SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 2009
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _____to_____
COMMISSION FILE NUMBER 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 [_] (Do not check if a smaller reporting company)
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [_] NO [X]
As of August 13, 2009, the registrant had outstanding 55,228,096 shares of
common stock, $.001 par value.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 2009 (UNAUDITED)
AND MARCH 31, 2009 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE MONTHS ENDED JUNE 30, 2009 AND 2008 AND FOR THE
PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH
JUNE 30, 2009 (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE
MONTHS ENDED JUNE 30, 2009 AND 2008 AND FOR THE PERIOD
JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2009 (UNAUDITED) 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
ITEM 4T. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION 24
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 1A. RISK FACTORS 24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS 26
2
PART I.
FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2009 2009
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash $ 90,317 $ 6,157
Prepaid expenses and other current assets 52,680 37,011
------------ ------------
Total current assets 142,997 43,168
Property and equipment, net 1,751 2,603
Patents and patents pending, net 136,126 138,417
Deposits 13,200 13,200
------------ ------------
Total assets $ 294,074 $ 197,388
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 414,514 $ 460,074
Due to related parties 609,438 634,896
Notes payable, net of discounts 322,501 302,500
Convertible notes payable, net of discounts 1,652,100 2,069,720
Derivative liability 316,635 --
Other current liabilities 701,013 679,498
------------ ------------
Total current liabilities 4,016,201 4,146,688
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per share;
100,000,000 shares authorized;
54,586,699 and 49,454,131 shares issued
and outstanding as of June 30, 2009 and
March 31, 2009, respectively 54,587 49,455
Additional paid-in capital 35,589,201 34,312,659
Deficit accumulated during development stage (39,365,915) (38,311,414)
------------ ------------
(3,722,127) (3,949,300)
------------ ------------
Total liabilities and stockholders' deficit $ 294,074 $ 197,388
============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
3
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
June 30, 2009 and 2008 and
For the Period January 31, 1984 (Inception) Through June 30, 2009
(Unaudited)
January 31, 1984
Three Months Three Months (Inception)
Ended Ended through
June 30, June 30, June 30,
2009 2008 2009
------------ ------------ ------------
REVENUES
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
------------ ------------ ------------
-- -- 1,533,568
EXPENSES
Professional Fees 235,853 160,275 8,028,312
Payroll and related 327,074 352,763 11,452,800
General and administrative 79,028 110,621 5,977,110
Impairment -- -- 1,313,253
------------ ------------ ------------
641,955 623,659 26,771,475
------------ ------------ ------------
OPERATING LOSS (641,955) (623,659) (25,237,907)
------------ ------------ ------------
OTHER EXPENSE (INCOME)
Loss on extinguishment of debt -- -- 3,368,582
Change in fair value of
derivative liability 37,434 (187,692) 1,659,052
Interest and other debt expenses 316,657 562,848 8,671,427
Interest income (107) -- (20,293)
Other -- -- 390,678
------------ ------------ ------------
353,984 375,156 14,069,446
------------ ------------ ------------
NET LOSS $ (995,939) $ (998,815) $(39,307,353)
============ ============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.02) $ (0.03)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 52,728,612 39,633,952
============ ============
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 THREE MONTHS ENDED JUNE 30, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2009
(Unaudited)
Three Months Three Months January 31, 1984
Ended Ended (Inception)
June 30, June 30, Through
2009 2008 June 30,
2009
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (995,939) $ (998,815) $(39,307,353)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,143 4,735 1,048,367
Amortization of deferred consulting fees -- -- 109,000
Loss on issuance of units for accrued
interest and penalties -- -- 627.264
Gain on sale of property and equipment -- -- (13,065)
Gain on settlement of debt -- -- (131,175)
Loss on settlement of accrued legal liabilities -- -- 142,245
Stock based compensation 194,223 69,496 1,876,999
Loss on debt extinguishment -- -- 2,741,318
Fair market value of warrants issued in
connection with accounts payable and debt -- -- 2,715,736
Fair market value of common stock, warrants
and options issued for services 129,020 25,250 4,275,963
Change in fair value of derivative liability 37,434 (187,692) 1,659,052
Amortization of debt discount and
deferred financing costs 233,000 501,437 4,231,782
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 28,331 -- 182,816
Other assets -- -- (13,200)
Accounts payable and other current
liabilities 30,206 15,802 2,529,372
Due to related parties (25,458) (28,000) 1,260,249
------------ ------------ ------------
Net cash used in operating activities (366,040) (597,787) (14,534,154)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment -- -- (272,850)
Additions to patents and patents pending -- -- (387,343)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------ ------------ ------------
Net cash used in investing activities -- -- (632,400)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable -- -- 2,350,000
Principal repayments of notes payable -- -- (352,500)
Net proceeds from the issuance of convertible notes
payable 335,000 -- 2,903,000
Proceeds from the issuance of common stock 115,200 500,000 10,433,102
Professional fees related to registration statement -- -- (76,731)
------------ ------------ ------------
Net cash provided by financing activities 450,200 500,000 15,256,871
------------ ------------ ------------
Net (decrease) increase in cash 84,160 (97,787) 90,317
Cash at beginning of period 6,157 254,691 --
------------ ------------ ------------
Cash at end of period $ 90,317 $ 156,904 $ 90,317
============ ============ ============
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 THREE MONTHS ENDED JUNE 30, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2009
(Unaudited)
Three Months Three Months January 31, 1984
Ended Ended (Inception)
June 30, June 30, Through
2009 2008 June 30,
2009
------------ ------------ ------------
Supplemental disclosures of non-cash investing and financing information:
Reclassification of accounts payable to notes payable $ 24,001 -- $ 24,001
============ ============ ============
Debt and accrued interest converted to common stock $ 546,246 $ 39,325 $ 4,065,438
============ ============ ============
Stock option exercise by director for accrued expenses -- -- 95,000
============ ============ ============
Debt discount on convertible notes payable associated with
Beneficial conversion feature 233,735 -- 1,538,690
============ ============ ============
Debt discount on notes payable associated with detachable
warrants -- -- 1,154,860
============ ============ ============
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related parties -- -- 1,003,273
============ ============ ============
Issuance of common stock in connection with license agreements -- -- 18,000
============ ============ ============
Net assets of entities acquired in exchange for equity
securities -- -- 1,597,867
============ ============ ============
Debt placement fees paid by issuance of warrants -- -- 856,845
============ ============ ============
Patent pending acquired for 12,500 shares of common stock -- -- 100,000
============ ============ ============
Common stock issued for prepaid expenses -- -- 161,537
============ ============ ============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
6
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2009
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. ("Aethlon", "We" or the "Company") is a development stage
medical device company focused on expanding the applications of our Hemopurifier
(R) platform technology, which is designed to rapidly reduce the presence of
infectious viruses and other toxins from human blood. In this regard, our core
focus is the development of therapeutic devices that treat acute viral
conditions, chronic viral diseases and pathogens targeted as potential
biological warfare agents. The Hemopurifier(R) combines the established
scientific principles of affinity chromatography and hemodialysis as a means to
mimic the immune system's response of clearing viruses and toxins from the blood
before cell and organ infection can occur. The Hemopurifier(R) cannot cure viral
conditions but can prevent 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 financial statements have been
prepared in accordance with GAAP for interim financial information. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. We have evaluated subsequent events through
August 13, 2009, the day before our condensed consolidated financial statements
were issued. The condensed consolidated balance sheet as of March 31, 2009 was
derived from our audited financial statements. Operating results for the three
month period ended June 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2010. For further
information, refer to our Annual Report on Form 10-K for the year ended March
31, 2009, which includes audited financial statements and footnotes as of March
31, 2009 and for the years ended March 31, 2009 and 2008 and the period January
31, 1984 (Inception) through March 31, 2009.
NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates, among other things, the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. We have experienced continuing losses from operations, are in
default on certain debt, have negative working capital of approximately
($3,873,000) recurring losses from operations and a deficit accumulated during
the development stage of approximately ($39,366,000) at June 30, 2009, which
among other matters, raises significant doubt about our ability to continue as a
going concern. We have not generated significant revenue or any profit from
operations since inception. A significant amount of additional capital will be
necessary to advance the development of our products to the point at which they
may become commercially viable. Our current financial resources are insufficient
to fund our capital expenditures, working capital and other cash requirements
(consisting of accounts payable, accrued liabilities, amounts due to related
parties and amounts due under various notes payable) for the fiscal year ending
March 31, 2010. 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 private placement of common stock or issuance of
additional debt. We believe that our access to additional capital, together with
existing cash resources, will be sufficient to meet our liquidity needs for
fiscal 2010. However, no assurance can be given that we will receive any funds
in connection with our capital raising efforts.
The unaudited consolidated financial statements do not include any adjustments
relating to the recoverability of assets that might be necessary should we be
unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies presented below is designed
to assist the reader in understanding our consolidated financial statements.
Such financial statements and related notes are the representations of our
management, who are responsible for their integrity and objectivity. These
accounting policies conform to GAAP in all material respects, and have been
consistently applied in preparing the accompanying consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc. and Cell Activation, Inc. (collectively hereinafter referred
to as the "Company" or "Aethlon"). These subsidiaries are dormant and there
exist no material intercompany transactions or balances.
LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares assumed to be
outstanding during the period of computation. Diluted loss per share is computed
similar to basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued, and if the additional common
shares were dilutive. As the Company had net losses for all periods presented,
basic and diluted loss per share are the same, and additional common stock
equivalents have been excluded as their effect would be antidilutive.
The potentially dilutive common shares outstanding for the quarters ended
June 30, 2009 and 2008, which include shares underlying outstanding stock
options, warrants and convertible debentures were 38,837,862 and 31,575,690,
respectively.
PATENTS
We capitalize the cost of patents, some of which were acquired, and amortize
such costs over the shorter of the remaining legal life or their estimated
economic life, upon issuance of the patent.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred approximately $77,000 and $163,000 of research and development
expenses during the three months ended June 30, 2009 and 2008, respectively,
which are included in various operating expense line items in the accompanying
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.
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 months ended June 30, 2009.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of
conversion that is below the market value of our common stock. Such feature is
normally characterized as a "Beneficial Conversion Feature" ("BCF"). 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 interest method.
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. 07-5
"DETERMINING WHETHER AN INSTRUMENT (OR EMBEDDED FEATURE) IS INDEXED TO AN
ENTITY'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.
EITF 07-5, "Determining whether an Instrument (or Embedded Feature) is indexed
to an Entity's own Stock" ("EITF 07-5") provides a new two-step model to be
applied in determining whether a financial instrument or an embedded feature is
indexed to an issuer's own stock and thus able to qualify for the SFAS No. 133
paragraph 11(a) scope exception. We have identified one convertible debt
agreement in which the embedded conversion feature contains certain provisions
that may result in an adjustment of the conversion price, which under EITF 07-5
results in the failure of the embedded conversion feature to be considered to be
indexed to our stock. Accordingly, under EITF 07-5 we are required to separate
the embedded feature from the host instrument and to record the estimated fair
value of the embedded feature as a derivative liability As a result, the
estimated fair value of the embedded feature,(See SIGNIFICANT RECENT ACCOUNTING
PRONUNCEMENTS below) was recorded as a derivative liability (at the date of
issuance), and a cumulative effect adjustment to our accumulated deficit, was
recorded based on the difference between amounts recognized at the date of
issuance and April 1, 2009, the initial adoption of EITF 07-5. In addition, we
have re-measured such derivative liability at estimated fair value as of June
30, 2009 and have recorded the change in the estimated fair value in operating
results for the three months ended June 30, 2009.
REGISTRATION PAYMENT ARRANGEMENTS
We account for contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement separately from
any related financing transaction agreements, and any such contingent
obligations are recognized only when it is determined that it is probable that
the Company will become obligated for future payments and the amount, or range
of amounts, of such future payments can be reasonably estimated. On October
2008, the SEC declared effective a registration statement that covered all of
the shares and warrants that had previously been generating liquidated damages
pursuant to registration rights agreements and as a result, we ceased recording
such liquidated damages at that time.
As of June 30, 2009, we did not owe any liquidated damages.
9
STOCK BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation
plans are accounted for under the fair value method. Accordingly, share-based
compensation is measured when all granting activities have been completed,
generally the grant date, based on the fair value of the award. The exercise
price of options is generally equal to the market price of the Company's common
stock (defined as the closing price as quoted on the Over-the-Counter Bulletin
Board) on the date of grant. Compensation cost recognized by the Company
includes (a) compensation cost for all equity incentive awards granted prior to,
but not yet vested as of April 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of 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. We use a Binomial Lattice option pricing model for
estimating fair value of options granted.
The following table summarizes the effect of share-based compensation recorded
during the quarters ended June 30, 2009 and 2008:
June 30, 2009 June 30, 2008
-------------- --------------
Stock Option Expense $ 133,860 $ 64,696
Direct Stock Grants 60,363 4,800
-------------- --------------
Total Stock-Based Compensation Expense $ 194,223 $ 69,496
============== ==============
Basic and diluted loss per common share $ (0.00) $ (0.00)
============== ==============
We account for transactions involving services provided by third parties where
we issue equity instruments as part of the total consideration using the fair
value of the consideration received (i.e. the value of the goods or services) or
the fair value of the equity instruments issued, whichever is more reliably
measurable. In transactions, when the value of the goods and/or services are not
readily determinable and (1) the fair value of the equity instruments is more
reliably measurable and (2) the counterparty receives equity instruments in full
or partial settlement of the transactions, we use the following methodology:
a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the performance
is complete (and valued on the date of issuance).
b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the date of
the contract.
c) For any transactions not meeting the criteria in (a) or (b) above, the
Company re-measures the consideration at each reporting date based on its then
current stock value.
We review share-based compensation on a quarterly basis for changes to the
estimate of expected award forfeitures based on actual forfeiture experience.
The effect of adjusting the forfeiture rate for all expense amortization after
March 31, 2006 is recognized in the period the forfeiture estimate is changed.
The effect of forfeiture adjustments for the quarter ended June 30, 2009 was
insignificant.
The expected volatility is based on the historic volatility. The expected life
of options granted is based on the "simplified method" 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.
We did not issue any stock option grants in either the June 2009 period or in
the June 2008 period. Direct stock grants in each period were valued based upon
the amount of compensation and the stock price at the time of grant.
10
Options outstanding that have vested and are expected to vest as of June 30,
2009 are as follows:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual
Shares Price Term in Years
------------------------- ----------- -------- -------------
Vested 12,289,060 $ 0.38 5.11
Expected to vest 2,200,000 0.36 6.50
-----------
Total 14,489,060
===========
Additional information with respect to stock option activity is as follows:
Outstanding Options
-----------------------------
Weighted
Number of Average
Shares Exercise Price
--------------------------- ------ --------------
March 31, 2009 14,489,060 $ 0.37
Grants -- --
Exercises -- --
Cancellations -- --
---------- ------
June 30, 2009 14,489,060 $ 0.37
========== ======
Options exercisable at:
June 30, 2009 12,289,060 $ 0.38
========== ======
At June 30, 2009, there was approximately $544,000 of unrecognized compensation
cost related to share-based payments which is expected to be recognized over a
weighted average period of 1.37 years.
On June 30, 2009, our stock options had a negative intrinsic value since the
closing price on that date of $0.36 per share was below the weighted average
exercise price of our stock options.
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,"
("SFAS No. 157") 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. 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. We adopted
SFAS 157 on April 1, 2008 without material impact to our financial statements.
SFAS No. 157 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.
11
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)" ("FSB APB 14-1"). 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. The adoption of FSP APB 14-1 did not have a material impact on
our financial statements.
In June 2008, the FASB ratified the Emerging Issues Task Force ("EITF") Issue
No. 07-5, "Determining whether an Instrument (or Embedded Feature) is indexed to
an Entity's own Stock" ("EITF 07-5"). EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to our own stock and
(b) classified in stockholders' equity in the statement of financial position
would not be consider a derivative financial instrument. EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer's own stock and thus able to
qualify for the SFAS No. 133 paragraph 11(a) scope exception.
We adopted EITF 07-5 effective April 1, 2009. The adoption of EITF 07-5's
requirements can affect the accounting for warrants or convertible debt that
contain provisions that protect holders from a decline in the stock price (or
"down-round" protection). For example, warrants with such provisions will no
longer be recorded in equity. Down-round protection provisions reduce the
exercise price of a warrant or convertible instrument if a company either issues
equity shares for a price that is lower than the exercise price of those
instruments or issues new warrants or convertible instruments that have a lower
exercise price. We evaluated whether convertible debt or warrants to acquire
stock of the Company contain provisions that protect holders from declines in
the stock price or otherwise could result in modification of the exercise price
and/or shares to be issued under the respective warrant agreements based on a
variable that is not an input to the fair value of a "fixed-for-fixed" option.
We determined tha t we have one convertible debt agreement in which the terms
provide for a possible adjustment to the conversion price, and as such, the
embedded conversion feature fails to be indexed solely to our stock under this
pronouncement.
As a result, we classified the estimated fair value of the embedded conversion
feature of the convertible debt agreement described above as a derivative
liability on April 1, 2009 and have re-measured at estimated fair value as of
June 30, 2009 with change in the estimated fair value recognized in operating
results. The change in the estimated fair value of the derivative liability from
the date of issuance to initial date of adoption was charged to accumulated
deficit and totaled $279,201. The embedded derivatives were valued using Level 3
inputs because there are significant unobservable inputs associated with them.
The table below sets forth a summary of changes in the fair value of our Level 3
derivative liability for the quarter ended June 30, 2009:
Recorded Change in
Initial fair estimated fair
Value on value recognized
April 1, in results June 30,
2009 of operations 2009
----------- ------------ ---------
Derivative Liability $ 279,201 $ 37,434 $ 316,635
In April 2009, the FASB issued FSP FAS 107-1/APB 28-1 ("FSP 107-1"), which is
entitled "Interim Disclosures about Fair Value of Financial Instruments." This
pronouncement amended SFAS No 107, Disclosures about Fair Value of Financial
Instruments, to require disclosure of the carrying amount and the fair value of
all financial instruments for interim reporting periods and annual financial
statements of publicly traded companies (even if the financial instrument is not
recognized in the balance sheet), including the methods and significant
assumptions used to estimate the fair values and any changes in such methods and
assumptions. FSP 107-1 also amended APB Opinion No. 28, Interim Financial
Reporting, to require disclosures in summarized financial information at interim
reporting periods. FSP 107-1 is effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ended after March
15, 2009 if a company also elects to early adopt FSP FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Indentifying Transactions That Are Not Orderly, and
FSP FAS 115-2/FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments. We adopted this pronouncement without material impact to our
financial statements.
12
In April 2009, the FASB also issued FSP FAS 157-4, which generally applies to
all assets and liabilities within the scope of any accounting pronouncements
that require or permit fair value measurements. This pronouncement, which does
not change SFAS No. 157's guidance regarding Level 1 inputs, requires the entity
to (i) evaluate certain factors to determine whether there has been a
significant decrease in the volume and level of activity for the asset or
liability when compared with normal market activity, (ii) consider whether the
preceding indicates that transactions or quoted prices are not determinative of
fair value and, if so, whether a significant adjustment thereof is necessary to
estimate fair value in accordance with SFAS No. 157, and (iii) ignore the intent
to hold the asset or liability when estimating fair value. FSP FAS 157-4 also
provides guidance to consider in determining whether a transaction is orderly
(or not orderly) when there has been a significant decrease in the volume and
level of activity for the asset or liability, based on the weight of available
evidence. This pronouncement is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied prospectively. Early
adoption of FSP FAS 157-4 also requires early adoption of the pronouncement
described in the following paragraph. However, early adoption for periods ended
before March 15, 2009 is not permitted. We adopted this pronouncement without
material impact to our financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and 124-2 (hereinafter referred to
as "FAS 115-2/124-2"), which amends the other-than-temporary impairment ("OTTI")
recognition guidance in certain existing U.S. GAAP (including SFAS No. 115 and
130, FSP FAS 115-1/FAS 124-1, and EITF Issue 99-20) for debt securities
classified as available-for-sale and held-to-maturity. FAS 115-2/124-2 requires
the entity to consider (i) whether the entire amortized cost basis of the
security will be recovered (based on the present value of expected cash flows),
and (ii) its intent to sell the security. Based on the factors described in the
preceding sentence, this pronouncement also explains the process for determining
the OTTI to be recognized in "other comprehensive income" (generally, the
impairment charge for other than a credit loss) and in earnings. FAS 115-2/124-2
does not change existing recognition or measurement guidance related to OTTI of
equity securities. This pronouncement is effective as described in the preceding
paragraph. Certain transition rules apply to debt securities held at the
beginning of the interim period of adoption when an OTTI was previously
recognized. If an entity early adopts either FSP 107-1 or FSP FAS 157-4, the
entity is also required to early adopt this pronouncement. In addition, if an
entity early adopts FAS 115-2/124-2, it is also required to early adopt FSP FAS
157-4. We adopted this pronouncement without material impact to our financial
statements.
In November 2007, the EITF issued a consensus on EITF 07-1, "Accounting for
Collaborative Arrangements" ("EITF 07-1"). The Task Force reached a consensus on
how to determine whether an arrangement constitutes a collaborative arrangement,
how costs incurred and revenue generated on sales to third parties should be
reported by the partners to a collaborative arrangement in each of their
respective income statements, how payments made to or received by a partner
pursuant to a collaborative arrangement should be presented in the income
statement, and what participants should disclose in the notes to the financial
statements about a collaborative arrangement. This issue shall be effective for
annual periods beginning after December 15, 2008. Entities should report the
effects of applying this Issue as a change in accounting principle through
retrospective application to all periods to the extent practicable. Upon
application of this issue, the following should be disclosed: a) a description
of the prior-period information that has been retrospectively adjusted, if any,
and b) the effect of the change on revenue and operating expenses (or other
appropriate captions of changes in the applicable net assets or performance
indicator) and on any other affected financial statement line item. We adopted
this pronouncement without material impact to our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). This statement requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date. SFAS 141(R) replaces the cost-allocation process of SFAS No. 141,
"Business Combinations" ("SFAS 141") which required the cost of an acquisition
to be allocated to the individual assets acquired and liabilities assumed based
on their estimated fair values. This statement applies prospectively and is
effective for annual periods beginning after December 15, 2008. Earlier adoption
is prohibited. We adopted this pronouncement without material impact to our
financial statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, ("SFAS 165") which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. It requires the disclosure of the date
through which an entity has evaluated subsequent events and the basis for that
date. We adopted SFAS 165 beginning April 1, 2009. The adoption of SFAS 165 did
not have a material impact on our consolidated financial position, results of
operations or cash flows. We have evaluated subsequent events through August 13,
2009, the day before our condensed consolidated financial statements were
issued. See Note 1 and Note 9.
The Sarbanes-Oxley Act of 2002 ("the Act") introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements of the
Act is for management to annually assess and report on the effectiveness of its
internal control over financial reporting under Section 404(a) and for its
registered public accountant to attest to this report under Section 404(b). The
SEC has modified the effective date and adoption requirements of Section 404(a)
and Section 404(b) implementation for non-accelerated filers multiple times,
such that we were required to issue our management report on internal control
over financial reporting in this annual report on Form 10-K for the fiscal year
ended March 31, 2009. Based on current SEC requirements, we will be required to
have our auditor attest the effectiveness of internal controls over financial
reporting for our fiscal year ending March 31, 2010.
13
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
NOTE 4. NOTES PAYABLE
Notes payable consist of the following at June 30, 2009:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 297,500 -- $ 297,500
10% Note payable, past due 5,000 -- 5,000
Note payable to law firm 20,001 -- 20,001
----------- --------- -----------
Total Notes Payable $ 322,501 ($ --) $ 322,501
=========== ========= ===========
Notes payable consisted of the following at March 31, 2009:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 297,500 -- $ 297,500
10% Note payable, past due 5,000 -- 5,000
----------- --------- -----------
Total Notes Payable $ 302,500 ($ --) $ 302,500
=========== ========= ===========
During the fiscal year ended March 31, 2009, we restructured our 8% and 9% Notes
and for accounting purposes, we recorded an extinguishment loss of approximately
$977,000 (See Note 5 for further description). 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.
NOTE PAYABLE TO LAW FIRM
On May 20 2009, we entered into a Promissory Note with our intellectual
property law firm for the amount of $24,001, which represented the amount we
owed to that firm. The Promissory Note calls for monthly payments of $4,000 from
June 2009 through November 2009. We made the June payment, which reduced that
balance at June 30, 2009 to $20,001. The note bears interest at 10% per annum.
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings
(the "12% Notes"). On January 26, 2009, a holder of $50,000 of the 12% Notes
converted his principal balance and $56,723 of accrued interest to common stock
at the then current market price of $0.17 per share. At June 30, 2009, 12%
Notes with a principal balance of $297,500 are outstanding, all which are past
due, in default, and bearing interest at the default rate of 15%. At June 30,
2009, interest payable on the 12% Notes totaled $296,750.
10% NOTES
From time to time, we issued notes payable ("10% Notes") to various investors,
bearing interest at 10% per annum, with principal and interest due six months
from the date of issuance. The 10% Notes required no payment of principal or
interest during the term. The total amount of the original notes issued was
$275,000. One 10% Note in the amount of $5,000, which is past due and in
default, remains outstanding at June 30, 2009. At June 30, 2009, interest
payable on this note totaled $4,000.
Management's plans to satisfy the remaining outstanding balance on these 12% and
10% Notes include converting the notes to common stock at market value or
repayment with available funds.
14
NOTE 5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following at June 30, 2009:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes 45,000 (6,449) 38,551
December 2006 10% Convertible Notes 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 570,157 -- 570,157
May & June 2009 10% Convertible Notes 350,000 (223,608) 126,392
---------- ----------- ----------
Total - Convertible Notes $1,882,157 $ (230,057) $1,652,100
========== ============ ==========
Convertible Notes Payable consisted of the following at March 31, 2009:
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes 45,000 (8,683) 36,317
December 2006 10% Convertible Notes 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 1,116,403 -- 1,116,403
---------- ----------- ----------
Total - Convertible Notes $2,078,403 $ (8,683) $2,069,720
========== ============ ==========
AMENDED SERIES A 10% CONVERTIBLE NOTES
At June 30, 2009, $900,000 of the Amended Series A 10% Convertible Notes
remained outstanding and in default. At June 30, 2009, interest payable on those
notes totaled $67,500.
2008 10% CONVERTIBLE NOTES
2008 10% Convertible Notes in the aggregate amount of $45,000 remain outstanding
at June 30, 2009. At June 30, 2009, interest payable on those notes totaled
$4,103.
DECEMBER 2006 10% CONVERTIBLE NOTES
At June 30, 2009, $17,000 of the December 10% Notes remained outstanding and in
default. At June 30, 2009, interest payable on those notes totaled $6,233.
RESTRUCTURED DECEMBER 2008 10% CONVERTIBLE NOTES AND RELATED CONVERTIBLE NOTES
Restructured December 2008 10% Convertible Notes and Related Convertible Notes
in the aggregate amount of $570,157 remain outstanding at June 30, 2009. No
accrued interest was outstanding at June 30, 2009.
In June 2009, the holders of the Restructured December 2008 10% Convertible
Notes and Related Convertible Notes informally agreed to extend the
expiration date of the notes by three months from July 1, 2009 to October 1,
2009.
MAY & JUNE 2009 10% CONVERTIBLE NOTES
In May and June 2009, we raised an aggregate amount of $350,000 from the sale to
accredited investors of 10% convertible notes ("May & June 10% Convertible
Notes"). The May & June 10% Convertible Notes mature at various dates between
November 2010 through December 2010 and are convertible into our common stock at
a fixed conversion price of $0.20 per share prior to maturity. If the investors
opt to convert their convertible debt to our common stock, then they will
receive a matching three year warrant to purchase unregistered shares of our
common stock at a price of $0.20 per share. We have measured the warrants but
have not recorded them given their contingent terms.
After consideration of the warrants, we recorded a discount associated with the
beneficial conversion feature of $233,735 related to the May & June 10%
Convertible Notes and we are amortizing that discount over the terms of the May
& June 10% Convertible Notes using the effective interest method. The BCF
calculation included valuing the potential issuance of warrants if the investors
choose to convert their debt instruments to our common stock per the guidance of
EITF 00-27.
15
At June 30, 2009, interest payable on those notes totaled $2,772.
NOTE 6. EQUITY TRANSACTIONS
In April 2009, we issued 71,519 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for financial consulting services and research services valued
at $12,158 based on the value of the services.
In April 2009, we issued 1,688,211 shares of common stock as a result of
conversions of $263,478 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
In April 2009, we issued 490,000 shares of restricted common stock valued at the
closing price in payment for investor relations services.
In April 2009, we issued 25,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In April 2009, we issued 32,935 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for internal controls consulting services valued at $7,575
based on the value of the services provided.
In April 2009, we issued 12,372 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for regulatory affairs consulting services valued at $2,660
based on the value of the services provided.
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In April 2009, we issued 43,021 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for financial consulting services valued at $7,744 based on the
value of the services provided.
In April 2009, we issued 70,870 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
In April 2009, we issued 22,817 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, holders of certain convertible notes converted $139,256 of
principal and accrued interest into 878,059 shares of our common stock per the
terms of the notes at an average conversion rate of approximately $0.16 per
share.
In May 2009, we issued 13,043 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 10,714 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 51,118 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for financial consulting services valued at $9,713 based on the
value of the services provided.
16
In May 2009, we issued 22,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, we issued 34,602 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $7,613 based on the
value of the services provided.
In May 2009, we issued 40,104 shares of restricted common stock at $0.24 in
payment for financial advisory services valued at $9,625 based on the value of
the services provided.
In May 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we issued 20,500 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $4,920
based on the value of the services provided.
In June 2009, we issued 57,055 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$12,552 based on the value of the services provided.
In June 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we issued 23,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $5,290
based on the value of the services provided.
In June 2009, we issued 48,106 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$10,583 based on the value of the services provided.
In June 2009, we issued 779,956 shares of common stock as a result of
conversions of $143,512 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In June 2009, we issued 16,176 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.34 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
On June 29, 2009, Mr. Joyce, our Chief Executive Officer entered into an Option
Suspension Agreement, whereby Mr. Joyce has agreed to not exercise his stock
options pending the filing of amended articles of incorporation of the Company
increasing the Company's authorized capital. Accordingly of Mr. Joyce's total
options, 2,857,143 cannot be exercised until the amended articles of
incorporation are filed, and 6,731,090 cannot be exercised until the later of
June 9, 2010 or the filing of the amended articles of incorporation. The
Agreement also provides Mr. Joyce certain protections in the event the Company
shall undergo a change of control transaction while his options are suspended.
Such protections include the right to receive, in the form of cash payments, the
positive value of his options (which remain subject to suspension) at the time
of such transaction. A copy of the Option Suspension Agreement was filed as an
Exhibit to our Form 10-K for the fiscal year ended March 31, 2009 and is
incorporated by reference as an Exhibit to this Report.
In addition, we committed to issue 4,000,000 shares of restricted common stock,
to Mr. Joyce at a price per share of $0.24, which shall vest in equal
installments over a thirty six month period commencing June 9, 2010; however
such shares will not be issued until the filing of the amended articles of
incorporation.
17
NOTE 7. OTHER CURRENT LIABILITIES
At June 30, 2009 and March 31, 2009, our other current liabilities were
comprised of the following items:
June 30, March 31,
2009 2009
---------- ----------
Accrued interest $ 401,870 $ 352,204
Accrued legal fees 211,865 211,865
Other 87,278 115,429
---------- ----------
Total other current liabilities $ 701,013 $ 679,498
========== ==========
As of the date of this report, various promissory and convertible notes payable
in the aggregate principal amount of $1,219,500 have reached maturity and are
past due. We are continually reviewing other financing arrangements to retire
all past due notes. At June 30, 2009, we had accrued interest in the amount of
$381,983 associated with these notes in accrued liabilities payable.
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 July 2009, we issued 518,649 shares of common stock as a result of
conversions of $100,566 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In July 2009, we issued 18,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.30 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In July 2009, we issued 51,971 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
In July 2009, we issued 11,647 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.34 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In July 2009, we issued 19,643 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In July 2009, we issued a convertible promissory note in the principal amount of
$330,000 to an accredited investor. The note is convertible into shares of our
common stock at a price per share that is equal to the lesser of (i) $0.25, or
(ii) the average of the closing bid prices of the common stock for the three
days immediately preceding the conversion date, subject in any case to a floor
of $0.15 per share. The investor also received warrants to purchase 600,000
shares of our common stock at an exercise price of $0.50 per share.
In August 2009, we issued 21,154 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of our financial condition and results of operations
should be read in conjunction with, and is qualified in its entirety by the
condensed consolidated financial statements and notes thereto, included in Item
1 in this Quarterly Report on Form 10-Q. This item contains forward-looking
statements that involve risks and uncertainties. Actual results may differ
materially from those indicated in such forward-looking statements.
FORWARD LOOKING STATEMENTS
All statements, other than statements of historical fact, included in this Form
10-Q are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended ("the
Securities Act"), and Section 21E of the Exchange Act. Such forward-looking
statements involve assumptions, known and unknown risks, uncertainties and other
factors which may cause the actual results, performance, or achievements of
Aethlon Medical, Inc. ("we", "us" or "the Company") to be materially different
from any future results, performance, or achievements expressed or implied by
such forward looking statements contained in this Form 10-Q. Such potential
risks and uncertainties include, without limitation, completion of our
capital-raising activities, FDA approval of our products, other regulations,
patent protection of our proprietary technology, product liability exposure,
uncertainty of market acceptance, competition, technological change, and other
risk factors detailed herein and in other of our filings with the Securities and
Exchange Commission. The forward-looking statements are made as of the date of
this Form 10-Q, and we assume no obligation to update the forward-looking
statements, or to update the reasons actual results could differ from those
projected in such forward-looking statements.
THE COMPANY
We are a developmental stage medical device company focused on expanding the
applications of our Hemopurifier(R) platform technology which is designed to
rapidly reduce the presence of infectious viruses and other toxins from human
blood. As such, we focus on developing therapeutic devices to treat acute viral
conditions brought on by pathogens targeted as potential biological warfare
agents and chronic viral conditions including HIV/AIDS and Hepatitis-C. The
Hemopurifier(R) combines the established scientific technologies of hemodialysis
and affinity chromatography as a means to mimic the immune system's response of
clearing viruses and toxins from the blood before cell and organ infection can
occur. The Hemopurifier(R) cannot cure these afflictions but can lower viral
loads and allow compromised immune systems to overcome otherwise serious or
fatal medical conditions.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities Exchange Act
and must file reports, proxy statements and other information with the SEC. The
reports, information statements and other information we file with the
Commission can be inspected and copied at the Commission Public Reference Room,
450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The
Commission also maintains a Web site http://www.sec.gov) that contains reports,
proxy, and information statements and other information regarding registrants,
like us, which file electronically with the Commission. Our headquarters are
located at 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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2008
Operating Expenses
Consolidated operating expenses for the three months ended June 30, 2009 were
$641,955 in comparison with $623,659 for the comparable quarter a year ago. This
increase of $18,296, or 3%, was due to an increase in professional fees of
$75,578, which was partially offset by decreases in payroll & related expenses
of $25,689 and a decrease in general and administrative expenses of $31,593.
The $75,578 increase in our professional fees was primarily due to a $68,446
increase in our fees paid to two investor relations firms. $64,700 of those
expenses were non-cash in nature as we paid those firms in restricted stock.
Additionally, we incurred $33,000 of expenses for business development
consulting in the quarter ended June 30, 2009 and there was no such expense in
the quarter ended June 30, 2008. These increases in professional fees were
offset by a $21,790 decrease in scientific consulting expense and a $15,444
decrease in accounting fees,
19
The $25,689 decrease in payroll and related expenses was due to a $90,054
decrease in cash-based compensation, which was partially offset by a $64,364
increase in non-cash stock-based compensation expense.
The $31,593 decrease in general and administrative expenses was due primarily to
decreases in insurance expense of $8,901, in licenses and permits of $5,850, in
lab supplies of $5,841, in trade show expense of $3,137 and in travel expense of
$2,971.
Other Expenses (Income)
Other expenses (income) consist primarily of the change in the fair value of our
derivative liability, interest expense and other expense. Other expenses for the
three months ended June 30, 2009 were $353,984 in comparison with $375,156 for
the comparable quarter a year ago. Both periods includes changes in the fair
value of derivative liability. For the three months ended June 30, 2009, the
change in the estimated fair value of derivative liability was an expense of
$(37,434) and for the three months ended June 30, 2008, the change in estimated
fair value was a gain of $187,692.
Interest expense was $316,657 for the three months ended June 30, 2009 compared
to $562,848, a decrease of $246,191. The various components of our interest
expense are shown in the following table:
Quarter Ended Quarter Ended Change
6/30/09 6/30/08
--------- --------- ---------
Actual Interest Expense $ 79,624 $ 62,806 $ 16,818
Amortization of Deferred Offering Costs -- 38,250 (38,250)
Amortization of Note Discounts 232,999 463,187 (230,188)
Finance Charges from Vendors 4,034 4,105 (70)
Other -- (5,500) 5,500
--------- --------- ---------
Total Interest Expense 316,657 562,848 (246,191)
========= ========= =========
As noted in the above table, the primary factor in the $246,191 reduction in
interest expense was the $230,188 reduction in amortization of note discounts.
This occurred because most of our note discounts were fully amortized as of
March 31, 2009.
Net Loss
As a result of the increased expenses noted above, we recorded a consolidated
net loss of approximately $996,000 and $999,000 for the quarters ended June
30, 2009 and 2008, respectively.
Basic and diluted loss per common share were ($0.02) for the three month period
ended June 30, 2009 compared to ($0.03) for the period ended June 30, 2008.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our capital requirements for the current operations from
net funds received from the public and private sale of debt and equity
securities, as well as from the issuance of common stock in exchange for
services. Our cash position at June 30, 2009 was approximately $90,000 compared
to approximately $6,000, at March 31, 2009, representing an increase of
approximately $84,000. During the three months ended June 30, 2009, operating
activities used net cash of approximately $366,000, while we received $450,000
from financing activities from the issuance of common stock and convertible
notes.
During the three month period ended June 30, 2009, net cash used in operating
activities was approximately ($366,000) and resulted from the approximate net
loss of $996,000, offset by the change in the estimated fair value of derivative
liability of approximately $37,000, the amortization of note discounts of
$42,000, fair market value of common stock of approximately $129,000 issued in
payment for services and approximately $194,000 in stock-based compensation.
An increase in working capital during the three months ended June 30, 2009 in
the amount of approximately $231,000 changed our negative working capital
position to approximately ($3,873,000) at June 30, 2009 from a negative working
capital of approximately ($4,104,000) at March 31, 2009.
20
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
June 30, 2009, we raised an additional $300,000 through the sale to an
accredited investor of a convertible note and common stock purchase warrants
however, we continue to seek additional financing.
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 $150,000 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.
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.
21
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Company to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of expenses during the reporting
period. On an ongoing basis, we evaluate estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe
our estimates and assumptions are reasonable in the circumstances; however,
actual results may differ from these estimates under different future
conditions.
We believe that the estimates and assumptions that are most important to the
portrayal of our financial condition and results of operations, in that they
require the most difficult, subjective or complex judgments, form the basis for
the accounting policies deemed to be most critical to us. These critical
accounting policies relate to measurement of stock purchase warrants issued with
notes payable, beneficial conversion feature of convertible notes payable,
impairment of intangible assets and long lived assets, stock compensation, and
the classification of warrant obligations, and evaluation of contingencies. We
believe estimates and assumptions related to these critical accounting policies
are appropriate under the circumstances; however, should future events or
occurrences result in unanticipated consequences, there could be a material
impact on our future financial conditions or results of operations.
There have been no changes to our critical accounting policies as disclosed in
our Form 10-K for the year ended March 31, 2009.
OFF-BALANCE SHEET ARRANGEMENTS
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.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO"), who is also our acting Chief
Financial Officer ("CFO"), we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered
by this Quarterly Report (the "Evaluation Date").
Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of such period, our disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Exchange Act and are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the registrant's annual or interim
financial statements will not be prevented or detected on a timely basis.
The Company's management, with the participation of its Chief Executive
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of March 31, 2009. In making this assessment, the Company
used the criteria set forth by the Committee of Sponsoring Organizations of The
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
that assessment under such criteria, management concluded that the Company's
internal control over financial reporting was not effective as of March 31, 2009
due to control deficiencies that constituted material weaknesses. Such material
weakness continued to exist for the period ended June 30, 2009.
Management in assessing its internal controls and procedures for the
fiscal period covered by this Report identified a lack of sufficient segregation
of duties, particularly in cash disbursements. Specifically, this material
weakness is such that the design of controls over the area of cash disbursements
relies primarily on detective controls and could be strengthened by adding
preventative controls to properly safeguard company assets.
Management has identified a lack of sufficient personnel in the
accounting function due to the limited resources of the Company with appropriate
skills, training and experience to perform the review processes to ensure the
complete and proper application of generally accepted accounting principles,
particularly as it relates to taxes. Specifically, this material weakness led to
segregation of duties issues and resulted in audit adjustments to the annual
consolidated financial statements and revisions to related disclosures,
including tax reporting.
We are in the process of developing and implementing remediation plans
to address the material weaknesses.
Management has identified specific remedial actions to address the
material weaknesses described above:
o Improve the effectiveness of the accounting group by
continuing to augment existing Company resources with
additional consultants or employees to improve segregation
procedures and to assist in the analysis and recording of
complex accounting transactions and preparation of tax
disclosures. The Company plans to mitigate the segregation of
duties issues by hiring additional personnel in the accounting
department once the Company has achieved commercialization of
its products and is generating revenue, or has raised
significant additional working capital.
o Improve segregation procedures by strengthening cross approval
of various functions including cash disbursements and
quarterly internal audit procedures where appropriate.
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Since our evaluation as of March 31, 2009 we have had no significant
changes in our internal controls.
23
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.
During the first quarter of 2009, we issued the following securities which were
not registered under the Securities Act of 1933, as amended. We did not employ
any form of general solicitation or advertising in connection with the offer and
sale of the securities described below. In addition, we believe the purchasers
of the securities are "ACCREDITED INVESTORS" for the purpose of Rule 501 of the
Securities Act. For these reasons, among others, the offer and sale of the
following securities were made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act or Regulation D promulgated by
the SEC under the Securities Act:
In April 2009, we issued 1,688,211 shares of common stock as a result of
conversions of $263,478 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
In April 2009, we issued 490,000 shares of restricted common stock valued at the
closing price in payment for investor relations services. We believe the
recipients of the shares is an accredited investor.
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In May 2009, holders of certain convertible notes converted $139,256 of
principal and accrued interest into 878,059 shares of our common stock per the
terms of the notes at an average conversion rate of approximately $0.16 per
share.
In May 2009, we issued 40,104 shares of restricted common stock at $0.24 in
payment for financial advisory services valued at $9,625 based on the value of
the services provided. We believe the recipients of the shares is an accredited
investor.
In June 2009, we issued 779,956 shares of common stock as a result of
conversions of $263,478 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In July 2009, we issued a convertible promissory note in the principal amount of
$330,000 to an accredited investor. The note is convertible into shares of our
common stock at a price per share that is equal to the lesser of (i) $0.25, or
(ii) the average of the closing bid prices of the common stock for the three
days immediately preceding the conversion date, subject in any case to a floor
of $0.15 per share. The investor also received warrants to purchase 600,000
shares of our common stock at an exercise price of $0.50 per share. The proceeds
from the sale of the note and warrants will be used for general working capital
purposes.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As of the date of this report, various promissory and convertible notes payable
in the aggregate principal amount of $1,219,500 have reached maturity and are
past due. We are continually reviewing other financing arrangements to retire
all past due notes. Additionally, on July 30, 2008, the holders of the Amended
Series A Convertible Notes notified us that we were in default on the notes due
to our failure to register the warrants by March 31, 2008 and for failing to
make required interest payments. At June 30, 2009, we had accrued interest in
the amount of $381,983 associated with these notes and accrued liabilities
payable.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
In July 2009, we issued a convertible promissory note in the principal amount of
$330,000 to an accredited investor. The note is convertible into shares of our
common stock at a price per share that is equal to the lesser of (i) $0.25, or
(ii) the average of the closing bid prices of the common stock for the three
days immediately preceding the conversion date, subject in any case to a floor
of $0.15 per share. The investor also received warrants to purchase 600,000
shares of our common stock at an exercise price of $0.50 per share. The proceeds
from the sale of the note and warrants will be used for general working capital
purposes. No fees or commissions were paid in connection with the sale of the
note and warrants.
25
ITEM 6. EXHIBITS.
(a) Exhibits. The following documents are filed as part of this report:
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated March 28,
2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated June 13,
2005 (3)
3.5 Certificate of Amendment of Articles of Incorporation dated March 6,
2007 (4)
10.1 Form of Convertible Promissory Note*
10.2 Form of Common Stock Purchase Warrant*
10.3 Option Suspension Agreement (5)
31.1* Certification of Principal Executive Officer and Principal Financial
Officer pursuant to Securities Exchange Act rules 13a- 15 and 15d-15(c)
as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of James A. Joyce, Principal Executive Officer and
Principal Financial Officer pursuant to 18 U.S.C. section 1350, as
adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
* Filed herewith.
(1) December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 10,
2005 and incorporated by reference.
(4) Filed with the Company's Current Report on form 8-K dated March 7, 2007
and incorporated herein by reference.
(5) Filed with the Company's Annual Report on form 10-K dated July 2, 2009
and incorporated herein by reference.
26
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: AUGUST 14, 2009 BY: /S/ JAMES A. JOYCE
---------------------------
JAMES A. JOYCE
CHAIRMAN, PRESIDENT, CHIEF
ACCOUNTING OFFICER AND
CHIEF EXECUTIVE OFFICER
27