SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
================================================================================
(MARK ONE)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2003
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ________ to __________
Commission file number 0-21846
AETHLON MEDICAL, INC.
(Name of Small Business issuer in its charter)
NEVADA 13-3632859
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7825 FAY AVENUE, SUITE 200,
LA JOLLA, CALIFORNIA 92037
(Address of principal executive office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (858) 456-5777
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK--$.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
Revenues of the registrant for the fiscal year ended March 31, 2003 were $0.
The aggregate market value of the Common Stock held by non-affiliates
was approximately $1,512,000 based upon the closing price of the Common Stock of
$0.40, as reported by the NASDAQ Over-the-Counter Bulletin Board ("OTCBB") on
June 30, 2003.
The number of shares of the Common Stock of the registrant outstanding
as of June 30, 2003 was 7,334,960.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
INDEX TO FORM 10-KSB
PAGE
PART I.
Item 1. Business 1
Item 2. Properties 5
Item 3. Legal Proceedings 5
Item 4. Submission of Matters to a Vote of Security Holders 5
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder 6
Matters
Item 6. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 7. Financial Statements 12
Item 8. Changes in and Disagreements with Accountants on Accounting 12
and Financial Disclosure
PART III.
Item 9. Directors and Executive Officers of the Registrant 13
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 19
Item 12. Certain Relationships and Related Transactions 20
PART IV.
Item 13. Control Procedures 20
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 22
8-K
Signatures 23
Certifications 24
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
PART I
All statements, other than statements of historical fact, included in
this Form 10-KSB are, or may be deemed to be, "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). Such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Aethlon Medical, Inc. (the "Company") to
be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements contained in this Form
10-KSB. Such potential risks and uncertainties include, without limitation, FDA
and other regulatory approval of the Company's products, patent protection on
the Company's proprietary technology, product liability exposure, uncertainty of
market acceptance, competition, technological change, and other risk factors
detailed herein and in other of the Company's filings with the Securities and
Exchange Commission. The forward-looking statements are made as of the date of
this Form 10-KSB, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ
from those projected in such forward-looking statements.
ITEM 1. BUSINESS
GENERAL
Aethlon Medical, Inc. ("Aethlon Medical" or the "Company"), formerly
Bishop Equities, Inc. ("Bishop"), was incorporated in Nevada in April 1991 to
provide a public vehicle for participation in a business transaction through a
merger with or acquisition of a private company. In March 1993, the Company
successfully offered its common stock at $6.00 per share through an initial
public offering. In March 1999, Bishop began doing business as "Aethlon Medical,
Inc." In March 2000, the Company's Articles of Incorporation were amended to
formally change the name of the Company from "Bishop Equities, Inc." to "Aethlon
Medical, Inc."
BUSINESS DEVELOPMENT/ACQUISITIONS
On March 10, 1999, (1) Aethlon, Inc., a California corporation
("Aethlon"), (2) Hemex, Inc., a Delaware corporation ("Hemex"), the accounting
predecessor to the Company, and (3) Bishop, a publicly traded "shell" company,
completed an Agreement and Plan of Reorganization (the "Plan") structured to
result in Bishop's acquisition of all of the outstanding common shares of
Aethlon and Hemex (the "Reorganization"). The Reorganization was intended to
qualify as a tax-free transaction under Section 368 (a)(1)(B) of the 1986
Internal Revenue Code, as amended. Under the Plan's terms, Bishop issued 733,500
and 1,350,000 shares of its common stock to the common stock shareholders of
Aethlon and Hemex, respectively, such that Bishop then owned 100% of each
company.
Effective January 1, 2000, the Company entered into an agreement under
which an invention and related patent rights for a method of removing HIV and
other viruses from the blood using the Hemopurifier(TM) technology were assigned
to the Company. This invention further expands our HIV/AIDS treatment portfolio
and our follow-on HIV/AIDS product candidate, the HIV-Hemopurifier(TM), AEMD-61
and is based in part on this invention and related patent rights. In addition to
certain royalty payments equal to 8.75% of net sales of the patented product,
the consideration for the acquired rights included the issuance of 208,578
shares of the Company's common stock to the inventors, as defined.
On January 10, 2000, the Company acquired all the outstanding common
stock of Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of the
Company's common stock in order to employ Dr. Richard Tullis, the founder of
Syngen. Dr. Tullis is a nationally recognized research scientist in the area of
DNA synthesis and antisense. Syngen had no significant assets, liabilities, or
operations, and primarily served as the conduit for Dr. Tullis to perform
research consulting services. As such, the acquisition has been accounted for as
an acquisition of assets in the form of the employment contract with Dr. Tullis
and not as a business combination. Dr. Tullis was appointed to the Board of
Directors of Aethlon Medical and was elected its Vice President for Business
Development. Effective June 1, 2001, Dr. Tullis was appointed Chief Scientific
Officer of Aethlon Medical, replacing Dr. Clara Ambrus, who retired from this
position.
1
On April 6, 2000, the Company completed the acquisition of Cell
Activation, Inc. ("Cell"). In accordance with the purchase agreement, the
Company issued 99,152 shares of restricted common stock and issued 50,148
options to purchase common stock in exchange for all of the outstanding common
shares and options to purchase common stock of Cell. After the transaction, Cell
became a wholly-owned subsidiary of the Company. The acquisition was accounted
for as a purchase. At March 31, 2001, management determined that goodwill
recognized in the purchase of Cell was impaired due to the temporary suspension
of the operations by Cell, and, accordingly, treated the related goodwill as
fully impaired.
BUSINESS OF ISSUER
Aethlon Medical is a development stage therapeutic device company
focused on expanding the applications of its Hemopurifier platform technology,
which is designed to rapidly reduce the presence of infectious viruses and toxic
viral proteins from human blood. In this regard, Aethlon Medical's core focus is
the development of therapeutic devices that treat HIV/AIDS, Hepatitis-C, and
other infectious diseases. In pre-clinical testing, the Company's lead product,
AEMD-45 removed 55% of HIV from human blood in three hours and in excess of 85%
in twelve hours. This same treatment cartridge was able to remove 90% of toxic
proteins that deplete immune cells in one hour. In January of 2003, the Company
completed early stage blood studies of its HCV-Hemopurifier, which documented a
consistent ability to remove 58 percent of the Hepatitis-C virus from infected
blood in two hours.
THE HEMOPURIFIER(TM) DEVICE.
The AEMD-45 therapeutic device is developed from an expansive platform
technology known as the HemopurifierTM, which employs a proprietary method of
modifying artificial kidneys (hemodialysis cartridges) to mimic the immune
systems response to clear infectious virus from circulation before healthy cells
can be infected. The Company believes that AEMD-45 can help to fill the urgent
need for new treatments that are effective in reducing viral load, decrease the
likelihood of treatment resistance, and treat without the side effects of
current AIDS drugs. Based on recent human blood studies, AEMD-45 has the
potential to serve as a promising new weapon to combat AIDS, and is positioned
to treat the full-spectrum of HIV-infected individuals as listed below:
o As a conjunctive therapy to enhance and prolong the
performance of established pharmaceutical regimens.
o As a treatment for the large and growing population of HIV
infected that have either become drug resistant or are unable
to tolerate drug therapy.
o As a front line treatment for newly infected individuals who
are delaying treatment with AIDS drugs, as advised under new
federal guidelines.
Clinical testing of each Hemopurifier application will require market
clearance as a medical device by the Food and Drug Administration ("FDA"). We
intend to initiate the FDA approval process for our lead product candidate, the
HIV-Hemopurifier AEMD-45 within fiscal year 2004. At this time, management
cannot predict how long it will take to obtain FDA approval or if FDA approval
will be obtained.
THE INFECTIOUS DISEASE MARKET
Aethlon Medical's focus is the development of new treatments that
address the infectious disease marketplace. The Company's first product
candidates target two significant global issues, the treatment of HIV/AIDS, and
Hepatitis-C (HCV), the most common blood-borne disease in the United States.
Currently, there are no effective long-term treatments for either of these viral
diseases. Prescribed drugs often have severe side effects and both HIV and HCV
mutate frequently, a factor that results in resistance to currently available
drug treatments.
THE HIV/AIDS MARKET OPPORTUNITY
Accounting for over 22 million deaths since 1982, AIDS is officially the
worst epidemic in the history of mankind. In July 2002, The United Nations
projected that AIDS will be responsible for an additional 68 million deaths by
2020. Industry analysts expect the HIV market to triple by 2007, with sales of
antiretroviral drugs increasing from $5 billion in 2000 to over $13 billion by
2007.
2
In the absence of therapeutic intervention, the vast majority of
individuals infected with HIV ultimately develop AIDS, which has a mortality
rate approaching 100%. Since AIDS was discovered in 1981, there have been few
breakthroughs in the effort to cure this progressive and fatal disease. THE WALL
STREET JOURNAL projects the global population of those infected with the AIDS
virus will exceed 100 million in the year 2005.
THE HEPATITIS-C (HCV) MARKET OPPORTUNITY
According to the Centers for Disease Control (CDC), over 200 million
people worldwide are infected with the Hepatitis-C virus (HCV). HCV has become
the most common, chronic, blood-borne disease in the United States with nearly
four million people infected. Chronic and progressive Hepatitis C, which
represents 80-90% of all cases, has significant morbidity and mortality rates,
and is a leading cause of cirrhosis, end-stage liver disease, and liver cancer.
End-stage liver disease caused by HCV is now the most common indication for
liver transplantation in this country. It is estimated that 60% of those
infected with HCV are resistant to available treatments and much like HIV, HCV
is known to mutate frequently.
TREATMENT CLASSIFICATION
Aethlon's treatments for infectious diseases are classified as
"IMMUNOTHERAPIES" that augment or mimic the immune system's response of clearing
infectious virus, and as "ENTRY INHIBITORS" that curb the re-infection process
by physically removing infectious virus before healthy cells are infected.
IMMUNOTHERAPY - The "Immunotherapy" classification is a result of
Aethlon's ability to mimic the immune system's natural response of generating
antibodies to fight foreign antigens such as viruses. Antibodies are
specifically created by the immune system to attach themselves to the antigen
(virus) that stimulated the immune system, forming an antigen-antibody complex
to neutralize the invader. In the case of Aethlon's treatment technology,
antibodies against targeted viruses are immobilized within artificial kidneys
that have been modified to replicate the antigen-antibody complex generated by
an immune response. As a result, an extracorporeal antigen-antibody complex is
generated, and the physical elimination of infectious virus occurs without the
side-effects common in current AIDS drugs.
ENTRY INHIBITOR - Aethlon's treatment technology is also classified as
an "Entry Inhibitor" since the re-infection process is interrupted when viruses
are removed from circulation before cells can be infected. As a result, the
replication cycle is inhibited as infectious virus is denied entry into the
cells that it seeks to kill. From a therapeutic standpoint, entry inhibitors
represent a departure from the traditional HIV drug action of inhibiting HIV
replication within the cells that have already been infected. The novel
therapeutic mechanism offered by "Entry Inhibitors", combined with the high
level of treatment resistance to currently approved drugs, positions "Entry
Inhibitors" as an important new treatment strategy to assist HIV infected
individuals in managing their disease.
HIV/AIDS TREATMENT OPPORTUNITIES
Aethlon Medical is targeting its HIV-Hemopurifier as a therapy to treat
the three distinct segments that represent the full spectrum of the HIV/AIDS
patient population.
1. Conjunctive Therapy
2. Salvage Therapy
3. Federal Guideline Compliant
3
CONJUNCTIVE THERAPY
AEMD-45 and AEMD-61 are designed to delay disease progression when
implemented in conjunction with established antiretroviral drugs. These drugs,
known as protease and reverse transcriptase inhibitors, represent the current
standard in antiretroviral treatment. The primary drug action associated with
these medications is to inhibit the ability of the virus to replicate within the
cells. Unfortunately, these drugs are ineffective for extended periods since
they encourage the development of mutant viral strains that lead to drug
resistance. As a conjunctive therapy, each HIV-Hemopurifier(TM) treatment
cartridge will enhance and prolong the performance of AIDS drugs by physically
binding circulating HIV before it is able to infect new host cells, and by
extracting mutant strains of HIV that lead to drug resistance.
SALVAGE THERAPY
Today, the HIV/AIDS treatment landscape is comprised of 18 drugs whose
annual sales now exceed $5 billion. While this small arsenal is an indisputable
advance over the early days of the epidemic, a resistance to these drugs
inevitably occurs in virtually all patients, even those that currently have
undetectable viral loads and adhere to treatment regimens. In addition to
resistance, many of these medications have severe side effects that further
diminish their effectiveness as a long-term treatment option. These factors
combined with the evolution of new HIV strains have dramatically increased the
number of newly infected individuals who fail drug therapies. As a result,
almost half of newly infected individuals in the U.S. and Europe now fail two or
more regimens of treatment. AEMD-45 and AEMD-61 will be targeted to be primary
monotherapies for the growing population of patients who are either unresponsive
to available drugs or become resistant as a result of HIV mutation. The
population of HIV drug resistant patients is expected to increase from 28.5% in
2000 to 42% in 2005.
FEDERAL GUIDELINE COMPLIANT
Citing dangerous side effects and issues of drug resistance, the
federal government changed its AIDS treatment policy on February 5, 2001,
stating that HIV-infected people should now allow for a further progression of
the disease towards AIDS before initiating antiretroviral treatments. As a
result, the prior recommendations of "hit early, hit hard" with available drug
regimens that were issued five years earlier have been discontinued. The new
guidelines suggest that practitioners should now withhold treating HIV-infected
adults and adolescents with available drugs until their supply of T-helper cells
is less than 350 per cubic millimeter of blood. AEMD-45 and AEMD-61 are both
positioned to become important first-line therapies for newly infected
individuals to delay disease progression and to delay the need to initiate
treatment with AIDS drugs. The primary benefits of this treatment strategy
include: a delay in the development of drug resistance; the avoidance of drug
related adverse effects; the preservation of drug options when HIV disease risk
is highest; and finally, a definitive improvement in the quality of life.
VALUE ADDED SERVICES (DIAGNOSTIC APPLICATIONS)
As a result of the HIV-Hemopurifiers ability to effectively concentrate
HIV and harmful viral proteins from the entire bloodstream, the detection
sensitivity of current diagnostic tests can be enhanced as much as 1000-fold. As
a result, Aethlon may contract with leading diagnostic organizations to offer
physicians with the following value-added services:
1. Measurement of the amount of HIV removed from the body.
2. Measurement of the amount of harmful viral proteins removed
from the body.
3. Isolate and identify viral strains so that pharmaceutical
regimens can be "tailored" to eliminate the use of drugs to
which the strains are resistant.
HEAVY METAL TREATMENT PRODUCTS
Historically, the original Hemopurifier treatment applications were
developed to treat individuals burdened with heavy metal intoxicants. Products
developed in this category include treatments for iron overload, aluminum
intoxication, lead poisoning, and cisplatin removal. The Company is not
currently pursuing the commercialization of these products as it is focused on
the infectious disease marketplace.
4
RESEARCH AND DEVELOPMENT
In fiscal year 2001, we realigned our research and development
activities to address the urgent need for effective HIV/AIDS treatment methods,
as well as for treatment of other infectious diseases, such as Hepatitis C.
Since then, our efforts have been directed towards advancing the
HIV-Hemopurifier.
As a result of this strategic realignment, we initiated the
consolidation of all scientific and administrative functions into our San Diego
facilities during the fourth quarter of fiscal 2001. This consolidation was
completed during the first quarter of fiscal 2002 and our facilities in Buffalo,
N.Y. were closed.
The focus on infectious diseases represents a departure from our
original efforts to develop niche market Hemopurifiers to treat heavy metal
intoxicants. Products developed in this category included treatments for Iron
Overload, Aluminum Intoxication, Lead Poisoning, and Cisplatin removal. We
believe these products to be effective in removing intoxicants from blood.
However, we are no longer focused on the commercialization of these products
since our available resources are engaged in the advancement of our
HIV-Hemopurifier and the development of other infectious disease treatments.
The cost of research and development, all of which has been charged to
operations, amounted to approximately $540,000 over the last two fiscal years.
PATENTS
Effective January 1, 2000, the Company entered into an agreement with a
related party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to the Company by the inventors in exchange for a royalty to be paid on
future sales of the patented product or process and shares of the Company's
common stock. On March 4, 2003, the related patent was issued and the Company
issued 196,078 shares of common stock. The Company has applied for and obtained
several patents relating to its HIV-Hemopurifier and related technology. Any
resulting medical device or process will require approval by the U.S. Food and
Drug Administration ("FDA"), and the Company has not yet begun efforts to obtain
FDA approval on its current lead product candidate, which may take several
years. Since several of the Company's patents were issued in the 1980's, they
are scheduled to expire in the near future. Thus, such patents may expire before
FDA approval, if any, is obtained. However, the Company's business generally is
not dependent upon the protection of any patent, patent application or patent
license agreement, or group thereof, and would not be materially affected by the
expiration thereof.
EMPLOYEES
At March 31, 2003, we had two full-time employees. The Company
utilizes, whenever appropriate, contract and part time professionals in order to
conserve cash and resources.
ITEM 2. DESCRIPTION OF PROPERTY
The Company currently rents approximately 1,000 square feet of
laboratory space in San Diego, California on a month-to-month basis at a lease
rate of $1,200 per month. The Company also leases approximately 1,200 square
feet of executive office space in La Jolla, California at the rate of $3,425 per
month on a month-to-month lease for use as its principal executive offices.
ITEM 3. LEGAL PROCEEDINGS
The Company may be involved from time to time in various claims,
lawsuits, disputes with third parties or breach of contract actions incidental
in the normal course of business operations. The Company is currently not
involved in any such litigation or any pending legal proceedings that management
believes could have a material adverse effect on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LIMITED PUBLIC MARKET FOR SHARES OF COMMON STOCK
The Company's Common Stock is quoted on the NASDAQ Over-the-Counter
Bulletin Board ("OTCBB"). The Company's trading symbol is "AEMD." The Company's
Common Stock has had a limited and sporadic trading history.
The following table sets forth for the calendar period indicated the
high and low quotations for the Common Stock as reported by the OTCBB. The
prices represent quotations between dealers, without adjustment for retail
markup, mark down or commission, and do not necessarily represent actual
transactions.
HIGH LOW
---- ---
2003
2nd Quarter $ 0.60 $ 0.35
1st Quarter $ 0.56 $ 0.15
2002
4th Quarter $ 0.85 $ 0.15
3rd Quarter $ 1.05 $ 0.65
2nd Quarter $ 1.95 $ 0.55
1st Quarter $ 2.30 $ 1.15
2001
4th Quarter $ 3.60 $ 2.00
3rd Quarter $ 3.50 $ 2.10
2nd Quarter $ 3.50 $ 1.75
1st Quarter $ 3.00 $ 1.63
2000
4th Quarter $ 6.53 $ 1.94
3rd Quarter $ 7.00 $ 3.13
2nd Quarter $ 9.00 $ 3.00
1st Quarter $ 9.00 $ 3.80
We have not declared any cash dividends on our common stock since
inception and do not anticipate any in the future, due to the Company's
anticipated development and operational cash requirements.
There are approximately 370 record holders of the Company's Common
Stock at June 30, 2003.
The transfer agent and registrar for our common stock is Computershare,
located in Denver, Colorado.
PENNY STOCK
Until the Company's shares qualify for inclusion in the NASDAQ system,
the public trading, if any, of the Company's common stock will be on the OTC
Bulletin Board. As a result, an investor may find it more difficult to dispose
of, or to obtain accurate quotations as to the price of, the common stock
offered. The Company's common stock is subject to provisions of Section 15(g)
and Rule 15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), commonly referred to as the "penny stock rule." Section 15(g) sets forth
certain requirements for transactions in penny stocks, and Rule 15g-9(d)
incorporates the definition of "penny stock" that is found in Rule 3a51-1 of the
Exchange Act. The SEC generally defines "penny stock" to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. If the Company's common stock is deemed to be a penny stock, trading
in the shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors. "Accredited investors" are persons with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse. For transactions covered by these rules, broker-dealers must
make a special suitability determination for the purchase of such security and
must have the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document, prepared by the SEC, relating to the penny stock
market. A broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in an account and information on the
limited market in penny stocks. Consequently, these rules may restrict the
ability of a broker-dealer to trade and/or maintain a market in the Company's
common stock and may affect the ability of the Company's shareholders to sell
their shares.
6
RECENT SALES OF UNREGISTERED SECURITIES
COMMON STOCK
During the year ended March 31, 2003, the Company issued 150,124 shares
of restricted common stock in connection with the conversion of amounts owed to
certain vendors and noteholders approximating $188,000.
During the year ended March 31, 2003, the Company issued 200,000 shares
of restricted common stock for cash totaling $100,000 in connection with the
exercise of warrants.
During the year ended March 31, 2003, the Company issued 461,600 shares
of restricted common stock at $0.25 per share for cash totaling $115,400. In
connection with the issuance of certain shares, the Company granted the
stockholders warrants to purchase common stock of the Company at $0.25 per
share. The warrants vested immediately and expire through March 2004.
During the year ended March 31, 2003, the Company issued 19,230 shares
of restricted common stock at $0.26 per share for cash totaling $5,000.
During the year ended March 31, 2003, the Company issued 8,000 shares
of restricted common stock at $1.25 for cash totaling $10,000.
During the year ended March 31, 2003, the Company issued 420,000 shares
of restricted common stock in connection with the conversion of $75,000 of 12%
Notes payable and $30,000 of 10% Convertible Notes.
In November 2002, the Company issued 69,231 shares of restricted common
stock for consulting services valued at $45,000 (estimated based on the market
price on the date of issue).
In March 2003, the Company issued 196,078 shares of restricted common
stock in connection with a royalty agreement. The shares were valued at $100,000
(estimated based on the market price on the date of issue).
All of the shares of common stock referred to above were issued in
reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities Act.
OPTIONS AND WARRANTS
During the year ended March 31, 2003, the Company granted 240,830
warrants to investors in connection with the purchase of common stock. The
warrants have an exercise price of $0.25 per share, vest immediately and are
exercisable through March 2004.
During the year ended March 31, 2003, the Company granted 75,061
warrants to certain vendors in connection with the conversion of amounts owed by
the Company into common stock. The warrants were valued at $71,000 (estimated
based on the relative fair values as determined by the Black Scholes option
pricing model pursuant to SFAS 123), have exercise prices of $2.00, vest
immediately and are exercisable through June 2005.
In December 2002, the Company issued 580,000 warrants to purchase
common stock for $0.25 per share, which are exercisable through December 2004
and vested upon grant. The warrants were issued in connection with a short-term
secured note payable.
In March 2003, the Company issued 420,000 warrants to purchase common
stock for $0.25 per share, which are exercisable through March 2004 and vested
upon grant. The warrants were issued in connection with the conversion of notes
payable.
In August 2002, the Company granted warrants to purchase 52,000 shares
of the Company's restricted common stock at an exercise price of $0.25 per share
in connection with equity fund raising activities. These warrants vested upon
grant and are exercisable through March 2004.
In July 2002, the Company extended a consulting agreement and granted
an additional 200,000 stock options valued at $114,000 (estimated based on the
Black Scholes option pricing model pursuant to SFAS 123).
All of the securities referred to above were issued in reliance upon
the exemption from registration pursuant to Section 4(2) of the Securities Act.
7
The following table sets forth March 31, 2003 information on the Company's
equity compensation plans (including the potential effect of debt instruments
convertible into common stock) in effect as of that date:
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available
of outstanding options, outstanding options, for future issuance
warrants and rights (1)(2) warrants and rights under equity
compensation plans
(excluding securities
reflected in column
(a))
Equity compensation
plans approved by
security holders 47,500 $2.75 452,500
Equity compensation
plans not approved by
security holders (1) 4,235,361 2.34 N/A
---------- ------ ----------
Totals 4,282,861 2.35 452,500
(1) The description of the material terms of non-plan issuances of
equity instruments is discussed in Notes 4, 5 and 6 to the
accompanying consolidated financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-KSB. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, competition from other similar businesses, and market and general
policies, competition from other similar businesses, and market and general
economic factors. All forward-looking statements contained in this Form 10-KSB
are qualified in their entirety by this statement.
Aethlon Medical is a development stage therapeutic device company that
has not yet engaged in significant commercial activities. The primary focus of
our resources is the advancement of our proprietary Hemopurifier(TM) platform
treatment technology, which is designed to remove viruses and toxic viral
proteins from human blood. Our main focus during fiscal 2003 was to prepare our
HIV-Hemopurifier to treat HIV/AIDS for human clinical trials, and to initiate
the pre-clinical human blood studies of our HCV-Hemopurifier for treating
Hepatitis-C. See Item 1, "Business."
We recorded a consolidated net loss of $2,461,116 or ($0.44) per share
and $3,995,910 or $(1.04) per share for the fiscal years ended March 31, 2003
and 2002, respectively.
8
Consolidated operating expenses for fiscal 2003 were $1,971,385 versus
$2,272,930 for fiscal 2002. This decrease in operating expenses of $301,545 or
13.3% is largely attributable to a reduction in professional fees, general and
administrative expenses and payroll totaling $635,849, partially offset by a
patent impairment charge of $334,304. Capital equipment expenditures were
insignificant in fiscal 2003 and 2002.
In fiscal year 2003, we incurred non-cash expenses in the amount of
$334,304 related to the impairment of the carrying value of patents pending. The
Company capitalizes the cost of patents and patents pending, some of which were
acquired, and amortizes such costs over the shorter of the remaining legal life
or their estimated economic life, upon issuance of the patent. The unamortized
cost of patents and patents pending is written off when management determines
there is no future benefit.
In fiscal years 2003 and 2002, we incurred non-cash expenses in the
amount of $114,000 and $562,000, respectively, related to options granted to a
consultant. These expenses represent a significant portion of the professional
fees incurred during fiscal 2003 and 2002.
We plan to continue our research and development activities related to
our Hemopurifier(TM) platform technology, with particular emphasis on the
advancement of our lead product candidates for the treatment of HIV/AIDS.
We will continue to carefully align our use of capital with the funding
we receive and are pursuing various funding alternatives to support our business
plan going forward. At the date of this report, we do not have plans to purchase
significant amounts of equipment nor hire significant numbers of employees prior
to successfully raising additional capital.
LIQUIDITY AND CAPITAL RESOURCES
The implementation of the Company's business plan is dependent upon our
ability to raise equity and/ or equity-oriented capital.
During the fiscal year 2002, all of our approximately $1,365,000 12%
notes matured and were in default, increasing the interest to 15% per annum. At
March 31, 2003, all of such 12% Notes were past due and in default and bear
interest at 15% per annum until paid.
The Company is currently seeking other financing arrangements to retire
all past due notes.
During September through December 2001, we issued convertible notes
totaling $128,000 bearing interest at 10% per annum, with principal and interest
becoming due six months after issuance, to cover short-term capital needs. Of
these convertible notes $113,000 has been converted into common stock at the
conversion price of $1.25 per share.
In March 2002, the Company extended an offer to certain note holders
and vendors to convert past due amounts into restricted common stock and
warrants to purchase common stock of the Company. The offer entails the
conversion of liabilities at a conversion of one share and one-half of a warrant
for every $1.25 converted. The warrants have an exercise price of $2.00 per
share and expire three years from the date of issuance.
During the year ended March 31, 2003 and 2002, note holders and vendors
representing liabilities in the aggregate amount of approximately $188,000 and
$1,020,000 converted their debt in exchange for 150,124 and 816,359 shares of
common stock and 75,061 and 408,180 warrants to purchase common stock,
respectively.
Additional funds in the aggregate amount of $200,000 were generated in
January and February 2002, through the exercise of an option to purchase common
stock of the Company by a consultant.
On March 18, 2002, the Company issued a promissory note to a
stockholder in the amount of $50,000, bearing interest at 6.75% per annum and
maturing on May 17, 2002. The note was converted in March 2003.
In May 2002, the Company issued notes payable totaling $25,000, bearing
interest at 6.75% per annum, maturing in July 2002. The notes were converted
into shares of the Company's common stock in March 2003.
9
In December 2002, an existing noteholder increased its advances to the
Company by $40,000 to a total of $140,000. In consideration, the Company granted
the noteholder warrants, cancelled the noteholder's existing $100,000 of
convertible debt and replaced it with a secured $140,000 note payable. The new
note bears interest at 10% per annum, with principal and interest thereon due
April 30, 2003.
In November 2000, the Company issued convertible notes payable ("8%
Convertible Notes"), bearing interest at 8% per annum, with principal and
accrued interest due on November 1, 2002. The 8% Convertible Notes require no
payment of principal or interest during the term and may be converted to common
stock of the Company at any time at the option of the holder. The number of
common shares issuable upon conversion is equal to the total principal and
unpaid interest as of the date of conversion, divided by the conversion price.
The conversion price per share was changed effective August 31, 2001 to the
lesser of (a) 80% of the closing market price for the common stock; or (b) 70%
of the average of the three lowest closing market prices for the common stock
for the 10 trading days prior to conversion. Such change resulted in additional
BCF approximating $57,000 during the year ended March 31, 2002.
During fiscal year 2002, the holder converted principal and accrued
interest of approximately $49,000 into 40,267 shares of common stock, leaving
the principal of $350,000 and interest thereon due and outstanding. The average
conversion price was approximately $1.22 per share.
From time to time, the Company issued convertible notes payable ("10%
Convertible Notes") to various investors, bearing interest at 10% per annum,
with principal and interest due six months from the date of issuance. The 10%
Convertible Notes require no payment of principal or interest during the term
and may be converted to common stock of the Company at the conversion price of
$0.50 per share at any time at the option of the noteholder.
In April 2002, the Company issued a convertible note in the amount of
$50,000. The conversion price of this note was $1.25 at the time of issuance,
but in August 2002, the Company reduced the conversion price to $0.50.
During the year ended March 31, 2003, the Company issued additional 10%
Convertible Notes totaling $225,000, of which $30,000 was converted into
restricted common stock.
On March 9, 2001, the Company entered into a common stock subscription
agreement with an investor whereby the Company agreed to sell 950,000 shares of
its restricted common stock, with a minimum subscription of 800,000 shares at
$1.00 per share to such investor on certain dates. The March 9, 2001 closing
market price of the Company's common stock was $2.50 per share. During March
2001, the Company issued 100,000 shares of common stock in exchange for $100,000
in cash under such agreement. During the year ended March 31, 2002, the Company
issued 747,471 shares of common stock to the investors in exchange for
approximately $712,000 in cash, net of issuance costs of approximately $44,000
under this agreement. No further subscriptions were made under this agreement.
In November 2002, the Company issued 69,231 shares of restricted common
stock for consulting services valued at $45,000 (estimated based on the market
price on the date of issue).
Other financings the Company completed during the year ended March 31,
2003:
- issued 150,124 shares of restricted common stock in
connection with the conversion of amounts owed to certain vendors and
noteholders approximating $188,000.
- issued 200,000 shares of restricted common stock for cash
totaling $100,000 in connection with the exercise of warrants.
- issued 461,600 shares of restricted common stock at $0.25
per share for cash totaling $115,400. In connection with the issuance
of certain shares, the Company granted the stockholders warrants to
purchase common stock of the Company at $0.25 per share. The warrants
vested immediately and expire through March 2004.
- issued 239,000 warrants to purchase common stock in exchange
for services. These warrants were valued using the Black-Scholes option
pricing model at $118,000, of which $78,000 were previously recorded as
accounts payable and accrued liabilities in fiscal year 2001.
10
- issued 19,230 shares of restricted common stock at $0.26 per
share for cash totaling $60,400.
- issued 8,000 shares of restricted common stock at $1.25 for
cash totaling $5,000.
- issued 420,000 shares of restricted common stock in
connection with the conversion of notes payable of $105,000.
In March 2003, the Company issued 196,078 shares of restricted common
stock in connection with a patent royalty agreement. The shares were valued at
$100,000 (estimated based on the market price on the date of issue).
We expect to raise additional capital within the next six months to
fund our research and development activities and anticipated operations.
Our operations to date have consumed substantial capital without
generating revenues, and we will continue to require substantial and increasing
capital funds to conduct necessary research and development and pre-clinical and
clinical testing of our Hemopurifier products, and to market any of those
products that receive regulatory approval. We do not expect to generate revenue
from operations for the foreseeable future, and our ability to meet our cash
obligations as they become due and payable is expected to depend for at least
the next several years on our ability to sell securities, borrow funds or a
combination thereof. Our future capital requirements will depend upon many
factors, including progress with pre-clinical testing and clinical trials, the
number and breadth of our programs, the time and costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, and our ability to
establish collaborative arrangements, effective commercialization, marketing
activities and other arrangements. We expect to continue to incur increasing
negative cash flows and net losses for the foreseeable future.
Management does not believe that inflation has had or is likely to have
any material impact on the Company's limited operations.
We currently do not have plans to purchase significant amounts of
equipment or hire significant numbers of employees prior to successfully raising
additional capital.
GOING CONCERN
The Company's independent certified public accountants have stated in
their report included in this Form 10-KSB, that the Company has a working
capital deficit and a significant deficit accumulated during the development
stage. These conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in the our consolidated financial statements and the
accompanying notes. The amounts of assets and liabilities reported on our
balance sheet and the amounts of revenues and expenses reported for each of our
fiscal periods are affected by estimates and assumptions, which are used for,
but not limited to, the accounting for revenue recognition, accounts receivable,
doubtful accounts and inventories. Actual results could differ from these
estimates. The following critical accounting policies are significantly affected
by judgments, assumptions and estimates used in the preparation of the financial
statements:
ACCOUNTING FOR TRANSACTIONS INVOLVING STOCK COMPENSATION
FASB Interpretation No. 44 ("FIN 44"), "ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB 25"
clarifies the application of APB 25 for (a) the definition of employee for
purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (c) the accounting consequence for various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. FIN 44 is effective July 1, 2000, but certain provisions cover
specific events that occur after either December 15, 1998, or January 12, 2000.
The adoption of certain other provisions of FIN 44 prior to June 30, 2000 did
not have a material effect on the financial statements.
11
Under Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES," the intrinsic value based method, compensation expense is
the excess, if any, of the fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.
SFAS 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION," if fully adopted,
changes the method of accounting for employee stock-based compensation plans to
the fair value based method. For stock options and warrants, fair value is
determined using an option pricing model that takes into account the stock price
at the grant date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period. The adoption of the accounting methodology
of SFAS 123 is optional and the Company has elected to continue accounting for
stock-based compensation issued to employees using APB 25; however, pro forma
disclosures, as the Company adopted the cost recognition requirement under SFAS
123, are required to be presented.
SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123," was issued in December 2002
and is effective for fiscal years ending after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company granted warrants in connection with the issuance of certain
notes payable. Under Accounting Principles Board Opinion No. 14, " ACCOUNTING
FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," the
estimated value of such warrants represents a discount from the face amount of
the notes payable.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force Issue No. 98-5 ("EITF 98-5"), "ACCOUNTING FOR CONVERTIBLE SECURITIES WITH
BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and
Emerging Issues Task Force Issue No. 00-27, " APPLICATION OF EITF ISSUE NO. 98-5
TO CERTAIN CONVERTIBLE INSTRUMENTS." Accordingly, the relative fair value of the
BCF is recorded in the consolidated financial statements as a discount from the
face amount of the notes. Such discounts are amortized to interest expense term
of the notes.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS," supersedes Statement No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF", and addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets, including accounting for a segment of a business accounted for as a
discontinued operation. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. Management has not yet
determined exactly how the requirements of such pronouncements will affect the
Company's future financial statements.
ITEM 7. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 14.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
12
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16 (a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission (the "SEC") and
Nasdaq. Officers, directors, and greater than 10% beneficial owners are required
by SEC regulation to furnish the Company with copies of all Section 16 (a) forms
they file. The Company believes that all filing requirements applicable to its
officers, directors, and greater than 10% beneficial owners were complied with.
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The names, ages and positions of the Company's directors and executive
officers as of March 31, 2003 are listed below:
NAMES TITLE OR POSITION AGE
----- ----------------- ---
James A. Joyce (1) Chairman, President, Chief Executive 41
Officer and Secretary
Richard H. Tullis, PhD (2) Vice President, Chief Scientific Officer 58
and Director
Edward C. Hall (3) Vice President, Chief Financial Officer 62
Franklyn S. Barry, Jr. Director 63
Edward G. Broenniman Director 66
(1) Effective June 1, 2001, Mr. Joyce was appointed President and Chief
Executive Officer of the Company, replacing Mr. Barry, who continues as a member
of the board of directors. Mr. Barry also served as a consultant to the Company
on strategic business issues from June 1, 2001 to May 31, 2003.
(2) Also effective June 1, 2001, Dr. Tullis was appointed as the
Company's Chief Scientific Officer, replacing Dr. Clara M. Ambrus, who retired.
(3) Effective August 14, 2002 Mr. Hall was elected Vice President and
Chief Financial Officer of the Company, replacing Robert S. Stefanovich, who
resigned July 26, 2002.
Resumes of Management:
James A. Joyce, Chairman, President and CEO
-------------------------------------------
Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman
of the Board and Secretary since March 1999. On June 1, 2001, Aethlon's Board of
Directors appointed Mr. Joyce with the additional roles of President and CEO. In
February of 1993, Mr. Joyce founded James Joyce & Associates, an organization
that provided management consulting and corporate finance advisory services to
CEOs and CFOs of publicly traded companies. Previously, Mr. Joyce was Chief
Executive Officer of Mission Labs, Inc., and a principal in charge of U.S.
operations for London Zurich Securities, Inc. Mr. Joyce is a graduate from the
University of Maryland.
13
Edward C. Hall, Vice President, Chief Financial Officer
-------------------------------------------------------
Mr. Hall has been Vice President, Chief Financial Officer of the
Company since August 2002. Mr. Hall has held senior financial executive
positions with both public and privately-held life sciences and technology
companies for over 25 years. Prior to his appointment as Chief Financial Officer
of Aethlon Medical, he served as Vice President and Chief Financial Officer of
Chromagen, Inc, a biotech tools company which develops proteomic and genomic
assays for use in drug discovery. Prior to that Mr. Hall was Vice President,
Finance and Chief Financial Officer of Cytel Corporation, a biotech company and
developer of anti-inflammatory drugs. Mr. Hall is a Partner of Tatum CFO
Partners, LLP.
Richard H. Tullis, Ph.D., Vice President, Chief Scientific Officer
------------------------------------------------------------------
Dr. Tullis has been Vice President and a director of the Company since
January 2000 and Chief Scientific Officer since June 2001. Dr. Tullis has
extensive biotechnology management and research experience, and is the founder
of Syngen Research, a wholly-owned subsidiary of Aethlon Medical, Inc.
Previously, Dr. Tullis co-founded Molecular Biosystems, Inc., a former NYSE
company. At Molecular Biosystems, Dr. Tullis was Director of Research and
Development, Director of Oligonucleotide Hybridization, Senior Research
Scientist and Member of the Board of Directors. In research, Dr. Tullis
developed and patented the first application of oligonucleotides to antisense
antibiotics and developed new methods for the chemical synthesis of DNA via
methoxy-phosphorochloridites. Dr. Tullis also co-developed the first
applications of covalently coupled DNA-enzyme conjugates using synthetic
oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis
founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer
in custom DNA synthesis, which was sold to Molecular Biology Resources in 1991.
Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a
company that was eventually acquired by Genetic Vectors. Dr Tullis received his
Ph.D. in Biochemistry and Cell Biology from the University of California at San
Diego, and has done extensive post-doctoral work at UCSD, USC, and The Scripps
Research Institute.
Franklyn S. Barry, Jr.
----------------------
Mr. Barry has over 25 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and President and CEO of the Company from March 10, 1999 to
May 31, 2001. He became a director of the Company on March 10, 1999. >From 1994
to April 1997, Mr. Barry was a private consultant. Included among his prior
experiences are tenures as President of Fisher-Price and as co-founder and CEO
of Software Distribution Services, which today operates as Ingram Micro-D, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Barrister Global Services Network, Inc., a publicly traded
company and of Merchants Mutual Insurance Company.
Edward G. Broenniman
--------------------
Mr. Broenniman became a director of the Company on March 10, 1999. Mr.
Broenniman has 30 years of management and executive experience with high-tech,
privately held growth firms where he has served as a CEO, COO, or corporate
advisor, using his expertise to focus management on increasing profitability and
stockholder value. He is the Managing Director of The Piedmont Group, LLC, a
venture advisory firm. Mr. Broenniman recently served on the Board of Directors
of publicly traded QuesTech (acquired by CACI International), and currently
serves on the Boards of four privately-held firms. His nonprofit Boards are the
Dingman Center for Entrepreneurship's Board of Advisors at the University of
Maryland, the National Association of Corporate Directors, National Capital
Chapter and the Board of the Association for Corporate Growth, National Capital
Chapter.
14
The Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing the overall performance of the Company.
Members of the Board are kept informed of the Company's business through
discussions with the President and other officers, by reviewing analyses and
reports sent to them, and by participating in Board and committee meetings. Our
Bylaws provide that each of the directors serves for a term that extends to the
next Annual Meeting of Shareholders of the Company. The Company's Board of
Directors presently has an Audit Committee and a Compensation Committee on each
of which Messrs. Barry and Broenniman serve. Mr. Barry is Chairman of the Audit
Committee, and Mr. Broenniman is Chairman of the Compensation Committee.
Non-employee Board members are accruing stock options and cash
compensation according to the plan approved on May 25, 2000. Employee directors
receive no compensation.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors,
executive officers or persons nominated or charged by the Company to become
directors or executive officers
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of the Company's knowledge, during the past five years,
none of the following occurred with respect to a present or former director or
executive officer of the Company: (1) any bankruptcy petition filed by or
against any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that
time; (2) any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses); (3)
being subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
SECTION 16(a) BENEFICIAL OWNERSHIP COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's executive officers and directors and persons who own more
than 10% of a registered class of the Company's equity securities to file with
the Securities and Exchange Commission initial statements of beneficial
ownership, reports of changes in ownership and annual reports concerning their
ownership of common stock and other equity securities of the Company, on Forms
3, 4 and 5, respectively. Executive officers, directors and greater than 10%
shareholders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) reports they file. To the best of the Company's
knowledge (based solely upon a review of the Forms 3, 4 and 5 filed), no
officer, director or 10% beneficial shareholder failed to file on a timely basis
for the fiscal year ended March 31, 2003 any reports required by Section 16(a)
of the Securities Exchange Act of 1934, as amended.
15
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation received for the fiscal
years ended March 31, 2001 through 2003 by the Company's Chief Executive Officer
and all executive officers.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------- -----------------------------
AWARDS
------------------
OTHER PAYOUTS/
ANNUAL RESTRICTED OPTIONS LTIP OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK SARs PAYOUTS COMPENSATION
POSITION YEAR ($)(1) ($) ($) ($) (#) ($) (1)
-------- ---- ------ --- --- --- --- --- ---
James A. Joyce 2003 180,000 - -
Chairman, 2002 180,000 - 250,000
President/CEO 2001 180,000
Richard H. Tullis,, 2003 150,000 - -
Ph.D. Vice President, 2002 150,000 - 250,000
Chief Science Officer 2001 150,000 30,000
Edward C. Hall (2) 2003 14,103(2) - -
Vice President, Chief 2002 N/A
Financial Officer 2001 N/A
(1) The remuneration described in the table does not include the cost to
the Company of benefits furnished to the named executive officers,
including premiums for health insurance and other personal benefits
provided to such individual that are extended to all employees of the
Company in connection with their employment. Perquisites and other
personal benefits, securities, or property received by an executive are
either the lesser of $50,000 or 10% of the total salary and bonus
reported for each named executive officer, except as otherwise
disclosed.
(2) Mr. Hall became a part-time employee and was elected as the CFO of the
Company on August 14, 2002. He is compensated on an hourly basis, a
portion of which, amounting to $2,821 in fiscal 2003, is paid to Tatum
CFO Partners (Tatum), of which he is a partner.
16
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARs
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARs EMPLOYEES IN BASE PRICE
NAME GRANTED (#) FISCAL YEAR ($/Sh) EXPIRATION DATE
(a) (b) (c) (d) (e)
------------------------ ------------- ------------ ------------ ---------------
James A. Joyce,
Chairman, President
and CEO 0 N/A N/A N/A
Richard H. Tullis,
Ph.D., Vice President,
Chief Scientific Officer 0 N/A N/A N/A
Edward C. Hall,
Vice President, Chief
Financial Officer 0 N/A N/A N/A
AGGREGATED OPTIONS/SAR EXERCISES IN THE LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth the number of common stock options, both
exercisable and unexercisable, held by each of the Named Executive Officers of
the Company and the value of any in-the-money options at March 31, 2003,
assuming a value of $0.50 per share on March 31, 2003:
NUMBER OF VALUE OF
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES MARCH 31, MARCH 31,
ACQUIRED VALUE 2003 2003
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
(#) ($) UNEXERCISABLE UNEXERCISABLE
----------- -------- ------------- -------------
James A. Joyce -- $ -- 250,000/-- $0.0/$0.0
Richard H. Tullis -- $ -- 255,000/25,000 $0.0/$0.0
Edward C.Hall -- $ -- N/A N/A
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with Mr. Joyce
effective April 1, 1999. Effective June 1, 2001, Mr. Joyce was appointed
President and Chief Executive Officer and his base annual salary was increased
from $120,000 to $180,000. Under the terms of the agreement, his employment
continues at a salary of $180,000 per year for successive one year periods,
unless given notice of termination 60 days prior to the anniversary of his
employment agreement.
The Company entered into an employment agreement with Dr. Tullis
effective January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed as
the Company's Chief Scientific Officer of the Company. His compensation under
the agreement was modified in June 2001 from $80,000 to $150,000 per year. Under
the terms of the agreement, his employment continues at a salary of $150,000 per
year for successive one year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement.
Both Mr. Joyce and Dr. Tullis' agreements provide for medical insurance
and disability benefits, one year of severance pay if their employment is
terminated by the Company without cause or due to change in control of the
Company before the expiration of their agreements, and allow for bonus
compensation and stock option grants as determined by the Board of Directors.
Both agreements also contain restrictive covenants preventing competition with
the Company and the use of confidential business information, except in
connection with the performance of their duties for the Company, for a period of
two years following the termination of their employment with the Company.
Effective August 14, 2002, Mr Hall was elected Vice president, Chief
Financial Officer of the Company. His employment is subject to 30 days' notice,
with no severance pay provisions, in accordance with his employment agreement.
He receives no medical or other benefits from the Company.
17
STOCK OPTION GRANTS
Our 2000 Stock Option Plan (the "Plan"), adopted by the Company in
August 2000, provides for the grant of incentive stock options ("ISOs") to
full-time employees (who may also be Directors) and nonstatutory stock options
("NSOs") to non-employee Directors, consultants, customers, vendors or providers
of significant services. The exercise price of any ISO may not be less than the
fair market value of the Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of outstanding stock of the Company, not be less than 110% of the fair
market value on the date of grant. The exercise price, in the case of any NSO,
must not be less than 75% of the fair market value of the Common Stock on the
date of grant. The amount available under the Plan is 500,000 options.
At March 31, 2003, 47,500 options had been granted under the Plan, with
452,500 available for future issuance. The remaining 1,966,415 options issued by
the Company (of which 627,000 have been exercised or cancelled) were issued
outside the Plan.
At March 31, 2003, options to purchase 1,376,115 shares of Common
Stock were outstanding. See Item 11, "Security Ownership of Certain Beneficial
Owners and Management."
OUTSTANDING STOCK PURCHASE WARRANTS
At March 31, 2003, a total of 2,906,746 Common Stock purchase warrants
were outstanding, exercisable at prices between $0.25 - 6.50 per share and with
expiration dates from 2004 - 2007.
See Item 11, "Security Ownership of Certain Beneficial Owners and Management."
18
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of June 30, 2003 for:
- each person known by us to be the beneficial owner of 5% or more of
our Common Stock;
- each of our Directors and each of our executive officers whose name
appears in the summary compensation table (the "Named Executive
Officers"); and
- all of our Directors and the Named Executive Officers as a group.
Except as otherwise noted in the footnotes below, the entity,
individual Director or Named Executive Officer has sole voting and investment
power with respect to such securities.
COMMON SHARES
------------------------
NAME AND ADDRESS
OF BENEFICIAL OWNER (1) (2) NUMBER %(3)
------------------------------------- ---------- ----------
Calvin M. Leung (4) 2,036,643 28.1
PO Box 2366
Costa Mesa, CA 92628
James A. Joyce (5) 850,000 11.6
Accelerated Technologies Fund, LLC 580,804 7.9
1350 Draper Parkway
Draper, UT 84020
Clara M. Ambrus 432,059 5.9
143 Windsor Avenue
Buffalo, NY 14209
Franklyn S. Barry, Jr (6) 418,593 5.7
Richard H. Tullis (7) 320,000 4.4
Edward G. Broenniman (8) 261,374 3.6
Edward C. Hall 0 *
----------------------
All directors and officers as a group 1,849,967 25.2
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")
and is generally determined by voting power and/or investment power
with respect to securities. Except as indicated by footnote and subject
to community property laws where applicable, the Company believes the
persons named in the table above have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned
by them. Unless otherwise indicated, the address of each shareholder is
7825 Fay Avenue, La Jolla, CA 92037.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this
information statement upon the exercise of warrants or options. Each
beneficial owner's percentage ownership is determined by assuming that
options and warrants that are held by such person (but not those held
by any other person) and that are exercisable within 60 days from the
date of this information statement have been exercised.
An asterisk indicates that the percentage ownership is less than 1.0%.
(3) Assumes 7,334,960 shares of Common Stock outstanding at June 30, 2003.
(4) Includes all shares owned by members of Mr. Leung's family and entities
he controls plus 10,000 warrants at $3.00, expiring on January 1, 2006
and 472,000 warrants at $0.25, expiring on March 27, 2004.
(5) Includes 250,000 stock options exercisable at $1.90 per share.
(6) Includes Mr. Barry's options to purchase 412,500 shares at $3.00.
(7) Includes 225,000 stock options exercisable at $1.90 per share and
30,000 stock options exercisable at $2.56 per share.
(8) Includes 53,885 shares owned by Mr. Broenniman's wife and Mr.
Broenniman's options to purchase 3,000 shares at $1.78 and 2,500 shares
at $3.75.
19
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Franklyn S. Barry, a director of the Company, was engaged as a
consultant to the Company on strategic and business issues from June 1, 2001 to
May 31, 2003 and was paid $60,000 per year. See Item 9, "Directors and Executive
Officers" and Item 11, "Security Ownership of Certain Beneficial Owners and
Management."
Certain officers of the Company and other related parties have advanced
the Company funds, agreed to defer compensation or paid expenses on behalf of
the Company to cover short-term working capital deficiencies. These non
interest-bearing liabilities have been included as due to related parties in the
accompanying financial statements.
Effective January 1, 2000, the Company entered into an agreement with a
related party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to the Company by the inventors in exchange for (a) a royalty to be
paid on future sales of the patented product or process equal to 8.75% of net
sales, as defined and (b) 12,500 shares of the Company's common stock. Upon the
issuance of the first United States patent relating to the invention, the
Company is obligated to issue an additional 12,500 shares of common stock to the
inventors. If the market price of the Company's common stock on the date the
patent is issued is below $8 per share, the number of shares to be issued will
be that amount which equates to $100,000 of market value. On March 4, 2003, the
related patent was issued and therefore the Company issued 196,078 shares of
common stock valued at $100,000 and is included in professional fees in the
accompanying consolidated statements of operations.
We believe that each of the related party transactions discussed above
is on terms as favorable as could have been obtained from unaffiliated third
parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as part of this report on Form
10-KSB:
1. Consolidated Financial Statements for the periods ended March 31,
2003 and 2002:
Independent Auditors' Reports
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Deficit
Notes to Consolidated Financial Statements
2. Exhibits
The following exhibits are being filed with this Annual Report on Form
10-KSB and/or are incorporated by reference therein in accordance with
the designated footnote references:
20
3.1 Articles of Incorporation and Bylaws of the Company (1)
3.2 Certificate of Amendment of Articles of Incorporation dated March 28,
2000 (2)
10.1 Employment Agreement between the Company and Franklyn S. Barry, Jr.
dated April 1, 1999 (3)
10.2 Employment Agreement between the Company and James A. Joyce dated April
1, 1999 (3)
10.3 Agreement and Plan of Reorganization Between the Company and Aethlon,
Inc. dated March 10, 1999 (4)
10.4 Agreement and Plan of Reorganization Between the Company and Hemex,
Inc. dated March 10, 1999 (4)
10.5 Agreement and Plan of Reorganization Between the Company and Syngen
Research, Inc. (5)
10.6 Agreement and Plan of Reorganization Between the Company and Cell
Activation, Inc. (6)
99.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. 1350 as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002. *
--------------------
(1) Filed with the Company's Registration Statement on Form SB-2 and
incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000.
(3) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999.
(4) Filed with the Company's Current Report on Form 8-K dated March 10,
1999.
(5) Filed with the Company's Current Report on Form 8-K dated January 10,
2000.
(6) Filed with the Company's Current Report on Form 8-K dated April 10,
2000.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated January 10, 2000 (filed with the SEC
on January 24, 2000) relating to the acquisition of Syngen Research,
Inc.
Current Report on Form 8-K/A dated March 10, 2000 (filed with the SEC
on July 17, 2000) relating to the acquisition of Syngen Research, Inc.
(Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits)
Current Report on Form 8-K dated April 10, 2000 (filed with the SEC on
April 25, 2000) relating to the acquisition of Cell Activation, Inc.
Current Report on Form 8-K/A dated April 10, 2000 (filed with the SEC
on November 6, 2000) relating to the acquisition of Cell Activation,
Inc. (Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits)
Current Report on Form 8-K dated November 1, 2000 (filed with the SEC
on November 6, 2000) regarding the change of accountants
Current Report on Form 8-K dated April 26, 2001 (filed with the SEC on
May 1, 2001) regarding the change of accountants
* Filed herewith
21
ITEM 14. CONTROL PROCEDURES
Within 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our Chief
Executive Officer and our Chief Financial Officer, of the effectiveness of
the design and the operation of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of
1934). Based upon that evaluation, our Chief Executive Officer and our Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in alerting them on a timely basis to material information required to
be disclosed in our periodic reports to the Securities and Exchange Commission.
There have been no significant changes in our internal controls or in other
factors which could significantly affect internal controls subsequent to such
evaluation.
22
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on the 15th day of July 2003.
By: /s/ JAMES A. JOYCE
---------------------------------------------
James A. Joyce
Chairman, President & Chief Executive Officer
By: /s/ EDWARD C. HALL
---------------------------------------------
Edward C. Hall
Vice President and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ JAMES A. JOYCE Chairman of the Board July 15, 2003
-----------------------------
James A. Joyce
/s/ FRANKLYN S. BARRY, JR. Director July 15, 2003
-----------------------------
Franklyn S. Barry, Jr.
/s/ EDWARD G. BROENNIMAN Director July 15, 2003
-----------------------------
Edward G. Broenniman
/s/ RICHARD H. TULLIS Director July 15, 2003
-----------------------------
Richard H. Tullis
23
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James A. Joyce, certify that:
1. I have reviewed that annual report on Form 10-KSB of Aethlon Medical, Inc.
and Subsidiaries;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results or operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within
those entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
July 15, 2003 /s/ James A. Joyce
-----------------------------------
James A. Joyce
Chief Executive Officer
24
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Edward C. Hall, certify that:
1. I have reviewed that annual report on Form 10-KSB of Aethlon Medical, Inc.
and Subsidiaries;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results or operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant is made known to us by others within
those entities, particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of the date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether or not there were significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
July 15, 2003 /s/ Edward C. Hall
-----------------------------------
Edward C. Hall
Chief Financial Officer
25
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003 AND 2002
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report................................................ F-1
Consolidated Balance Sheet ................................................. F-2
Consolidated Statements of Operations ...................................... F-3
Consolidated Statements of Stockholders' Deficit............................ F-4
Consolidated Statements of Cash Flows ...................................... F-7
Notes to Consolidated Financial Statements.................................. F-8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2003 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2003. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aethlon Medical,
Inc. and Subsidiaries as of March 31, 2003 and the results of their operations
and their cash flows for the each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. At March 31, 2003, the
Company has negative working capital of approximately $4,007,000 and a deficit
accumulated during the development stage of approximately $15,627,000. As
discussed in Note 1 to the consolidated financial statements, a significant
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
These conditions raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans regarding these matters are also
described in Note 1. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ Squar, Milner, Reehl & Williamson, LLP
June 27, 2003
Newport Beach, California
F-1
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
March 31, 2003
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 6,332
Prepaid expenses 10,310
-------------
TOTAL CURRENT ASSETS 16,642
-------------
Property and equipment, net 20,358
Patents, net 260,707
Employment contract 95,208
Other assets 5,605
-------------
TOTAL NONCURRENT ASSETS 381,878
-------------
TOTAL ASSETS $ 398,520
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,546,618
Due to related parties 1,414,999
Notes payable 552,500
Convertible notes payable 510,000
-------------
TOTAL CURRENT LIABILITIES 4,024,117
-------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, par value of $0.001, 25,000,000 shares
authorized; 6,694,960 issued and outstanding 6,695
Additional paid in capital 11,994,223
Deficit accumulated during the development stage (15,626,515)
-------------
TOTAL STOCKHOLDERS' DEFICIT (3,625,597)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 398,520
=============
--------------------------------------------------------------------------------
PAGE F-2 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended March 31, 2003 and 2002 and
For the Period January 31,1984 (Inception) Through March 31, 2003
------------------------------------------------------------------------------------------------
January 31, 1984
(Inception) Through
2003 2002 March 31, 2003
------------- ------------- -------------
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
------------- ------------- -------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 760,949 1,200,071 3,426,839
Payroll and related 549,611 597,873 5,153,024
General and administrative 326,521 474,986 3,244,165
Impairment 334,304 -- 1,231,531
------------- ------------- -------------
1,971,385 2,272,930 13,055,559
------------- ------------- -------------
OPERATING LOSS (1,971,385) (2,272,930) (11,521,991)
OTHER (INCOME) EXPENSE
Interest expense 489,731 1,526,609 3,984,332
Interest income -- -- (17,415)
Other -- 196,371 137,607
------------- ------------- -------------
489,731 1,722,980 4,104,524
------------- ------------- -------------
NET LOSS $ (2,461,116) $ (3,995,910) $(15,626,515)
============= ============= =============
Basic and diluted net loss available to
common stockholders per share $ (0.44) $ (1.04)
============= =============
Weighted average number of common
shares outstanding 5,553,196 3,839,821
============= =============
------------------------------------------------------------------------------------------------
PAGE F-3 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
------------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended March 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through March 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
DEFICIT
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL DURING TOTAL
PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- -------- ------------- ------------- -------------
Balance, January 31, 1984 (Inception) -- $ -- $ -- $ -- $ --
Common stock issued for cash at $1 per share 22,000 22 26,502 -- 26,524
Common stock issued for cash at $23 per share 1,100 1 24,999 -- 25,000
Common stock issued for cash at $86 per share 700 1 59,999 -- 60,000
Common stock issued for cash at $94 per share 160 1 14,999 -- 15,000
Common stock issued for cash at $74 per share 540 1 39,999 -- 40,000
Common stock issued for cash at $250 per share 4,678 5 1,169,495 -- 1,169,500
Capital contributions -- -- 521,439 -- 521,439
Common stock issued for compensation at $103 per share 2,600 3 267,403 -- 267,406
Conversion of due to related parties to common stock at $101
per share 1,120 1 113,574 -- 113,575
Conversion of due to related parties to common stock at $250
per share 1,741 2 435,092 -- 435,094
Effect of reorganization 2,560,361 2,558 (2,558) -- --
Common stock issued in connection with employment contract at
$8 per share 65,000 65 519,935 -- 520,000
Common stock issued in connection with the acquisition of patents
at $8 per share 12,500 13 99,987 -- 100,000
Warrants issued to note holders in connection with notes payable -- -- 734,826 -- 734,826
Warrantes issued for services -- -- 5,000 -- 5,000
Net loss -- -- -- (4,746,416) (4,746,416)
------------- -------- ------------- ------------- -------------
BALANCE, MARCH 31, 2000 2,672,500 2,673 4,030,691 (4,746,416) (713,052)
Common stock and options issued in connection with acquisition
of Cell Activation, Inc. at $7.20 per share 99,152 99 1,067,768 -- 1,067,867
Warrants issued to note holders in connection with notes payable -- -- 218,779 -- 218,779
Warrants issued to promoter in connection with notes payable -- -- 298,319 -- 298,319
Beneficial conversion feature of convertible notes payable -- -- 150,000 -- 150,000
Warrants issued to promoter in connection with convertible notes
payable -- -- 299,106 -- 299,106
Options issued to directors for services as board members -- -- 14,163 -- 14,163
Options and warrants issued for services -- -- 505,400 -- 505,400
Common stock issued for services at $3 per share 5,500 5 16,495 -- 16,500
Common stock issued for cash at $1 per share 100,000 100 99,900 -- 100,000
Net loss -- -- -- (4,423,073) (4,423,073)
------------- -------- ------------- ------------- -------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ (9,169,489) $ (2,465,991)
continued
------------------------------------------------------------------------------------------------------------------------------------
PAGE F-4 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended March 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through March 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
DEFICIT
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL DURING TOTAL
PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- -------- ------------- ------------- -------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ (9,169,489) $ (2,465,991)
Common stock, warrants and options issued for accounts payable and
accrued liabilities 21,750 22 243,353 -- 243,375
Common stock issued for services at $2.65 per share 6,038 6 15,994 -- 16,000
Common stock issued for cash at $1.00 per share, net of issuance
costs of $41,540 paid to a related party 730,804 731 688,533 -- 689,264
Common stock issued for services at $2.75 per share 10,000 10 27,490 -- 27,500
Common stock issued in connection with license agreement at $3.00
per share 6,000 6 17,994 -- 18,000
Common stock issued to holder of convertible notes payable at
$3.00 per share 70,586 71 211,687 -- 211,758
Options issued to directors for services as board members -- -- 7,459 -- 7,459
Common stock issued for cash at $1.50 per share, net of issuance
costs of $2,500 16,667 17 22,483 -- 22,500
Beneficial conversion feature of convertible notes payable -- -- 185,000 -- 185,000
Common stock issued for conversion of convertible notes payable and
accrued interest at an average price of $1.24 per share 134,165 134 166,352 -- 166,486
Common stock issued for services at $2.72 per share 9,651 10 26,240 -- 26,250
Options issued to consultant for services -- -- 562,000 -- 562,000
Common stock and warrants for services at $1.95 per share 62,327 62 161,475 -- 161,537
Common stock issued for services at $1.90 per share 9,198 9 17,491 -- 17,500
Stock options exercised for cash 400,000 400 199,600 -- 200,000
Warrants issued to note holders for 90-day forebearance -- -- 118,000 -- 118,000
Common stock and warrants issued to note holders and vendors in the
debt-to-equity conversion program at $1.25 per share 816,359 816 1,623,635 -- 1,624,451
Other warrant transactions -- -- (32,715) -- (32,715)
Net loss -- -- -- (3,995,910) (3,995,910)
------------- -------- ------------- ------------- -------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $(13,165,399) $ (2,197,536)
continued
------------------------------------------------------------------------------------------------------------------------------------
PAGE F-5 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
For the Years Ended March 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through March 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
DEFICIT
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL DURING TOTAL
PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- -------- ------------- ------------- -------------
------------- -------- ------------- ------------- -------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $(13,165,399) $ (2,197,536)
Proceeds from the issuance of common stock at $0.50 per
share in connection with the exercise of options 200,000 200 99,800 -- 100,000
Interest expense related to beneficial conversion feature -- -- 150,000 -- 150,000
Pro-rata value assigned to warrants issued in connection with
conversion of accounts payable -- -- 71,000 -- 71,000
Pro-rata value assigned to warrants issued in connection with
note payable -- -- 30,000 -- 30,000
Issuance of common stock at $1.25 in connection with the
conversion of accounts payable 150,124 150 187,505 -- 187,655
Issuance of common stock at $1.25 in connection with the
conversion of notes payable 420,000 420 104,580 -- 105,000
Estimated fair market value of options issued for services -- -- 114,000 -- 114,000
Issuance of common stock at $0.25 for cash 461,600 462 114,938 -- 115,400
Issuance of common stock at $0.26 for cash 19,230 19 4,981 -- 5,000
Issuance of common stock at $1.25 for cash 8,000 8 9,992 -- 10,000
Issuance of common stock at $0.65 for services 69,231 69 44,931 -- 45,000
Issuance of common stock at $0.51 for services 196,078 196 99,804 -- 100,000
Net loss -- -- -- (2,461,116) (2,461,116)
------------- -------- ------------- ------------- -------------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,994,223 $(15,626,515) $ (3,625,597)
============= ======== ============= ============= =============
------------------------------------------------------------------------------------------------------------------------------------
PAGE F-6 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
------------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended March 31, 2003 and 2002 and
For the Period January 31, 1984 (Inception) Through March 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2003 2002 March 31, 2003
------------- ------------- -------------
Cash flows from operating activities:
Net loss $ (2,461,116) $ (3,995,910) $(15,626,515)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 159,783 204,202 782,915
Gain of sale of property and equipment -- -- (13,065)
Fair market value of warrants issued in connection with accounts payable and
debt 101,000 1,232,124 2,715,736
Fair market value of common stock, warrants and options issued for services 259,000 734,121 2,130,434
Beneficial conversion feature of convertible notes payable 150,000 185,000 485,000
Impairment of patents and patents pending 334,304 -- 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Accounts receivable -- 4,689 --
Prepaid expenses 130,478 13,851 151,227
Other assets (3,650) (625) (5,605)
Accounts payable and accrued liabilities 474,054 462,215 1,634,273
Due to related parties 341,644 152,902 1,414,999
------------- ------------- -------------
Net cash used in operating activities (514,503) (1,007,431) (4,881,847)
------------- ------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (1,198) (30,804) (209,384)
Patents and patents pending (49,034) (46,920) (352,833)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------- ------------- -------------
Net cash used in investing activities (50,232) (77,724) (534,424)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable 65,000 50,000 1,480,000
Principal repayments of notes payable (10,000) -- (10,000)
Proceeds from the issuance of convertible notes payable 275,000 128,000 798,000
Proceeds from the issuance of common stock 230,400 911,764 3,154,603
------------- ------------- -------------
Net cash provided by financing activities 560,400 1,089,764 5,422,603
------------- ------------- -------------
Net (decrease) increase in cash (4,335) 4,609 6,332
Cash at beginning of period 10,667 6,058 --
------------- ------------- -------------
Cash at end of period $ 6,332 $ 10,667 $ 6,332
============= ============= =============
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 13,000 $ 87,734 $ 207,492
============= ============= =============
Income taxes $ 1,180 $ 2,363 $ 12,166
============= ============= =============
Supplement schedule of noncash investing activities:
Debt converted to common stock $ 205,000 $ 1,000,500 $ 1,640,594
============= ============= =============
Issuance of common stock, warrants and options for accounts payable $ 87,655 $ 425,161 $ 512,816
============= ============= =============
Issuance of common stock in connection with license agreements $ -- $ 18,000 $ 18,000
============= ============= =============
Net assets of entities acquired in exchange for equity securities $ -- $ -- $ 1,597,867
============= ============= =============
Debt placement fees paid by issuance of warrants $ -- $ -- $ 843,538
============= ============= =============
Patent pending acquired for 12,500 shares of common stock $ -- $ -- $ 100,000
============= ============= =============
Common stock issued for prepaid expenses $ -- $ 161,537 $ 161,537
============= ============= =============
------------------------------------------------------------------------------------------------------------------------------------
PAGE F-7 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. (the "Company") engages in the research and development of
a medical device known as the Hemopurifier(TM) that removes harmful substances
from the blood. The Company is in the development stage on the Hemopurifier and
significant research and testing are still needed to reach commercial viability.
Any resulting medical device or process will require approval by the U.S. Food
and Drug Administration ("FDA"), and the Company has not yet begun efforts to
obtain any FDA approval, which may take several years. Since many of the
Company's patents were issued in the 1980's, they are scheduled to expire in the
near future. Thus, such patents may expire before FDA approval, if any, is
obtained.
The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its principal operations.
The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers ("OCTBB") under the symbol
"AEMD."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its legal wholly-owned subsidiaries Aethlon, Inc.,
Hemex, Inc. and Cell Activation, Inc. (collectively hereinafter referred to as
the "Company"). All significant intercompany balances and transactions have been
eliminated in consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the normal
course of business. The Company has negative working capital of approximately
$4,007,000 and a deficit accumulated during the development stage of
approximately $15,627,000 at March 31, 2003, among other matters, which raise
substantial doubt about its ability to continue as a going concern. A
significant amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become
commercially viable. The Company intends to fund operations through debt and
equity financing arrangements, which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements for
the fiscal year ending March 31, 2004. Therefore, the Company will be required
to seek additional funds to finance its long-term operations. The successful
outcome of future activities cannot be determined at this time and there is no
assurance that if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.
The consolidated financial statements do not include any adjustments related to
recoverability and classification of assets carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
F-8
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RISKS AND UNCERTAINTIES
The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.
USE OF ESTIMATES
The Company prepares its consolidated financial statements in conformity with
GAAP, which require management to make 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 and reported amounts of
revenues and expenses during the reporting period. Significant estimates made by
management include, among others, realization of long-lived assets. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS," requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. The carrying amount of the Company's cash, accounts payable, accrued
liabilities, notes payable and convertible notes payable approximates their
estimated fair values due to the short-term maturities of those financial
instruments. The fair values of amounts due to related parties are not
determinable as these transactions are with related parties.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at various financial institutions. The Federal Deposit
Insurance Corporation ("FDIC") insures accounts at each institution for up to
$100,000. At times, cash may be in excess of the FDIC insurance limit of
$100,000. The Company had no amounts exceeding this limit at March 31, 2003.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the
double-declining method over the estimated useful lives of the related assets,
which range from three to five years. Repairs and maintenance are charged to
expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation with any gain or loss included in the
statements of operations. Depreciation expense approximated $18,000 and $23,000
for the years ended March 31, 2003 and 2002, respectively.
INCOME TAXES
Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
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. The Company records a valuation allowance for deferred
income tax assets when, based on management's best estimate of taxable income in
the foreseeable future, it is more likely than not that some portion of the
deferred income tax assets may not be realized.
F-9
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LONG-LIVED ASSETS
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. The Company adopted SFAS 144 on January
1, 2002. The provisions of this pronouncement relating to assets held for sale
or other disposal generally are required to be applied prospectively after the
adoption date to newly initiated commitments to plan to sell or dispose of such
asset, as defined, by management. As a result, management cannot determine the
potential effects that adoption of SFAS 144 will have on the Company's financial
statements with respect to future disposal decisions, if any. Management
believes that no impairment loss is necessary on long-lived assets, other than
$334,000 related to patents pending. There can be no assurance, however, that
market conditions or demand for the Company's products or services will not
change which could result in future long-lived asset impairment changes in the
future.
EARNINGS PER SHARE
Under SFAS 128, "EARNINGS PER SHARE," basic earnings per share is computed by
dividing income available to common stockholders by the weighted average number
of shares assumed to be outstanding during the period of computation. Diluted
earnings per share is computed similar to basic earnings 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 (2,900,000 and 822,000 shares
were considered additional common stock equivalents at March 31, 2003 and 2002).
As the Company had net losses for the period presented, basic and diluted loss
per share are the same, as any additional common stock equivalents would be
antidilutive.
SEGMENTS
SFAS 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,"
changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the material countries in which it holds assets and how the
Company reports revenues and its major customers. The Company currently operates
in one segment, as disclosed in the accompanying consolidated statements of
operations.
F-10
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The Company accounts for employee stock options in accordance with the
Accounting Principles Board Opinion No. 25 ("APB 25") "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" and related Interpretations and makes the necessary pro
forma disclosures mandated by SFAS No. 123 ("SFAS 123") "ACCOUNTING FOR
STOCK-BASED COMPENSATION."
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), "ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB
25". This Interpretation clarifies (a) the definition of employee for purposes
of applying APB 25, (b) the criteria for determining whether a plan qualifies as
a non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. FIN 44
became effective July 1, 2000, but certain conclusions in FIN 44 cover specific
events that occur after either December 15, 1998, or January 12, 2000.
Management believes that the Company accounts for its employee stock based
compensation in accordance with FIN 44.
In December 2002, the FASB issued SFAS No. 148 ("SFAS 148"), "ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF FASB
STATEMENT NO. 123." SFAS 148 amends SFAS 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair-value-based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of that statement to require prominent disclosure about
the effects on reported net income and earnings per share and the entity's
accounting policy decisions with respect to stock-based employee compensation.
Certain of the disclosure requirements are required for all companies,
regardless of whether the fair value method or intrinsic value method is used to
account for stock-based employee compensation arrangements. The Company
continues to account for its employee incentive stock option plans using the
intrinsic value method in accordance with the recognition and measurement
principles of APB 25. SFAS 148 is effective for financial statements for fiscal
years ended after December 15, 2002 and for interim periods beginning after
December 15, 2002. The Company has adopted the disclosure provisions of this
statement during the year ended March 31, 2003.
At March 31, 2003, the Company has one stock-based employee compensation plan
(the "Plan")(see Note 6). The Company accounts for the Plan under the
recognition and measurement principles of APB 25 and related Interpretations.
There was no stock-based employee compensation cost reflected in net income for
the years ended March 31, 2003 and 2002. The following table illustrates the
effect on net income and earnings per common share if the Company had applied
the fair value recognition provisions of SFAS 123 to stock-based employee
compensation.
YEAR ENDED MARCH 31,
----------------------------------
2003 2002
-------------- --------------
Net loss available to common stockholders, as reported $ 2,461,116 $ 3,995,910
Pro forma compensation expense $ 9,000 $ 238,000
-------------- --------------
Pro forma net loss available to common stockholders $ 2,470,116 $ 4,233,910
============== ==============
Loss per share, as reported
Basic $ (0.44) $ (1.04)
Diluted $ (0.44) $ (1.04)
Loss per share, pro forma
Basic $ (0.45) $ (1.10)
Diluted $ (0.45) $ (1.10)
F-11
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
ADOPTION/ EFFECTIVE
PRONOUNCEMENT TITLE DATE
------------------------- ------------------------------------------------------------------------------- --------------------
SFAS No. 141 BUSINESS COMBINATIONS January 1, 2002
SFAS No. 142 GOODWILL AND OTHER INTANGIBLE ASSETS January 1, 2002
SFAS No. 143 ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS January 1, 2003
RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT
SFAS No. 145 NO. 13, AND TECHNICAL CORRECTIONS May 15, 2002
SFAS No. 146 ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES January 1, 2003
ACQUISITION OF CERTAIN FINANCIAL INSTITUTIONS-AN AMENDMENT OF FASB STATEMENT
SFAS No. 147 NO. 72 AND 144 AND FASB INTERPRETATION NO. 9 October 1, 2002
SFAS No. 149 AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES July 1, 2003
ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH
SFAS No. 150 LIABILITIES AND EQUITY July 1, 2003
GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING
INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS - AN INTERPRETATION OF FASB
FIN 45 STATEMENTS NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34 December 31, 2002
Other recent accounting pronouncements are discussed elsewhere in these notes to
the financial statements. In the opinion of management, recent accounting
pronouncements did not or will not have a material effect on the consolidated
financial statements.
F-12
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PATENTS
The Company capitalizes the cost of patents and patents pending, some of which
were acquired, and amortizes such costs over the shorter of the remaining legal
life or their estimated economic life, upon issuance of the patent. Patents
pending approximated $0 and $431,000 at March 31, 2003 and 2002, respectively,
of which $245,000 at March 31, 2002 were acquired. The unamortized cost of
patents and patents pending is written off when management determines there is
no future benefit. Capitalized patent costs in the amount of approximately
$334,000 and $5,000 were written off during the year ended March 31, 2003 and
2002, respectively. Accumulated amortization of patents approximated $78,000 at
March 31, 2003. Patents include both foreign and domestic patents.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company granted warrants in connection with the issuance of certain notes
payable (see Note 4). Under Accounting Principles Board Opinion No. 14, "
ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS,"
the estimated value of such warrants represents a discount from the face amount
of the notes payable. Accordingly, the relative estimated fair value of the
warrants has been recorded in the financial statements as a discount from the
face amount of the notes. The discount was amortized using the effective yield
method over the respective lives of the related notes payable of one year. The
discount was fully amortized at March 31, 2002.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable (see Note 5) provides for a
rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging
Issues Task Force Issue No. 98-5 ("EITF 98-5"), "ACCOUNTING FOR CONVERTIBLE
SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE
CONVERSION RATIO" and Emerging Issues Task Force Issue No. 00-27, " APPLICATION
OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the Company has
determined the value of such BCF to be approximately $150,000 and $450,000, for
the years ended March 31, 2003 and 2002, respectively. Accordingly, the relative
fair value of the BCF has been recorded in the consolidated financial statements
as a discount from the face amount of the notes. Such discounts were amortized
to interest expense during their respective years of issuance.
RESEARCH AND DEVELOPMENT EXPENSES
The Company incurred approximately $200,000 and $340,000 of research and
development expenses during the years ended March 31, 2003 and 2002,
respectively, which are included in operating expenses in the accompanying
consolidated statements of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2002 financial statement
presentation to correspond to the 2003 format.
F-13
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
2. EMPLOYMENT CONTRACT
On January 10, 2000, the Company completed the acquisition of the assets of
Syngen Research, Inc. ("Syngen"). In accordance with the purchase agreement, the
Company issued 65,000 shares of restricted common stock in exchange for all of
the outstanding common shares of Syngen. The transaction was intended to qualify
as a tax-free purchase under Section 368 (a)(1)(b) of the 1986 Internal Revenue
Code, as amended. Since Syngen had no significant assets, liabilities or
operations, the Company has accounted for the transaction as an asset purchase
for the employment of Syngen's sole shareholder, Dr. Richard Tullis, and not as
a business combination. Dr. Tullis, as part of the transaction executed a
two-year employment contract with the Company to perform research. Such
employment contract is amortized over four years on a straight-line basis
because the employment has been extended beyond its original expiration date of
January 9, 2002. The compensation under such agreement was modified in June 2001
from $80,000 to $150,000 per year. Under the terms of the agreement, if Dr.
Tullis is terminated, he will receive a salary continuation payment in the
amount of at least twelve months' base salary.
The Company recorded approximately $510,000 for the employment contract based on
the fair value of the Company's 65,000 shares of restricted common stock issued
in the transaction. Such value has been estimated at approximately $8.00 per
share.
Accumulated amortization of the employment contract approximated $415,000 at
March 31, 2003.
3. DEBT-TO-EQUITY CONVERSION PROGRAM
In March 2002, the Company extended an offer to certain note holders and vendors
to convert past due amounts into restricted common stock and warrants to
purchase common stock of the Company. The offer entails the conversion of
liabilities at a conversion of one share and one-half of a warrant for every
$1.25 converted. The warrants have an exercise price of $2.00 per share and
expire three years from the date of issuance.
During the year ended March 31, 2003 and 2002, note holders and vendors
representing liabilities in the aggregate amount of approximately $188,000 and
$1,020,000 converted their debt in exchange for 150,124 and 816,359 shares of
common stock and 75,061 and 408,180 warrants to purchase common stock,
respectively. Such warrants were valued using the Black-Scholes option pricing
model based on their pro rata value at approximately $71,000 and $339,000. The
warrant conversion rate was below estimated market value for warrants issued
during the fiscal year ended March 31, 2002, therefore BCF approximating
$265,000 was recorded during the year ended March 31, 2002.
4. NOTES PAYABLE
12% NOTES
The Company entered into arrangements for the issuance of notes payable from
private placement offerings (the "12% Notes"). The 12% Notes bear interest at
12% per annum, interest payable quarterly, mature one year from the date of
issuance, and carry detachable warrants. At March 31, 2003, all outstanding 12%
Notes had matured, and interest on such notes for periods after maturity is
accruing at the annual rate of 15%.
In January 2002, the Company issued warrants to purchase common stock in
exchange for an additional ninety days to become compliant with all past due
interest payments related to notes issued in prior years (see Note 6).
F-14
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
4. NOTES PAYABLE (continued)
6.75% NOTES (continued)
On March 18, 2002, the Company issued a promissory note to a stockholder in the
amount of $50,000, bearing interest at 6.75% per annum and maturing on May 17,
2002. Such note was converted in March 2003 (see Note 6).
In May 2002, the Company issued notes payable totaling $25,000, bearing interest
at 6.75% per annum, and maturing in July 2002. The notes were converted into
shares of the Company's common stock in March 2003 (see Note 6).
In December 2002, an existing noteholder increased its advances to the Company
by $40,000 to a total of $140,000. In consideration, the Company granted the
noteholder warrants (see Note 6), cancelled the noteholder's existing $100,000
of convertible debt and replaced it with a secured $140,000 note payable. The
new note bears interest at 10% per annum, with principal and interest thereon
due April 30, 2003, which was paid by the Company in accordance with the terms
of the agreement. A beneficial conversion feature approximating $30,000 was
recorded in connection with the issuance of this note.
All of the 12% Notes and 6.75% Notes were past due and in default at March 31,
2003 and bear interest at 15% per annum until paid.
The Company is currently seeking other financing arrangements to retire all past
due notes.
5. CONVERTIBLE NOTES PAYABLE
8% CONVERTIBLE NOTES
In November 2000, the Company issued convertible notes payable ("8% Convertible
Notes"), bearing interest at 8% per annum, with principal and accrued interest
due on November 1, 2002. The 8% Convertible Notes require no payment of
principal or interest during the term and may be converted to common stock of
the Company at any time at the option of the holder. The number of common shares
issuable upon conversion is equal to the total principal and unpaid interest as
of the date of conversion, divided by the conversion price. The conversion price
per share was changed effective August 31, 2001 to the lesser of (a) 80% of the
closing market price for the common stock; or (b) 70% of the average of the
three lowest closing market prices for the common stock for the 10 trading days
prior to conversion. Such change resulted in additional BCF approximating
$57,000 during the year ended March 31, 2002.
During fiscal year 2002, the holder converted principal and accrued interest of
approximately $49,000 into 40,267 shares of common stock, leaving the principal
of $350,000 and interest thereon due and outstanding. The average conversion
price was approximately $1.22 per share.
The 8% Convertible Notes required the Company to file an effective registration
statement by February 2001. The Company filed Form SB-2 with the Securities and
Exchange Commission in December 2000; however, such registration statement was
never declared effective. Management intends to file a new registration
statement when cash becomes available to fund registration expenses.
F-15
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
8% CONVERTIBLE NOTES (continued)
In exchange for a waiver of the requirement to file an effective registration
statement through January 2002, the Company issued 70,586 shares of common stock
to the holder of the 8% Convertible Notes and agreed to reduce the exercise
price of 119,048 warrants from $3.575 to $2.50 per share. The adjustment
recorded by the Company at March 31, 2002 to account for the reduction of the
warrant's exercise price is not material to the accompanying financial
statements. The Company obtained no such waiver through March 31, 2003 and
therefore, has recorded penalties totaling $150,000 in the accompanying
consolidated statement of operations during the year ended March 31, 2003. The
Company may incur additional charges in exchange for further waivers through the
date of an effective registration statement.
10% CONVERTIBLE NOTES
>From time to time, the Company issued convertible notes payable ("10%
Convertible Notes") to various investors, bearing interest at 10% per annum,
with principal and interest due six months from the date of issuance. The 10%
Convertible Notes require no payment of principal or interest during the term
and may be converted to common stock of the Company at the conversion price of
$0.50 per share at any time at the option of the noteholder.
In April 2002, the Company issued a convertible note in the amount of $50,000.
The conversion price of this note was $1.25 at the time of issuance, but in
August 2002, the Company reduced the conversion price to $0.50.
During the year ended March 31, 2003, the Company issued additional 10%
Convertible Notes totaling $225,000, of which $30,000 was converted into
restricted common stock (see Note 6).
A beneficial conversion feature approximating $150,000 was recorded during the
year ended March 31, 2003 related to the 10% Convertible Notes.
6. STOCKHOLDERS' EQUITY
COMMON STOCK SUBSCRIPTION AGREEMENT
On March 9, 2001, the Company entered into an agreement with an investor whereby
the Company agreed to sell 950,000 shares of its restricted common stock, with a
minimum subscription of 800,000 shares at $1.00 per share to such investor on
certain dates. The March 9, 2001 closing market price of the Company's common
stock was $2.50 per share. During March 2001, the Company issued 100,000 shares
of common stock in exchange for $100,000 in cash under such agreement. During
the year ended March 31, 2002, the Company issued 747,471 shares of common stock
to the investors in exchange for approximately $712,000 in cash, net of issuance
costs of approximately $44,000 under this agreement. No further subscriptions
were made under this agreement.
COMMON STOCK
During the year ended March 31, 2003, the Company issued 150,124 shares of
restricted common stock in connection with the conversion of amounts owed to
certain vendors and noteholders approximating $188,000 (see Note 3).
During the year ended March 31, 2003, the Company issued 200,000 shares of
restricted common stock for cash totaling $100,000 in connection with the
exercise of warrants.
F-16
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (continued)
COMMON STOCK (continued)
During the year ended March 31, 2003, the Company issued 461,600 shares of
restricted common stock at $0.25 per share for cash totaling $115,400. In
connection with the issuance of certain shares, the Company granted the
stockholders warrants to purchase common stock of the Company at $0.25 per
share. The warrants vested immediately and expire through March 2004 (see
below).
During the year ended March 31, 2003, the Company issued 19,230 shares of
restricted common stock at $0.26 per share for cash totaling $5,000.
During the year ended March 31, 2003, the Company issued 8,000 shares of
restricted common stock at $1.25 for cash totaling $10,000.
During the year ended March 31, 2003, the Company issued 420,000 shares of
restricted common stock in connection with the conversion of $75,000 of 12%
Notes payable and $30,000 of 10% Convertible Notes (see Notes 4 and 5).
In November 2002, the Company issued 69,231 shares of restricted common stock
for consulting services valued at $45,000 (estimated based on the market price
on the date of issue) and recorded such amounts as professional fees in the
accompanying consolidated financial statements.
In March 2003, the Company issued 196,078 shares of restricted common stock in
connection with a royalty agreement (see Note 7). The shares were valued at
$100,000 (estimated based on the market price on the date of issue) and recorded
as professional fees in the accompanying consolidated financial statements.
WARRANTS
During the year ended March 31, 2003, the Company granted 240,830 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.25 per share, vest immediately and are exercisable through
March 2004. As the warrants were issued in connection with equity financing, no
related expense has been recorded in the accompanying consolidated financial
statements.
During the year ended March 31, 2003, the Company granted 75,061 warrants to
certain vendors in connection with the conversion of amounts owed by the Company
into common stock. The warrants were valued at $71,000 (estimated based on the
relative fair values as determined by the Black Scholes option pricing model
pursuant to SFAS 123), have exercise prices of $2.00, vest immediately and are
exercisable through June 2005.
In December 2002, the Company issued 580,000 warrants to purchase common stock
for $0.25 per share, which are exercisable through December 2004 and vested upon
grant. The warrants were issued in connection with a short-term secured note
payable (see Note 4). In accordance with GAAP, the proceeds of the financing
have been allocated to the debt and the warrants based on their relative fair
values. Accordingly, a discount of $30,000 has been recorded as a reduction of
the debt balance and the offsetting credit has been recorded as additional
paid-in capital. The debt discount was amortized to interest expense in the year
ended March 31, 2003 in accordance with the short-term nature of the note
payable.
F-17
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (continued)
WARRANTS (continued)
In March 2003, the Company issued 420,000 warrants to purchase common stock for
$0.25 per share, which are exercisable through March 2004 and vested upon grant.
The warrants were issued in connection with the conversion of notes payable (see
Notes 4 and 5). As the warrants were issued in connection with equity fund
raising activity, no related expense has been recorded in the accompanying
consolidated financial statements.
In August 2002, the Company granted warrants to purchase 52,000 shares of the
Company's restricted common stock at an exercise price of $0.25 per share in
connection with equity fund raising activities. These warrants vested upon grant
and are exercisable through March 2004. As such warrants were issued in
connection with equity fund raising activities, there was no related expense
recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2002, the Company granted 239,000 warrants for
services and the satisfaction of certain liabilities. The warrants have exercise
prices ranging from $2.75 through $6.50, vested immediately and are exercisable
through January 2007. The warrants were valued at $118,000, of which $78,000 was
recorded as accounts payable and accrued liabilities in fiscal year 2001.
In January 2002, the Company issued 335,000 warrants to purchase common stock in
exchange for an additional ninety days to become compliant with all past due
interest payments (see Note 4). The warrants have an exercise price of $2.00 per
share, vest immediately, and expire twelve months from the date of issuance.
Such warrants were valued using the Black-Scholes option pricing model at
approximately $118,000, and were recorded as interest expense.
A summary of the aggregate warrant activity for the years ended March 31, 2003
and 2002 is presented below:
Year Ended March 31,
----------------------------------------------------------
2003 2002
-------------------------- -----------------------------
Weighted Weighted
Average Average
Warrants Price Warrants Price
----------- --------- ----------- ---------
Outstanding, beginning of year 1,873,855 $ 3.65 891,675 $ 4.62
Granted 1,367,891 0.35 982,180 2.77
Exercised -- -- -- --
Cancelled/Forfeited (335,000) (2.00) -- --
----------- --------- ----------- ---------
Outstanding, end of year 2,906,746 $ 2.29 1,873,855 $ 3.65
=========== ========= =========== =========
Exercisable, end of year 2,906,746 $ 2.29 1,873,855 $ 3.65
=========== ========= =========== =========
Weighted average fair
value of warrants granted $ 0.38 $ 0.60
========= =========
F-18
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (continued)
WARRANTS (continued)
The following outlines the significant assumptions used to calculate the fair
value information presented utilizing the Black-Scholes pricing model:
Years Ended March 31,
2003 2002
--------------------- --------------------
Risk free rate 3.50% 3.40%
Average expected life 2.5 years 2.4 years
Expected volatility 210% 56%
Expected dividends None None
A detail of the warrants outstanding and exercisable as of March 31, 2003 is as
follows:
Warrants Outstanding Warrants Exercisable
-----------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
--------------- ------------- ------------ --------------- ------------
$0.25 1,292,830 2.7 $ 0.25 1,292,830 $ 0.25
$2.00 - $3.00 637,166 2.2 $ 2.13 637,166 $ 2.13
$4.00 - $5.00 823,000 2.2 $ 4.91 823,000 $ 4.91
$6.00 - $6.50 153,750 2.0 $ 6.49 153,750 $ 6.49
--------------- ---------------
2,906,746 2,906,746
=============== ===============
OPTIONS
In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option
Plan"), which was approved by its stockholders in September 2000. The Stock
Option Plan provides for the issuance of up to 500,000 options to purchase
shares of common stock. Such options can be incentive options or nonstatutory
options, and may be granted to employees, directors and consultants. The Stock
Option Plan has limits as to the eligibility of those stockholders who own more
than 10% of Company stock, as defined. The options granted pursuant to the Stock
Option Plan may have exercise prices of no less than 100% of fair market value
of the Company's common stock at the date of grant (incentive options), or no
less than 75% of fair market value of such stock at the date of grant
(nonstatutory).
In March 2002, the board of directors granted the Company's Chief Executive
Officer ("CEO") and Dr. Tullis non-qualified stock options to purchase up to
250,000 shares of common stock each, at an exercise price of $1.90 per share
(the estimated fair market value at grant date) and expire March 2012. Awards
are earned upon achievement of certain financial and/or research and development
milestones. Should the Company's Chief Executive Officer or Dr. Tullis leave his
position with Aethlon Medical for any reason other than "For Cause" (as commonly
defined), each will be credited with no fewer than 50,000 option shares for each
full year of employment from March 11, 2002. As of March 31, 2003, the CEO and
Dr. Tullis have vested in 250,000 and 225,000 of such options, respectively.
F-19
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (continued)
OPTIONS (continued)
In January 2002, the Company granted 400,000 stock options to a consultant for
services rendered valued at $562,000 (estimated based on the Black Scholes
option pricing model pursuant to SFAS 123) in connection with a consulting
agreement. In July 2002, the Company extended the original agreement by six
months to expire July 2003 and granted an additional 200,000 stock options
valued at $114,000 (estimated based on the Black Scholes option pricing model
pursuant to SFAS 123). All 600,000 options have been exercised as of March 31,
2003. The stock options had an exercise price of $0.50, vested immediately and
were exercisable through October 2002.
In November 2001, the Company issued 26,067 non-statutory options (10,800
options were cancelled during fiscal 2002) to purchase common stock to certain
members of the Company's Board of Directors for their services as directors at
exercise prices ranging from $1.78 per share to $2.00 per share, expiring five
years from the date of issuance and vesting on the grant date. The Company
recorded compensation expense under APB 25 of approximately $7,500 related to
such options.
In July 2001, the Company granted its Chief Financial Officer non-qualified
stock options to purchase up to 150,000 shares of common stock at an exercise
price of $2.25 per share (the estimated fair market value at grant date), which
vest ratably over three years and expire July 15, 2011.
The following is a status of the stock options outstanding at March 31, 2003 and
the changes during the two years then ended:
Year Ended March 31,
-------------------------------------------------------
2003 2002
-------------------------- --------------------------
Weighted Weighted
Average Average
Options Price Options Price
----------- --------- ----------- ---------
Outstanding, beginning of year 1,376,115 $ 2.49 710,848 $ 2.95
Granted 200,000 0.50 1,076,067 1.44
Exercised (200,000) (0.50) (400,000) (0.50)
Cancelled/Forfeited -- -- (10,800) (1.81)
----------- --------- ----------- ---------
Outstanding, end of year 1,376,115 $ 2.49 1,376,115 $ 2.49
=========== ========= =========== =========
Exercisable, end of year 1,283,530 $ 2.50 908,160 $ 1.40
=========== ========= =========== =========
Weighted average fair
value of options granted $ 0.57 $ 1.35
========= =========
F-20
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
6. STOCKHOLDERS' EQUITY (continued)
OPTIONS (continued)
The following outlines the significant assumptions used to calculate the fair
value information presented utilizing the Black-Scholes option-pricing model:
Years Ended March 31,
2003 2002
--------------------- --------------------
Risk free rate 3.50 3.80%
Average expected life 3 years 4.6 years
Expected volatility 210% 58%
Expected dividends None None
A detail of the options outstanding and exercisable as of March 31, 2003 is as
follows:
Options Outstanding Options Exercisable
------------------------------------------ ----------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
--------------- ------------- ------------ --------------- ------------
$0.39 50,848 4.7 years $ 0.39 45,763 $ 0.39
$1.78 - $2.00 515,267 8.9 years $ 1.90 490,267 $ 1.90
$2.25 - $3.00 602,500 4.3 years $ 2.78 540,000 $ 2.78
$3.25 - $3.75 207,500 2.9 years $ 3.27 207,500 $ 3.27
--------------- ---------------
1,376,115 1,283,530
=============== ===============
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain officers of the Company and other related parties have advanced the
Company funds, agreed to defer compensation or paid expenses on behalf of the
Company to cover short-term working capital deficiencies. These non
interest-bearing liabilities have been included as due to related parties in the
accompanying consolidated financial statements.
ROYALTY AGREEMENT
Effective January 1, 2000, the Company entered into an agreement with a related
party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to the Company by the inventors in exchange for (a) a royalty to be
paid on future sales of the patented product or process equal to 8.75% of net
sales, as defined and (b) 12,500 shares of the Company's common stock. Upon the
issuance of the first United States patent relating to the invention, the
Company is obligated to issue an additional 12,500 shares of common stock to the
inventors. If the market price of the Company's common stock on the date the
patent is issued is below $8 per share, the number of shares to be issued will
be that amount which equates to $100,000 of market value. On March 4, 2003, the
related patent was issued and therefore the Company issued 196,078 shares of
common stock valued at $100,000 and is included in professional fees in the
accompanying consolidated statements of operations (see Note 6).
Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.
F-21
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
8. INCOME TAX PROVISION
Income tax expense for the years ended March 31, 2003 and 2002 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 percent to
the income from continuing operations before provision for income taxes as a
result of the following:
2003 2002
------------ ------------
Computed "expected" tax benefit $ (837,000) $(1,360,000)
Reduction in income taxes resulting from:
Equity for services 39,000 230,000
Interest for warrants and BCF 85,000 360,000
Change in deferred tax assets valuation allowance 897,000 900,000
State and local income taxes,
net of federal benefit (162,000) (130,000)
Other (22,000) --
------------ ------------
$ -- $ --
============ ============
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at March 31, 2003 are presented below:
Deferred tax assets:
Capitalized research and development $ 1,833,000
Net operating loss carryforwards 2,394,000
-----------------
Total gross deferred tax assets 4,227,000
Less valuation allowance (4,227,000)
------------------
Net deferred tax assets $ --
==================
The valuation allowance for deferred tax assets from continuing operations as of
April 1, 2002 was $3,330,000. The net change in the total valuation allowance
for Federal and State was for the year ended March 31, 2003 and 2002 was an
increase of $897,000 and $900,000, respectively.
As of March 31, 2003, the Company had tax net operating loss carryforwards of
approximately $6,460,000 and $2,230,000 available to offset future taxable
Federal and state income, respectively. The carryforward amounts expire in
varying amounts between 2004 and 2024.
Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.
F-22
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2003 AND 2002
--------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
REGISTRATION RIGHTS AGREEMENTS
The Company is obligated under various agreements to register its common stock,
including the common stock underlying certain warrants and options. The Company
is subject to penalties for failure to register such securities, the amount of
which could be material to the Company's financial condition, results of
operations and cash flows. The Company filed a registration statement on Form
SB-2 with the Securities and Exchange Commission in December 2000 to register
the necessary securities. However, such registration statement was never
declared effective. Management is currently unaware of any potential claims
related to the lack of registration and plans to file a revised registration
statement as cash to fund registration expenses becomes available.
EMPLOYMENT CONTRACTS
In addition to the employment contract discussed in Note 2, the Company entered
into an employment agreement with its Chairman of the Board effective April 1,
1999. The agreement, which is cancelable by either party upon sixty days notice,
will be in effect until the employee retires or ceases to be employed by the
Company. The Chairman of the Board was appointed President and Chief Executive
Officer effective June 1, 2001 upon which his base annual salary was increased
from $120,000 to $180,000. Under the terms of the agreement, if the employee is
terminated he may become eligible to receive a salary continuation payment in
the amount of at least twelve months' base salary.
DELINQUENT SEC FILING
The Company's March 31, 2002 Form 10-KSB did not contain certain disclosure
items in its Management's Discussion and Analysis or Plan of Operation sections
including Executive Compensation, Security Ownership of Certain Beneficial
Owners and Management and Certain Relationships and Related Transactions. Such
filing delinquencies constitute securities laws non-compliance and, among other
actions enforceable by the SEC, could result in de-listing of the Company's
common stock from the OCTBB.
In addition, any owners of the Company's restricted securities who are otherwise
eligible to sell such securities under Rule 144 may be temporarily unable to do
so until such filing delinquencies are cured.
10. SUBSEQUENT EVENTS (UNAUDITED)
In April 2003, the Company issued a convertible note in the amount of $150,000,
bearing interest at 9% per annum, with principal and interest due in June 2003.
The convertible note requires no payment of principal or interest during the
term and may be converted to common stock of the Company at the conversion price
of $0.25 per share at any time at the option of the noteholder. The Company has
recorded a BCF of $150,000 in connection with the issuance of the note.
In April 2003, the Company issued 600,000 shares of restricted common stock at
$0.25 per share for cash totaling $150,000. In connection with the issuance of
certain shares, the Company granted the stockholders 600,000 warrants to
purchase common stock of the Company at $0.25 per share. The warrants vest
immediately and expire through April 2005. As the warrants were issued in
connection with equity financing, no related expense will be recorded in the
consolidated financial statements.
In May 2003, the Company issued 40,000 shares of restricted common stock at
$0.25 per share for cash totaling $10,000.
F-23