Attached files
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 September 30, 2009
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 000-21846
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.)
8910 UNIVERSITY CENTER LANE, SUITE 255, 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 [_]
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 [_] 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 [_] Accelerated filer [_]
Non-accelerated filer [_] (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 [_] NO [X]
As of November 13, 2009, the registrant had outstanding 58,518,169 shares of
common stock, $.001 par value.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2009
(UNAUDITED) AND MARCH 31, 2009 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTH PERIODS ENDED SEPTEMBER 30, 2009 AND
2008 AND FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH
SEPTEMBER 30, 2009 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30,
2009 (UNAUDITED) 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
ITEM 4T. CONTROLS AND PROCEDURES 27
PART II. OTHER INFORMATION 28
ITEM 1. LEGAL PROCEEDINGS 28
ITEM 1A. RISK FACTORS 28
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
ITEM 5. OTHER INFORMATION 29
ITEM 6. EXHIBITS 29
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, March 31,
2009 2009
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash $ 92,429 $ 6,157
Deferred financing costs 47,531 --
Prepaid expenses and other current assets 10,539 37,011
------------ ------------
Total current assets 150,499 43,168
Property and equipment, net 1,071 2,603
Patents and patents pending, net 143,548 138,417
Deposits 7,168 13,200
------------ ------------
Total assets $ 302,286 $ 197,388
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 370,237 $ 460,074
Due to related parties 619,331 634,896
Notes payable 310,501 302,500
Convertible notes payable, net of discounts 1,826,708 2,069,720
Derivative liabilities 510,201 --
Other current liabilities 777,282 679,498
------------ ------------
Total current liabilities 4,414,260 4,146,688
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per share; 250,000,000
and 100,000,000 shares authorized as of September 30, 2009
and March 31, 2009; 55,369,404 and 49,454,131 shares
issued and outstanding as of September 30, 2009 and
March 31, 2009, respectively 55,370 49,455
Additional paid-in capital 35,924,072 34,312,659
Deficit accumulated during development stage (40,091,416) (38,311,414)
------------ ------------
(4,111,974) (3,949,300)
------------ ------------
Total liabilities and stockholders' deficit $ 302,286 $ 197,388
============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended
September 30, 2009 and 2008 and For the Period January
31, 1984 (Inception) Through September 30, 2009
(Unaudited)
January 31, 1984
Three Months Three Months Six Months Six Months (Inception)
Ended Ended Ended Ended through
September 30, September 30, September 30, September 30, September 30,
2009 2008 2009 2008 2009
------------ ------------ ------------ ------------ ------------
REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research and development -- -- -- -- 35,810
------------ ------------ ------------ ------------ ------------
-- -- -- -- 1,533,568
EXPENSES
Professional fees 327,172 282,325 563,025 442,600 8,355,484
Payroll and related 346,051 302,814 673,125 655,577 11,798,851
General and administrative 124,654 147,520 203,682 258,141 6,101,764
Impairment -- -- -- -- 1,313,253
------------ ------------ ------------ ------------ ------------
797,877 732,659 1,439,832 1,356,318 27,569,352
------------ ------------ ------------ ------------ ------------
OPERATING LOSS (797,877) (732,659) (1,439,832) 1,356,318 (26,035,784)
------------ ------------ ------------ ------------ ------------
OTHER EXPENSE (INCOME)
Loss on extinguishment of debt -- -- -- -- 2,760,674
Loss on settlement of accrued
interest and damages -- 607,908 -- 607,908 607,908
Change in fair value of
derivative liability (282,096) (76,275) (244,762) (263,967) 1,376,856
Interest and other debt expenses 176,055 551,042 492,712 1,113,890 8,847,482
Interest income (504) (2,514) (711) (2,514) (20,897)
Other 34,368 -- 34,368 -- 425,046
------------ ------------ ------------ ------------ ------------
(72,177) 1,080,161 281,607 1,455,317 13,997,069
------------ ------------ ------------ ------------ ------------
NET LOSS $ (725,700) $ (1,812,820) $ (1,721,439) $ (2,811,635) $(40,032,853)
============ ============ ============ ============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.01) $ (0.04) $ (0.03) $ (0.07)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 55,150,050 41,318,195 53,939,331 40,476,073
============ ============ ============ ============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2009
(Unaudited)
January 31, 1984
Six Months Six Months (Inception)
Ended Ended Through
September 30, September 30, September 30,
2009 2008 2009
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (1,721,439) $ (2,811,635) $(40,032,853)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 6,114 8,820 1,051,338
Amortization of deferred consulting fees -- -- 109,000
Loss on issuance of units for accrued
interest and penalties -- 607,908 627,264
Gain on sale of property and equipment -- -- (13,065)
Gain on settlement of debt -- -- (131,175)
Loss on settlement of accrued legal liabilities -- -- 142,245
Stock based compensation 298,747 134,192 1,981,523
Loss on debt extinguishment -- -- 2,741,318
Fair market value of warrants issued in
connection with accounts payable and debt -- -- 2,715,736
Fair market value of common stock, warrants
and options issued for services 303,584 90,072 4,450,527
Change in fair value of derivative liability (244,762) (263,967) 1,376,856
Amortization of debt discount and
deferred financing costs 328,905 949,352 4,327,687
Impairment of patents and patents pending -- -- 416,026
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses 26,472 -- 180,957
Deposits 6,032 -- (7,168)
Accounts payable and other current
liabilities 80,277 138,260 2,579,443
Due to related parties (15,565) (28,000) 1,270,142
------------ ------------ ------------
Net cash used in operating activities (931,635) (1,174,998) (15,099,749)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment -- -- (272,850)
Additions to patents and patents pending (9,713) (9,693) (397,056)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------ ------------ ------------
Net cash used in investing activities (9,713) (9,693) (642,113)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable -- -- 2,350,000
Principal repayments of notes payable (16,000) -- (368,500)
Net proceeds from the issuance of convertible notes
payable 928,420 430,000 3,496,420
Proceeds from the issuance of common stock 115,200 500,000 10,433,102
Professional fees related to registration statement -- -- (76,731)
------------ ------------ ------------
Net cash provided by financing activities 1,027,620 930,000 15,834,291
------------ ------------ ------------
Net (decrease) increase in cash 86,272 (254,691) 92,429
Cash at beginning of period 6,157 254,691 --
------------ ------------ ------------
Cash at end of period $ 92,429 $ -- $ 92,429
============ ============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
5
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2009
(Unaudited)
Six Months Six Months January 31, 1984
Ended Ended (Inception)
September 30, September 30, Through
2009 2008 September 30,
2009
------------ ------------ ------------
Supplemental disclosures of non-cash investing and
financing information:
Reclassification of accounts payable to notes payable $ 24,001 -- $ 24,001
============ ============ ============
Debt and accrued interest converted to common stock $ 646,812 $ 232,675 $ 4,166,004
============ ============ ============
Stock option exercise by director for accrued expenses -- -- 95,000
============ ============ ============
Debt discount on convertible notes payable associated with
conversion feature and warrants 988,698 -- 2,293,653
============ ============ ============
Conversion of accrued debt to common stock by
officers and directors -- 332,279 332,279
============ ============ ============
Debt discount on notes payable associated with detachable
warrants -- -- 1,154,860
============ ============ ============
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related parties -- -- 1,003,273
============ ============ ============
Issuance of common stock in connection with license agreements -- -- 18,000
============ ============ ============
Net assets of entities acquired in exchange for equity
securities -- -- 1,597,867
============ ============ ============
Debt placement fees paid by issuance of warrants -- -- 856,845
============ ============ ============
Patent pending acquired for 12,500 shares of common stock -- -- 100,000
============ ============ ============
Common stock issued for prepaid expenses -- -- 161,537
============ ============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
6
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2009
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. ("Aethlon", "We" or the "Company") is a development stage
medical device company focused on expanding the applications of our Hemopurifier
(R) platform technology, which is designed to rapidly reduce the presence of
infectious viruses and other toxins from human blood. In this regard, our core
focus is the development of therapeutic devices that treat acute viral
conditions, chronic viral diseases and pathogens targeted as potential
biological warfare agents. The Hemopurifier(R) combines the established
scientific principles of affinity chromatography and hemodialysis as a means to
mimic the immune system's response of clearing viruses and toxins from the blood
before cell and organ infection can occur. The Hemopurifier(R) cannot cure viral
conditions but can prevent viruses and toxins from infecting unaffected tissues
and cells. We have completed pre-clinical blood testing of the Hemopurifier(R)
to treat HIV and Hepatitis-C, and have completed human safety trials on
Hepatitis-C infected patients in India and are in the process of obtaining
regulatory approval from the U.S. Food and Drug Administration ("FDA") to
initiate clinical trials in the United States.
The commercialization of the Hemopurifier(R) will require the completion of
human efficacy and safety-related clinical trials. The approval of any
application of the Hemopurifier(R) in the United States will necessitate the
approval of the FDA to initiate human studies. Such studies could take years to
demonstrate safety and effectiveness in humans and there is no assurance that
the Hemopurifier(R) will be cleared by the FDA as a device we can market to the
medical community. We also expect to face similar regulatory challenges from
foreign regulatory agencies should we attempt to commercialize and market the
Hemopurifier(R) outside of the United States. As a result, we have not generated
revenues from the sale of any Hemopurifier(R) application. Additionally, there
have been no independent validation studies of our Hemopurifiers(R) to treat
infectious disease. We manufacture our products on a small scale for testing
purposes but have yet to manufacture our products on a large scale for
commercial purposes. All of our pre-clinical human blood studies have been
conducted in our laboratories under the direction of Dr. Richard Tullis, our
Chief Science Officer.
We are classified as a development stage enterprise under accounting principles
generally accepted in the United States of America ("GAAP"), and have not
generated revenues from our principal operations.
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 GAAP for interim financial information and with the
instructions to Form 10-Q and Article 8-03 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. We
have evaluated subsequent events through November 13, 2009, the last business
day before our condensed consolidated financial statements were issued. The
condensed consolidated balance sheet as of March 31, 2009 was derived from our
audited financial statements. Operating results for the three and six month
periods ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2010. For further
information, refer to our Annual Report on Form 10-K for the year ended March
31, 2009, which includes audited financial statements and footnotes as of March
31, 2009 and for the years ended March 31, 2009 and 2008 and the period January
31, 1984 (Inception) through March 31, 2009.
7
NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates, among other things, the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. We have experienced continuing losses from operations, are in
default on certain debt, have negative working capital of approximately
($4,264,000) recurring losses from operations and a deficit accumulated during
the development stage of approximately ($40,092,000) at September 30, 2009,
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. Our current financial
resources are insufficient to fund our capital expenditures, working capital and
other cash requirements (consisting of accounts payable, accrued liabilities,
amounts due to related parties and amounts due under various notes payable) for
the fiscal year ending March 31, 2010 ("fiscal 2010"). Therefore we will be
required to seek additional funds through debt and/or equity financing
arrangements to finance our current and long-term operations.
We are currently addressing our liquidity issue by exploring investment capital
opportunities through the private placement of common stock or issuance of
additional debt. We believe that our access to additional capital, together with
existing cash resources, will be sufficient to meet our liquidity needs for
fiscal 2010. However, no assurance can be given that we will receive any funds
in connection with our capital raising efforts.
The unaudited 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 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 consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc., Syngen Research, Inc. and Cell Activation, Inc. (collectively
hereinafter referred to as the "Company" or "Aethlon"). These subsidiaries are
dormant and there exist no material intercompany transactions or balances.
LOSS PER COMMON SHARE
Basic loss per 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 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 the Company had net losses for all periods presented,
basic and diluted loss per share are the same, and additional common stock
equivalents have been excluded as their effect would be antidilutive.
The potentially dilutive common shares outstanding for the quarters ended
September 30, 2009 and 2008, which include shares underlying outstanding stock
options, warrants and convertible debentures were 50,868,288 and 32,057,784,
respectively.
PATENTS
We capitalize the cost of patents, some of which were acquired, and amortize
such costs over the shorter of the remaining legal life or their estimated
economic life, upon issuance of the patent.
8
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses during the three and six month
periods ended September 30, 2009 and 2008, which are included in various
operating expense line items in the accompanying consolidated statements of
operations. Our research and development expenses in those periods were as
follows:
September 30, September 30,
2009 2008
------------- -------------
Three months ended $ 168,648 $ 220,259
Six months ended $ 245,937 $ 382,777
EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY 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 are not readily
determinable and (1) the fair value of the equity instruments is more reliably
measurable and (2) the counterparty receives equity instruments in full or
partial settlement of the transactions, we use the following methodology:
(a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
(b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the
date of the contract.
(c) For any transactions not meeting the criteria in (a) or (b) above, 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 existed at or during the three months ended September 30, 2009.
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 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 an instrument, which is carried as a liability, 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.
9
On April 1, 2009 we adopted new Financial Accounting Standards Board ("FASB")
guidance 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
enable it to qualify for equity classification. We have identified several
convertible debt agreements in which the embedded conversion feature contains
certain provisions that may result in an adjustment of the conversion price,
which results in the failure of the embedded conversion feature to be considered
to be indexed to our stock. Accordingly, under this guidance, we are required to
record the estimated fair value of the embedded conversion feature as a
derivative liability. As a result of the adoption of this guidance, the
estimated fair value of the embedded conversion feature (See SIGNIFICANT RECENT
ACCOUNTING PRONOUNCEMENTS below) was recorded as a derivative liability (at the
date of issuance), and a cumulative effect adjustment was recorded to our
accumulated deficit. In addition, we have re-measured such derivative liability
at estimated fair value as of September 30, 2009 and have recorded the change in
the fair value for the three and six months ended September 30, 2009 in other
expense (income) in the accompanying Condensed Consolidated 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. On October 7,
2008, the SEC declared effective a registration statement that covered all of
the shares and warrants that had previously been generating liquidated damages
pursuant to registration rights agreements and as a result, we ceased recording
such liquidated damages at that time.
As of September 30, 2009, we did not owe any liquidated damages and there are no
future payments for liquidated damages that we have determined to be probable.
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 Over-the-Counter Bulletin
Board) 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.
In June 2009, our Chief Executive Officer agreed to suspend the exercise of up
to 9,588,243 of his stock options, which allowed us to utilize the shares
underlying those stock options in capital raising activities while we presented
our stockholders with a proposal to increase the number of authorized shares
from 100,000,000 to 250,000,000. That proposal was approved by our stockholders
at our Annual Meeting on September 16, 2009 (see Item 4 of this report).
Following that approval we extended the Chief Executive Officer's stock options
by the 100 days that he had unreserved his shares. We valued the change in fair
value of his stock options due to this extension, and based on the change in
fair value, recorded an increase to our stock based compensation expense in the
quarter ended September 30, 2009 of $64,678 for his vested options. For his
unvested options, we recorded an increase to fair value of $15,308 which will be
expensed over the remaining vesting period of those options.
10
The following table summarizes share-based compensation expenses relating to
shares and options granted and the effect on basic and diluted loss per common
share during the three and six months ended September 30, 2009:
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
September 30, 2009 September 30, 2008 September 30, 2009 September 30, 2008
------------------ ------------------ ------------------ ------------------
Payroll and related $ 164,888 $ 64,696 $ 298,747 $ 134,192
========== ========= =========== ==========
Net share-based compensation effect
in net loss from continuing operations $ 164,888 $ 64,696 $ 298,747 $ 134,192
========== ========= =========== ==========
Basic and diluted loss per common share $ (0.00) $ (0.00) $ (0.01) $ (0.00)
========== ========= =========== ==========
We account for transactions involving 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 are not
readily determinable and (1) the fair value of the equity instruments is more
reliably measurable and (2) the counterparty receives equity instruments in full
or partial settlement of the transactions, we use the following methodology:
a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the performance
is complete (and valued on the date of issuance).
b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the date of
the contract.
c) For any transactions not meeting the criteria in (a) or (b) above, the
Company re-measures the consideration at each reporting date based on its then
current stock value.
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 and six months ended September
30, 2009 was insignificant.
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 either the six months ended
September 30, 2009 or in the six months ended September 30, 2008.
Options outstanding that have vested and are expected to vest as of September
30, 2009 are as follows:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual
Shares Price Term in Years
------------------------- ----------- -------- -------------
Vested 12,289,060 $ 0.38 5.11
Expected to vest 2,200,000 0.36 6.50
-----------
Total 14,489,060
===========
11
Additional information with respect to stock option activity is as follows:
Outstanding Options
-----------------------------
Weighted
Number of Average
Shares Exercise Price
--------------------------- ------ --------------
March 31, 2009 14,489,060 $ 0.37
Grants -- --
Exercises -- --
Cancellations -- --
---------- ------
September 30, 2009 14,489,060 $ 0.37
========== ======
Options exercisable at:
September 30, 2009 12,289,060 $ 0.38
========== ======
At September 30, 2009, there was approximately $459,000 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted average period of 1.11 years.
On September 30, 2009, our stock options had a negative intrinsic value since
the closing price on that date of $0.28 per share was below the weighted average
exercise price of our stock options.
INCOME TAXES
Under FASB authoritative guidance for accounting for income taxes, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to the difference between the consolidated financial statements and
their respective tax basis. Deferred income taxes reflect the net tax effects of
(a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts reported for income tax
purposes, and (b) tax credit carryforwards. 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
In December 2007, the FASB issued an amendment to an existing accounting
standard which provides guidance related to business combinations. The amendment
retains its fundamental requirements that the acquisition method of accounting
be used for all business combinations and for an acquirer to be identified for
each business combination. This amendment also establishes principles and
requirements for how the acquirer: a) recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in the acquiree; b) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase
and c) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. This amendment will apply prospectively to business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. An entity may not
apply it before that date. Our adoption of this amendment effective April 1,
2009 did not have a significant impact on our statements of operations or
financial position.
12
In May 2009, the FASB issued a new accounting standard related to subsequent
events, which provides guidance on events that occur after the balance sheet
date but prior to the issuance of the financial statements. The new accounting
standard distinguishes events requiring recognition in the financial statements
and those that may require disclosure in the financial statements. Furthermore,
the new accounting standard requires disclosure of the date through which
subsequent events were evaluated. The new accounting standard is effective for
interim and annual periods after June 15, 2009. We adopted the new accounting
standard for the quarter ended June 30, 2009, and have evaluated subsequent
events through November 13, 2009.
In June 2009, the FASB issued a new accounting standard which provides guidance
related to the FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles - a replacement of a previously issued
standard. The new accounting standard stipulates the FASB Accounting Standards
Codification is the source of authoritative U.S. GAAP recognized by the FASB to
be applied by nongovernmental entities. The new accounting standard is effective
for financial statements issued for interim and annual periods ending after
September 15, 2009. The implementation of this standard during the quarter ended
September 30, 2009 did not have a material impact on our statements of
operations or financial position.
In December 2006, the FASB issued a new accounting standard which provides
guidance related to fair value measurements. That standard defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. This standard applies to derivatives and other
financial instruments measured at estimated fair value and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. This standard applies to certain
assets and liabilities that are being measured and reported on a fair value
basis. It defines fair value, establishes a framework for measuring fair value
in accordance with generally accepted accounting principles, and expands
disclosure about fair value measurements. This standard enables the reader of
the financial statements to assess the inputs used to develop those measurements
by establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. We adopted this standard on April 1,
2008 without material impact to our financial statements.
The standard requires that assets and liabilities carried at fair value will be
classified and disclosed in one of the following three categories:
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.
In May 2008, the FASB issued a new accounting standard which provides guidance
relating to accounting for convertible debt instruments that may be settled in
cash upon conversion (including partial cash settlement). This new standard
requires recognition of both the liability and equity components of convertible
debt instruments with cash settlement features. The debt component is required
to be recognized at the fair value of a similar instrument that does not have an
associated equity component. The equity component is recognized as the
difference between the proceeds from the issuance of the note and the fair value
of the liability. The standard also requires an accretion of the resulting debt
discount over the expected life of the debt. Retrospective application to all
periods presented is required and a cumulative-effect adjustment is recognized
as of the beginning of the first period presented. This standard was effective
for us in the first quarter of fiscal year 2010. The adoption of this standard
did not have a material impact on our financial statements.
In June 2008, the FASB issued a new accounting standard which provides guidance
relating to determining whether an instrument (or embedded feature) is indexed
to an entity's own stock and is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within those
fiscal years. This standard specifies that a contract that would otherwise meet
the definition of a derivative but is both (a) indexed to our own stock and (b)
classified in stockholders' equity in the statement of financial position would
not be considered a derivative financial instrument. The standard provides a new
two-step model to be applied in determining whether a financial instrument or an
embedded feature is indexed to an issuer's own stock and thus able to qualify
for the standard's scope exception.
13
We adopted this new standard effective April 1, 2009. The adoption of the
standard's requirements can affect the accounting for warrants or convertible
debt that contain provisions that protect holders from a decline in the stock
price (or "down-round" protection). For example, warrants with such provisions
will no longer be recorded in equity. Down-round protection provisions reduce
the exercise price of a warrant or convertible instrument if a company either
issues equity shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that have a lower
exercise price. We evaluated whether convertible debt or warrants to acquire
stock of the Company contain provisions that protect holders from declines in
the stock price or otherwise could result in modification of the exercise price
and/or shares to be issued under the respective warrant agreements based on a
variable that is not an input to the fair value of a "fixed-for-fixed" option.
We determined that we have several convertible debt agreements in which the
terms provide for a possible adjustment to the conversion price, and as such,
the embedded conversion feature fails to be indexed solely to our stock under
this pronouncement.
As a result, we classified the estimated fair value of the embedded conversion
feature of the convertible debt agreement described above as a derivative
liability on April 1, 2009 and have re-measured at estimated fair value as of
September 30, 2009 and have recorded the change in the estimated fair value for
the three and six months ended September 30, 2009 in other expense (income) in
the accompanying Condensed Consolidated Statement of Operations. The change in
the estimated fair value of the derivative liability from the date of issuance
to initial date of adoption, which totaled $279,201, was recorded as a
cumulative effect adjustment upon adoption of this standard and charged to
accumulated deficit. As we issued convertible debt instruments and warrants in
our July and August convertible debt financings (see Note 5) that included
derivative liabilities, we recorded an aggregate fair value of $475,762
associated with those transactions. The embedded derivatives were valued using
Level 3 inputs because there are significant unobservable inputs associated with
them.
The table below sets forth a summary of changes in the fair value of our Level 3
derivative liability for the six months ended September 30, 2009:
Recorded Fair
Recorded Value of Change in
Initial Fair Derivative Estimated Fair Fair Value
Value on Liabilities Value Recognized at
April 1, in July & in Results September 30,
2009 August, 2009 of Operations 2009
----------- ------------ --------------- -------------
Derivative Liability $ 279,201 $ 475,762 $ (244,762) $ 510,201
In April 2009, the FASB issued an amendment to an existing standard which
provides guidance relating to interim disclosures about fair value of financial
instruments. This new standard requires the disclosure of the carrying amount
and the fair value of all financial instruments for interim reporting periods
and annual financial statements of publicly traded companies (even if the
financial instrument is not recognized in the balance sheet), including the
methods and significant assumptions used to estimate the fair values and any
changes in such methods and assumptions. This new standard is effective for
interim reporting periods ending after June 15, 2009. We adopted this
pronouncement during the quarter ended June 30, 2009 without material impact to
our financial statements.
In April 2009, the FASB also issued an amendment to an existing standard which
provides guidance relating to all assets and liabilities within the scope of any
accounting pronouncements that require or permit fair value measurements. This
pronouncement, which does not change the FASB's guidance regarding Level 1
inputs, requires the entity to (i) evaluate certain factors to determine whether
there has been a significant decrease in the volume and level of activity for
the asset or liability when compared with normal market activity, (ii) consider
whether the preceding indicates that transactions or quoted prices are not
determinative of fair value and, if so, whether a significant adjustment thereof
is necessary to estimate fair value in accordance with the standard, and (iii)
ignore the intent to hold the asset or liability when estimating fair value.
This new standard also provides guidance to consider in determining whether a
transaction is orderly (or not orderly) when there has been a significant
decrease in the volume and level of activity for the asset or liability, based
on the weight of available evidence. This pronouncement is effective for interim
and annual reporting periods ending after June 15, 2009. We adopted this
pronouncement during the quarter ended June 30, 2009 without material impact to
our financial statements.
14
In April 2009, the FASB issued amendments to an existing standard which provides
guidance relating to other-than-temporary impairment ("OTTI") recognition for
debt securities classified as available-for-sale and held-to-maturity. The
standard requires the entity to consider (i) whether the entire amortized cost
basis of the security will be recovered (based on the present value of expected
cash flows), and (ii) its intent to sell the security. Based on the factors
described in the preceding sentence, this pronouncement also explains the
process for determining the OTTI to be recognized in "other comprehensive
income" (generally, the impairment charge for other than a credit loss) and in
earnings. This standard does not change existing recognition or measurement
guidance related to OTTI of equity securities. This pronouncement is effective
for interim and annual reporting periods ending after June 15, 2009. Certain
transition rules apply to debt securities held at the beginning of the interim
period of adoption when an OTTI was previously recognized. We adopted this
pronouncement during the quarter ended June 30, 2009 without material impact to
our financial statements.
In November 2007, the Emerging Industries Task Force ("EITF") issued a new
accounting standard which provides guidance relating to accounting for
collaborative arrangements. The standard provides guidance on how to determine
whether an arrangement constitutes a collaborative arrangement, how costs
incurred and revenue generated on sales to third parties should be reported by
the partners to a collaborative arrangement in each of their respective income
statements, how payments made to or received by a partner pursuant to a
collaborative arrangement should be presented in the income statement, and what
participants should disclose in the notes to the financial statements about a
collaborative arrangement. This issue is effective for annual periods beginning
after December 15, 2008. Entities should report the effects of applying this
standard as a change in accounting principle through retrospective application
to all periods to the extent practicable. Upon application of this standard, the
following should be disclosed: a) a description of the prior-period information
that has been retrospectively adjusted, if any, and b) the effect of the change
on revenue and operating expenses (or other appropriate captions of changes in
the applicable net assets or performance indicator) and on any other affected
financial statement line item. We adopted this pronouncement, effective April 1,
2009, without material impact to our financial statements.
The Sarbanes-Oxley Act of 2002 ("the Act") introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements of the
Act is for management to annually assess and report on the effectiveness of its
internal control over financial reporting under Section 404(a) and for its
registered public accountant to attest to this report under Section 404(b). The
SEC has modified the effective date and adoption requirements of Section 404(a)
and Section 404(b) implementation for non-accelerated filers multiple times,
such that we were required to issue our management report on internal control
over financial reporting in our annual report on Form 10-K for the fiscal year
ended March 31, 2009. Based on current SEC requirements, we will be required to
have our independent registered public accounting firm attest to the
effectiveness of internal controls over financial reporting for our fiscal year
ending March 31, 2011.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
NOTE 4. NOTES PAYABLE
Notes payable consist of the following at September 30, 2009:
Principal
-------------
12% Notes payable, all past due $ 297,500
10% Note payable, past due 5,000
Note payable to law firm 8,001
-----------
Total Notes Payable $ 310,501
===========
Notes payable consisted of the following at March 31, 2009:
Principal
-------------
12% Notes payable, all past due $ 297,500
10% Note payable, past due 5,000
-----------
Total Notes Payable $ 302,500
===========
15
NOTE PAYABLE TO LAW FIRM
On May 20 2009, we entered into a Promissory Note with our intellectual property
law firm for the amount of $24,001, which represented the amount we owed to that
firm. The Promissory Note calls for monthly payments of $4,000 from June 2009
through November 2009. Our monthly payments have reduced the balance on the note
payable to $8,001 at September 30, 2009. The note bears interest at 10% per
annum. At September 30, 2009, interest payable on this note totaled $200.
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 January 26, 2009, a holder of $50,000 of the 12% Notes
converted his principal balance and $56,723 of accrued interest to common stock
at the then current market price of $0.17 per share. At September 30, 2009, 12%
Notes with a principal balance of $297,500 are outstanding, all of which are
past due, in default, and bearing interest at the default rate of 15%. At
September 30, 2009, interest payable on the 12% Notes totaled $307,906.
10% NOTES
From time to time, we issued notes payable ("10% Notes") to various investors,
bearing interest at 10% per annum, with principal and interest due six months
from the date of issuance. The 10% Notes required no payment of principal or
interest during the term. The total amount of the original notes issued was
$275,000. One 10% Note in the amount of $5,000, which is past due and in
default, remains outstanding at September 30, 2009. At September 30, 2009,
interest payable on this note totaled $4,125.
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. During the fiscal year ended March 31, 2009, we
restructured our 8% and 9% Notes and for accounting purposes, we recorded an
extinguishment loss of approximately $977,000 (See Note 5 for further
description).
NOTE 5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following at September 30, 2009:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes, past due $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes 45,000 (4,852) 40,148
December 2006 10% Convertible Notes, past due 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 469,591 -- 469,591
May & June 2009 10% Convertible Notes 350,000 (198,442) 151,558
July & August 2009 10% Convertible Notes 668,250 (419,839) 248,411
---------- ----------- ----------
Total - Convertible Notes $2,449,841 $ (623,133) $1,826,708
========== ============ ==========
Convertible Notes Payable consisted of the following at March 31, 2009:
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes, past due $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes 45,000 (8,683) 36,317
December 2006 10% Convertible Notes, past due 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 1,116,403 -- 1,116,403
---------- ----------- ----------
Total - Convertible Notes $2,078,403 $ (8,683) $2,069,720
========== ============ ==========
AMENDED SERIES A 10% CONVERTIBLE NOTES
At September 30, 2009, $900,000 of the Amended Series A 10% Convertible Notes
remained outstanding and in default. At September 30, 2009, interest payable on
those notes totaled $101,250.
2008 10% CONVERTIBLE NOTES
2008 10% Convertible Notes in the aggregate amount of $45,000 remain outstanding
at September 30, 2009. At September 30, 2009, interest payable on those notes
totaled $5,228. The notes mature in January and February 2010.
16
DECEMBER 2006 10% CONVERTIBLE NOTES
At September 30, 2009, $17,000 of the December 2006 10% Notes remained
outstanding and in default. At September 30, 2009, interest payable on those
notes totaled $6,871.
RESTRUCTURED DECEMBER 2008 10% CONVERTIBLE NOTES AND RELATED CONVERTIBLE NOTES
Restructured December 2008 10% Convertible Notes and Related Convertible Notes
in the aggregate amount of $469,591 remain outstanding at September 30, 2009. At
September 30, 2009, interest payable on those notes totaled $11,740.
In June 2009, the holders of the Restructured December 2008 10% Convertible
Notes and Related Convertible Notes informally agreed to extend the expiration
date of the notes by three months from July 1, 2009 to October 1, 2009.
MAY & JUNE 2009 10% CONVERTIBLE NOTES
In May and June 2009, we raised an aggregate amount of $350,000 from the sale to
accredited investors of 10% convertible notes ("May & June 2009 10% Convertible
Notes"). The May & June 2009 10% Convertible Notes mature at various dates
between November 2010 through December 2010 and are convertible into our common
stock at a fixed conversion price of $0.20 per share prior to maturity. If the
investors opt to convert their convertible debt to our common stock, then they
will receive a matching three year warrant to purchase unregistered shares of
our common stock at a price of $0.20 per share. We have measured the warrants
but have not recorded them given their contingent terms.
After consideration of the warrants, we recorded a discount associated with the
beneficial conversion feature of $233,735 related to the May & June 2009 10%
Convertible Notes and we are amortizing that discount over the terms of the May
& June 2009 10% Convertible Notes using the effective interest method.
At September 30, 2009, interest payable on those notes totaled $10,097.
JULY & AUGUST 2009 10% CONVERTIBLE NOTES
In July and August 2009, we raised an aggregate amount of $668,250 from the sale
to three investment funds of 10% convertible notes ("July & August 2009 10%
Convertible Notes"). Each note carries a one-year term and is convertible into
our common stock at 80% of market with a floor of $0.15 cents and a ceiling of
$0.25 cents per share. As additional consideration, the investors also received
1,336,500 three year warrants to purchase our common stock at $0.50 per share,
although that exercise price is subject to change based on certain conditions.
The conversion feature may additionally be adjusted in the event of future
financing by the Company. Because the conversion feature and warrant exercise
price each can be reset based on future events, they are considered derivatives.
We commissioned a valuation study on this transaction from a third party
valuation firm and based on the results of that study, we recorded a discount
associated with the derivative liability of $475,762 associated with the
conversion feature.
At September 30, 2009, interest payable on those notes totaled $10,724.
We are amortizing the discount associated with the July & August 2009 10%
Convertible Notes and associated warrants using the effective interest method.
Deferred financing costs incurred in connection with this financing totaled
$60,750 were capitalized and are being amortized using the effective interest
method.
NOTE 6. EQUITY TRANSACTIONS
In April 2009, we issued 71,519 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for financial consulting services and research services valued
at $12,158 based on the value of the services.
In April 2009, we issued 1,688,211 shares of common stock as a result of
conversions of $263,478 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
17
In April 2009, we issued 490,000 shares of restricted common stock valued at the
closing price in payment for investor relations services.
In April 2009, we issued 25,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In April 2009, we issued 32,935 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for internal controls consulting services valued at $7,575
based on the value of the services provided.
In April 2009, we issued 12,372 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for regulatory affairs consulting services valued at $2,660
based on the value of the services provided.
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In April 2009, we issued 43,021 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for financial consulting services valued at $7,744 based on the
value of the services provided.
In April 2009, we issued 70,870 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
In April 2009, we issued 22,817 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, holders of certain convertible notes converted $139,256 of
principal and accrued interest into 878,059 shares of our common stock pursuant
to the terms of the notes at an average conversion rate of approximately $0.16
per share.
In May 2009, we issued 13,043 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 10,714 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 51,118 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for financial consulting services valued at $9,713 based on the
value of the services provided.
In May 2009, we issued 22,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, we issued 34,602 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $7,613 based on the
value of the services provided.
In May 2009, we issued 40,104 shares of restricted common stock at $0.24 in
payment for financial advisory services valued at $9,625 based on the value of
the services provided.
In May 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
18
In June 2009, we issued 20,500 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $4,920
based on the value of the services provided.
In June 2009, we issued 57,055 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$12,552 based on the value of the services provided.
In June 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we issued 23,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $5,290
based on the value of the services provided.
In June 2009, we issued 48,106 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$10,583 based on the value of the services provided.
In June 2009, we issued 779,956 shares of common stock as a result of
conversions of $143,512 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In June 2009, we issued 16,176 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.34 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
On June 29, 2009, Mr. Joyce, our Chief Executive Officer entered into an Option
Suspension Agreement, whereby Mr. Joyce agreed to not exercise his stock options
pending the filing of amended articles of incorporation of the Company
increasing the Company's authorized capital. Accordingly of Mr. Joyce's total
options, 2,857,143 could not be exercised until the amended articles of
incorporation were filed, and 6,731,090 could not be exercised until the later
of June 9, 2010 or the filing of the amended articles of incorporation. We filed
the amendment to our articles of incorporation on September 21, 2009. The
Agreement also provided Mr. Joyce certain protections in the event the Company
shall undergo a change of control transaction while his options are suspended.
Such protections include the right to receive, in the form of cash payments, the
positive value of his options (which remain subject to suspension) at the time
of such transaction.
In addition, we committed to issue 4,000,000 shares of restricted common stock,
to Mr. Joyce at a price per share of $0.24, which shall vest in equal
installments over a thirty six month period commencing June 9, 2010.
In July 2009, we registered 1,000,000 additional shares under our 2003
Consultant Stock Plan through the filing of a Form S-8 Registration Statement.
In July 2009, we issued 518,649 shares of common stock as a result of
conversions of $100,566 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In July 2009, we issued 18,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.30 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In July 2009, we issued 51,971 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
In July 2009, we issued 11,647 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.34 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In July 2009, we issued 19,643 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
19
In July 2009, we issued a convertible promissory note in the principal amount of
$330,000 to an accredited investor. The note is convertible into shares of our
common stock at a price per share that is equal to the lesser of (i) $0.25, or
(ii) the average of the closing bid prices of the common stock for the three
days immediately preceding the conversion date, subject in any case to a floor
of $0.15 per share. The investor also received warrants to purchase 660,000
shares of our common stock at an exercise price of $0.50 per share. See JULY &
AUGUST 2009 10% CONVERTIBLE NOTES in note 5.
In August 2009, we issued two convertible promissory note in the principal
amount of $338,250 to two accredited investors. These notes are convertible into
shares of our common stock at a price per share that is equal to the lesser of
(i) $0.25, or (ii) the average of the closing bid prices of the common stock for
the three days immediately preceding the conversion date, subject in any case to
a floor of $0.15 per share. The investors also received warrants to purchase
676,500 shares of our common stock at an exercise price of $0.50 per share. See
JULY & AUGUST 2009 10% CONVERTIBLE NOTES in note 5.
In August 2009, we issued 21,154 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In August 2009, we issued 14,143 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In August 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In September 2009, we issued 36,094 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $7,941 based on the
value of the services provided.
In September 2009, we issued 20,370 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.27 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In September 2009, we issued 16,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $3,840
based on the value of the services provided.
In September 2009, we issued 19,784 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In September 2009, we issued 12,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
NOTE 7. OTHER CURRENT LIABILITIES
At September 30, 2009 and March 31, 2009, our other current liabilities were
comprised of the following items:
September 30, March 31,
2009 2009
---------- ----------
Accrued interest $ 478,553 $ 352,204
Accrued legal fees 211,865 211,865
Other 86,864 115,429
---------- ----------
Total other current liabilities $ 777,282 $ 679,498
========== ==========
As of the date of this report, various promissory and convertible notes payable
in the aggregate principal amount of $1,219,500 (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 September 30,
2009, we had accrued interest in the amount of $419,152 associated with these
notes in accrued liabilities payable (see Notes 4 and 5).
20
NOTE 8. 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. In connection with our
termination of our lease at our former headquarters, our former landlord, BMR
3030 Bunker Hill Street LLC, commenced an action in the Superior Court of
California, County of San Diego, against us on September 14, 2009 seeking
damages of approximately $25,000 for alleged unpaid rent and for surrender of
the premises. All amounts were timely paid and the premises were timely
surrendered. The former landlord has agreed to dismiss the action promptly.
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.
LEASES
In September 2009, we gave notice that we were terminating the month-to-month
rental arrangement for our offices and laboratory effective October 3, 2009 and
we entered into two new leases for office and laboratory space. The terms of the
new leases are three years and two years, respectively, and the initial base
lease payments are $4,746.15 per month and $1,667.00 per month, respectively. We
expect that the cost of our new facilities will be less than the cost of our old
facilities, which was $10,075 per month for rent and common area maintenance
charges.
NOTE 9. SUBSEQUENT EVENTS
In October 2009, we issued 100,000 shares of restricted common stock as a
donation to a scientific research foundation valued at $25,000 based on the
closing price of $0.25.
In October 2009, we issued 319,033 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $70,187 based on
the value of the services provided.
In October 2009, we issued 22,088 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In October 2009, we issued 37,585 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $8,269 based on the
value of the services provided.
In October 2009, we issued 2,511,264 shares of common stock as a result of
conversions of $481,297 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In October 2009, we issued 15,231 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for regulatory affairs consulting services valued at $3,840
based on the value of the services provided.
In October 2009, we issued 11,702 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.47 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In October and to date in November 2009, we have raised $430,000 through the
issuance of 10% convertible notes to accredited investors. The notes are
convertible into our common stock at a fixed conversion price of $0.25 per
share. The investors also received 1,720,000 three year warrants to purchase
shares of our common stock at $0.25 per share.
In November 2009, we issued 117,759 shares of common stock as a result of
conversions of $38,595 of notes payable ($15,200 in a 12% Note Payable, see Note
4, and $10,000 in a May & June 2009 10% Convertible Note, see Note 5) and
related accrued interest. The shares were issued to accredited investors.
In November 2009, we issued 14,103 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.39 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.
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.
THE COMPANY
We are a developmental stage medical device company focused on expanding the
applications of our Hemopurifier(R) platform technology which is designed to
rapidly reduce the presence of infectious viruses and other toxins from human
blood. As such, we focus on developing therapeutic devices to treat acute viral
conditions brought on by pathogens targeted as potential biological warfare
agents and chronic viral conditions including HIV/AIDS and Hepatitis-C. The
Hemopurifier(R) combines the established scientific technologies of hemodialysis
and affinity chromatography as a means to mimic the immune system's response of
clearing viruses and toxins from the blood before cell and organ infection can
occur. The Hemopurifier(R) cannot cure these afflictions but can lower viral
loads and allow compromised immune systems to overcome otherwise serious or
fatal medical conditions.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
and must file reports, proxy statements and other information with the SEC. The
reports, information statements and other information we file with the
Commission can be inspected and copied at the Commission Public Reference Room,
450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The
Commission also maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants,
like us, which file electronically with the Commission. Our headquarters are
located at 8910 University Center Lane, Suite 255, 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 SEPTEMBER 30, 2009 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2008
Operating Expenses
Consolidated operating expenses for the three months ended September 30, 2009
were $797,877 in comparison with $732,659 for the comparable quarter a year ago.
This increase of $65,218, or 9%, was due to an increase in professional fees of
$44,847 and an increase in payroll and related expenses of $43,237, which was
partially offset by a decrease in general and administrative expenses of
$22,866.
23
The $44,847 increase in our professional fees was primarily due to a $64,769
charge by a contract manufacturer for establishing the systems to manufacture
our product under the FDA's good manufacturing practices and also to produce
both a trial product manufacturing run and to produce our first commercial batch
of products. We also had a $39,850 increase in the fees paid for investor
relations services and a $7,454 increase in expenses related to business
development work. These increases were partially offset by a $25,377 reduction
in our accounting fees, a $22,785 reduction in our legal fees and a $21,728
decrease in our fees paid for scientific consulting services. $84,500 of the
professional fees for the three months ended September 30, 2009 were paid for
through issuances of our common stock.
The $43,237 increase in payroll and related expenses was due to a $100,191
increase in non-cash stock-based compensation expense, which was partially
offset by a $56,954 decrease in cash-based compensation.
The $22,866 decrease in general and administrative expenses was due primarily to
a $56,763 decrease in lab supplies. That decrease was partially offset by
increases in rent of $18,025 related to our move to new locations and to an
$18,715 increase in travel and entertainment largely related to attending
investor conferences.
Other Expenses (Income)
Other expenses (income) consist primarily of the change in the fair value of our
derivative liability, interest expense and other expense. Other expenses
(income) for the three months ended September 30, 2009 were $(72,277) in
comparison with $1,080,161 for the comparable quarter a year ago.
The three month period ended September 30, 2008 included a $607,908 charge for a
loss on the issuance of common stock and warrants in payment of accrued interest
and penalties to certain convertible noteholders. There was no comparable charge
in the three month period ended September 30, 2009.
Both periods include changes in the fair value of derivative liability. For the
three months ended September 30, 2009, the change in the estimated fair value of
derivative liability was a gain of $282,096 and for the three months ended
September 30, 2008, the change in estimated fair value was a gain of $76,275.
Interest expense was $176,055 for the three months ended September 30, 2009
compared to $551,042 in the corresponding prior period, a decrease of $374,987.
The various components of our interest expense are shown in the following table:
Quarter Ended Quarter Ended Change
9/30/09 9/30/08
--------- --------- ---------
Actual Interest Expense $ 76,683 $ 66,148 $ 10,535
Amortization of Deferred Financing Costs 13,219 43,073 (29,854)
Amortization of Note Discounts 82,686 434,942 (352,256)
Finance Charges from Vendors 3,467 6,879 (3,412)
--------- --------- ---------
Total Interest Expense $ 176,055 $ 551,042 $(374,987)
========= ========= =========
As noted in the above table, the primary factor in the $374,987 reduction in
interest expense was the $352,256 reduction in amortization of note discounts.
This occurred because a significant portion of our note discounts were fully
amortized as of September 30, 2009.
Net Loss
As a result of the increased expenses noted above, we recorded a consolidated
net loss of approximately $726,000 and $1,813,000 for the quarters ended
September 30, 2009 and 2008, respectively.
Basic and diluted loss per common share were ($0.01) for the three month period
ended September 30, 2009 compared to ($0.04) for the period ended September 30,
2008.
24
SIX MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO THE SIX MONTHS ENDED SEPTEMBER
30, 2008
Operating Expenses
Consolidated operating expenses for the six months ended September 30, 2009 were
$1,439,832 in comparison with $1,356,318 for the comparable period a year ago.
This increase of $83,514, or 6%, was due to an increase in professional fees of
$120,425 and an increase in payroll and related expenses of $17,548, which was
partially offset by a decrease in general and administrative expenses of
$54,459.
The $120,425 increase in our professional fees was primarily due to a $108,295
increase in the fees paid for investor relations services and a $64,769 charge
by a contract manufacturer for establishing the systems to manufacture our
product under the FDA's good manufacturing practices and also to produce both a
trial product manufacturing run and to produce our first commercial batch of
products. Those increases were partially offset by a $40,821 reduction in our
accounting fees, a $13,443 reduction in our legal fees and a $43,518 decrease in
our fees paid for scientific consulting services. $223,200 of the professional
fees for the six months ended September 30, 2009 were paid for through issuances
of our common stock.
The $17,548 increase in payroll and related expenses was due to a $164,555
increase in non-cash stock-based compensation expense, which was partially
offset by a $147,007 decrease in cash-based compensation due to headcount
reductions.
The $54,459 decrease in general and administrative expenses was due primarily to
a $64,604 decrease in lab supplies and a $14,929 decrease in insurance expense
due to headcount reductions. That decrease was partially offset by increases in
rent of $23,471 related to our move to new locations and to a $14,864 increase
in travel and entertainment largely related to attending investor conferences.
Other Expenses (Income)
Other expenses (income) consist primarily of the change in the fair value of our
derivative liability, interest expense and other expense. Other expenses
(income) for the six months ended September 30, 2009 were $281,707 in comparison
with $1,455,317 for the comparable period a year ago.
The six month period ended September 30, 2008 included a $607,908 charge for a
loss on the issuance of common stock and warrants in payment of accrued interest
and penalties to certain convertible noteholders. There was no comparable charge
in the six month period ended September 30, 2009.
Both periods include changes in the fair value of derivative liability. For the
six months ended September 30, 2009, the change in the estimated fair value of
derivative liability was a gain of $244,762 and for the six months ended
September 30, 2008, the change in estimated fair value was a gain of $263,967.
Interest expense was $492,712 for the six months ended September 30, 2009
compared to $1,113,890 in the corresponding prior period, a decrease of
$621,178. The various components of our interest expense are shown in the
following table:
Six Months Six Months
Ended Ended Change
9/30/09 9/30/08
--------- --------- ---------
Actual Interest Expense $ 156,307 $ 128,955 $ 27,352
Amortization of Deferred Financing Costs 13,219 81,323 (68,104)
Amortization of Note Discounts 315,685 898,129 (582,444)
Finance Charges from Vendors 7,501 5,483 2,018
--------- --------- ---------
Total Interest Expense $ 492,712 $1,113,890 $(621,178)
========= ========== =========
As noted in the above table, the primary factor in the $621,178 reduction in
interest expense was the $582,444 reduction in amortization of note discounts.
This occurred because a significant portion of our note discounts were fully
amortized as of September 30, 2009.
25
Net Loss
As a result of the increased expenses noted above, we recorded a consolidated
net loss of approximately $1,722,000 and $2,812,000 for the six month periods
ended September 30, 2009 and 2008, respectively.
Basic and diluted loss per common share were ($0.03) for the six month period
ended September 30, 2009 compared to ($0.07) for the period ended September 30,
2008.
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 September 30, 2009 was approximately $92,000
compared to approximately $6,000, at March 31, 2009, representing an increase of
approximately $86,000. During the six months ended September 30, 2009, operating
activities used net cash of approximately $932,000, while we received
approximately $1,028,000 from financing activities from the issuance of common
stock and convertible notes. In addition, during this period we used $10,000 in
investing activities related to expenditures related to additions to patents and
patents pending.
During the six month period ended September 30, 2009, net cash used in operating
activities resulted primarily from the approximate net loss of $1,722,000 and
the non-cash gain of approximately $245,000 relating to the change in the
estimated fair value of derivative liability offset by the amortization of note
discounts of approximately $329,000, fair market value of common stock of
approximately $304,000 issued in payment for services and approximately $299,000
in stock-based compensation.
A decrease in working capital during the six months ended September 30, 2009 in
the amount of approximately $160,000 changed our negative working capital
position to approximately ($4,264,000) at September 30, 2009 from a negative
working capital of approximately ($4,104,000) at March 31, 2009.
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. Subsequent to
September 30, 2009, we raised an additional $430,000 through the sale to
accredited investors of convertible notes and common stock purchase warrants,
however, we continue to seek additional financing.
We are a development stage medical device company that has not yet engaged in
significant commercial activities. The primary focus of our resources is the
advancement of our proprietary Hemopurifier(R) platform treatment technology,
which is designed to rapidly reduce the presence of infectious viruses and
toxins in human blood. Our focus is to prepare our Hemopurifier(R) to treat
chronic viral conditions, acute viral conditions and viral-based bioterror
threats in human clinical trials.
We plan to continue research and development activities related to our
Hemopurifier(R) platform technology, with particular emphasis on the advancement
of our treatment for "Category A" pathogens as defined by the Federal Government
under Project Bioshield and the All Hazards Preparedness Act of 2006. The
Company has filed an Investigational Device Exemption ("IDE") with the FDA in
order to proceed with human safety studies of the Hemopurifier(R). Such studies,
complemented by planned IN VIVO and appropriate animal IN VITRO studies, should
allow us to proceed to the Premarket Approval ("PMA") process. The PMA process
is the last major FDA hurdle in determining the safety and effectiveness of
Class III medical devices (of which the Hemopurifier(R) is one).
Subject to the availability of working capital, we anticipate continuing to
increase spending on research and development over the next 12 months.
Additionally, associated with our anticipated increase in research and
development expenditures, we anticipate purchasing additional amounts of
equipment during this period to support our laboratory and testing operations.
Operations to date have consumed substantial capital without generating
revenues, and will continue to require substantial and increasing capital funds
to conduct necessary research and development and pre-clinical and clinical
testing of our Hemopurifier(R) products, as well as market any of those products
that receive regulatory approval. 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 dependent for at least the next
several years on our ability to sell securities, borrow funds or a combination
thereof. Future capital requirements will depend upon many factors, including
progress with pre-clinical testing and clinical trials, the number and breadth
of our clinical programs, the time and costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other proprietary
rights, the time and costs involved in obtaining regulatory approvals, competing
technological and market developments, as well as 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, and presently require a minimum
of $150,000 per month to sustain operations.
26
We do not believe that inflation has had or is likely to have any material
impact on our limited operations.
At the date of this filing, we plan to purchase significant amounts of equipment
and hire significant numbers of employees subject to successfully raising
additional capital.
In September 2009, we terminated our month-to-month rental arrangement for our
offices and laboratory and we entered into two new leases for office and
laboratory space. The terms of the new leases are three years and two years,
respectively, and the initial base lease payments are $4,746.15 per month and
$1,667.00 per month, respectively. We expect that the cost of our new facilities
will be less than the cost of our old facilities.
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 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, 2009.
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.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer, who is also our acting 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 the end of the period covered by this Quarterly
Report.
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 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 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.
27
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. In connection with our
termination of our lease at our former headquarters, our former landlord, BMR
3030 Bunker Hill Street LLC, commenced an action in the Superior Court of
California, County of San Diego, against us on September 14, 2009 seeking
damages of approximately $25,000 for alleged unpaid rent and for surrender of
the premises. All amounts were timely paid and the premises were timely
surrendered. The former landlord has agreed to dismiss the action promptly.
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.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the quarter ended September 30, 2009, 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 July 2009, we issued 518,649 shares of common stock as a result of
conversions of $100,566 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
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 $1,219,500 have reached maturity and are
past due. We are continually reviewing other financing arrangements to retire
all past due notes. Additionally, on July 30, 2008, the holders of the Amended
Series A Convertible Notes notified us that we were in default on the notes due
to our failure to register the warrants by March 31, 2008 and for failing to
make required interest payments. At September 30, 2009, we had accrued interest
in the amount of $419,152 associated with these notes and accrued liabilities
payable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On September 16, 2009, we held our Annual Meeting of Stockholders (the "Annual
Meeting"). At the Annual Meeting, our four incumbent directors, James A. Joyce,
Richard H. Tullis, Franklyn S. Barry, Jr. and Edward G. Broenniman, were
reelected as members of our board of directors. The voting with respect to each
of the nominees was as follows:
Nominee Votes For Votes Withheld
------- --------- --------------
James A. Joyce 43,120,294 362,344
Richard H. Tullis 43,304,615 178,023
Franklyn S. Barry, Jr. 43,130,815 351,823
Edward G. Broenniman 43,136,798 345,840
Stockholders also voted to ratify the appointment of Squar, Milner, Peterson,
Miranda & Williamson, LLP as the Company's independent auditors for the fiscal
year ending March 31, 2010 and to approve an amendment to our articles of
incorporation to increase the number of authorized shares of our common stock
from 100,000,000 to 250,000,000. Voting with respect to those two proposals was
as follows:
Proposal Votes For Votes Against Abstentions Broker Non-Votes
-------- --------- ------------- ----------- ----------------
Ratification of auditors 43,219,670 218,889 44,079 0
Amendment of articles of incorporation 40,316,985 3,052,337 113,316 0
28
ITEM 5. OTHER INFORMATION.
In September 2009, we gave notice that we were terminating the month-to-month
rental arrangement for our offices and laboratory effective October 3, 2009 and
we entered into two new leases for office and laboratory space. The terms of the
new leases are three years and two years, respectively, and the initial base
lease payments are $4,746.15 per month and $1,667.00 per month, respectively. We
expect that the cost of our new facilities will be less than the cost of our old
facilities, which was $10,075 per month for rent and common area maintenance
charges.
In October and to date in November 2009, we have raised $430,000 through the
issuance in a private placement of 10% convertible notes to accredited
investors. The notes are convertible into 1,720,000 shares of our common stock
at a fixed conversion price of $0.25 per share. The investors also received
1,720,000 three year warrants to purchase shares of our common stock at $0.25
per share.
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*
3.2 Bylaws of Aethlon Medical, Inc.*
10.1 Form of Convertible Promissory Note (1)
10.2 Form of Common Stock Purchase Warrant (1)
10.3 Form of Common Stock Purchase Warrant (2)
10.4 Form of Subscription Agreement (3)
10.5 Form of Convertible Promissory Note (4)
10.6 Office Lease, dated as of September 16, 2009, between Glenborough
Aventine, LLC and Aethlon Medical, Inc.*
10.7 Standard Industrial Net Lease, dated as of September 28, 2009, between
Sorrento Business Complex and Aethlon Medical, Inc.*
31.1 Certification of Principal Executive Officer and Principal Financial
Officer pursuant to Securities Exchange Act rules 13a- 15 and 15d-15(c)
as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.*
32.1 Certification of James A. Joyce, Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.*
* Filed herewith.
(1) Incorporated by reference to the exhibit of the same number to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 2009.
(2) Incorporated by reference to Exhibit 4.1 to the Company's Current Report on
Form 8-K dated August 25, 2009.
(3) Incorporated by reference to Exhibit 10.1 to the Company's Current Report on
Form 8-K dated August 25, 2009.
(4) Incorporated by reference to Exhibit 10.2 to the Company's Current Report on
Form 8-K dated August 25, 2009.
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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: NOVEMBER 16, 2009 BY: /S/ JAMES A. JOYCE
---------------------------
JAMES A. JOYCE
CHAIRMAN, PRESIDENT, CHIEF
ACCOUNTING OFFICER AND
CHIEF EXECUTIVE OFFICER
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