SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
0
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _____to_____
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
---------------------
(Exact name of registrant as specified in its charter)
NEVADA 13-3632859
---------------------- ----------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7825 FAY AVENUE, SUITE 200, LA JOLLA, CA 92037
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(858) 456-5777
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X .
The number of shares of common stock of the registrant outstanding as of
February 11, 2003 was 5,921,052.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at December 31, 2002 (unaudited) and
March 31, 2002
Condensed Consolidated Statements of Operations (unaudited) for the three and
nine months ended December 31, 2002 and 2001 and for the period January 31, 1984
(Inception) through December 31, 2002
Condensed Consolidated Statements of Cash Flows (unaudited) for the nine months
ended December 31, 2002 and 2001 and for the period January 31, 1984
(Inception) through December 31, 2002
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
2
PART I.
FINANCIAL INFORMATION
All references to "us", "we", "Aethlon", "Aethlon Medical", or "the
Company" refer to Aethlon Medical, Inc., its predecessors and its subsidiaries.
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2002 2002
(Unaudited)
------------- -------------
ASSETS
Current Assets
Cash $ 14,446 $ 10,667
Prepaid expenses 23,771 140,788
Other current assets 2,150 --
------------- -------------
40,367 151,455
Furniture and Equipment, net 22,048 37,182
Patents and Patents Pending, net 592,198 560,790
Employment Contract, net 126,945 222,156
Other Assets 1,955 1,955
------------- -------------
$ 783,513 $ 973,538
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued
liabilities $ 1,202,006 $ 1,160,219
Due to related parties 1,344,530 1,073,355
Notes payable 487,500 572,500
Convertible notes payable 680,000 365,000
------------- -------------
3,714,036 3,171,074
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per
share; 25,000,000 shares authorized;
5,633,052 and 5,170,697 shares issued
and outstanding at December 31, 2002
and March 31, 2002, respectively 5,633 5,171
Additional paid-in capital 8,020,775 7,391,382
Stock options and warrants 3,660,596 3,571,310
Deficit accumulated during
development stage (14,617,527) (13,165,399)
------------- -------------
(2,930,523) (2,197,536)
------------- -------------
$ 783,513 $ 973,538
============= =============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended December 31, 2002 and 2001 and For the
Period January 31, 1984 (Inception) Through December 31, 2002
(Unaudited)
JANUARY 31,
1984
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS (INCEPTION)
ENDED ENDED ENDED ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2002 2001 2002 2001 2002
------------- ------------- ------------- ------------- -------------
REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research and development -- -- -- -- 35,810
------------- ------------- ------------- ------------- -------------
-- -- -- -- 1,533,568
EXPENSES
Personnel 103,635 147,594 401,018 411,799 5,005,431
Professional fees 165,654 176,539 500,823 587,451 3,165,714
Rent 15,921 14,502 44,726 52,844 720,299
Depreciation 5,351 5,465 16,332 17,860 190,780
Amortization of goodwill -- -- -- -- 99,692
Other amortization 31,737 33,779 102,565 142,978 451,556
Impairment of goodwill -- -- -- -- 897,227
Other expenses 33,172 26,574 83,829 125,052 1,702,263
------------- ------------- ------------- ------------- -------------
355,470 404,453 1,149,293 1,337,984 12,232,961
OTHER EXPENSE (INCOME)
Interest and other debt expenses 50,849 216,169 304,493 564,341 3,799,599
Other charge -- -- -- 97,550 211,758
Other income -- -- (1,616) -- (75,767)
Interest income (42) -- (42) -- (17,457)
------------- ------------- ------------- ------------- -------------
50,807 216,169 302,835 661,891 3,918,133
------------- ------------- ------------- ------------- -------------
NET LOSS BEFORE PROVISION
FOR INCOME TAXES (406,277) (620,622) (1,452,128) (1,999,875) (14,617,527)
PROVISION FOR INCOME TAXES -- -- -- -- --
------------- ------------- ------------- ------------- -------------
NET LOSS ($ 406,277) ($ 620,622) ($ 1,452,128) ($ 1,999,875) ($14,617,527)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE ($ 0.07) ($ 0.17) ($ 0.27) ($ 0.55)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 5,586,904 3,756,327 5,433,046 3,614,506
============= ============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended December 31, 2002 and 2001 and For the Period January
31, 1984 (Inception) Through December 31, 2002
(Unaudited)
January 31,
1984
Nine Months Nine Months (Inception)
Ended Ended Through
December 31, December 31, December 31,
2002 2001 2002
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,452,128) $ (1,999,875) $(14,617,527)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 118,897 160,839 742,029
Gain on sale of furniture and equipment -- -- (13,065)
Interest and debt expenses related to
warrants (24,714) 227,291 2,590,022
Common stock, warrants and options issued
for services 159,000 236,170 2,030,434
Beneficial conversion feature of convertible
notes payable 245,700 128,000 580,700
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Accounts receivable -- 4,689 --
Prepaid expenses 117,017 6,934 137,766
Other assets (2,150) -- (4,105)
Accounts payable and accrued liabilities 179,442 311,088 1,339,661
Due to related parties 296,175 152,169 1,369,530
------------- ------------- -------------
Net cash used in operating activities (362,761) (772,695) (4,730,105)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of furniture and equipment (1,197) (30,804) (209,383)
Acquisition of patents and patents pending (38,763) (40,471) (342,562)
Proceeds from sale of furniture and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------- ------------- -------------
Net cash used in investing activities (39,960) (71,275) (524,152)
(continued)
5
The accompanying notes are an integral part of these condensed consolidated financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 2002 and 2001 and For the Period January
31, 1984 (Inception) Through December 31, 2002
(Unaudited)
January 31,
1984
Nine Months Nine Months (Inception)
Ended Ended Through
December 31, December 31, December 31,
2002 2001 2002
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ 340,000 $ 128,000 $ 2,278,000
Principal payments of notes payable (35,000) -- (35,000)
Net proceeds from issuance of common stock 101,500 711,764 3,025,703
------------- ------------- -------------
Net cash provided by financing activities 406,500 839,764 5,268,703
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH 3,779 (4,206) 14,446
CASH - beginning of period 10,667 6,058 --
------------- ------------- -------------
CASH - end of period $ 14,446 $ 1,852 $ 14,446
============= ============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. (the "Company") engages in the research and development of
a medical device known as the Hemopurifier(TM) that removes harmful substances
from the blood. The Company is in the development stage on the Hemopurifier and
significant research and testing are still needed to reach commercial viability.
Any resulting medical device or process will require approval by the U.S. Food
and Drug Administration ("FDA"), and the Company has not yet begun efforts to
obtain FDA approval on its current lead product candidate, which may take
several years. Since many of the Company's patents were issued in the 1980's,
they are scheduled to expire in the near future. Thus, such patents may expire
before FDA approval, if any, is obtained.
The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States ("GAAP"), and has not
generated revenues from its principal operations.
The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers under the symbol "AEMD".
The accompanying unaudited condensed consolidated financial statements of
Aethlon Medical, Inc. (the "Company") have been prepared in accordance with GAAP
for interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by GAAP for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month and
nine-month periods ended December 31, 2002 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2003. For further
information, refer to the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2002, which includes audited financial statements and footnotes
as of and for the years ended March 31, 2002 and 2001.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of the Company presented below is
designed to assist the reader in understanding the Company's consolidated
financial statements. Such financial statements and related notes are the
representations of Company management, who is responsible for their integrity
and objectivity. These accounting policies conform to GAAP in all material
respects, and have been consistently applied in preparing the accompanying
condensed consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
---------------------------
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its legal wholly-owned subsidiaries
Aethlon, Inc., Hemex, Inc. and Cell Activation, Inc. ("Cell") (collectively
hereinafter referred to as the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.
7
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
LOSS PER COMMON SHARE
---------------------
Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share."
Securities that could potentially dilute basic loss per share (prior to their
conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive. The
total potential common shares that have not been included in such computation
are approximately 4,150,000 at December 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
In July 2001, the FASB issued Statements No. 141, " Business Combinations "
("SFAS 141") and No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 is effective for fiscal years beginning after June 30, 2001 and
requires that all business combinations be accounted for by the purchase method.
SFAS 142 provides that all existing and newly acquired goodwill and certain
intangible assets will no longer be amortized but will be tested for impairment
at least annually and written down only when impaired. Additionally, the FASB
has recently issued Statements No. 143, " Accounting for Asset Retirement
Obligations " ("SFAS 143") and No. 144, " Accounting for the Impairment or
Disposal of Long-Lived Assets " ("SFAS 144"). SFAS 143 addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs, and is
effective for financial statements issued for fiscal years beginning after June
15, 2002. For the three-month period ended June 30, 2002, the Company adopted
SFAS 141, 142 and 144. There was no significant effect on the Company's June 30,
2002 financial statements. Management does not expect that the requirements of
SFAS 143 will have a significant impact on the Company's future financial
statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure an amendment of FASB Statement No. 123,
"which is effective for fiscal years beginning after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. Management has not determined the
effect, if any, of SFAS 148 on the Company's future financial statements.
RECLASSIFICATIONS
-----------------
Certain reclassifications have been made to the December 31, 2001 financial
statement presentation to correspond to the December 31, 2002 format.
8
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
NOTE 3. CONVERTIBLE NOTES PAYABLE
CONVERTIBLE NOTES
-----------------
On July 2, 2002, the Company issued a convertible note in the amount of $50,000
to an investor bearing interest at 10% per annum, with principal and interest
thereon due January 3, 2003. On August 9, 2002, the Company issued a convertible
note in the amount of $50,000 to an investor bearing interest at 10% per annum,
with principal and interest thereon due February 10, 2003. On August 15, 2002,
the Company issued a convertible note in the amount of $50,000 to an investor
bearing interest at 10% per annum, with principal and interest thereon due
February 16, 2003. All three notes may be converted to common stock of the
Company at any time at the option of the respective holder at the conversion
price of $0.50 per share. A beneficial conversion feature approximating $150,000
was recorded during the quarter ended September 30, 2002. In the three months
ended December 31, 2002, the Company issued five convertible notes totaling
$45,000 with the right of the noteholders to convert to common stock at a
conversion price of $0.50 per share. During the quarter, an existing
noteholder increased its advances to the Company by $40,000 to a total of
$140,000. In consideration, the Company granted the noteholder a warrant
to purchase 580,000 shares of common stock at a price of $0.25 per share
and a security interest in certain assets of the Company. The new note
bears interest at 10% per annum, with principal and interest thereon due
April 30, 2003. A beneficial conversion feature approximating $15,700 was
recorded during the quarter ended December 31, 2002.
The Company is currently in default on approximately $857,500 of amounts owed
under various notes payable and is currently seeking other financing
arrangements to retire all past due notes.
NOTE 4. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business. The Company has
experienced a loss of approximately $15 million for the period from January 31,
1984 (Inception) through December 31, 2002. The Company has not generated
significant revenue or any profit from operations since inception. A substantial
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
Such factors indicate that the Company may be unable to continue as a going
concern for a reasonable period of time. Management is in discussions with
potential investors to pursue additional capital infusions into the Company,
which management believes are necessary at least until such time that the
Company generates sufficient revenues and achieves profitability and positive
cash flow.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability of assets that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to obtain additional financing as
may be required, and generate sufficient revenue and operating cash flow to meet
its obligations on a timely basis.
NOTE 5. COMMITMENTS AND CONTINGENCIES
REGISTRATION RIGHTS AGREEMENTS
------------------------------
The Company is obligated under various agreements to register its common stock,
including the common stock underlying certain warrants and options. The Company
is subject to penalties for failure to register such securities, the amount of
which could be material to the Company's financial position, results of
operations and cash flows. The Company filed a registration statement on Form
SB-2 with the Securities and Exchange Commission in December 2000 to register
the necessary securities. However, such registration statement was never
declared effective. Management is currently unaware of any potential claims
related to the lack of registration and plans to file a revised registration
statement as funds to cover registration expenses become available. The Company
may incur additional charges in exchange for further waivers through the date of
an effective registration statement.
9
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002
DELINQUENT SEC FILING
---------------------
The Company's March 31, 2002 Form 10-KSB did not contain certain disclosure
items in its Executive Compensation, Security Ownership of Certain Beneficial
Owners and Management and Certain Relationships and Related Transactions. Such
sections were intended to be incorporated by reference in the Company's proxy
statement, which was not filed. The failure to file the proxy statement with the
disclosures required in Form 10-KSB constitutes non-compliance with the periodic
reporting requirements of the Securities and Exchange Act of 1934 (the "Exchange
Act") and, among other things, could result in de-listing of the Company's
common stock from the Over-the-Counter Bulletin Board ("OTCBB").
In addition, any owners of the Company's restricted securities who are otherwise
eligible to sell such securities under Rule 144 may be temporarily unable to do
so until such filing delinquency is cured. The Company intends to file an
amendment to its Annual Report on Form 10-KSB for the year ended March 31, 2002
to cure such delinquency.
NOTE 6. STOCK TRANSACTIONS
In January 2002, the Company entered into a consulting agreement under which the
consultant was granted an option to purchase up to 400,000 shares of restricted
common stock of the Company at the exercise price of $0.50 per share, expiring
January 2003. On February 12, 2002, the consultant exercised all 400,000
options. Such options were valued at approximately $562,000, using the
Black-Scholes option pricing model. In July 2002, the Company extended the
original agreement by six months to expire July 2003. As a result of extending
the agreement, the consultant received an additional option to purchase up to
200,000 shares of restricted common stock of the Company at the exercise price
of $0.50 per share. During the quarter ended September 30, 2002, the Company
issued 148,000 shares of restricted common stock in exchange for $74,000 in cash
under such agreement. Such options were valued at approximately $114,000 using
the Black-Scholes option pricing model all of which was charged to expense in
the accompanying condensed consolidated statements of operations and $57,000 is
included in prepaid expenses at September 30, 2002. $57,000 was charged to
expense in the accompanying condensed consolidated statements of operations.
In October 2002, the Company issued 52,000 shares of Restricted Common Stock in
connection with the exercise of options for cash totaling $26,000. In addition,
in November 2002, a consultant was issued 3000 shares of Restricted Common Stock
in consideration for cash of $1,500. Also in November, 2002, 69,231 shares were
issued to another consultant in consideration of services performed valued at
approximately $45,000.
NOTE 7. SUBSEQUENT EVENTS
In January and February 2003, investors purchased 288,000 shares of the
Company's Restricted Common Stock for cash totaling $80,000.
In February 2003, a complaint was filed against the Company to collect a past
due note. The plaintiff seeks repayment of past due principal and interest of
approximately $65,000. The plaintiff also asserts that the Company violated
state and federal securities laws and claims that the Company committed fraud in
the issuance of the note. While the Company admits that it borrowed money from
the plaintiff and that the note is past due, the Company disputes the
plaintiff's allegations concerning state and federal securities law violations
and fraud.
The Company has not yet answered this complaint and is seeking to settle the
lawsuit by repaying the indebtedness. The Company has accrued such amount
in the accompanying condensed consolidated financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of Aethlon Medical's financial condition and results of
operations should be read in conjunction with, and is qualified in its entirety
by the condensed consolidated financial statements and notes thereto, included
in Item 1 in this Quarterly Report on Form 10-QSB. This item contains
forward-looking statements that involve risks and uncertainties. Actual results
may differ materially from those indicated in such forward-looking statements.
FORWARD LOOKING STATEMENTS
--------------------------
All statements, other than statements of historical fact, included in this Form
10-QSB are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended ("the
Securities Act"), and Section 21E of the Exchange Act. Such forward-looking
statements involve assumptions, known and unknown risks, uncertainties and other
factors which may cause the actual results, performance, or achievements of
Aethlon Medical, Inc. ("the Company") to be materially different from any future
results, performance, or achievements expressed or implied by such forward
looking statements contained in this Form 10-QSB. Such potential risks and
uncertainties include, without limitation, completion of the Company's
capital-raising activities, FDA approval of the Company's products, other
regulations, patent protection of the Company's proprietary technology, product
liability exposure, uncertainty of market acceptance, competition, technological
change, and other risk factors detailed herein and in other of the Company's
filings with the Securities and Exchange Commission. The forward-looking
statements are made as of the date of this Form 10-QSB, and the Company assumes
no obligation to update the forward-looking statements, or to update the reasons
actual results could differ from those projected in such forward-looking
statements.
THE COMPANY
-----------
Aethlon Medical is a development stage therapeutic device company that has not
yet engaged in significant commercial activities. We are continuing to devote a
significant portion of our resources to the advancement of our research and
development efforts and are developing new treatments for the removal of
targeted viruses and other intoxicants from the blood based on our proprietary
Hemopurifier(TM) platform technology. Our main focus during fiscal 2002 was to
further advance the HIV-Hemopurifier, know as AEMD-45.
Our principal executive office is located at 7825 Fay Avenue, Suite 200, La
Jolla, California 92037. Our telephone number is 858/456-5777, and our website
is www.aethlonmedical.com.
We file annual, quarterly, special reports, proxy statements and other
information with the Securities Exchange Commission (SEC). Reports, proxy
statements and other information filed with the SEC can be inspected and copied
at the public reference facilities of the SEC at 450 Fifth Street NW,
Washington, DC 20549. Such material may also be accessed electronically by means
of the SEC's website at www.sec.gov.
Our common stock, par value $0.001 per share, is traded on the OTCBB under the
symbol "AEMD".
CRITICAL ACCOUNTING POLICIES
----------------------------
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires us 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 our most difficult, subjective or complex judgments, form the basis for
the accounting policies deemed to be most critical to us. These critical
accounting policies relate to stock purchase warrants issued with notes payable,
beneficial conversion feature of convertible notes payable, impairment of
intangible assets and long lived assets, contingencies and litigation. We
believe estimates and assumptions related to these critical accounting policies
are appropriate under the circumstances; however, should future events or
occurrences result in unanticipated consequences, there could be a material
impact on our future financial conditions or results of operations.
11
RESULTS OF OPERATIONS
---------------------
THE THREE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 2001.
OPERATING EXPENSES
------------------
Consolidated operating expenses were $355,470 for the three months ended
December 31, 2002, versus $404,453 for the comparable period ended December 31,
2001. This decrease of 12.1% in operating expenses is principally attributable
to decreased professional fees and personnel expenses due to reduced
professionals associated with strategic and financial planning activities
reduced staff.
NET LOSS
--------
We recorded a consolidated net loss of ($406,277) and ($620,622) for the
quarters ended December 31, 2002 and 2001, respectively. The decrease in net
loss of 34.5% was primarily attributable to decreased professional fees and
personnel expenses and decreased financing costs associated with warrants and
debt conversions.
Basic and diluted loss per common share were ($0.07) for the three month period
ended December 31, 2002 compared to ($0.17) for the same period ended December
31, 2001, representing a reduction in basic and diluted loss per share of 58.8%.
This reduction in loss per share was primarily attributable to the decreased
personnel, professional and financing costs, as well as the increase in the
weighted average number of shares outstanding during the three month period
ended December 31, 2002, as compared to the three month period ended December
31, 2001.
THE NINE MONTHS ENDED DECEMBER 31, 2002 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 31, 2001.
OPERATING EXPENSES
------------------
Consolidated operating expenses were $1,149,293 for the nine months ended
December 31, 2002, versus $1,337,984 for the comparable period ended December
31, 2001. This decrease of 14.1% in operating expenses is primarily attributable
to decreased professional fees, amortization and other expenses, due to
relatively fewer professionals associated with strategic and financial planning
activities as well as decreased personnel expenses due to reduced staff. .
We continue to carefully control costs and are pursuing various funding
alternatives to support our business plan going forward.
NET LOSS
--------
We recorded a consolidated net loss of ($1,452,128) and ($1,999,875) for the
nine-month periods ended December 31, 2002 and 2001, respectively. The decrease
in net loss of 27.4% was primarily attributable to decreases in professional
fees and financing costs, plus decreases in other expenses, amortization and
personnel expenses.
Basic and diluted loss per common share were ($0.27) for the nine month period
ended December 31, 2002 compared to ($0.55) for the same period ended December
31, 2001, representing a reduction in basic and diluted loss per share of 50.9%.
This reduction in loss per share was primarily attributable to the decreased
professional, financing and other costs, as well as the increase in the the
weighted average number of shares outstanding during the nine month period ended
December 31, 2002 as compared the nine month period ended December 31, 2001.
11
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
To date, we have funded our capital requirements for the current operations from
net funds received from the public and private sale of debt and equity
securities, as well as from the issuance of common stock in exchange for
services. Our cash position at December 31, 2002 was $14,446 as compared to
$10,667, at March 31, 2002, representing an increase of 35.4%.
During the nine months ended December 31, 2002, operating activities used net
cash of $362,761. We received $101,500 from the sale of common stock. In
addition, during the nine months ended December 31, 2002, we received $340,000
from notes payable issued. During the nine month period ended December 31, 2002,
net cash used in operating activities primarily consisted of net loss of
$(1,452,128). Net loss was offset by the change in other net assets (excluding
cash) of $590,484 and was increased by interest and debt expenses related to
warrants of $24,714. This change in net assets (excluding cash) was offset by -
$159,000 in common stock paid for services in lieu of cash, - $245,700 in
beneficial conversion feature of convertible notes payable, and - $118,897 in
depreciation and amortization.
Changes in current assets and current liabilities resulted in a negative working
capital position of ($3,673,669) at December 31, 2002 as compared to a negative
working capital of ($3,019,619) at March 31, 2002. Our current deficit in
working capital requires us to obtain funds in the short-term to be able to
continue in business, and in the longer term to fund research and development on
products not yet ready for market. We are seeking to fund these and other
operating needs in the next 12 months from funds to be obtained through a
corporate acquisition of or merger with another entity with greater financial
resources, or from the proceeds of additional private placements or public
offerings of debt or equity securities, or both.
Due to the our recurring losses from operations, and continued need for capital,
our independent certified public accountants have included an explanatory
paragraph in their audit report in the Company's Form 10-KSB at March 31, 2002
stating that these factors raise substantial doubt about the Company's ability
to continue as a going concern.
During the fiscal year ended March 31, 2001, we financed our operations through
the private placement of approximately $1,365,000 of notes bearing interest at
12% per annum and convertible notes in the amount of $395,000 bearing interest
at 8% per annum. During fiscal 2002, all of the 12% notes matured, increasing
the interest to 15% per annum.
In March 2002, the Company extended an offer to the 12% note holders and certain
vendors to convert past due amounts into restricted common stock and warrants to
purchase common stock of the Company. During the year ended March 31, 2002, note
holders and vendors representing liabilities in the aggregate amount of
approximately $1,020,000 converted their debt and approximately $238,000 in
additional liabilities were converted subsequent to the fiscal year ended March
31, 2002.
During the fourth quarter of fiscal year 2001, we entered into a subscription
agreement under which we received gross proceeds of approximately $856,000, of
which $712,000, net of $44,000 in issuance costs, were received during the first
half of fiscal year 2002. The proceeds were used in part to fund operating
expenses as well as to reduce existing accounts payable and related party
liabilities.
During fiscal year ended March 31, 2002, we continued to issue promissory notes
and convertible notes totaling $178,000. During the nine month period ended
December 31, 2002, we issued promissory notes and convertible notes totaling
$340,000. Additional funds in the aggregate amount of $200,000 were generated in
January and February 2002, through the exercise of an option to purchase 400,000
shares of the Company's restricted common stock by a consultant. During the
quarter ended September 30, 2002, funds totaling $74,000 were received from the
same consultant through the exercise of an option to purchase 148,000 shares of
the Company's restricted common stock. During the quarter ended December 31,
2002, funds totaling $27,500 were received from the same consultant through the
exercise of options and purchases of common stock totaling 55,000 shares of the
Company's common stock.
12
We expect to raise additional capital within the next three months to fund
research and development and other activities. Our operations to date have
consumed substantial capital without generating revenues, and we will continue
to require substantial and increasing capital funds to conduct necessary
research and development and pre-clinical and clinical testing of our
Hemopurifier products, and to market any of those products that receive
regulatory approval. We do not expect to generate revenue from operations for
the foreseeable future, and our ability to meet our cash obligations as they
become due and payable is expected to depend for at least the next several years
on our ability to sell securities, borrow funds or a combination thereof. Our
future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our
programs, the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other proprietary rights, the time
and costs involved in obtaining regulatory approvals, competing technological
and market developments, and our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other
arrangements. We expect to continue to incur increasing negative cash flows and
net losses for the foreseeable future.
Management does not believe that inflation has had or is likely to have any
material impact on the Company's limited operations.
At the date of this report, we do not have plans to purchase significant amounts
of equipment or hire significant numbers of employees prior to successfully
raising additional capital.
ITEM 3. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer/Principal
Accounting Officer (collectively, the "Certifying Officers") are responsible for
establishing and maintaining disclosure controls and procedures for the Company.
Such officers have concluded (based upon their evaluation of these controls and
procedures as of a date within 90 days of the filing of this report) that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in this report is
accumulated and communicated to the Company's management, including its
principal executive officers as appropriate, to allow timely decisions regarding
required disclosure.
The Certifying Officers also have indicated that there were no significant
changes in the Company's internal controls or other factors that could
significantly affect such controls subsequent to the date of their evaluation,
and there were no corrective actions with regard to significant deficiencies and
material weaknesses.
13
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 2003, a complaint was filed against the Company to collect a past
due note. The plaintiff seeks repayment of past due principal and interest of
approximately $65,000. The plaintiff also asserts that the Company violated
state and federal securities laws and claims that the Company committed fraud in
the issuance of the note. While the Company admits that it borrowed money from
the plaintiff and that the note is past due, the Company disputes the
plaintiff's allegations concerning state and federal securities law violations
and fraud.
The Company has not yet answered this complaint and is seeking to settle the
lawsuit by repaying the indebtedness. The Company has accrued such amount
in the accompanying condensed consolidated financial statements.
ITEM 2. CHANGES IN SECURITIES
The Company issued 462,355 unregistered shares of common stock during the nine
month period ended December 31, 2002. Such shares were not registered under the
Securities Act of 1933, as amended, in reliance upon an exemption from its
registration requirements. In January and February 2003, investors purchased
288,000 shares of the Company's Restricted Common Stock for cash totaling
$80,000.
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 $857,500 have reached maturity and are past
due. The Company is currently seeking other financing arrangements to retire all
past due notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. The following documents are filed as part of this report:
Pursuant to 18 U.S.C. ss.1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 99.1 Certification of the Chief Executive
Officer 99.2 Certification of the Chief Financial Officer
(b) Reports on Form 8-K filed during the quarter ended December 31, 2002.
None
14
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AETHLON MEDICAL, INC
Date: February 19, 2003
BY: /S/ JAMES A. JOYCE BY: /S/ EDWARD C. HALL
--------------------------- ---------------------------
JAMES A. JOYCE EDWARD C. HALL
CHAIRMAN, PRESIDENT AND CHIEF FINANCIAL OFFICER
CHIEF EXECUTIVE OFFICER
AETHLON MEDICAL, INC.
15
Certification of Chief Executive Officer
Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
I, James A. Joyce, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Aethlon Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ James A. Joyce February 19, 2003
--------------------------- ----------------------
James A. Joyce Date
Chairman, President and CEO
16
AETHLON MEDICAL, INC.
Certification of Chief Financial Officer/Principal Accounting Officer
Pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002
I, Edward C. Hall, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Aethlon Medical,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Edward C. Hall February 19, 2003
--------------------------- --------------------
Edward C. Hall Date
CFO/Principal Accounting Officer
17