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,December 31, 2008
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____to_____
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
---------------------
(Exact name of registrant as specified in its charter)
NEVADA 13-3632859
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 BUNKER HILL ST, SUITE 4000, SAN DIEGO, CA 92109
----------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(858) 459-7800
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
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
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 [_] Smaller reporting company [X]
(Do not check if a smaller reporting company)
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 NovemberFebruary 12, 2008,2009, the registrant had outstanding 43,437,96647,081,465 shares of
common stock, $.001 par value.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30,DECEMBER 31, 2008
(UNAUDITED) AND MARCH 31, 2008 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIXNINE MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2008 AND 2007
AND FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH
SEPTEMBER 30,DECEMBER 31, 2008 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIXNINE MONTHS
ENDED SEPTEMBER 30,DECEMBER 31, 2008 AND 2007 AND FOR THE PERIOD JANUARY 31, 1984
(INCEPTION) THROUGH SEPTEMBER 30,DECEMBER 31, 2008 (UNAUDITED) 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 1720
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 2124
ITEM 4T. CONTROLS AND PROCEDURES 2124
PART II. OTHER INFORMATION 2225
ITEM 1. LEGAL PROCEEDINGS 2225
ITEM 1A. RISK FACTORS 2225
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 2225
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 2225
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 2225
ITEM 5. OTHER INFORMATION 2225
ITEM 6. EXHIBITS 2326
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30,December 31, March 31,
2008 2008
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash $ --92,020 $ 254,691
Deferred financing costs 33,22322,293 71,139
Prepaid expenses and other current assets 3,60077,832 3,600
------------ ------------
Total current assets 36,823192,145 329,430
Property and equipment, net 4,0752,652 8,313
Patents and patents pending, net 142,273139,982 137,162
Other assets 13,200 13,200
------------ ------------
Total assets $ 196,371347,979 $ 488,105
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable and accrued liabilities $ 424,363367,008 $ 351,261
Due to related parties 598,753 949,063
Notes payable, net of discounts 1,055,277352,500 633,611
Convertible notes payable, net of discounts 875,8982,412,973 152,530
Warrant obligation 369,128-- 633,095
Other current liabilities 870,923709,391 1,090,809
------------ ------------
Total current liabilities 4,194,3424,440,625 3,810,369
Commitments and Contingencies (Note 8)
Stockholders' Deficit
Common stock, par value $0.001 per share;
100,000,000 shares authorized; 42,416,56844,881,414 and
38,991,151 shares issued and outstanding as of
September 30,December 31, 2008 and March 31, 2008, respectively 42,41844,883 38,992
Additional paid-in capital 30,998,50233,245,916 28,866,000
Deficit accumulated during development stage (35,038,891)(37,383,445) (32,227,256)
------------ ------------
(3,997,971)(4,092,646) (3,322,264)
------------ ------------
Total liabilities and stockholders' deficit $ 196,371347,979 $ 488,105
============ ============
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 and SixNine Months Ended
September 30,December 31, 2008 and 2007 and
For the Period January 31, 1984 (Inception) Through September 30,December 31, 2008
(Unaudited)
January 31, 1984
Three Months Three Months SixNine Months SixNine Months (Inception)
Ended Ended Ended Ended through
September 30, September 30, September 30, September 30, September 30,December 31, December 31, December 31, December 31, December 31,
2008 2007 2008 2007 2008
------------ ------------ ------------- ------------ ------------
REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research and development -- -- -- -- 35,810
------------ ------------ ------------ ----------- ------------
-- -- -- -- 1,533,568
EXPENSES
Professional Fees 282,325 253,671 442,600 441,076 7,386,269151,022 132,419 593,622 573,495 7,537,291
Payroll and related 302,814 300,590 655,577 821,776 10,154,724630,958 285,373 1,286,535 1,107,149 10,785,682
General and administrative 147,520 135,767 258,141 298,449 5,708,33885,389 109,183 343,530 407,632 5,793,727
Impairment -- -- -- -- 1,313,253
------------ ------------ ------------ ----------- ------------
732,659 690,028 1,356,318 1,561,301 24,562,584867,369 526,975 2,223,687 2,088,276 25,429,953
------------ ------------ ------------ ----------- ------------
OPERATING LOSS (732,659) (690,028) (1,356,318) (1,561,301) (23,029,016)(867,369) (526,975) (2,223,687) (2,088,276) (23,896,385)
------------ ------------ ------------ ----------- ------------
OTHER EXPENSE (INCOME)
Loss on extinguishment of debt -- -- -- -- 1,763,8671,063,344 489,013 1,063,344 489,013 2,827,211
Loss on settlement of accrued
interest and damages 607,908-- -- 607,908 -- 607,908
Change in fair value of
warrant obligation (76,275) (492,250) (263,967) (914,025) 1,571,55450,064 633,249 (213,903) (280,776) 1,621,618
Interest and other debt expenses 551,042 75,107 1,113,890 125,726 7,695,797363,964 952,068 1,477,854 1,077,794 8,059,761
Interest income (2,514)(187) -- (2,514)(2,701) -- (19,929)(20,116)
Other -- (17,833)1,778 -- 18,24920,027 390,678
------------ ------------ ------------ ----------- ------------
1,080,161 (434,976) 1,455,317 (770,050) 12,009,8751,477,185 2,076,108 2,932,502 1,306,058 13,487,060
------------ ------------ ------------ ----------- ------------
NET LOSS $ (1,812,820)(2,344,554) $ (255,052)(2,603,083) $ (2,811,635) $ (791,251) $(35,038,891)(5,156,189) $(3,394,334) $(37,383,445)
============ ============ ============ =========== ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.04) $ (0.01)(0.05) $ (0.07) $ (0.02)(0.12) $ (0.10)
============ ============ ============ ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING-BASIC AND DILUTED 41,318,195 32,997,498 40,476,073 32,489,94943,506,386 35,077,841 41,486,177 33,352,579
============ ============ ============ ===========
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 SIXNINE MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30,DECEMBER 31, 2008
(Unaudited)
SixNine Months SixNine Months January 31, 1984
Ended Ended (Inception)
September 30, September 30,December 31, December 31, Through
2008 2007 September 30,December 31,
2008
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (2,811,635)(5,156,189) $ (791,251) $(35,038,891)(3,394,334) $(37,383,445)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 8,820 12,668 1,037,76312,534 16,616 1,041,477
Amortization of deferred consulting fees -- -- 109,000
Loss on settlement of accrued
interest and damages 607,908 -- 607,908
Gain on sale of property and equipment -- 1,777-- (13,065)
Gain on settlement of debt -- -- (131,175)
Loss on settlement of accrued legal liabilities -- -- 142,245
Stock based compensation 134,192 352,951 1,083,679590,832 422,397 1,540,319
Loss on debt extinguishment -- -- 1,763,8671,063,344 489,013 2,827,211
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 90,072 194,119 3,902,145249,186 197,107 4,061,259
Change in fair value of warrant liability (263,967) (914,025) 1,571,554(213,903) (280,776) 1,621,618
Amortization of debt discount and
deferred financing costs 949,352 7,958 3,431,0021,251,326 1,469,181 3,732,976
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 -- (3,709) 157,937(14,315) (430) 143,622
Other assets -- -- (13,200)
Accounts payable and other current
liabilities 138,260 77,270 2,278,867136,799 (432,547) 2,221,512
Due to related parties (28,000) (5,000) 1,298,4281,354,322
------------ ------------ ------------
Net cash used in operating activities (1,174,998) (1,067,242) (13,565,724)(1,500,478) (1,518,773) (13,891,204)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment -- (3,997)(4,215) (271,443)
Additions to patents and patents pending (9,693) (6,669)(6,797) (386,617)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------ ------------ ------------
Net cash used in investing activities (9,693) (10,666)(11,012) (630,267)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable -- -- 2,350,000
Principal repayments of notes payable -- -- (352,500)
Proceeds from the issuance of convertible notes
payable 430,000 60,000500,000 2,568,000
Proceeds from the issuance of common stock 500,000 757,948 9,707,222917,500 922,950 10,124,722
Professional fees related to registration statement -- -- (76,731)
------------ ------------ ------------
Net cash provided by financing activities 930,000 817,948 14,195,9911,347,500 1,422,950 14,613,491
------------ ------------ ------------
Net decrease in cash (254,691) (259,960) --(162,671) (106,835) 92,020
Cash at beginning of period 254,691 440,106 --
------------ ------------ ------------
Cash at end of period $ --92,020 $ 180,146333,271 $ --92,020
============ ============ ============
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 SIXNINE MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30,DECEMBER 31, 2008
(Unaudited)
January 31, 1984
SixNine Months SixNine Months (Inception)
Ended Ended Through
September 30, September 30, September 30,December 31, December 31, December 31,
2008 2007 2008
------------ ------------ ------------
Supplemental disclosures of non-cash investing
and financing information:
Debt and accrued interest converted to common stock $ 232,67539,325 $ -- $ 3,029,7612,836,411
============ ============ ============
Stock option exercise by director for accrued expenses -- -- 95,000
============ ============ ============
Reclassification of warrant derivative liability to equity 419,192 -- 419,192
============ ============ ============
Additional convertible debt issued in connection with
Debt restructuring 573,211 -- 573,211
============ ============ ============
Discount on 10% convertible notes 150,095 -- 150,095
============ ============ ============
Conversion of accrued debtamounts due to related parties 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 -- -- 33,800
============ ============ ============
Net assets of entities acquired in exchange for equity
securities -- -- 1,597,867
============ ============ ============
Debt placement fees paid by issuance of warrants 13,307 -- -- 843,538856,845
============ ============ ============
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,December 31, 2008
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 virus and toxins from infecting unaffected tissues
and cells. We have completed pre-clinical blood testing of the Hemopurifier(R)
to treat HIV and Hepatitis-C, and have completed human safety trials on
Hepatitis-C infected patients in India and are in the process of obtaining
regulatory approval from the U.S. Food and Drug Administration ("FDA") to
initiate clinical trials in the United States.
The commercialization of the Hemopurifier(R) will require the completion of
human efficacy clinical trials. The approval of any application of the
Hemopurifier(R) in the United States will necessitate the approval of the FDA to
initiate human studies. Such studies could take years to demonstrate safety and
effectiveness in humans and there is no assurance that the Hemopurifier(R) will
be cleared by the FDA as a device we can market to the medical community. We
also expect to face similar regulatory challenges from foreign regulatory
agencies, should we attempt to commercialize and market the Hemopurifier(R)
outside of the United States. As a result, we have not generated revenues from
the sale of any Hemopurifier(R) application. Additionally, there have been no
independent validation studies of our Hemopurifiers(R) to treat infectious
disease. We manufacture our products on a small scale for testing purposes but
have yet to manufacture our products on a large scale for commercial purposes.
All of our pre-clinical human blood studies have been conducted in our
laboratories under the direction of Dr. Richard Tullis, our Chief Science
Officer.
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 interim financial statements
have been prepared in accordance 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 in order to make the financial
statements not misleading have been included. The condensed consolidated balance
sheet as of March 31, 2008 was derived from our audited financial statements.
Operating results for the three and sixnine month periods ended September 30,December 31, 2008
are not necessarily indicative of the results that may be expected for the year
ending March 31, 2009. For further information, refer to our Annual Report on
Form 10-KSB for the year ended March 31, 2008, which includes audited financial
statements and footnotes as of March 31, 2008 and for the years ended March 31,
2008 and 2007 and the period January 31, 1984 (Inception) through March 31,
2008.
NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying unaudited condensed consolidated interim 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 ($4,158,000)4,248,000), recurring losses from operations and a deficit
accumulated during the development stage of approximately ($35,039,000)37,383,000) at
September 30,December 31, 2008, 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, 2009. Therefore we will be required to seek
additional funds through debt and/or equity financing arrangements to finance
our current and long-term operations.
7
We are currently addressing our liquidity issue by exploring investment capital
opportunities through the public markets, specifically, through private
placement of common stock. WeIf we are able to access debt/equity capital, then we
believe that our access to capital, together with
existing cash resources,we will behave sufficient liquidity to meet our liquidityoperating needs for fiscal 2009.the
next twelve months. However, no assurance can be given that we will receive any
funds in a connection with our capital raising efforts, in which case we will be
required to significantly curtail operations, sell or license out significant
portions of our technology, or possibly cease operations.
The unaudited condensed consolidated financial statements do not include any
adjustments relating to the recoverability of assets that might be necessary
should we be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies presented below is designed
to assist the reader in understanding our condensed consolidated interim
financial statements. Such financial statements and related notes are the
representations of our management, who are responsible for their integrity and
objectivity. These accounting policies conform to GAAP in all material respects,
and have been consistently applied in preparing the accompanying condensed
consolidated financial statements.
PRINCIPLEPRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc. and Cell Activation, Inc. (collectively hereinafter referred
to as the "Company" or "Aethlon"). These subsidiaries are dormant and there are
no material intercompany transactions or balances.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year in
accordance with SFAS No. 128, "EARNINGS PER SHARE."
Securities that could potentially dilute basic loss per share (prior to their
conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive. Based
on the treasury method, theThe
potentially dilutive common shares outstanding for the three and sixnine month
periods ended September 30,December 31, 2008 and 2007, which include shares underlying
outstanding stock options, warrants and convertible debentures were as follows:
September 30, September 30,December 31, December 31,
2008 2007
Three months ended 3,699,270 18,459,500
Six14,048,072 16,453,788
Nine months ended 7,065,020 17,899,81216,687,988 16,432,760
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.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred approximately $383,000$526,000 and $440,000$592,000 of research and development
expenses during the sixnine months ended September 30,December 31, 2008 and 2007, respectively,
whichrespectively.
For the three months ended December 31, 2008 and 2007, we incurred approximately
$143,000 and $153,000 of research and development expenses. Our research and
development expenses are included in various operating expense line items in the
accompanying condensed consolidated statements of operations.
EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY OTHER THAN EMPLOYEES
We follow SFAS No. 123-R (as interpreted by Emerging Issues Task Force ("EITF")
Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES") ("EITF No. 96-18") to account for transactions involving goods and
services provided by third parties where we issue equity instruments as part of
the total consideration. Pursuant to paragraph 7 of SFAS No. 123-R, we account
for such transactions using the fair value of the consideration received (i.e.
the value of the goods or services) or the fair value of the equity instruments
issued, whichever is more reliably measurable.
8
We apply EITF No. 96-18, in transactions, when the value of the goods and/or
services are not readily determinable and (1) the fair value of the equity
instruments is more reliably measurable and (2) the counterparty receives equity
instruments in full or partial settlement of the transactions, using the
following methodology:
(a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
(b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the
date of the contract.
(c) For any transactions not meeting the criteria in (a) or (b) above, we
re-measure the consideration at each reporting date based on its then
current stock value.
8
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS No.144 ("SFAS 144"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. We believe that
no impairment existed at or during the three or sixnine months ended September 30,December 31,
2008.
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"). Pursuant to
EITF Issue No. 98-5, "ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL
CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF No.
00-27, "APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS,"
the estimated fair value of the BCF is recorded, when applicable, in the
consolidated financial statements as a discount from the face amount of the
notes. Such discounts are accreted to interest expense over the term of the
notes using the effective yield basis.
DERIVATIVE LIABILITIES AND CLASSIFICATION
We evaluate free-standing instruments (or embedded derivatives) indexed to its
common stock to properly classify such instruments within equity or as
liabilities in our financial statements, pursuant to the requirements of the
EITF Issue No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED
TO AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," EITF Issue No. 01-06,
"THE MEANING OF INDEXED TO A COMPANY'S OWN STOCK," FSP EITF Issue No. 00-19-2,
"ACCOUNTING FOR REGISTRATION PAYMENT ARRANGEMENTS," and SFAS No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as amended. Our
policy is to settle instruments indexed to our common shares on a
first-in-first-out basis. Pursuant to EITF Issue No. 00-19, the classification
of an instrument indexed to our stock, which is carried as a liability, must be
reassessed at each balance sheet date. If the classification required under this
Consensus changes as a result of events during a reporting period, the
instrument 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.
REGISTRATION PAYMENT ARRANGEMENTS
We account for our liquidated damages on registration rights agreements in
accordance with FASB Staff Position EITF Issue No. 00-19-2 "ACCOUNTING FOR
REGISTRATION PAYMENT ARRANGEMENTS" which specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement should be separately recognized and measured in
accordance with SFAS No. 5, "ACCOUNTING FOR CONTINGENCIES" ("SFAS No. 5").
Pursuant to SFAS No. 5, a liability related to potential liquidated damages if
such damages were determined to be both probable and reasonably estimable.
We
had accrued liquidated damages on the 10% Series A Convertible Notes. In
connection with the amendment of these instruments and related warrants on
November 29, 2007, the liquidated damages related to these Notes were settled.
As of September 30, 2008, we made a payment to the holders of the Amended Series
A 10% Convertible Notes in the form of common stock and warrants to settle
accrued amounts of interest and liquidated damages. Since we filed a
registration statement to register the relevant securities relating to the 10%
Series A Convertible Notes and that registration statement was declared
effective in October 2008, we will not incur any further liquidated damages
relating to the 10% Series A Convertible Notes.
We also have accrued $201,900 in liquidated damages in connection with potential
liquidated damages related to other transactions that required liquidated
damages on registration rights agreements.
9
The following table lists the amounts of liquidated damages accrued by
Transaction. As registration has now occurred for each of the following
transactions, no further liquidated damages are being accrued.
Accrued
Transaction Damages Damages Formula
- ---------------------------------------------------------------------------
8% Notes 119,000 Maximum of $150,000
2008 9% Notes 48,400 Maximum of $75,000
Stock Units 34,500 No cap on damages
--------
$201,900
========
See Notes 4 and 5 for further description.
STOCK BASED COMPENSATION
Effective April 1, 2006, we adopted the provisions of SFAS No. 123-R,
"Share-Based Payment," ("SFAS No. 123-R"). SFAS No. 123-R requires employee
stock options and rights to purchase shares under stock participation plans to
be accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the award. We
previously accounted for awards granted under our equity incentive plan under
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations, and
provided the required pro forma disclosures prescribed by SFAS No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION," as amended. The exercise price of
options is generally equal to the market price of our common stock (defined as
the closing price as quoted on the Over-the-Counter Bulletin Board on the date
of grant. Accordingly, no share-based compensation was recognized in the
financial statements for periods prior to April 1, 2006.
Under the modified prospective method of adoption for SFAS No. 123-R, the
compensation cost that we recognize beginning April 1, 2006 includes (a)
compensation cost for all equity incentive awards granted prior to, but not yet
vested as of April 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all equity incentive awards granted subsequent to April 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123-R.
From time to time, our Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone basis
outside of any of our formal stock plans. The terms of these grants are
individually negotiated and generally expire within five years from the grant
date. Such grants are recorded based on the grant date fair value of the equity
instruments.
In August 2000, we adopted the 2000 Stock Option Plan ("Stock Option Plan"),
which was approved by our stockholders in December 2000. The Stock Option Plan
provides for the issuance of up to 500,000 options to purchase shares of common
stock. Such options can be incentive options or nonstatutory options, and may be
granted to employees, directors and consultants. The Stock Option Plan has
limits as to the eligibility of those stockholders who own more than 10% of our
stock, as defined. The options granted pursuant to the Stock Option Plan may
have exercise prices of no less than 100% of fair market value of the Company's
common stock at the date of grant (incentive options), or no less than 75% of
fair market value of such stock at the date of grant (nonstatutory). At September 30,December
31, 2008, we had granted 47,500 options under the 2000 Stock Option Plan of
which 15,000 had been forfeited. All of these options vested prior to the
adoption of SFAS 123-R. We have reserved 467,500 shares for future issuance.
Share-based compensation resulting from direct stock grants and from the
application of SFAS No. 123-R to options outstanding resulted in expenses of
$64,696$456,640 and $134,192$590,675 for the three and sixnine month periods ended September 30,December 31,
2008 and $69,446 and $352,951$422,397 for the three and sixnine month periods ended
September 30,December 31, 2007. We use the Binomial Lattice option pricing model for
estimating fair value of options granted.
10
The following table lists the components of our stock-based compensation for the
three and nine month periods ended December 31, 2008:
Three Months Ended Nine Months Ended
December 31, 2008 December 31, 2008
----------------- -----------------
Stock Option Expense $416,672 $546,064
Direct Stock Grants 39,968 44,768
-------- --------
Total Stock-Based Compensation Expense $456,640 $590,832
======== ========
The following table summarizes the effect of share-based compensation resulting
from direct share grants and from the application of SFAS No. 123-R to options
granted:
Three Months Ended Three Months Ended SixNine Months Ended SixNine Months Ended
September 30,December 31, 2008 September 30,December 31, 2007 September 30,December 31, 2008 September 30,December 31, 2007
------------------ ------------------ ------------------ ------------------
Payroll and related $ 64,696456,640 $ 69,446 $ 134,192590,832 $ 352,951422,397
========== ========= =========== ==========
Net share-based compensation effect
in net loss from continuing operations $ 64,696456,640 $ 69,446 $ 134,192590,832 $ 352,951422,397
========== ========= =========== ==========
Basic and diluted loss per common share $ (0.00)(0.01) $ (0.00) $ (0.00)(0.01) $ (0.01)
========== ========= =========== ==========
10
In accordance with SFAS No. 123-R, beginning on April 1, 2006, we adjust share-based compensation on a
quarterly basis for changes to the estimate of expected award forfeitures based
on actual forfeiture experience. The effect, if any, of adjusting the forfeiture
rate for all expense amortization is recognized in the period the forfeiture
estimate is changed. The effect of forfeiture adjustments for the three month
period ended September 30,December 31, 2008 was insignificant.
The following weighted average assumptions were used in the valuation of these
instruments.
SixNine Months Ended
September 30December 31
-------------------------------
2008 2007
None Issued
----------- ----------
Annual dividends n/azero zero
Expected volatility n/a 92%112.2% 91.2%
Risk free interest rate n/a 4.72%1.02% 4.85%
Expected life n/a 2.143.0 years 3.0 years
The expected volatility is based on the historic volatility. The expected life
of options granted is based on the "simplified method" described in the SEC's
Staff Accounting Bulletin No. 107 due to changes in the vesting terms and
contractual life of current option grants compared to our historical grants.
Options outstanding that have vested and are expected to vest as of September
30,December 31,
2008 are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term in Years Value (1)
- ------------------------- ----------- -------- ------------- ----------
Vested (2) 9,772,39411,439,060 $ 0.38 4.800.37 5.31 $ --
Expected to vest 1,166,6663,383,334 0.35 8.649.35 $ 35,000--
----------- ----------
Total 10,939,06014,822,394 $ 35,000--
=========== ==========
(1) These amounts represent the difference between the exercise price and $0.38,$0.22,
the closing market price of our common stock on September 30,December 31, 2008 as quoted on
the Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all
in-the-money options outstanding.
(2) 4,278,375 options were granted prior to April 1, 2006 (the date of adoption
for SFAS 123-R) and were fully vested at the date of adoption.
Additional information with respect to stock option activity is as follows:
Outstanding Options
-------------------------------------
Weighted Aggregate
Number of Average Intrinsic
Shares Exercise Price Value (1)
- --------------------------- ------ -------------- ----------
March 31, 2008 10,954,060 $ 0.38 $1,643,109
==========
Grants --4,050,000 --
Exercises -- --
Cancellations (15,000)(181,666) --
---------- ------
September 30,December 31, 2008 10,939,06014,822,394 $ 0.380.37 $ 35,000--
========== ====== ==========
Options exercisable at:
September 30,December 31, 2008 9,772,39411,439,060 $ 0.380.37
========== ======
(1) Represents the difference between the exercise price and the March 31, 2008
or September 30,December 31, 2008 market price of our common stock, which was $0.53 and
$0.38, respectively.
11
$0.22, respectively, for all in-the-money options outstanding.
At September 30,December 31, 2008, there was approximately $710,000$812,000 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted average period of 2.152.5 years.
11
INCOME TAXES
Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
difference between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. 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 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS," which
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not
require any new fair value measurements. The guidance in SFAS No. 157 applies to
derivatives and other financial instruments measured at estimated fair value
under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We adopted Statement of Financial
Accounting Standards No. 157 ("SFAS No. 157") as of April 1, 2008. SFAS No. 157
applies to certain assets and liabilities that are being measured and reported
on a fair value basis. SFAS No. 157 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 Statement
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. The Statement
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.
The fair value of our warrant liabilities is determined based on observable
market based inputs or unobservable inputs that are corroborated by market data,
which is a Level 3 classification. We record variations in our warrant liability
account on our balance sheet at fair value with changes in fair value recorded
in our consolidated statements of operations.
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented, with respect to warrants
utilizing the Binomial Lattice option pricing model:
QuarterNine Months Ended September 30,December 31, 2008
-------------------------------------------------------------------
Risk free interest rate 2.64% - 3.01%
Average expected life 3 - 5 years
Expected volatility 83.6% - 84.8%
Expected dividends None
We did not record the fair value of any new warrants issued in the three months
ended December 31, 2008 nor did we make any changes to our valuation techniques
in either the quarter or nine month period ended September 30,December 31, 2008.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 expands the scope of
specific types of assets and liabilities that an entity may carry at fair value
on its statement of financial position, and offers an irrevocable option to
record the vast majority of financial assets and liabilities at fair value, with
changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We have not yet elected to use the fair
value option, and as such, our adoption AFAS No. 159 as of April 1, 2008 did not
have a material impact on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on our present or future
consolidated financial statements.12
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted
Accounting Principles ("SFAS 162"). This statement identifies the sources of and
framework for selecting the accounting principles to be used in the preparation
of financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles ("GAAP") in the United
States ("GAAP hierarchy"). Because the current GAAP hierarchy is set forth in
the American Institute of Certified Public Accountants Statement on Auditing
Standards No. 69, it is directed to the auditor rather than to the entity
responsible for selecting accounting principles for financial statements
presented in conformity with GAAP. Accordingly, the FASB concluded the GAAP
hierarchy should reside in the accounting literature established by the FASB and
issued this statement to achieve that result. The provisions of SFAS 162 are
effective November 15, 2008, which is 60 days following the SEC's approval of
the Public Comp anyCompany Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles. Management believes that adoption of SFAS 162 will not have a
material effect on the consolidated financial statements.
12
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)". FSP APB 14-1 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. FSP APB 14-1 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 is effective for us in the first quarter of
fiscal year 2010. We are currently evaluating the impact of FSP APB 14-1.
Other recent accounting pronouncements or guidance issued by the FASB (including
its Emerging Issues Task Force), the American Institute of Certified Public
Accountants, or the Securities and Exchange Commission did not or are not
believed by management to have a material impact on our present or future
consolidated financial statements.
NOTE 4. NOTES PAYABLE
Notes payable consist of the following at December 31, 2008:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 347,500 -- $ 347,500
10% Note payable, past due 5,000 -- 5,000
----------- --------- -----------
Total Notes Payable $ 352,500 ($ --) $ 352,500
=========== ========= ===========
During the three months ended December 31, 2008, we restructured our 8% and 9%
Notes and for accounting purposes, we recorded an extinguishment loss of
approximately $1,063,000 (See Note 5 for further description). Our plans to
satisfy the remaining outstanding balance on the 12% and 10% Notes include
repayment with available funds or converting the notes to common stock at market
value.
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). At September 30,December 31, 2008, $347,500 of the12% Notes with a principal balance of
the 12% Notes was$347,500 are outstanding, all which are past due, in default, and bearsbearing
interest at the default rate of 15%. At December 31, 2008, interest payable on
the 12% Notes totaled $323,188.
10% NOTES
From time to time, we issued convertible notes payable ("10% Note") 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 and may be converted to our common stock
at the conversion price of $0.50 per share at any time at the option of the
noteholder. The total amount of the original notes issued was $275,000. One
remaining 10% Note in the amount of $5,000, waswhich is past due and in default, remains
outstanding at September 30,December 31, 2008. At September 30,December 31, 2008, interest payable on this
note totaled $3,625.$3,750.
13
8% NOTES
In December 2007, we issued notes payable ("8% Notes") to two accredited
investors in the aggregate amount of $495,000 with 8% interest maturing on
September 5, 2008. In conjunction with the issuance of the 8% Notes, we also
issued three year warrants to acquire 1,485,000 shares of Common Stock at $0.50
per share.
Under this transaction, we arewere obligated to register for resale theissue registered common shares,
underlyingupon exercise of the warrants, and aswarrant. As a result, this warrant obligation doesdid not meet
the scope exception of paragraph 11(a) of SFAS No. 133. Specifically, at the
commitment date, we did not have any uncommitted registered shares to settle the
warrant obligation and accordingly, such obligation was required to
be classified as a
liability (outside of stockholders' deficit) in accordance with EITF Issue
No.00-19. The warrants were valued at $693,050 on the commitment date using a
Binomial Lattice option pricing model. Such amount was recorded as a derivative
liability with an offsetting debt discount recorded against the $495,000 face
amount of the 8% Notes and the remaining $198,050 recorded as interest expense.
The debt discount was amortized to expense over the term of the 8% Notes.
On September 5,October 8, 2008, the Company's registration statement covering the warrants
underlying the 8% Notes was declared effective. Consequently, the warrant
liability of $419,192 was reclassified into equity in accordance with EITF
00-19. On December 30, 2008, the 8% Notes matured. We are currently in negotiations to
extend thosewere restructured into convertible
notes but there can be no assurance that such extension will be
obtained on terms acceptable to us or at all.December 30, 2008. See Note 5 "Restructuring of 8% and 9% Notes"
2008 9% NOTES
In January 2008, we issued notes payable ("2008 9% Notes") to an accredited
investor in the amount of $220,000 with 9% interest maturing on October 19,
2008. In conjunction with the issuance of the 2008 9% Notes, we also issued
three year warrants to acquire 660,000 shares of Common Stock at $0.50 per
share.
Under this transaction, we arewere obligated to register for resale theissue registered common shares,
underlyingupon exercise of the warrants, and asAs a result, this warrant obligation doesdid not meet
the scope exception of paragraph 11(a) of SFAS No. 133. Specifically, at the
commitment date, we did not have any uncommitted registered common shares to
settle the warrant obligation and accordingly, such obligation was required to
be classified as
a liability (outside of stockholders' deficit) in accordance with EITF Issue No.
00-19. The warrants were valued at $222,450 on the commitment date using a
Binomial Lattice option pricing model. Such amount was recorded as a derivative
liability with an offsetting debt discount recorded against the $220,000 face
amount of the 2008 9% Notes and the remaining $2,450 recorded as interest
expense. The debt discount is amortized to expense over the term of the 2008 9%
Notes.
On October 8, 2008, the Company's registration statement covering the warrants
underlying the 8% Notes payablewas declared effective. Consequently, the warrant
liability of $419,192 was reclassified into equity in accordance with EITF
00-19. On December 30, 2008, the 8% Notes were restructured into convertible
notes on December 30, 2008. See Note 5 "Restructuring of 8% and 9% Notes"
NOTE 5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following at September 30,December 31, 2008:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 347,500 -- $ 347,500
10% Note payable, past due 5,000 -- 5,000
8% Note payable 495,000 -- 495,000
2008 9% Note payable 220,000 (12,223) 207,777
----------- --------- -----------
Total Notes Payable $ 1,067,500 ($ 12,223) $ 1,055,277
=========== ========= ===========
Our plans to satisfy the remaining outstanding balance on these notes include
converting the notes to common stock at market value or repayment with available
funds.
13
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $(115,576) $ 784,424
2008 10% Convertible Notes 430,000 (106,662) 323,338
December 2006 10% Convertible Notes 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 1,288,211 -- 1,288,211
---------- ----------- ----------
Total - Convertible Notes $2,635,211 $ (222,238) $2,412,973
========== ============ ==========
14
NOTE 5. CONVERTIBLE NOTES PAYABLEDECEMBER 2006 10% CONVERTIBLE NOTES
On December 15, 2006, we issued two 10% Convertible Notes ("December 10% Notes")
totaling $50,000 to accredited investors. The December 10% Notes accrue interest
at a rate of ten percent (10%) per annum and matured on March 15, 2007. Such
notes are convertible into shares of restricted common stock at any time at the
election of the holder at a fixed conversion price of $0.17 per share for any
conversion occurring on or before the maturity date. In addition, upon issuance,
we issued five-year Warrants ("December 10% Note Warrants") to purchase a number
of shares equal to the number of shares into which the December 10% Notes can be
converted at a fixed exercise price of $0.17. Additionally, if the December 10%
Note Warrants were exercised prior to December 15, 2007, the holder would have
received an additional warrant on the same terms as the December 10% Note
Warrants on a one to one basis. The warrants can be settled in unregistered
shares of our common stock. The December 10% Note Warrants have been valued
using a Binomial Lattice option pricing model and an associated discount of
$15,627, the relative fair value measured at the commitment date, was recorded
and presented net against the face amount of the December 10% Notes. The
convertible feature of the December 10% Notes provides for an effective
conversion rate that is below market value. Pursuant to EITF No. 98-5 and EITF
No. 00-27, we estimated the fair value of such beneficial conversion feature to
be $34,373 and recorded such amount as a debt discount. The discounts associated
with the warrants and the beneficial conversion feature were accreted to
interest expense over the term of the December 10% Notes.
On May 1, 2008, a holder of $33,000 of the December 10% Notes converted his
$33,000 principal amount and accrued interest of $6,325 at the agreed conversion
rate of $0.17 per share. As a result, we issued 232,033 shares of common stock
under this conversion.
At September 30,December 31, 2008, $17,000 of the December 10% Notes remained outstanding and
were in default.
10%AMENDED SERIES A 10% CONVERTIBLE NOTES AND AMENDMENT
From July 11, 2005 through December 15, 2005 we received cash investments
totaling $1,000,000 from accredited investors based on agreed-upon terms reached
on the cash receipt dates. Such investments were documented in November and
December 2005 in several 10% Series A Convertible Promissory Notes. The 10%
Series A Convertible Notes accrue interest at a rate of ten percent (10%) per
annum and matured on January 2, 2007. The 10% Series A Convertible Notes were
convertible into shares of our common stock at any time at the election of the
holder at a fixed conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date.
On November 2007, we entered into Amended and Restated 10% Series A Convertible
Promissory Notes (the "Amended Notes") with the holders of certain promissory
notes that we previously issued (the "Prior Notes"), and all amendments to the
Prior Notes.
The Amended Notes, in the principal amount of $1,000,000, are convertible into
an aggregate of 5,000,000 shares of our Common Stock and mature on February 15,
2009. The Amended Notes provideprovided for the payment of accrued and default interest
through December 31, 2007 in the aggregate amount of $295,248 to be paid in units
("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of one share
of our Common Stock and one Class A Common Stock Purchase Warrant (the "Class A
Warrant") to purchase one share of our Common Stock at a fixed exercise price of
$0.20 per share. If the Holders exercise the Class A Warrants on or before
February 15, 2010, we will issue them one Class B Common Stock Purchase Warrant
(the "Class B Warrant") for every two Class A Warrants exercised. The Class B
Warrants will have a fixed exercise price of $0.60 per share.
The Amended Notes also provided for the payment of liquidated damages through
November 29, 2007 in the aggregate amount $269,336 to be paid in units ("Damages
Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit consisting
of one share of our Common Stock and one Class A-1 Common Stock Purchase Warrant
(the "Class A-1 Warrant") to purchase one share of our Common Stock at a fixed
exercise price of $0.40 per share. If the Holders exercise the Class A-1
Warrants on or before February 15, 2010, we will issue them one Class B-1 Common
Stock Purchase Warrant (the "Class B-1 Warrant") for every two Class A-1
Warrants exercised. The Class B-1 Warrants will have a fixed exercise price of
$0.40 per share.
In addition, the Amended Notes provided for the issuance of Class A Principal
Common Stock Purchase Warrants (the "Class A Principal Warrant") to purchase an
aggregate of 5,000,000 shares of our Common Stock on the same terms as the Class
A Warrants.
1415
The following table summarizes the number of shares of the our Common Stock
issuable upon the conversion of the Amended Notes or the exercise of the various
warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
------------
Total 15,373,955
============
We were obligated to register the shares underlying the Class A Warrants, the
Class A-1 Warrants and the Class A Principal Warrants with the SEC by March 31,
2008, and the shares underlying the Class B Warrants and to register the Class
B-1 Warrants with the SEC by the 30th day following the issuance date of such
warrants. Since we failed to effect a registration statement by March 31, 2008,
we recorded liquidated damages of $15,000 per month through September 30, 2008,
when we stopped recording damages due to the effectiveness of a registration
statement in October 2008.
For accounting purposes, the amendment of the 10% Series A Convertible Notes was
treated as an extinguishment pursuant to EITF Issue No. 06-6. The changes in the
note agreements, conversion feature and warrants were considered substantive as
prescribed in that consensus. Consequently, at the amendment date we initially
recorded an estimated loss on extinguishment of $489,013 as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized notes (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
------------
Loss on extinguishment $ 489,013
============
Subsequently, we engaged a third party valuation firm to value the various
components of the amendment of the Series A Convertible Notes. As a result of
that valuation, we recorded an additional $58,106 of loss on extinguishment of
debt with the offset being recorded to additional paid-in capital.
The new warrants issued in connection with the Amended Notes were evaluated
pursuant to EITF Issue No. 00-19 and classified as equity instruments. In
connection with the new warrants, we recorded $4,392,664 as an increase to
additional paid in capital, based on the estimated fair value at issuance.
The
amended conversion feature contains a BCF at the date of the Amended Notes;
consequently, we recorded a discount of $1,000,000 against the notes and a
corresponding increase in additional paid in capital.
In January 2008, one of the holders of the Amended Series A Convertible Notes
converted $100,000 of their notes into 500,000 shares of common stock at the
agreed conversion rate of $0.20 per share.
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.
We subsequently registered their warrants under a registration statement
declared effective in October 2008. We were obligated to register the shares
underlying the Class A Warrants, the Class A-1 Warrants and the Class A
Principal Warrants with the SEC by March 31, 2008, and the shares underlying the
Class B Warrants and to register the Class B-1 Warrants with the SEC by the 30th
day following the issuance date of such warrants. Since we failed to effect a
registration statement by March 31, 2008, we recorded liquidated damages of
$15,000 per month through September 30, 2008, when we stopped recording damages
due to the effectiveness of a registration statement in October 2008.
To satisfy the accrued interest and damages through September 30, 2008, on
September 19, 2008, we issued 966,750 shares of restricted common stock, valued
at the closing price of $0.49, and 966,750 warrants with a strike price of $0.20
in payment of accrued interest of $89,500 and accrued damages of $103,850 per
the payment formula in the Loan Agreement. The difference in value of equity
instruments issued upon settlement and the liabilities settled resulted in a
non-cash loss on settlement of $607,908. We have not yet paid an agreed amount
of legal fees, which total $15,379 and are accrued in our accounts payable,
associated with the amendment to the notes.
2008 10% CONVERTIBLE NOTES
During the threenine months ended September 30,December 31, 2008, we raised an aggregate amount of
$430,000 from the sale to accredited investors of 10% convertible notes and
warrants (2008 10% Convertible Notes). The notes are convertible into our common
stock at a fixed conversion price of $0.50 per share prior to maturity and the
warrants are exercisable at $0.50 per share. Weshare for a period of three years ending
between July and September 2011. In connection with this financing, we agreed to
pay to the investment banking firm that arranged this sale a cash commission of
seven percent of the proceeds and warrants equal to seven percent of the gross.
Convertible Notes Payable consistsgross
capital raised which we accounted for as deferred financing costs and amortize
over the terms of convertible notes.
16
The warrants issued as part of the following at September 30, 2008:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $(342,457) $ 557,543 2008 10% Convertible Notes 430,000 (128,645) 301,355
Decembercan be settled in
unregistered shares of our common stock. The warrants have been valued using a
Binomial Lattice option pricing model and an associated discount of $150,095,
the relative fair value measured at the commitment date, was recorded and
presented net against the face amount of the 2008 10% Convertible Notes. The
discount associated with the warrants is amortized over the term of the notes.
The convertible feature of the 2008 10% Convertible Notes 17,000 -- 17,000
---------- ---------does not have a
beneficial conversion pursuant to EITF 98-5.
CONVERSION AND RESTRUCTURING OF 8% NOTES AND 2008 9% NOTES INTO DECEMBER 2008
10% CONVERTIBLE NOTES
On December 30, 2008, we entered into an agreement with the holders of the 8%
Notes and the 2008 9% Notes (see Note 4) to extend the maturity dates of those
notes. As part of this arrangement, we also agreed to (a) extend the expiration
dates of the warrants originally issued with those notes to July 1, 2012, (b)
modify the interest rate to 10%, (c) issue notes in the amount of $265,911
representing loan extension fees, (d) issue new notes representing accrued
interest and penalties incurred through September 30, 2008, (e) book the
anticipated interest through maturity on the original principal amounts, the
loan fees and the accrued interest and damages into another new note. All of
these new notes and the modified original notes are convertible into our common
stock at 80% of the market price on the date of conversion with a floor on the
conversion price of $0.15 per share and a ceiling on the conversion price of
$0.25 per share (see Note 4).
The following table summarizes the number of shares of our Common Stock issuable
upon the conversion of the restructured December 2008 10% convertible notes
using upon the floor conversion price of $0.15 per common share:
Modified Original Notes 4,766,667
New Notes 3,821,407
---------
Total -8,588,074
=========
For accounting purposes, the restructuring and amendment of the 8% and 9% Notes
into December 2008 10% Convertible Notes $1,347,000 $(471,102) $ 875,898was treated as an extinguishment
pursuant to EITF Issue No. 06-6. The changes in the note agreements, conversion
feature and warrants were considered substantive as prescribed in that
consensus. Consequently, at the amendment date we initially recorded an
estimated loss on extinguishment of $1,063,344 as follows:
Reacquisition Price (fair value of notes
and warrants as amended) $1,995,769
Less amounts relieved at date of extinguishment
Accrued interest and accrued damages (217,425)
Principal balance of original notes (715,000)
----------
Loss on extinguishment $1,063,344
========== ========== =========
NOTE 6. EQUITY TRANSACTIONS
In April 2008, we issued 10,170 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.59 per
share in payment for regulatory affairs consulting services valued at $6,000
based on the value of the services. Effective as of April 22, 2008, per a patent
license agreement, we issued 10,849 shares of restricted common stock to Boston
University. This issuance represented the initial payment under the license
agreement and was based on our share price at April 22, 2008 and the payment
amount of $5,750.
15
In May 2008, we entered into a Private Placement Agreement with Fusion Capital
Fund II, LLC, an Illinois limited liability company for the sale of 1,000,000
shares of our common stock for an aggregate purchase price of $500,000.
In May 2008, we issued 6,667 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.45 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services.
In May 2008, a holder of $33,000 of the December 10% Notes converted his $33,000
principal amount and accrued interest of $6,325 at the agreed conversion rate of
$0.17 per share. As a result, we issued 232,033 shares of common stock under
this conversion (See Note 5).
In June 2008, we issued 25,610 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.41 per
share in payment for regulatory affairs consulting services valued at $10,500
based on the value of the services.
17
In June 2008, we issued grants of restricted common stock to two employees of
5,000 shares each as additional compensation. Those grants were valued at $2,400
apiece based our closing stock price of $0.48 on the date of issuance.
In July 2008, our Chief Executive Officer converted $35,000 of accrued debt to
100,000 shares of unregistered common stock based upon the closing stock price
of $0.35 per share on that day.
In July 2008, a board member and his spouse, both former executives at Hemex, a
company we acquired in 1999, converted $147,279 of accrued debt to 446,300
shares of unregistered common stock based upon the closing stock price of $0.33
per share on that day.
In July 2008, our Chief Science Officer converted $150,000 of accrued debt to
468,750 shares of unregistered common stock based upon the closing stock price
of $0.32 per share on that day.
In September 2008, we issued 110,138 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.45 per
share in payment for legal services valued at $49,562 based on the value of the
services.
In September 2008, we issued 38,150 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.40 per
share in payment for regulatory affairs consulting services valued at $15,260
based on the value of the services.
In September 2008, we issued 966,750 shares of restricted common stock and
966,750 warrants with a strike price of $0.20 in payment of accrued interest of
$89,500 and accrued damages of $103,850 (see note 5) per the payment formula in
the Loan Agreement.
In October 2008, we issued 770,000 shares, of which 385,000 were through the
exercise of registered warrants and 385,000 were issuances of restricted common
stock, for gross proceeds of $192,500.
In October 2008, we issued 51,398 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.31 per
share in payment for financial consulting services and research services valued
at $16,080 based on the value of the services.
In November 2008, we issued 200,000 shares, of which 100,000 were through the
exercise of registered warrants and 100,000 were issuances of restricted common
stock, for gross proceeds of $50,000.
In November 2008, we issued 95,550 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 financial consulting services valued at $23,888 based on
the value of the services.
In November 2008, we issued 98,684 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 legal services valued at $18,750 based on the value of the
services.
In December 2008, we issued 59,950 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 $16,606 based on the value of the
services.
In December 2008, we issued 700,000 shares of restricted common stock and
700,000 warrants with a strike price of $0.25 to an accredited investor for
gross proceeds of $175,000.
In December 2008, we issued 338,099 shares of restricted common stock pursuant
at $0.25 per share in payment for legal services valued at $84,288 based on the
value of the services.
In December 2008, we issued 23,636 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 $6,000
based on the value of the services.
In December 2008, we issued 77,192 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 $20,070
based on the value of the services.
In December 2008, we issued 35,000 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 $8,400
based on the value of the services.
In December 2008, we issued 15,337 shares of restricted common stock pursuant at
$0.33 per share in payment for public relations services valued at $5,000 based
on the value of the services.
18
NOTE 7. OTHER CURRENT LIABILITIES
At September 30,December 31, 2008 and March 31, 2008, our other current liabilities were
comprised of the following items:
September 30,December 31, March 31,
2008 2008
---------- ----------
Accrued liquidated damages 201,90034,500 337,400
Accrued interest 396,794402,663 412,914
Accrued legal fees and other 272,229272,228 340,495
---------- ----------
Total other current liabilities $ 870,923709,391 $1,090,809
========== ==========
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. 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. We are not
presently a party to any pending or threatened legal proceedings.
OTHER
We have not filed our income tax returns for certain prior periods. Whereas we
are in the process of remediating this matter, we may be subject to penalties;
however, those amounts are not expected to be significant.
NOTE 9. SUBSEQUENT EVENTS
In October 2008,January 2009, we issued 51,398 registered23,566 shares of restricted common shares under our 2000 Stock
Option Plan to two employeesstock as compensation.a patent
license payment valued at $5,750.
In October and November 2008, warrant holders exercised 485,000 warrants with a
strike price of $0.50 per share and received a matching 485,000 restrictedJanuary 2009, we issued 1,452,926 shares of common stock. This generated $242,500 in proceeds.stock as a result of
conversions of $419,473 of convertible notes payable, other notes payable and
related accrued interest. The shares were issued to accredited investors.
In June and in November 2008,January 2009, we issued 105,869 shares of common stock pursuant to our Board of Directors approved stock option
grants in an aggregate amount of 4,050,000 shares to certain of our employees,
officers and directors. We have not yet completed the stock option agreement
forms but intend to complete that documentation during the third fiscal quarter
ending December 2008 and expect to record the related stock option expense in
that period.
In October 2008, the Securities and Exchange Commission declared effective aS-8
registration statement thatcovering our 2003 Consultant Stock Plan at an average
price of $0.19 per share in payment for regulatory affairs consulting services
valued at $19,550 based on the value of the services.
In January 2009, we filedissued 353,000 shares of restricted common stock and
warrants to fulfillpurchase 353,000 shares of common stock in exchange for $55,310. The
shares were issued to an accredited investor.
In February 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration obligationsstatement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on certainthe value of the services.
In February 2009, we issued 157,000 shares of restricted common stock and
warrants.
16warrants to purchase 157,000 shares of common stock in exchange for $25,120. The
shares were issued to an accredited investor.
In February 2009, we issued 78,743 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at a price of
$0.18 per share in payment for regulatory affairs consulting services valued at
$13,780 based on the value of the services.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
We refer readers to the "Risk Factors" set forth in our Annual Report on Form
10-KSB file on July 15, 2008, for additional factors to be considered in
reviewing this Quarterly Report.
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 3030 Bunker Hill Street, Suite 4000, San Diego, CA 92109. Our phone
number at that address is (858) 459-7800. Our Web site is
http://www.aethlonmedical.com.
The accompanying unaudited condensed consolidated interim 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 ($4,158,000)2,731,000), recurring losses from operations and a deficit
accumulated during the development stage of approximately ($35,039,000)35,938,000) at
September 30,December 31, 2008, 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, 2009. Therefore we will be required to seek
additional funds through debt and/or equity financing arrangements to finance
our current and long-term operations.
20
We are currently addressing our liquidity issue by exploring investment capital
opportunities through the public markets, specifically, through private
placement of common stock. We believe that our access to capital, together with
existing cash resources, will be sufficient to meet our liquidity needs for
fiscal 2009. However, no assurance can be given that we will receive any funds
in a connection with our capital raising efforts, in which case we will be
required to significantly curtail operations, sell or license out significant
portions of our technology, or possibly cease operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2008 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30,DECEMBER 31, 2007
Operating Expenses
Consolidated operating expenses for the three months ended September 30,December 31, 2008
were $732,659$867,369 in comparison with $690,028$526,975 for the comparable quarter a year ago.
This increase of $42,631,$340,394, or 6%65%, was primarily due to increasesan increase in professional feespayroll
and related expenses of $28,654,$345,585 and a decrease in general and administrative
expenses of $11,753 and$23,794 partially offset by an increase in Payroll &
Related expensesprofessional fees of
$2,224.$18,603.
The $345,585 increase in payroll and related expenses was partially offsetlargely due to a
$4,750 decrease$347,718 increase in non-cash stock compensation expense.
Excluding that non-cash
expense, our payroll and related expenses would have increased by $6,974.
The $11,753 increase$23,794 decrease in general and administrative expenses was due primarily to
increasesdecreases in lab supplies of $28,438 and$5,075, in rentlaboratory fees of $9,919, partially offset by
reductions$1,575, in insurance
expense of $10,812$7,101, in utility expenses of $4,857 and in utilitiesconference expense of
$4,587 among
other items.$5,495.
Our professional fees increased by $28,654$18,603 due to increases inincreased accounting-related
fees of $46,603$9,986 and in business developmentscientific and consulting fees expense of $25,546. Those increases were$27,578 partially
offset by reduced use of
investor relations of $21,279, reduced legal fees of $16,231$18,820 and reduced
scientific consulting feesdecreased investor relations expense
of $6,813.
17
$4,155.
Other Expenses (Income)
Other expenses (income) consist primarily of the change in the fair value of our
warrant liability, gain on extinguishment of debt, loss on settlement of accrued
interest and damages, interest expense and other expense. Other expenses for the
three months ended September
30,December 31, 2008 were $1,080,161$1,477,185 in comparison with other
incomeexpense of $434,976$2,076,108 for the comparable quarter a year ago. Both periods
included non-cash incomeexpense from the change in the fair value of warrant
liability. For the three months ended September 30,December 31, 2008, the change in estimated
fair value was $76,275$50,064 and for the three months ended September 30,December 31, 2007, the
change in estimated fair value was $492,250.
The$633,249.
We recorded a loss on settlementextinguishment of accrued interest and damages was $607,908. There was
no comparable expensedebt of $1,063,344 in the three months
ended December 31, 2008 compared to a loss on extinguishment of debt of $489,013
in the prior period. Both losses on extinguishment arose from the restructuring
of notes payable.
Interest expense was $551,042$363,964 for the three months ended September 30,December 31, 2008
compared to $75,107, an increase$952,068, a decrease of $475,935.$588,104. The largest component of our
interest expense in the three months ended September 30,December 31, 2008 was the
amortization of debt discount of $434,942$261,086 that arose from the valuation of any
warrants or beneficial conversion feature associated with our debt instruments.
That value was recorded as a discount against the face value of the notes and
then amortized over the term of the notes. In the three months ended September
30,December
31, 2007 we amortized $8,276$902,299 of debt discounts. In the three months ended
September 30, 2008, we also incurred $43,073 in amortization of deferred
financing costs related to our recent debt financings while we had no such
amortization of deferred financing costs in the three months ended September 30,
2007. The amortization of deferred financing costs is calculated using the
effective interest method.
Net Loss
As a result of the increaseddecreased expenses noted above, we recorded a consolidated
net loss of approximately $1,813,000$2,345,000 and $255,000$2,603,000 for the quarters ended
September 30,December 31, 2008 and 2007, respectively.
Basic and diluted loss per common share were ($0.04)0.05) for the three month period
ended September 30,December 31, 2008 compared to ($0.01)0.07) for the period ended September 30,December 31,
2007. This increasedecrease in loss per share was primarily athe result of the higherdecreased net loss
during the three month period ended September 30,December 31, 2008, as compared to the three
month period ended September 30, 2007.
SIXDecember 31, 2007 combined with the increase in average
shares outstanding.
NINE MONTHS ENDED SEPTEMBER 30,DECEMBER 31, 2008 COMPARED TO THE SIXNINE MONTHS ENDED SEPTEMBER
30,DECEMBER
31, 2007
Operating Expenses
Consolidated operating expenses for the sixnine months ended September 30,December 31, 2008 were
$1,356,318$2,223,687 in comparison with $1,561,301$2,088,276 for the comparable period a year ago.
This decreaseincrease of $204,983,$135,411, or 13%6%, was due to a decreasean increase in Payroll & Related
expenses of $166,199$179,386 and a decrease in general and administrative expenses of
$40,308$64,102 partially offset by an increase in professional fees of $1,524.$20,127.
21
The $166,199 decrease$179,386 increase in payroll and related expenses was largely due to a
$218,759
decrease$128,959 increase in non-cash stock compensation expense.
Without that non-cash expense,
our payroll and related expenses would have increased by $52,560.
The $40,308$64,102 decrease in general and administrative expenses was due primarily to
decreases in lab supplies of $17,933,$23,008, in laboratory fees of $7,841,$9,416, in insurance
expense of $8,241$15,342, in utility expenses of $14,572 and in conference expense of
$4,548.$10,043.
Our professional fees increased by $1,524$20,127 due to increased accounting-related
fees of $80,402$90,388 and business development expense of $25,546 partially offset by
reduced legal fees of $32,778,$51,599 and decreased investor relations expense of
$52,604
and decreased scientific consulting expense of $19,313.
18
$56,760.
Other Expenses (Income)
Other expenses (income) consist primarily of the change in the fair value of our
warrant liability, loss on settlement of accrued interest and damages, interest
expense and other expense. Other expenses (income) for the sixnine months ended
September 30,December 31, 2008 were $1,455,317$2,932,502 in comparison with other incomeexpense of $770,050$1,306,058
for the comparable period a year ago. Both periods included non-cash income from
the change in the fair value of warrant liability. For the sixnine months ended
September 30,December 31, 2008, the change in estimated fair value was $263,967$213,903 and for the
sixnine months ended September 30,December 31, 2007, the change in estimated fair value was
$914,025.$280,776.
The loss on settlement of accrued interest and damages was $607,908. There was
no comparable expense in the prior period.
We recorded a loss on extinguishment of debt of $1,063,344 in the nine months
ended December 31, 2008 compared to a loss on extinguishment of debt of $489,013
in the prior period. Both losses on extinguishment arose from the restructuring
of notes payable.
Interest expense was $1,113,890$1,477,854 for the sixnine months ended September 30,December 31, 2008
compared to $125,726,$1,077,794, an increase of $988,164.$258,420. The largest component of our
interest expense in the sixnine months ended September 30,December 31, 2008 was the amortization
of debt discount and deferred offering costs of $898,129$1,251,326 that arose from the
valuation of any warrants or beneficial conversion feature and deferred offering
costs associated with our debt instruments. That value of the debt discount
was recorded as a discount against the face value of the notes and the deferred
offering costs were capitalized as assets. Both the debt discount and the
deferred offering costs were then amortized over the term of the notes. By
comparison, we had $8,276$1,469,181 in amortization of debt discount in the six months ended September 30, 2007. We
also incurred $81,323 in amortization ofand deferred
financing costs related to our
recent debt financings while we had no such amortization of deferred financingoffering costs in the sixnine months ended September 30,December 31, 2007. The amortization of deferred
financing costs is calculated using the effective interest method.
Net Loss
As a result of the increased expenses noted above, we recorded a consolidated
net loss of approximately $2,812,000$5,156,000 and $791,000$3,394,000 for the sixnine month periods
ended September 30,December 31, 2008 and 2007, respectively.
Basic and diluted loss per common share were ($0.07)0.12) for the sixnine month period
ended September 30,December 31, 2008 compared to ($0.02)0.10) for the period ended September 30,December 31,
2008. This increasedecrease in loss per share was primarily a result ofdue to the higherincreased net loss duringcombined
with the sixlarger number of weighted average shares outstanding over the nine
month period ended September 30,December 31, 2008 as compared to the six month period ended September 30, 2007.prior period.
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. At September 30,December 31, 2008 we had no available$92,000 in cash, compared to approximately
$255,000 at March 31, 2008, representing a decrease of approximately $255,000.$163,000.
During the sixnine months ended September 30,December 31, 2008, operating activities used net
cash of approximately $1,175,000,$1,500,000, through our financing activities we received
$500,000$917,500 from the issuance of common stock and $430,000 from the issuance of
convertible notes.
During the sixnine month period ended September 30,December 31, 2008, net cash used in operating
activities was approximately ($1,175,000)$1,500,000 and resulted from the approximate net
loss of $2,812,000$5,156,000 coupled with the change in the estimated fair value of
warrant liability of approximately ($264,000).$214,000. Those factors were offset
principally by the amortization of note discount and deferred financing costs of
$949,000,$1,251,000, the loss on debt extinguishment of approximately $1,063,000, the
loss on settlement of accrued interest and damages of $607,908,$608,000, the fair market
value of common stock of approximately $90,000$249,000 issued in payment for services
and approximately $134,000$591,000 in stock-based compensation and an increase in
accounts payable and accrued liabilities of approximately $138,000.,$137,000, and a
reduction of due to related parties of approximately $28,000.
AAn decrease in working capital during the sixnine months ended September 30,December 31, 2008 in
the amount of approximately $677,000$768,000 changed our negative working capital
position to approximately ($4,158,000)$4,248,000 at September 30,December 31, 2008 from a negative
working capital of approximately ($3,481,000)$3,481,000 at March 31, 2008.
22
During the sixnine month period ended September 30,December 31, 2008, four of our officers and
directors converted to our common stock $332,279 of accrued salaries and
expenses due to them. The conversions were done at the closing price of our
common stock on the date of their debt to equity conversions and the common
stock issued was restricted stock. These conversions had the effect of improving our working
capital by $332,279.
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,December 31, 2008, we raised an additional $243,000$80,970 through the exercisesale of certaincommon
stock and warrants by existing shareholdersto an accredited investor and we continue to seek additional
financing.
We currently are in default on certain debt instruments. We are negotiating
extension agreements or other forms of waivers with the note holders. There can
be no assurance that we will successfully negotiate extensions or waivers to
these defaults on terms acceptable to us or at all. If the negotiations are not
successful, then we may face claims for payment by the noteholders.
19
Our operations to date have consumed substantial capital without generating
revenues, and will continue to require substantial capital funds to conduct
necessary research and development and pre-clinical and clinical testing of
Hemopurifier(R) products, and to market any of those products that receive
regulatory approval. We do not expect to generate revenue from operations for
the foreseeable future, and our ability to meet our cash obligations as they
become due and payable is expected to depend for at least the next several years
on our ability to sell securities, borrow funds or a combination thereof. Our
future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our
programs, the time and costs involved in preparing, filing, prosecuting,
maintaining and enforcing patent claims and other proprietary rights, the time
and costs involved in obtaining regulatory approvals, competing technological
and market developments, and our ability to establish collaborative
arrangements, effect successful commercialization strategies, 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 $186,000$168,000 per month to sustain operations.
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.
PLAN OF OPERATION
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.
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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.
The fair value of our warrant liabilities is determined based on observable
market based inputs or unobservable
inputs, that are corroborated by market data, which is a Level 3 classification. We record variations in our warrant
liability account on our balance sheet at fair value with changes in fair value
recorded as change in fair value of warrant liability in our consolidated
statements of operations.
We believe estimates and assumptions related to these critical accounting
policies are appropriate under the circumstances; however, should future events
or occurrences result in unanticipated consequences, there could be a material
impact on our future financial conditions or results of operations.
There have been no changes to our critical accounting policies as disclosed in
our Form 10-KSB for the year ended March 31, 2008.
OFF-BALANCE SHEET ARRANGEMENTS
There are no guarantees, commitments, lease and debt agreements or other
agreements that could trigger an adverse change in our credit rating, earnings,
cash flows or stock price, including requirements to perform under standby
agreements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management evaluated our
disclosure controls and procedures (as defined in Securities Exchange Act Rules
13a-15(e) and 15d-15(e)) as to whether such disclosure controls and procedures
were effective in providing reasonable assurance that the information required
to be disclosed by us in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms and
ensuring that information required to be disclosed in the reports that we file
or submit under the Exchange Act is accumulated and communicated to our
management, including the chief executive officer, as appropriate to allow
timely decisions regarding required disclosure. Based on our evaluation and
subject to the foregoing, our Chief Executive Officer concluded that there were
no material weaknesses in our disclosure controls and procedures and that such
disclosure controls and procedures were effective as of the end of the period
covered by this report in providing reasonable assurance of achieving the
desired control objectives, and therefore there were no corrective actions
taken.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Since our evaluation as of March 31, 2008 we have had no significant changes in
our internal controls.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, claims are made against us in the ordinary course of
business, which could result in litigation. Claims and associated litigation are
subject to inherent uncertainties and unfavorable outcomes could occur, such as
monetary damages, fines, penalties or injunctions prohibiting us from selling
one or more products or engaging in other activities. The occurrence of an
unfavorable outcome in any specific period could have a material adverse effect
on our results of operations for that period or future periods. 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.
All of the following stock issuances were made pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "Act"). There was
no general solicitation or advertising of the offerings or issuances. The
offerings were made in compliance with Regulation D of the Securities Act with
respect to investors we deem to be "accredited" as defined in Regulation 501 of
the Act, and Section 4(2) of the Securities Act with respect to all other
offerings. The cash proceeds (if any) were used for general working capital
purposes.
In July 2008, our Chief Executive Officer converted $35,000 of accrued debt to
100,000 shares of unregistered common stock based upon the closing stock price
of $0.35 per share on that day.
In July 2008, a board member and his spouse, both former executives at Hemex, a
Company we acquired in 1999, converted $147,279 of accrued debt to 446,300
shares of unregistered common stock based upon the closing stock price of $0.33
per share on that day.
In July 2008, our Chief Science Officer converted $150,000 of accrued debt to
468,750 shares of unregistered common stock based upon the closing stock price
of $0.32 per share on that day.
In the three months ended September 2008, we raised an aggregate amount of
$430,000 from the sale to accredited investors of 10% convertible notes and
warrants (2008 10% Convertible Notes). The notes are convertible into our common
stock at $0.50 per share and the warrants are exercisable at $0.50 per share. We
agreed to pay to the investment banking firm that arranged this sale a cash
commission of seven percent of the proceeds and warrants equal to seven percent
of the gross.
In September 2008, we issued 966,750 shares of restricted common stock and
966,750 warrants with a strike price of $0.20 in payment of accrued interest of
$89,500 and accrued damages of $103,850 per the payment formula in the Loan
Agreement.
In October and November 2008, warrant holders exercised 485,000 warrants with a
strike price of $0.50 per share and received a matching issuance of 485,000
restricted shares of common stock. This generated $242,500 in proceeds. The
warrant holders are accredited investors.
In December 2008, we issued 700,000 shares of restricted common stock and
700,000 warrants with a strike price of $0.25 to an accredited investor for
gross proceeds of $175,000.
In December 2008, we issued options to our Chief Executive Officer, our Chief
Science Officer, our two outside directors and another employee to purchase an
aggregate amount of 4,050,000 shares of our common stock. The exercise prices
were at market or above and ranged from $0.25 to $0.41 per share. The options
all have lives of up to ten years.
In January 2009, we issued 23,566 shares of restricted common stock as a patent
license payment valued at $5,750.
In January 2009, we issued 1,452,926 shares of common stock as a result of
conversions of $419,473 of convertible notes payable, other notes payable and
related accrued interest. The shares were issued to accredited investors.
In January 2009, we issued 353,000 shares of restricted common stock and
warrants to purchase 353,000 shares of common stock in exchange for $55,310. The
shares were issued to an accredited investor.
In February 2009, we issued 157,000 shares of restricted common stock and
warrants to purchase 157,000 shares of common stock in exchange for $25,120. The
shares were issued to an accredited investor.
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 $352,500 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, for failing to make
required interest payments and failing to pay certain legal fees. We
subsequently issued shares of common stock and warrants in payment of the
accrued interest and damages and filed a registration statement to fulfill our
registration obligations. As that registration statement was declared effective,
we no longer accrue liquidated damages relating to that financing. We have not
yet aidpaid the required legal fees.
Our $495,000 and $220,000 notes expired in September and October 2008,
respectively. We were not ablefees to repay those notes upon maturity, which put us
in a default position. We are negotiating potential extensions to those loans
but there can be no assurance that we will be able to extend those loans on
terms acceptable to us or at all.the holders' counsel.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
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ITEM 6. EXHIBITS.
(a) Exhibits. The following documents are filed as part of this report:
31.1*31 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*32 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.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
AETHLON MEDICAL, INC.
Date: NOVEMBER 19, 2008FEBRUARY 17, 2009 BY: /S/ JAMES A. JOYCE
---------------------------
JAMES A. JOYCE
CHAIRMAN, PRESIDENT, CHIEF
ACCOUNTING OFFICER AND
CHIEF EXECUTIVE OFFICER
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