostic tools that identify and quantify exosomes; and |
(4) | Deriving revenues from a test market evaluation for the Hemopurifier® in India following the successful results to date in our Hepatitis-C-oriented clinical trial currently being conducted in that country. We will need to establish one or more distributors to supply Hemopurifiers® to the Indian market. |
Cash Flows
Cash flows from operating, investing and financing activities, as reflected in the accompanying Condensed Consolidated Statements of Cash Flows, are summarized as follows (in thousands):
(In thousands) For the three months ended |
||||||||
June 30, 2013 |
June 30, 2012 |
|||||||
Cash (used in) provided by: | ||||||||
Operating activities | $ | (222 | ) | $ | (320 | ) | ||
Investing activities | – | – | ||||||
Financing activities | 128 | 772 | ||||||
Net increase (decrease) in cash | $ | (94 | ) | $ | 452 |
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NET CASH FROM OPERATING ACTIVITIES. We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was approximately $222,000 in the three months ended June 30, 2013 compared to net cash used in operating activities of approximately $320,000 in the three months ended June 30, 2012, a decrease of $98,000. The $98,000 decrease was primarily due to our reduced operating loss.
NET CASH FROM INVESTING ACTIVITIES. We did not have any investing activities during either period.
NET CASH FROM FINANCING ACTIVITIES. Net cash generated from financing activities decreased from approximately $772,000 in the three months ended June 30, 2012 to $128,000 in the three months ended June 30, 2013. The primary financing activity in both periods was from the issuance of common stock. We raised $128,000 from the sale of common stock in the three months ended June 30, 2013 compared to $802,000 in the three months ended June 30, 2012.
An increase in working capital during the three months ended June 30, 2012 in the amount of approximately $327,000 changed our negative working capital position to approximately ($8,950,000) at June 30, 2013 from a negative working capital of approximately ($9,277,000) at March 31, 2013. The most significant factors in the increase in working capital noted above were a decrease in derivative liability of approximately $702,000, a reduction in our convertible notes payable of approximately $107,000 and a reduction in our notes payable of approximately $86,000. Those liability reductions were partially offset by the collection of approximately $209,000 in accounts receivable, a decrease of approximately $94,000 in cash and an increase of approximately $150,000 in our accounts payable.
At the date of this filing, we plan to invest significantly into purchases of our raw materials and into our contract manufacturing arrangement subject to successfully raising additional capital.
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, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
We believe that the estimates and assumptions that are most important to the portrayal of our 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 revenue recognition, measurement of stock purchase warrants issued with notes payable, beneficial conversion feature of convertible notes payable, impairment of intangible assets and long lived assets, stock compensation, and the classification of warrant obligations, and evaluation of contingencies. 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 our future financial condition or results of operations.
There have been no changes to our critical accounting policies as disclosed in our Form 10-K for the year ended March 31, 2013.
OFF-BALANCE SHEET ARRANGEMENTS
We have no obligations required to be disclosed herein as off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a Smaller Reporting Company as defined by rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
ITEM 4. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of a date as of the end of the period covered by this Quarterly Report.
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Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, claims are made against us 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 us 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 our results of operations for that period or future periods. Other than as set forth here, we are not presently a party to any pending or threatened legal proceedings.
On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands company ("Gemini"), filed a complaint against the Company in the Supreme Court of the State of New York, County of New York, entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012 (the "Complaint"). In the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's common stock. The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to Gemini on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal and interest under the note into shares of the Company's common stock. The Complaint also alleges that the Company failed to issue shares upon the presentation of an exercise notice under a warrant originally issued to Gemini on November 22, 2010. The lawsuit also alleges that the Company should have issued shares pursuant to the exercise of a warrant issued in 2009. The Company believes that it has defenses to the claims asserted and it continues to vigorously defend the lawsuit, which is in the late discovery stage. No trial date has yet been set. There can be no assurances, however, that the litigation will be decided in the Company's favor as to all, or any part, of Gemini's Complaint. An adverse decision in the litigation could have an adverse effect on the Company's operations and could be dilutive to the Company's shareholders.
ITEM 1A. RISK FACTORS.
As a Smaller Reporting Company as defined by rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended June 30, 2013, we issued the following securities which were not registered under the Securities Act of 1933, as amended, and have not been included previously in a Current Report on Form 8-K. We did not employ any form of general solicitation or advertising in connection with the offer and sale of the securities described below. In addition, we believe the purchasers of the securities are "ACCREDITED INVESTORS" for the purpose of Rule 501 of the Securities Act. For these reasons, among others, the offer and sale of the following securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D promulgated by the SEC under the Securities Act:
In May 2013, we issued to a scientific advisory board member and a scientific consultant a three year option to purchase 125,000 shares of our common stock at a price of $0.11 per share.
In June 2013, we completed a unit subscription agreement with three accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased $128,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a price per share of $0.081 and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the Subscription Amount divided by (b) $0.081 (the "Warrant Shares") at an exercise price of $0.121 per Warrant Share. This resulted in the issuance of 1,580,248 shares of Common Stock and 790,124 Warrant Shares.
In June 2013, we issued to our CEO the remaining 3,400,000 shares under his restricted share grant, all of which were vested.
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During the three months ended June 30, 2013, we issued 3,675,278 shares of restricted common stock to the holders of three notes issued by the Company in exchange for the partial conversion of principal and interest in an aggregate amount of $246,500 at an average conversion price of $0.07 per share.
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 $2,311,916 have reached maturity and are past due. We are continually reviewing other financing arrangements to retire all past due notes. At June 30, 2013, we had accrued interest in the amount of $1,076,433 associated with these notes payable.
ITEM 4. MINE SAFETY DISCLOSURES.
We have no disclosure applicable to this item.
ITEM 5. OTHER INFORMATION.
Not applicable
ITEM 6. EXHIBITS.
(a) Exhibits. The following documents are filed as part of this report:
3.1 | Articles of Incorporation of Aethlon Medical, Inc., as amended (1) |
3.2 | Bylaws of Aethlon Medical, Inc., as amended (2) |
4.1 | Form of Common Stock Purchase Warrant dated June 14, 2013 (*) |
10.1 | Form of Unit Subscription Agreement Warrant dated June 14, 2013 (*) |
31.1 | Certification of Principal Executive Officer pursuant to Securities Exchange Act rules 13a- 14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002* |
31.2 | Certification of Principal Financial Officer pursuant to Securities Exchange Act rules 13a- 14(a) and 15d-14(a) as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002* |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* |
101 | Interactive Data Files |
101.INS | XBRL Instance Document |
101.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
101.LAB | XBRL Label Linkbase Document |
101.PRE | XBRL Presentation Linkbase Document |
* Filed herewith.
(1) | Incorporated by reference to the filing of such exhibit with the Company's Annual Report on Form 10-K for the year ended March 31, 2012. |
(2) | Incorporated by reference to the filing of such exhibit with the Company’s Annual Report on Form 10-K dated for the year ended March 31, 2013. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
AETHLON MEDICAL, INC. | |||
Date: August 13, 2013 | By: | /s/ JAMES B. FRAKES | |
JAMES B. FRAKES | |||
CHIEF FINANCIAL OFFICER | |||
CHIEF ACCOUNTING OFFICER | |||
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