10QSB 1 a2037884z10qsb.txt 10QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended December 31, 2000 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to __________ Commission file number 0-21846 AETHLON MEDICAL, INC. --------------------- (Exact name of registrant as specified in its charter) NEVADA 13-3632859 ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 7825 FAY AVENUE, SUITE 200, LA JOLLA, CA 92037 ------------------------------------------ -------------- (Address of principal executive offices) (Zip Code) (858) 456-5777 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /. Number of shares of common stock outstanding on December 31, 2000 2,771,652 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements Consolidated Balance Sheets at December 31, 2000 (unaudited) and March 31, 2000 Consolidated Statements of Operations (unaudited) for the three and nine months ended December 31, 2000 and December 31, 1999 Consolidated Statements of Cash Flows (unaudited) for the nine months ended December 31, 2000 and December 31, 1999 Consolidated Statement of Stockholders' Deficiency (unaudited) Notes to Consolidated Financial Statements ITEM 2. Management's Discussion and Analysis or Plan of Operation PART II. OTHER INFORMATION SIGNATURES 2 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS 3 AETHLON MEDICAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED BALANCE SHEETS
December 31, 2000 March 31, (unaudited) 2000 ASSETS CURRENT ASSETS Cash $1,622 $217,017 Accounts receivable 32,043 61,495 Prepaid expenses 24,349 36,940 Employee advances - 15,800 ---------------------------------- Total current assets 58,014 331,252 PROPERTY AND EQUIPMENT, NET 33,984 41,535 OTHER ASSETS Patents and trademarks, net 407,795 177,065 Deferred debt expense, net 134,745 273,738 Goodwill, net 1,558,091 495,088 Other 1,330 1,330 ---------------------------------- Total other assets 2,101,961 947,221 ---------------------------------- Total assets $2,193,959 $1,320,008 ================================== LIABILITIES AND STOCKHOLDERS' DEFICIENCY CURRENT LIABILITIES Accounts payable: Trade $756,044 $740,562 Related parties 236,217 234,324 Notes payable, net of discount 1,220,238 526,708 Accrued liabilities 346,661 201,631 Deferred compensation 329,835 329,835 ---------------------------------- Total current liabilities 2,888,995 2,033,060 Convertible notes, 8 %, due November 1, 2002, net of discount 223,134 - STOCKHOLDERS' DEFICIENCY Common stock - $.001 par value 25,000,000 shares authorized; 2,771,652 and 2,672,500 shares issued and outstanding 2,772 2,673 Additional paid in capital - common stock 4,242,132 3,290,865 Additional paid in capital - warrants and options 1,865,187 739,826 Deficit accumulated during development stage (7,028,261) (4,746,416) ---------------------------------- Total stockholders' deficiency (918,170) (713,052) ---------------------------------- Total liabilities and stockholders' deficiency $2,193,959 $1,320,008 ==================================
See accompanying notes. 4 AETHLON MEDICAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Cumulative During Three months ended Nine months ended Development Stage December 31 December 31 January 31, 1984 --------------------------------------------------------- To 2000 1999 2000 1999 December 31, 2000 REVENUE Grant income $ - $ - $ - $ - $ 1,430,799 Subcontract income - - - - 73,746 Sale of research and development - - - - 35,810 Other income 500 - 22,979 - 53,976 Interest income - - - - 17,415 ----------- ----------- ----------- ----------- ----------- Total revenue 500 - 22,979 - 1,611,746 EXPENSES Interest and debt expense 508,101 101,474 1,175,248 128,738 1,691,094 Personnel costs 179,774 110,247 525,480 314,940 3,830,605 Professional and consulting fees 112,883 67,647 213,123 208,436 784,361 Amortization-goodwill 42,454 - 127,361 - 140,056 Rent and office expense 40,139 19,575 101,467 53,733 593,181 Insurance 10,028 13,138 43,491 19,409 133,977 Laboratory supplies 24,475 - 38,206 - 140,589 Travel and meetings 6,525 9,538 26,403 19,009 170,558 Miscellaneous 8,142 295 25,544 3,815 130,474 Depreciation 4,092 2,555 11,925 7,319 146,843 Amortization-patents 2,043 2,043 6,129 6,129 49,028 Equipment and maintenance 827 - 6,307 - 171,629 R & D consultation - - - - 240,463 Subcontract expense - - - - 195,964 Contractual costs - - - - 192,112 Dues and subscriptions - - - - 13,596 ----------- ----------- ----------- ----------- ----------- Total expenses 939,483 326,512 2,300,694 761,528 8,624,530 LOSS BEFORE INCOME TAXES (938,983) (326,512) (2,277,705) (761,528) (7,012,784) PROVISION FOR INCOME TAXES 2,675 81 4,140 228 15,477 ----------- ----------- ----------- ----------- ----------- NET LOSS $ (941,658) $ (326,593) $(2,281,845) $ (761,756) $(7,028,261) =========== =========== =========== =========== =========== PER SHARE - BASIC AND DILUTED: Net loss $ (0.34) $ (0.13) $ (0.82) $ (0.29) Weighted average number of common shares outstanding 2,771,652 2,595,000 2,771,652 2,595,000
See accompanying notes. 5 AETHLON MEDICAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Cumulative During Nine months ended Development Stage December 31 January 31, 1984 -------------------------- To 2000 1999 December 31, 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(2,281,845) $ (761,756) $(7,028,261) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation 11,925 7,319 146,843 Amortization-patents & goodwill 133,490 6,129 189,083 Amortization-debt expense & note discount 1,048,359 12,126 1,319,517 Services paid by issuance of warrants 8,373 - 13,373 Deferred compensation forgiven - - 217,223 (Increase) decrease in assets: Accounts receivable and advances 45,252 (15,800) 30,623 Prepaid expenses 18,981 (32,349) (17,959) Other assets - (1,330) (1,329) Increase (decrease) in liabilities: Accounts payable 61,482 169,318 659,466 Accrued liabilities 145,030 117,847 413,899 Deferred compensation - 15,827 329,834 ----------- ----------- ----------- Net cash used by operating activities (808,953) (482,669) (3,727,688) CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property and equipment (6,478) (7,922) (177,382) Sale of equipment 4,000 - 4,000 Purchase of patents - - (120,564) Cash of acquired company 2,286 - 10,728 ----------- ----------- ----------- Net cash used by investing activities (192) (7,922) (283,218) CASH FLOWS FROM FINANCING ACTIVITIES Increase in notes payable 687,500 597,000 1,804,500 Deferred debt costs (93,750) (59,000) (208,500) Repayment of notes payable (25,000) (64,500) Loans from stockholders - - 370,384 Advances from affiliate - - 122,100 Proceeds from issuance of common stock - - 1,988,544 ----------- ----------- ----------- Net cash provided by financing activities 593,750 513,000 4,012,528 NET INCREASE IN CASH (215,395) 22,409 1,622 CASH, BEGINNING 217,017 3,052 - ----------- ----------- ----------- CASH, END $ 1,622 $ 25,461 $ 1,622 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 100,774 $ 4,703 $ 143,081 Income taxes $ 2,783 - 9,945 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Loans converted to common stock of Hemex $ - $ - $ 435,094 Net assets of entities acquired in exchange for the issuance of common stock and options $ 1,200,000 $ - $ 1,839,014 Patent acquired for 12,500 shares of common stock $ - $ - $ 100,000 Patent costs included in liabilities $ 95,817 $ - $ 95,817 Debt placement fees paid by issuance of warrants $ 52,207 $ - $ 298,320 Allocation of note proceeds to note discount $ 384,245 $ - $ 1,119,071 Beneficial conversion feature on note $ 150,000 $ - $ 150,000
See accompanying notes. 6 AETHLON MEDICAL, INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY (UNAUDITED)
PAID IN CAPITAL- COMMON STOCK PAID IN WARRANTS ACCUMULATED SHARES AMOUNT CAPITAL and OPTIONS DEFICIT TOTAL BALANCE AT MARCH 31, 2000 2,672,500 $ 2,673 $ 3,290,865 $ 739,826 $ (4,746,416) $ (713,052) Issuance of common stock and options for acquisition of Cell Activation 99,152 99 801,267 398,634 1,200,000 Warrants to acquire common stock issued with promissory notes 218,780 218,780 Warrants issued as compensation for sale of promissory notes 328,318 328,318 Warrants to acquire common stock issued with convertible note 165,466 165,466 Beneficial conversion feature on note 150,000 150,000 Options granted to directors for fees 14,163 14,163 Net loss for the nine months ended December 31, 2000 (2,281,845) (2,281,845) --------- -------- ------------ ------------ ------------ ----------- BALANCE AT DECEMBER 31, 2000 2,771,652 $ 2,772 $ 4,242,132 $ 1,865,187 $ (7,028,261) $ (918,170) ========= ======== ============ ============ ============ ===========
See accompanying notes. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2000 NOTE 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of Aethlon Medical, Inc. (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended December 31, 2000 are not necessarily indicative of the results that may be expected for the year ending March 31, 2001. For further information, refer to the Company's Annual Report on Form 10-KSB for the year ended March 31, 2000, which includes audited financial statements and footnotes as of and for the years ended March 31, 2000 and 1999. The consolidated financial statements include the accounts of Aethlon Medical, Inc. and its wholly owned subsidiaries, Hemex, Inc., Aethlon, Inc., Syngen Research, Inc., and Cell Activation, Inc. Syngen Research and Cell Activation are doing business as Aethlon Laboratories, Inc. All significant intercompany balances and transactions have been eliminated. NOTE 2. CAPITAL TRANSACTION On April 10, 2000, the Company acquired all the outstanding common stock of Cell Activation, Inc. ("Cell") in exchange for 99,152 shares of common stock of the Company. In addition, all the outstanding stock options of Cell were exchanged for options to purchase 50,848 shares of common stock of the Company for $.3933 per share. The options expire in 2007. The acquisition has been accounted for using the purchase method of accounting whereby the results of operations of Cell since the date of acquisition have been included in the accompanying Statement of Operations. The purchase price for Cell was $1,200,000 which was allocated between the shares and options based on the estimated fair value of each component of the consideration. Thus the value allocated to the 99,152 shares of stock was $801,366, and the value allocated to the options for 50,848 shares of stock was $398,634. The excess of the purchase price over the tangible assets acquired has been allocated $141,041 to patents and trademarks and $1,190,364 to goodwill. Patents will be amortized over their life from date of issuance, and goodwill will be amortized over ten years. Had the Cell acquisition taken place on April 1, 1999, the impact on the Company's results of operations for the three and nine months ended December 31, 1999 would not have been material. 8 NOTE 3. NOTES PAYABLE During the quarter ended December 31, 2000, the Company issued a two-year 8% convertible note in the principal amount of $375,000. A detachable warrant to purchase 119,048 shares of the Company's common stock was issued in connection with this note. Aethlon has allocated the proceeds from the note to the warrant and the note on a pro-rata basis based on the estimated fair value of each financial instrument separately. The fair value of the warrant was estimated using the Black-Scholes pricing model, and present value calculations were made to estimate the fair value of the note without the warrant. Of the note proceeds, $165,466 was allocated to the warrant and recorded as note discount. The note discount is being amortized as additional interest and debt expense over the two-year term of the related note. The note is convertible into common stock of the Company at $3.15 per share or, if less, at 75% of the average of the three lowest closing bid prices for the Company's stock during the ten trading days prior to conversion. The Company has determined that the intrinsic value to the investor of this beneficial conversion feature is $150,000, and this amount has been charged to interest expense and added to additional paid-in capital. At December 31, 2000 outstanding 12% promissory notes in the aggregate principal amount of $525,000 have reached their one-year maturity, and interest on such notes for periods after maturity is accruing at the annual rate of 15%. NOTE 4. OTHER OPTIONS AND WARRANTS On November 6, 2000, the Company approved the issuance of options for 200,000 shares of its common stock to the Company's general counsel. The options are exercisable at $3.25 per share and expire on December 31, 2005. Under an agreement between the Company and its general counsel, any proceeds from the sale of shares obtained through exercise of these options in excess of the exercise price will be applied to reduce the outstanding legal fees of general counsel. In accordance with this agreement, no expense has been recorded by the Company with respect to these options. On December 29, 2000, the Company issued warrants for 35,250 shares of its common stock as compensation for the sale of promissory notes. The warrants are exercisable at $5.00 per share and expire on various dates between November 4, 2004 and September 14, 2005. At December 31, 2000, there were options and warrants outstanding for a total of 1,736,194 shares of common stock at exercise prices from $.3933 to $6.00, averaging $3.86. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION PLAN OF OPERATION The Company is in the initial stages of its operations and has not yet engaged in significant commercial activities. During the fiscal year ending March 31, 2001, the Company plans to continue its research and development activities relating to the Hemopurifier-TM-, with particular priority on the Hemopurifier-TM- for the removal of HIV virus from the blood. The implementation of the Company's business plan is dependent upon its ability to raise equity capital. During the fiscal year ended March 31, 2000 and the nine months ended December 31, 2000, the Company financed its research and development activities through the private placement of approximately $1,365,000 principal amount of 12-month notes bearing interest at 12% per annum. The Company has entered into an agreement with an investment banking firm under which the firm will use its best efforts to sell $10 million of the Company's common stock in a private placement offering. The Private Placement Memorandum was issued in July 2000 but was withdrawn in September pending revisions in the business plan. The Company expects to re-issue the Memorandum during the fiscal year beginning April 1, 2001. On November 1, 2000, the Company entered into a Subscription Agreement under which up to $5,000,000 in convertible notes may be issued to a financial institution. Under this arrangement, a note for $375,000 was issued on November 1, 2000 and a second note for $200,000 was issued on February 12, 2001. There is no assurance that the terms and conditions prescribed in the Subscription Agreement for the issuance of additional convertible notes will be satisfied. The Company believes that the successful completion of the $10 million stock offering will satisfy the Company's anticipated capital requirements related to the development of its business for three years; however, additional financing may be required in the case of further acquisitions or to successfully develop other technologies. At the present time, the Company has no plans to purchase significant amounts of equipment or hire significant numbers of additional employees prior to the successful completion of the private placement of its common stock. Presently Aethlon has no internal source of cash resources and has no expectation for internally generated cash over the next twelve months. Aethlon's ongoing research and development activities over the next twelve months will be dependent upon funding from the aforementioned private placement of equity, the sale of additional convertible notes, or other sources of capital. 10 FORWARD LOOKING STATEMENTS All statements, other than statements of historical fact, included in this Form 10-QSB are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended ("the Securities Act"), and Section 21E of the Securities Exchange Act of 1934 ("the Exchange Act"). Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance, or achievements of Aethlon Medical, Inc.("the Company") to be materially different from any future results, performance, or achievements expressed or implied by such forward looking statements contained in this Form 10-QSB. Such potential risks and uncertainties include, without limitation, completion of the Company's capital-raising activities, FDA approval of the Company's products, other regulations, patent protection of the Company's proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological change, and other risk factors detailed herein and in other of the Company's filings with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this Form 10-QSB, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons actual results could differ from those projected in such forward-looking statements. 11 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - None (b) No Reports on Form 8-K were filed during the quarter ended December 31, 2000. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AETHLON MEDICAL, INC Date: February 20, 2000 /s/ Franklyn S. Barry, Jr. -------------------------- Franklyn S. Barry, Jr., President 12