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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
(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, 2000
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,
LAJOLLA, 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 X No
--- ---
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, 2000 were
$20,559.
The aggregate market value of the Common Stock held by non-affiliates was
approximately $5,147,000, based upon the closing price of the Common Stock on
the Nasdaq Over-the-Counter Bulletin Board on June 13, 2000.
The number of shares of the Common Stock of the registrant outstanding as
of June 13, 2000 was 2,771,652.
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
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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
approval of the Company's products and other regulations, 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" or the "Company"), formerly Bishop
Equities, Inc., 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 Equities, Inc. began doing business as "Aethlon Medical,
Inc." In February 2000, the members of the Board of Directors adopted a
resolution to amend the Company's Articles of Incorporation to formally change
the name of the Company from "Bishop Equities, Inc." to "Aethlon Medical, Inc.,"
and the change was approved by the shareholders.
BUSINESS DEVELOPMENT
On March 10, 1999, the Company executed an Agreement and Plan of
Reorganization for the Acquisition of All of the Outstanding Stock (the "Aethlon
Agreement") of Aethlon, Inc., a California corporation ("Aethlon"). Pursuant to
the Aethlon Agreement, Aethlon became a wholly-owned subsidiary of the Company.
Also on March 10, 1999, the Company executed an Agreement and Plan of
Reorganization for the Acquisition of All of the Outstanding Stock (the "Hemex
Agreement") of Hemex, Inc., a Delaware corporation ("Hemex"). Pursuant to the
Hemex Agreement, Hemex became a wholly-owned subsidiary of the Company.
In connection with these acquisitions, the Company issued 2,083,500 shares
of the Company's Common Stock to the former shareholders of Aethlon and Hemex.
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 Hemex Hemopurifier were assigned to the
Company. In addition to certain royalty payments to be made on future sales of
the patented product, the consideration for the acquired rights included the
issuance of 25,000 shares of the Company's common stock to the inventors, 12,500
shares of which have been issued and 12,500 will be issued if and when the
patent is granted.
On January 10, 2000, the Company acquired from Richard H. Tullis, PhD, all
the outstanding common stock of Syngen Research, Inc. in exchange for 65,000
shares of the Company's common stock. Syngen Research, Inc. (dba Aethlon
Laboratories, Inc.) became a wholly-owned subsidiary of the Company and will
engage in the development of the virus-removing device under the direction of
Dr. Tullis.
BUSINESS OF ISSUER
Aethlon Medical, Inc. is a developer and marketer of extracorporeal medical
device technologies. Aethlon Medical intends to build its business in three
ways:
- Complete the commercialization of the Hemopurifier(TM) line of
extracorporeal blood filtration devices upon completion of ongoing
clinical trials.
- Develop and exploit new applications of the Hemopurifier platform
technology.
- Continue the strategy of acquiring related medical device technologies
that can be developed and commercialized on an international basis.
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In developing this business, Aethlon Medical will act as a parent company to
wholly-owned subsidiaries such as Hemex, Inc. and Aethlon Laboratories, Inc. It
also intends to pursue the acquisition of additional businesses and technologies
that complement those under development.
HEMEX. Hemex, Inc. was the first acquisition completed by Aethlon Medical, Inc.
It operates as a wholly owned subsidiary of Aethlon Medical, with its own staff,
facilities, and subsidiary business plan. Aethlon Medical will provide general
management to Hemex, as well as financial and legal services, and will be
responsible for funding the operations of Hemex.
The mission of Hemex is to become a significant medical device manufacturer,
with an international business in products that remove harmful materials from
the blood of people with various intoxications.
The first product developed by Hemex is the DFO Hemopurifier(TM) device for the
removal of iron and aluminum. This device has been proven safe in hemodialysis
patients in an FDA-approved Feasibility Trial, and is ready to begin its Pivotal
Trial leading to potential commercialization in FY 2003.
Devices for removing lead and cisplatin, a chemotherapeutic agent, are in final
laboratory research, with few questions remaining before their clinical trials
can begin. Based on results from animal testing, Hemex researchers are confident
that each device will prove clinically safe and effective. The lead-removing
device is used to treat lead intoxication in adults, children, and industrial
workers, and the cisplatin-removing device is applied after cisplatin has passed
through the target tumor, sparing the normal cells of the cancer patient from
its toxic side-effects.
In addition to these metal-removing applications, Hemex acquired on January 11,
2000 the rights to a novel process (patent pending) for removing targeted
viruses from the blood using the Hemopurifier platform and DNA technology. This
device will be developed in collaboration with Aethlon Laboratories, where the
initial bioengineering will take place. See below for a more detailed discussion
of this product.
Other areas of current research interest are the removal of various antigens,
addictive narcotics, and other heavy metals in both civilian and military
environments.
THE HEMOPURIFIER(TM) DEVICE. The Hemopurifier device is a novel hollow-fiber
cartridge containing an immobilized antidote for removing toxic material from
the blood. The device is used in extracorporeal circulation systems that are
similar to those used in hemodialysis or any one of the simpler apheresis
systems used today.
The Hemopurifier device is a long cylindrical cartridge containing a bundle of
approximately 10,000 hollow fibers and an antidote or attractor compound. The
antidote, which is present in a proprietary form within the fibers, has a strong
and specific affinity to remove a targeted toxin from the blood. When the
patient's blood flows through the lumen of each of the fibers, molecules of a
certain size can travel through the pores of the fiber membrane and come in
contact with the attractor compound. The toxic material is captured by the
compound, and other small molecules return through the same pores to the lumen.
The cartridge itself is a dialyzer encasement with minor modifications.
The clinical advantages offered by the Hemopurifier device over present
treatments are:
- Toxic material can be selectively removed WITHOUT SIDE EFFECTS, since no
substance enters the body. Toxicity of the antidote is eliminated, because
it is immobilized in the device rather than injected into the patient.
- Antidotes of GREATER STRENGTH AND EFFECTIVENESS, which were previously used
sparingly because of their toxicity, can be used in this device without
regard for the side effects which would occur if the same substance were in
the bloodstream.
- The device is HIGHLY EFFICIENT. The structure of the Hemopurifier device
provides a large surface area for immobilization of a relatively large
quantity of antidote, allowing exposure to a large volume of blood in a
short period of time.
- The device is SAFE:
- In a closed system, the amount of blood retained by the Hemopurifier
device is small. No replacement fluid is needed, and no blood
transfusions are required. As a result, the risks of volume expansion,
blood pressure changes, infections and blood incompatibility (inherent
in blood transfusions) are eliminated.
- Only the targeted toxic materials are removed. All other blood
components remain in the circulation.
- The device uses well-established extracorporeal applications, especially
hemodialysis, as well as apheresis or other types of transfusion
procedures. These methods are widely used and available in hospitals and
clinics.
Aethlon Medical believes that the Hemopurifier device represents a true
breakthrough in the potential treatment of certain conditions ranging from acute
poisoning to chronic and life-threatening illnesses. It is novel because the
immobilized antidote in the Hemopurifier device binds the toxic material, thus
extracting it safely from the body.
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Harmful agents in the blood can be removed efficiently and without side effects,
reducing treatment times. The results of these advantages are improved patient
management and cost reduction for health care providers.
Hemex' first series of products has been developed for the extracorporeal
removal of the following harmful metals from the blood: iron, lead, and
cisplatin. The combined potential markets for these initial products exceeds
$1.7 billion per year in the United States, and $5.1 billion worldwide. These
projections have been developed from an analysis of the targeted patient
population for each metal intoxication, as reported in medical journals and
government publications.
IRON. The first product to be introduced by Hemex will be the DFO Hemopurifier.
With the chelator desferrioxamine (DFO) immobilized in the Hemopurifier, the
therapist can remove excess iron from the blood in a completely safe and
efficient manner. Among the target markets for this device are:
- HEREDITARY HEMACHROMATOSIS. This inherited life-threatening disorder
is one of the most under-diagnosed, yet common, conditions in North
America. 1.2 million Americans suffer from this genetic condition
which causes iron overload, which can lead to organ damage and a
number of serious medical manifestations.
- Current treatment is limited to periodic phlebotomy, usually weekly,
with greater frequency for urgently symptomatic patients. Phlebotomy
simply removes whole blood, including beneficial components along with
excess iron. The Hemopurifier treatment, on the other hand, is
selective, removing only iron, and is more efficient, removing iron at
a greater rate than with periodic phlebotomy.
- ACQUIRED IRON OVERLOAD. Iron overload is an unavoidable complication
of life-sustaining chronic blood transfusions. Patients with Cooley's
Anemia, Sickle Cell Disease, and other such conditions can acquire
iron overload leading to organ damage and other difficulties. Also, in
the process of 15,000 to 20,000 organ transplants per year, iron
overload is a major concern to transplant surgeons.
- Current treatment of this patient population involves the
administration of various chelators, including DFO, directly into the
body. The toxic side-effects and inefficient rate of iron removal
are in contrast to the completely safe and effective Hemopurifier
treatment.
- REPERFUSION INJURY AFTER HEART SURGERY. Despite the trend toward LISA
(Less Invasive Surgical Approaches), a large number of open-heart
surgical procedures continues each year. During open-heart surgery,
external blood circulation is maintained by a heart-lung machine. When
blood flow to the heart is reestablished, reperfusion injury can
result from sudden release of iron accumulated in the heart in the
form of oxygen-derived free radicals.
The Hemopurifier, when inserted in the existing external circulation,
can provide a safe and effective preventative measure for all such
procedures.
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The potential patient populations for the DFO Hemopurifier are shown below:
POTENTIAL PATIENT POPULATION FOR THE DFO HEMOPURIFIER DEVICE
<TABLE>
<CAPTION>
---------------------- ---------------------------- ---------------- -------------------- ----------------------
INDICATION POPULATION AT RISK ANNUAL REQUIRING ANNUAL PATIENT
INCIDENCE TREATMENT % POTENTIAL
---------------------- ---------------------------- ---------------- -------------------- ----------------------
<S> <C> <C> <C> <C>
IRON OVERLOAD Hemochromatosis 1,200,000 25% 300,000
Cooley's Anemia 7,000 100% 7,000
Sickle Cell Disease 50,000 10% 5,000
Other Anemias N/A 100% N/A
Acute Iron Poisoning 20,000 60% 12,000
---------------------- ---------------------------- ---------------- -------------------- ----------------------
REPURFUSION INJURY Heart Valve Replacement 69,000 100% 69,000
IN OPEN HEART SURGERY Coronary Bypass Surgery 468,000 100% 468,000
Other Coronary Procedures 53,000 100% 53,000
---------------------- ---------------------------- ---------------- -------------------- ----------------------
TOTAL 914,000
---------------------- ---------------------------- ---------------- -------------------- ----------------------
</TABLE>
CISPLATIN. Cisplatin, and other closely-related platinum derivatives, are among
the most effective chemotherapeutic agents for the treatment of certain types of
cancer. Direct infusion of cisplatin is typically followed by severe nausea and
vomiting. Cisplatin may deposit in the sensory nerves, resulting in
incapacitating levels of pain that can last for years after treatment has been
discontinued. The prescribed dosage of cisplatin, therefore, is often limited by
its toxicity.
The Hemopurifier device for the removal of cisplatin can be applied to the vein
draining the tumor, either during or immediately after cisplatin treatment. With
no other known means of removing cisplatin from the body (painkillers and
medications can only mitigate the side effects), this procedure is especially
promising and unique. Animal tests have demonstrated the effectiveness of this
approach.
With the Hemopurifier device, the oncologist can administer substantially higher
doses of cisplatin, thereby increasing its effectiveness as a chemotherapeutic
agent. The patient will receive more effective treatment while enjoying a better
quality of life during and after treatment.
Hemex estimates that there are annually over 265,700 new cancer patients who
could be treated with cisplatin, and at 3 treatments per year, the potential
U.S. market for this device is $159 million.
LEAD. The market for the removal of lead from the blood has three principal
segments, all of which are substantial in numbers as well as in need for
improved treatment modalities.
- YOUNG CHILDREN. Among children aged 1 to 5 years, it is estimated that
890,000 have some level of lead toxicity. Direct chelation therapy is
used very cautiously in children, depending on the individual level of
lead burden. When used, the most frequently prescribed chelation
agent, EDTA, is given by infusion over consecutive days. This process
is repeated 2 or 3 times, with long rests between treatments. The
child passes the lead/chelator complex, but is at risk for
side-effects serious enough to require that the treatments be given in
a hospital setting.
- The Hemopurifier treatment is safe, with no toxic substance entering
the child's body to create nasty side-effects. It is also more
effective, as demonstrated by extensive animal studies conducted by
Hemex. In addition, the Hemopurifier treatment causes lead residing in
the tissue and bone to migrate to the blood, where it can be removed
by this extracorporeal process. This phenomenon is the subject of a
provisional patent applied for in May 1999, and a full patent will be
filed in May 2000.
- PREGNANT WOMEN. The Public Health Service estimates that there are
23,000 pregnant women in the U.S. with high blood lead levels, clearly
creating a danger to their fetuses. Sadly, these mothers cannot be
treated by current chelation therapies because of the toxicity of EDTA
and other chelators to the fetus.
Because of the safety of the Hemopurifier, this extracorporeal method
can be used by pregnant women to reduce their blood lead levels with
no risk to mother or the fetus.
- INDUSTRIAL WORKERS. It is estimated by OSHA that nearly 600,000
workers are directly exposed to lead in the workplace, and that one
third have elevated blood levels. Since chelation therapy is rarely
used
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in the workplace because of its side-effects, workers are normally
sent home or reassigned until their blood lead levels return to
acceptable levels. In addition to the "down time" involved, the
prospect of long-term illness and cognitive damage makes lead overload
an expensive issue for certain employers.
Lead poisoning is also receiving attention form the legal community,
and is considered by some the next major target for class action
suits. This further increases the need to find an effective and safe
therapy for lead overload.
The potential patient population for lead removal by the Hemopurifier are as
follows:
POPULATIONS AT RISK FOR LEAD POISONING
<TABLE>
<CAPTION>
------------------------------------- --------------------------------------- --------------------------------------
POPULATION AT RISK NUMBER WITH ELEVATED LEAD LEVELS NUMBER REQUIRING MEDICAL INTERVENTION
------------------------------------- --------------------------------------- --------------------------------------
<S> <C> <C> <C>
Children Aged 1-5 890,000 890,000
------------------------------------- --------------------------------------- --------------------------------------
Pregnant Women 23,000 23,000
------------------------------------- --------------------------------------- --------------------------------------
Industrial Workers 587,231 196,000
===================================== ======================================= ======================================
TOTAL 1,500,000 1,109,000
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</TABLE>
Beyond these initial applications of the Hemex platform technology, additional
medical products will be developed for a variety of applications. In addition to
the virus-removing device discussed in below, future research will address
treatment of overdose of cardioactive and psychoactive drugs, improving patient
management in conditions with circulating harmful antibodies or antigen-antibody
complexes (e.g. in various types of cancer, diabetes, hemophilia); and treating
genetic enzyme deficiency diseases. The Department of Energy has shown an
interest in Hemex technology for various battlefield and civilian detoxification
applications in the U.S. and abroad.
PATENTS. The following patents have been issued to Dr. Ambrus and her
collaborators, with U.S. patents subsequently assigned to Hemex. Foreign patent
assignments are in process:
- Removing Metal Ions From the Blood
USA: No. 4,612,122 Issued September 16, 1986
Europe: No. 0,073,888 Issued April 23, 1986
Japan: No: 110,047/82 Issued June 7, 1994
- Blood Purification
USA: No. 4,714,556 Issued December 22, 1987
USA: No. 4,787,974 Issued November 29, 1988
Immobilization of a Chelator on Silica
USA: No. 6,071,412 Issued June 6, 2000
The above claims cover the product itself, the process of manufacture, and the
process of treatment.
Two additional patents were filed in recent months.
MARKETING. The fundamental Aethlon Medical marketing goal is to make the
Hemopurifier(TM) device the preferred treatment in the U.S. for each of the
conditions for which the device is designed, and to then expand use of the
device into international markets. Because the Hemopurifier will be sold into
many different medical markets, a single detailed marketing plan is not
possible.
There are over 25,000 installed hemodialysis stations in hospital and
free-standing dialysis clinics in the United States. With a trend to peritonal
dialysis, performed in the home rather than in a clinic, the utilization of
these dialysis stations is likely to diminish. The operators of dialysis clinics
should welcome additional opportunities to use their assets, including the
on-site staffs, for new medical applications.
The Hemopurifier devices for the removal of iron overload and for the removal of
lead are ideally suited to use in a hemodialysis setting. They use a modified
dialysis cartridge which is compatible with existing equipment, and require
repeat patient visits. And, unlike cartridges used in dialysis, the devices are
for a single use, increasing revenue potential per visit. The Company believes
that this model is compelling from both patient management and economic
viewpoints.
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Hemex will use multi-faceted sales and marketing strategies for penetrating the
U.S. market. Sales and promotional efforts will be directed to three target
audiences: the distributor, the prescribing physician or medical facility, and
the patient.
- Distributors. Hemex will employ area marketing managers, who will act
as missionary salesmen in working with distributors' sales forces. In
areas of lower population density, Hemex will use independent,
commissioned sales representatives who work with a small number of
closely aligned products.
- Physicians and Medical Facilities. Area marketing managers will visit
physicians and hospital/medical practice administrators, often with
distributor salesmen who have strong pre-established relationships
with these buyers. In addition, physicians will learn of the
Hemopurifier device at medical society meetings, and through medical
journals. Members of the Scientific Advisory Board will continue to
write medical papers for publication in specific medical journals, and
give presentations and posters in the appropriate medical meetings.
Marketing management will attend medical meetings to set up booths and
distribute literature.
- Patients. As consumers take a greater interest in their own health in
today's environment, it will be important to build awareness of the
potential of the Hemopurifier among each patient population. Hemex
will work with professional public relations advisors to promote the
Hemopurifier in newspapers and general interest magazines, as well as
in targeted patient-oriented publications. Talk shows and medical
programming on radio and television are hungry for truly newsworthy
health-related developments like the Hemopurifier. Of particular
interest to the general public may be the Hemopurifier device for
lead, as it applies to children and to industrial lead poisoning.
Hemex will form strategic alliances with a small number of significant
distributors of those medical products which are sold to Hemex target buyers.
Although distribution rights may be granted on a geographical or a product line
basis, the company will strive to avoid exclusivity which creates dependence on
another firm. The criteria for strategic partners are: (1) they offer a
knowledgeable sales force with strong relations with the dialysis clinics and
other medical facilities Hemex seeks to penetrate, and (2) they have the
financial and physical capacity to manage inventory and order processing well.
For the DFO Hemopurifier device, potential partners include suppliers to the
dialysis industry and large hospital supply companies. With potential to add
exciting new, higher priced products with good profit margins, Hemex products
will be attractive to these major firms. The use of aggressive area marketing
managers will ensure that Hemex receives more than its fair "share of mind" of
distributor sales people.
AETHLON LABORATORIES. Aethlon Laboratories, Inc. will, like Hemex, operate as a
wholly-owned subsidiary of Aethlon Medical, Inc., with its own staff,
facilities, and subsidiary business plan. Aethlon Medical will provide general
management, as well as financial and legal services, and will be responsible for
funding the operations of Aethlon Laboratories.
The mission of Aethlon Laboratories is to identify and develop new applications
of the Company's Hemopurifier(TM) technology, as well as related diagnostic and
therapeutic technologies which enhance the value of the core business. Working
in collaboration with Hemex, this subsidiary will develop early-stage devices
acquired through acquisition or identified in its own internal research. In
doing so, Aethlon Laboratories will continue to fill the product "pipeline" as
more mature products are commercialized.
Aethlon Laboratories will focus in the next three years on the development of
the technologies acquired by Aethlon Medical in the last quarter of FY 2000. As
additional technologies are acquired by the parent company, research and
development priorities will be reevaluated and adjusted as necessary.
- VIRUS THERAPY. On January 10, 2000, Aethlon Medical acquired the
rights to a novel process (patent pending) for the removal of
targeted viruses from the blood using the Hemopurifier
extracorporeal treatment method. While early research emphasis
will be on HIV and Hepatitis C viruses, because of the large
underlying markets, this therapeutic approach can be effective in
dealing with any virus whose DNA can be identified and
replicated.
This invention combines DNA and antibody technology with
extracorporeal treatment. DNA strands and antiviral antibodies
are immobilized in the Hemopurifier cartridge so that as blood
passes through the device, any virus not encapsulated in white
blood cells is attracted to, and can bond with, the immobilized
DNA and antibody combination.
This treatment is designed to enhance the effectiveness of other
therapies, like protease inhibitors in HIV treatment, by reducing
the body burden of virus in a rapid and safe fashion. By
capturing circulating viruses that would otherwise invade cells,
this therapy will inhibit the growth of the virus and allow drug
therapies to work more rapidly and effectively.
The development of this device will be assigned the highest
priority at Aethlon Laboratories, with an aggressive development
program leading to an initial Feasibility Trial in FY 2002.
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- CELL ACTIVATION THERAPY. On April 6, 2000, Aethlon Medical
acquired Cell Activation, Inc., a young biotechnology company
working in the field of inappropriate cell activation.
Inappropriate cell activation is the pathological overreaction of
the body's immune system, in various circumstances, causing the
white blood cells to exacerbate, rather than ameliorate, the
underlying medical issue. Cell Activation scientists have
demonstrated that inappropriate cell activation is likely to be a
major cause of life-threatening conditions frequently encountered
by patients in the emergency room or in the intensive care unit.
Aethlon Laboratories will focus on the development of
extracorporeal therapies for inappropriate cell activation in
trauma care, high-risk surgery, and cardiovascular care.
Immobilization techniques for the removal of those factors which
cause this pathological reaction, thought to be certain enzymes,
will be similar to those used by Hemex to remove metal
intoxicants from the blood.
- CELL ACTIVATION DIAGNOSTICS. Detection of the presence of
potentially troublesome cell activation factors is a
precondition for the application of extracorporeal therapy.
Therefore, Aethlon Laboratories will continue to develop the
diagnostic products well underway at Cell Activation at the
time of the acquisition. These include the Plazmazyme(TM)
plasma assay kit (patent pending), which detects the presence
of a certain enzyme that is a likely cause of complications in
patients who receive blood and blood products in organ
transplants and other procedures. Tests for additional factors
will be developed to enhance the potential for widespread use
of the Company's proprietary therapy for inappropriate cell
activation.
Although the diagnostic business is not a strategic priority
for the Company, closely related products like the Plasmazyme(TM)
kit can be important sources of early revenue and improved market
acceptance of higher margin therapeutic products.
- CELL-BASED AMPLIFICATION AND DETECTION OF BIOLOGICAL WARFARE
AGENTS. Syngen Research, acquired on January 10, 2000, has been
developing in association with SAIC a product sought by DARPA
(Defense Advanced Research Procurement Agency) to detect the
presence of certain biological warfare agents in military and
civilian environments. Aethlon Laboratories will carry on this
work, which could result in a widely-used inexpensive disposable
patch which identifies the presence of a specific threatening
pathogenic agent.
- OTHER PROJECTS. Syngen Research also has applied for a patent on
a method of enzyme detection of DNA hybridization probes, and has
other work underway in the field of protein amplification. These
opportunities will receive a lower priority than those set forth
above, but each represents a potential product opportunity for
the Aethlon Medical pipeline, or for a license to another
company.
Aethlon Laboratories was formed when Syngen Research was acquired by Aethlon
Medical on January 10, 2000. Syngen will be merged into the former Aethlon,
Inc. subsidiary, and the name will be changed to Aethlon Laboratories. Cell
Activation, Inc. was acquired on April 6, 2000, and will also be merged into
Aethlon Laboratories. Aethlon Laboratories is a California Corporation.
Syngen Research was founded in 1995 by Dr. Tullis as an operating company, with
revenues from consulting contracts and sub-contract development in a well
equipped laboratory with a staff oriented to DNA replication and amplification.
Prior to the January 2000 merger, laboratory work was performed there for Cell
Activation, as well as for several other biotechnology companies. Dr. Tullis
received 65,000 shares of Aethlon Medical common stock in exchange for 100% of
the stock of Syngen Research, and was appointed to the Board of Directors of
Aethlon Medical, and was elected its Vice President for Business Development.
Cell Activation was formed in December 1997 by a group of distinguished
scientists and businessmen who were all employed in senior positions in their
respective organizations, but wished to exploit the emerging inappropriate
cell activation technology in which they had a common interest. Although Cell
Activation had no salaried employees, it made good progress in developing its
diagnostic products, particularly the Plazmazyme(TM) Assay Kit, in its two
plus years of operation. The six owners of Cell Activation received a total
of 99,152 shares of Aethlon Medical common stock, and options to purchase
50,848 shares of Aethlon Medical common stock, in exchange for 100% of the
shares of Cell Activation.
Aethlon Laboratories intends to become a research and development company with
specialized resources for the development of extracorporeal treatments of
blood-borne pathogens. As products under development approach readiness for
human clinical trials, Aethlon laboratories will work closely with Hemex in
planning and executing these trials. Manufacturing, as well as distribution and
sales, will be arranged through strategic partners and contractors, also in
close collaboration with Hemex.
As products from Hemex and Aethlon Laboratories mature, management will continue
to review the most cost-efficient location - Aethlon Laboratories, Hemex, or
Aethlon Medical - for various activities which can be shared among subsidiaries.
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ITEM 2. DESCRIPTION OF PROPERTY
The Company currently rents approximately 2,000 square feet of laboratory
space from the University of Buffalo Foundation on a month-to-month basis at a
lease rate of approximately $2,775 per month. The Company also leases
approximately 1,200 square feet of executive office space in La Jolla,
California at the rate of $1,540 per month on a month-to-month basis for use as
its principal executive offices and two small offices in Williamsville, New York
at $850 per month on a month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, and the Company is not
aware of any threatened legal proceedings to which the Company may be a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the period covered by the report. Resolutions approving the change in the
name of the Company were adopted by shareholders owning in excess of 58% of the
outstanding voting stock in February 2000.
8
<PAGE>
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 traded on the Over-the-Counter Bulletin Board
("OTCBB"). The Company's trading symbol is "AEMD." The Company's Common Stock
has had a limited trading history, and trading has been limited and sporadic.
The following table sets forth for the period indicated the high and low
bid 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 BID LOW BID
2000
1st Quarter $9.00 $7.00
1999
4th Quarter $8.75 $7.03
3rd Quarter $8.75 $7.00
2nd Quarter $8.50 $7.75
1st Quarter $8.50 $8.00
1998
4th Quarter $9.50 $7.50
3rd Quarter $9.50 $5.50
2nd Quarter $9.50 $5.50
1st Quarter $10.50 $5.50
1997
4th Quarter $10.50 $5.50
3rd Quarter $10.50 $5.50
2nd Quarter $10.50 $5.50
There are approximately 60 record holders of the Company's Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Financial Statements and Notes thereto appearing elsewhere in this report.
The Company is in the initial stages of its operations and has not yet
engaged in significant commercial activities. During the fiscal 2001, the
Company plans to continue its research and development activities relating to
the Hemopurifier, and commence clinical trials for the device to remove iron
from the blood. See Item 1, "Business."
The implementation of the Company's business plan is dependent upon its
ability to raise equity capital. During the fiscal year ended March 31, 2000,
the Company financed its research and development activities through the private
placement of approximately $1,000,000 principal amount of 12-month notes bearing
interest at 12% per annum. The Company has entered into an agreement with an
investment banking firm under which the firm will use its best efforts to sell
$10 million of the Company's Common Stock in a private placement anticipated to
commence in June 2000. The Company believes that the successful completion of
the stock offering will satisfy the Company's anticipated capital requirements
related to the development of its business for three years; however, additional
financing may be required in the case of further acquisitions or to successfully
develop other technologies. At the present time, the Company has no plans to
purchase significant amounts of equipment or hire significant numbers of
additional employees prior to the successful completion of the private placement
of its Common Stock.
9
<PAGE>
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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the two most recent fiscal years of the registrant, there were no
disagreements with the principal accountant on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure.
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 June 15, 2000 are listed below:
<TABLE>
<CAPTION>
NAMES TITLE OR POSITION AGE
----- ----------------- ---
<S> <C> <C>
James A. Joyce Chairman, Secretary, and Director 38
Franklyn S. Barry, Jr. President/Chief Executive Officer 60
and Director
John M. Murray Vice President-Finance and Chief 66
Financial Officer
Richard H. Tullis, PhD Vice President-Business Development 55
and Director
Clara M. Ambrus, MD, PhD, Chief Scientific Officer 75
FACP and Director
Edward G. Broenniman Director 63
Robert J. Lambrix Director 60
John P. Penhune, PhD Director 64
</TABLE>
10
<PAGE>
Resumes of Management follow:
JAMES A. JOYCE
Mr. Joyce, the founder of Aethlon, Inc., became a director of the Company
on March 10, 1999. Since 1993, Mr. Joyce has served as the Chief Executive
Officer of James Joyce & Associates, a management consulting and investment
banking organization that specializes in the structure and placement of private
and public equity offerings. Most recently, he advised in the structure and
placement of over $20 million in private equity on behalf of a publicly-traded
computer distribution company, and served as a board member and advisor in the
initial public offering of a biomedical company. Previously, Mr. Joyce was Chief
Executive Officer of Mission Labs, Inc. and a principal in charge of U.S.
operations for London Zurich Securities, Ltd.
FRANKLYN S. BARRY, JR
Mr. Barry has over 25 years of experience in managing and building
companies. He has been the President and Chief Executive Officer of Hemex since
April 1997, and 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.
JOHN M. MURRAY
Mr. Murray joined the Company in September 1999. From 1988 until his
retirement in 1998 Mr. Murray was Vice President-Finance and Treasurer of
American Precision Industries Inc., a multi-national manufacturer of industrial
motion control and heat transfer products listed on The New York Stock Exchange.
RICHARD H. TULLIS, PHD
Dr. Tullis has extensive biotechnology management and research experience.
In 1996 he founded Syngen Research to pursue research in the fluorescent
detection of DNA hybridization reactions. Syngen was acquired by the Company in
January 2000, and he was elected a director of the Company at that time. During
the past five years, Dr. Tullis also served as Chief Executive Officer of DNA
Sciences, Inc. and Genetic Vectors, Inc.
CLARA M. AMBRUS, MD, PHD, FACP
Dr. Ambrus invented the Hemopurifier cartridge and is the founder of Hemex,
Inc. which was acquired by the Company in March 1999. She was elected a director
of the Company on July 14, 1999. She is a Research Professor at the State
University of New York at Buffalo in both the School of Medicine and the School
of Pharmacology.
EDWARD G. BROENNIMAN
Mr. Broenniman became a member of the Board of Directors 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,
the Dingman Center for Entrepreneurship's Board of Advisors at the University of
Maryland, and the Board of the Association for Corporate Growth.
ROBERT J. LAMBRIX
Mr. Lambrix was elected a director of the Company on July 14, 1999. Since
April 2000, Mr. Lambrix has been the Chief Executive Officer of U.S. Medical,
Inc., a distributor of new and used medical equipment. From January 1997 to
March 2000 he was a management consultant, and in 1996 he was Chief Financial
Officer of Senior Campus Living. From March 1994 to May 1995, Mr. Lambrix was a
principal with Kotter Associates. He is the former Senior Vice President and
Chief Financial Officer of Baxter International, Inc., a global leader in the
development, manufacture, and distribution of medical devices and hospital
supplies.
JOHN P. PENHUNE, PHD
Dr. Penhune was a founder, President, and Chairman of the Board of Cell
Activation, Inc. prior to its acquisition by the Company in April 2000, and he
was elected a director of the Company at that time In addition, he is Senior
Vice President of Research at Science Applications International Corporation
(SAIC), a Fortune 500 company with annual sales exceeding $5 billion.
11
<PAGE>
Each of the directors is serving 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. Broenniman, Lambrix, and Penhune serve. Mr. Lambrix is Chairman of the
Audit Committee, and Mr. Broenniman is Chairman of the Compensation Committee.
Mr. Broenniman is the son-in-law of Dr. Ambrus.
ITEM 10. EXECUTIVE COMPENSATION
During the fiscal year ended March 31, 2000, Mr. Joyce and Mr. Barry each
earned a salary of $120,000 of which $90,000 has been paid and $30,000 is unpaid
and deferred. No other officer of the Company received compensation in excess of
$100,000 for the fiscal year.
In April 1999, the Company entered into two-year employment agreements with
Mr. Joyce and Mr. Barry. Each agreement provides for base compensation of
$120,000 per year. The agreements also provide that the employees are eligible
to receive the Company's standard benefits package and participation in an
incentive compensation program to be developed and approved by the Board of
Directors.
No compensation was paid to the directors of the Company during the
fiscal year ended March 31, 2000. At a meeting held on May 31, 2000, the
Board of Directors approved a fee arrangement for non-employee directors,
effective with the May 31, 2000 meeting. An annual retainer will consist of a
stock option for 2,000 shares of Company stock with an exercise price equal
to 75% of the average closing price of the stock for the 30 days prior to
issuance. A cash fee of $1,000 for each day or partial day spent attending
board and committee meetings will be paid. The cash fee for telephonic
attendance will be $500. In addition, for each board and committee meeting
attended in person or by phone, the director will receive an option to
acquire 100 shares of Company stock with an exercise price equal to 75% of
the average closing price of the stock for the 30 days prior to the meeting
date. All out-of-pocket expenses incurred to attend meetings will be
reimbursed by the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the Company's
officers, directors, and persons who own more than five percent of the Company's
common stock as of June 15, 2000.
<TABLE>
<CAPTION>
Percent
Number of
Name Title of Shares Class (1)
---- ----- ----------- ---------
<S> <C> <C> <C>
James A. Joyce Chairman, Secretary, 675,500 24.4%
and Director
Clara M. Ambrus Chief Scientific Officer and 450,279 16.2%
Director
Deborah Salerno Shareholder 425,000 15.3%
Edward G. Broenniman Director 255,874 (2) 9.2%
All directors and executive 1,484,789 53.6%
officers of Company as a group
(5 persons)
</TABLE>
----------------
(1) Based on 2,771,652 shares outstanding.
(2) Includes 201,989 shares owned of record by Linda Broenniman, Mr.
Broenniman's wife.
The table above does not include 412,500 shares issuable to Mr. Barry upon
the exercise of a stock option granted to him which first becomes exercisable on
September 11, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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:
3.1 Articles of Incorporation and Bylaws of the Company (1)
12
<PAGE>
3.2 Certificate of Amendment of Articles of Incorporation dated March 28, 2000,
filed herewith
10.1 Employment Agreement between the Company and Franklyn S. Barry, Jr. dated
April 1, 1999 (2)
10.2 Employment Agreement between the Company and James A. Joyce dated April 1,
1999 (2)
10.3 Agreement and Plan of Reorganization Between the Company and Aethlon, Inc.
dated March 10, 1999 (3)
10.4 Agreement and Plan of Reorganization Between the Company and Hemex, Inc.
dated March 10, 1999 (3)
10.5 Agreement and Plan of Reorganization Between the Company and Syngen
Research, Inc. (4)
10.6 Agreement and Plan of Reorganization Between the Company and Cell
Activation, Inc. (5)
21 List of subsidiaries
------------------------------
(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, 1999.
(3) Filed with the Company's Current Report on Form 8-K dated March 10, 1999.
(4) Filed with the Company's Current Report on Form 8-K dated January 10, 2000.
(5) 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.
13
<PAGE>
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 26th day of June 2000.
By: /s/ Franklyn S. Barry, Jr.
-----------------------------------
Franklyn S. Barry, Jr., Chief
Executive Officer
By: /s/ John M. Murray
-----------------------------------
John M. Murray, 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 June 26, 2000
---------------------------
James A. Joyce
/s/ Clara M. Ambrus Director June 26, 2000
---------------------------
Clara M. Ambrus
/s/ Franklyn S. Barry, Jr. Director June 26, 2000
---------------------------
Franklyn S. Barry, Jr.
/s/ Edward G. Broenniman Director June 26, 2000
---------------------------
Edward G. Broenniman
/s/ Robert J. Lambrix Director June 26, 2000
---------------------------
Robert J. Lambrix
/s/ John P. Penhune Director June 26, 2000
---------------------------
John P. Penhune
/s/ Richard H. Tullis Director June 26, 2000
---------------------------
Richard H. Tullis
14
<PAGE>
AETHLON MEDICAL, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
March 31, 2000
Pages
Independent Auditor's Report F-1
Consolidated financial statements:
Statements of Operations F-2
Balance Sheets F-3
Statements of Cash Flows F-4
Statements of Stockholders' Deficiency F-5
Notes to the Financial Statements F-6 - F-13
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Aethlon Medical, Inc. and Subsidiaries
Buffalo, New York
We have audited the accompanying consolidated balance sheets of Aethlon
Medical, Inc. (formerly Bishop Equities, Inc.) and Subsidiaries (A Development
Stage Enterprise) as of March 31, 2000 and 1999, and the related consolidated
statements of operations, stockholders' deficiency, and cash flows for the years
then ended and for the period from January 31, 1984 (inception) to March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall 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 (A Development Stage Enterprise) as of March 31,
2000 and 1999, and the results of its operations and its cash flows for the
years then ended and from January 31, 1984 (inception) to March 31, 2000 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
2 to the financial statements, the Company has suffered recurring losses from
operations and its total liabilities exceed its assets. This raises substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
FREED MAXICK SACHS & MURPHY, P.C.
Buffalo, New York
June 21, 2000
F-1
<PAGE>
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
Cumulative
during
development
stage through
2000 1999 March 31, 2000
<S> <C> <C> <C>
REVENUE
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
Other income 20,559 -- 37,784
Interest income -- -- 17,415
----------- ----------- -----------
Total revenue 20,559 -- 1,588,767
EXPENSES
Personnel costs 457,629 221,779 3,305,125
Interest and debt expense 425,085 13,823 515,846
Professional fees 254,258 45,887 571,238
Rent and office expense 76,027 38,144 491,714
Insurance 33,175 (2,347) 90,486
Travel and meetings 26,738 5,325 144,155
Depreciation 11,098 16,287 134,918
Amortization-patents 8,172 8,171 42,899
Amortization-goodwill 12,695 -- 12,695
Laboratory supplies 2,650 180 102,383
Miscellaneous 6,627 3,131 104,930
Equipment and maintenance 623 1,674 165,322
Research and development consultation -- -- 240,463
Subcontract expense -- -- 195,964
Contractual costs -- -- 192,112
Dues and subscriptions -- -- 13,596
----------- ----------- -----------
Total expenses 1,314,777 352,054 6,323,846
----------- ----------- -----------
Loss before income tax provision (1,294,218) (352,054) (4,735,079)
Income tax provision 5,164 625 11,337
----------- ----------- -----------
NET LOSS $(1,299,382) $ (352,679) $(4,746,416)
=========== =========== ===========
PER SHARE:
Net loss $ (0.50) $ (0.23) $ (3.30)
=========== =========== ===========
Weighted average number of
common shares outstanding 2,612,292 1,506,833 1,439,595
=========== =========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE>
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
MARCH 31,
<TABLE>
<CAPTION>
2000 1999
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 217,017 $ 3,052
Accounts receivable 61,495 --
Prepaid expenses 36,940 --
Employee advances 15,800 --
----------- -----------
Total current assets 331,252 3,052
FURNITURE AND EQUIPMENT, NET 41,535 33,608
OTHER ASSETS
Patents and trademarks, net 177,065 45,413
Deferred debt expense, net 273,738 --
Goodwill, net 495,088 --
Other 1,330 --
----------- -----------
Total other assets 947,221 45,413
----------- -----------
Total assets $ 1,320,008 $ 82,073
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES
Accounts payable:
Trade $ 740,562 $ 252,178
Related parties 234,324 229,806
Notes payable, net of discount 526,708 --
Accrued liabilities 201,631 63,577
Deferred compensation 329,835 310,008
----------- -----------
Total current liabilities 2,033,060 855,569
STOCKHOLDERS' DEFICIENCY:
Common stock - $.001 par value
25,000,000 shares authorized, 2,672,500
(2,595,000 - 1999) shares issued and outstanding 2,673 2,595
Additional paid in capital - common stock 3,290,865 2,670,943
Additional paid in capital - warrants 739,826 --
Deficit accumulated during development stage (4,746,416) (3,447,034)
----------- -----------
Total stockholders' deficiency (713,052) (773,496)
----------- -----------
Total liabilities and stockholders' deficiency $ 1,320,008 $ 82,073
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
<TABLE>
<CAPTION>
Cumulative
during
development
stage through
2000 1999 March 31, 2000
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,299,382) $ (352,679) $(4,746,416)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation 11,098 16,287 134,918
Amortization 292,024 8,171 326,751
Services paid by issuance of warrants 5,000 -- 5,000
Deferred compensation forgiven -- 37,600 217,223
(Increase) decrease in assets:
Accounts receivable and advances (14,629) -- (14,629)
Prepaid expenses (36,940) -- (36,940)
Other assets (1,329) -- (1,329)
Increase (decrease) in liabilities:
Accounts payable 207,350 12,838 597,984
Accrued liabilities 138,054 77,074 268,869
Deferred compensation 19,827 77,959 329,834
----------- ----------- -----------
Net cash used by operating activities (678,927) (122,750) (2,918,735)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (13,476) -- (170,904)
Purchase of patents (39,824) -- (120,564)
Cash of acquired company 8,442 -- 8,442
----------- ----------- -----------
Net cash used by investing activities (44,858) -- (283,026)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 1,052,500 -- 1,052,500
Deferred debt costs (114,750) -- (114,750)
Loans from stockholders -- -- 370,384
Advances from affiliate -- 122,100 122,100
Proceeds from issuance of common stock -- 2,470 1,988,544
----------- ----------- -----------
Net cash provided by financing activities 937,750 124,570 3,418,778
NET INCREASE IN CASH 213,965 1,820 217,017
Cash - beginning of year 3,052 1,232 --
----------- ----------- -----------
Cash - end of year $ 217,017 $ 3,052 $ 217,017
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest $ 18,727 $ -- $ 42,307
Income taxes $ 1,350 $ 325 $ 7,162
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Loans converted to common stock of Hemex $ -- $ 435,094 $ 435,094
Net assets of entities acquired in exchange
for the issuance of common stock $ 520,000 $ 119,014 $ 639,014
Patent acquired for 12,500 shares of common stock $ 100,000 $ -- $ 100,000
Debt placement fees paid by issuance of warrants $ 246,113 $ -- $ 246,113
Allocation of note proceeds to note discount $ 734,826 $ -- $ 734,826
</TABLE>
See accompanying notes.
F-4
<PAGE>
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
<TABLE>
<CAPTION>
COMMON STOCK PAID IN
---------------------- PAID IN CAPITAL- ACCUMULATED
SHARES AMOUNT CAPITAL WARRANTS DEFICIT TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1998 1,274,000 $ 1,274 $ 1,987,270 $ -- $(3,094,355) $(1,105,811)
Conversion of loans payable -
stockholders into Hemex common
stock 76,000 76 435,018 -- -- 435,094
Issuance of common stock for
acquisition of Aethlon Medical 511,500 511 (2,437) -- -- (1,926)
Issuance of common stock for
acquisition of Aethlon 733,500 734 102,869 -- -- 103,603
Forgiven employee/stockholder
deferred compensation -- -- 217,223 -- -- 217,223
Net loss - 1999 -- -- -- -- (352,679) (352,679)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 1999, as previously
reported 2,595,000 2,595 2,739,943 -- (3,447,034) (704,496)
Prior period adjustment (Note 3) -- -- (69,000) -- -- (69,000)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 1999, as adjusted 2,595,000 2,595 2,670,943 -- (3,447,034) (773,496)
Issuance of common stock for
acquisition of Aethlon Labs 65,000 65 519,935 -- -- 520,000
Issuance of common stock for
acquisition of patent rights 12,500 13 99,987 -- -- 100,000
Warrants to acquire common stock
issued with promissory notes -- -- -- 734,826 -- 734,826
Warrants to acquire common stock
issued in exchange for services -- -- -- 5,000 -- 5,000
Net loss - 2000 -- -- -- -- (1,299,382) (1,299,382)
----------- ----------- ----------- ----------- ----------- -----------
BALANCE AT MARCH 31, 2000 2,672,500 $ 2,673 $ 3,290,865 $ 739,826 $(4,746,416) $ (713,052)
=========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Aethlon Medical, Inc. (formerly Bishop Equities, Inc.)
(Aethlon Medical) and its wholly owned subsidiaries, Hemex, Inc. (Hemex), Syngen
Research, Inc. (doing business as Aethlon Laboratories, Inc.) (Aethlon Labs),
and Aethlon, Inc. (collectively the Company). All significant intercompany
balances and transactions have been eliminated.
NATURE OF BUSINESS - Aethlon Medical, which was formerly a
non-operating public entity, is the parent company of Aethlon Inc., Aethlon
Labs, and Hemex. Hemex, incorporated on January 31, 1984 and acquired by
Aethlon Medical on March 10, 1999, is a start-up research and development
company involved in developing the HemopurifierTM which is a medical device
for removing substances from the blood. Aethlon, Inc. was incorporated on
June 24, 1998 to acquire proprietary medical device technologies with the
potential to be developed and commercialized on an international basis.
Aethlon Labs was incorporated on October 14, 1999 and acquired by Aethlon
Medical on January 10, 2000 primarily to develop the Hemopurifier for the
removal of certain viruses from the blood.
To date the Company is in the initial stage of its operations and has
not yet engaged in significant commercial activities. Marketing of the
Hemopurifier is subject to FDA approval.
ESTIMATES - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and receipts and expenditures during the reporting period. Actual
results could differ from estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of the
current assets and liabilities reported in the balance sheets approximate fair
value due to their short term maturity.
SEGMENT REPORTING - The Company is currently organized, managed and
internally reported as one segment. The segment operates entirely within the
United States.
F-6
<PAGE>
NET LOSS PER COMMON SHARE - In accordance with SFAS 128, dual
presentation of basic and diluted earnings per share is required on the face of
the statement of operations. Net loss per share is based upon the weighted
average number of common shares outstanding during the periods presented.
Outstanding stock options and warrants have not been considered common stock
equivalents because their assumed exercise would be anti-dilutive.
EQUIPMENT AND DEPRECIATION - Equipment is recorded at cost.
Depreciation has been determined using the straight-line method over the
estimated useful lives of the assets. Depreciation expense for the years ended
March 31, 2000 and 1999 was $11,098 and $16,287, respectively. Accumulated
depreciation as of March 31, 2000 and 1999 amounted to $132,771 and $123,820,
respectively.
INTANGIBLE ASSETS - Intangible assets consist of patents, goodwill, and
deferred debt expense. The Company periodically reviews the recoverability of
the carrying value of its intangible assets. In determining whether there is an
impairment, the Company compares the sum of the expected future net cash flows
(undiscounted and without interest charges) to the carrying amount of the asset.
In addition, the Company will consider other significant events or changes in
the economic and competitive environments that may indicate that the remaining
estimated useful lives of its intangibles may warrant revision. At March 31,
2000, the Company believed that no impairment of intangibles existed.
PATENTS AND AMORTIZATION - Three patents were acquired during the year
ended December 31, 1994 from a stockholder in exchange for a note payable in the
amount of $80,140 which has since been repaid. These patents are being amortized
on the straight-line method over their remaining lives which expire between the
years 2003 through 2005. Amortization for each of the years ended March 31, 2000
and 1999 was $8,171. Accumulated amortization as of March 31, 2000 and 1999
amounted to $42,899 and $34,727, respectively. During the year ended March 31,
2000, the Company capitalized costs relative to seven patent applications and
three trademarks totaling $139,824. The Company will amortize these costs over
the lives of the patents and trademarks beginning with date of issuance.
GOODWILL - Goodwill relates to the acquisition of Syngen Research, Inc.
on January 10, 2000. Goodwill is being amortized over ten years, and
amortization in the year ended March 31, 2000 amounted to $12,695.
DEFERRED DEBT EXPENSE - The cash fees paid and warrants granted to
private placement firms in connection with promissory notes issued during the
current year are being amortized on a straight-line basis over the one-year
term of the related notes. Amortization expense for the year ended March 31,
2000 was $87,124.
RESEARCH, DEVELOPMENTAL AND ORGANIZATIONAL COSTS - Research,
developmental and organizational costs are expensed as incurred.
F-7
<PAGE>
INCOME TAXES - Income taxes are computed in accordance with Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes.
Deferred taxes are provided on temporary differences arising from assets and
liabilities whose bases are different for financial reporting and income tax
purposes. Differences in basis for which deferred taxes are provided relate
primarily to costs associated with research and development.
NOTE 2. - FINANCIAL CONDITION
On March 10, 1999, Aethlon Medical acquired the outstanding stock of
two privately held Development Stage Enterprises, Hemex and Aethlon, Inc., in
order to pursue its commitment to become a significant developer and
manufacturer of medical device technologies (see Note 3). Hemex has developed a
proprietary and patented technology for the extracorporeal removal of toxic
materials from the blood, and has completed its first clinical trial of one
application of this technology. Aethlon, Inc. was formed as a medical device
acquisition company, whose mission will now be carried forward by Aethlon
Medical.
During fiscal year 2000, the Company consummated the acquisition of an
invention and related patents and also acquired all of the common stock of
Syngen Research, Inc. (see Note 3). These acquisitions were accomplished through
the issuance of shares of the common stock of the Company.
Management intends to seek other acquisitions in related medical device
technologies while in the near term concentrating on the commercialization of
the Hemex Hemopurifier(TM) product line.
The implementation of the Company's business plan is dependent upon its
ability to raise equity capital. During the fiscal year ended March 31, 2000,
the Company financed its research and development activities through the private
placement of $1,052,500 principal amount of 12-month notes bearing interest at
12 % per annum. In March 2000, the Company entered into an agreement with an
investment banking firm under which the firm will use its best efforts to
complete the private placement of the Company's common stock in the amount of
$10 million. Management believes that the financing provided by this stock
offering, should it be completed, will be sufficient to meet the Company's cash
needs, including the commercialization of the HemopurifierTM products, for at
least three years. Additional financing may be required in the case of further
acquisitions.
Management has several strategies for the conservation of capital while
it is a Development Stage Enterprise. Management will invest principally in
research and product development, and to a lesser extent in marketing, planning
and development. Strategic partnerships and subcontracting relationships are
planned for direct sales, distribution and manufacturing activities related to
the Hemex product line. Careful management of general and administrative
expenses, including the use of part-time experts in specific functions, will
minimize "burn rate" during the pre-revenue phase.
F-8
<PAGE>
The Company has sustained substantial operating losses in recent years,
and expects to do so for the next two fiscal years. Also, its current
liabilities exceed its current assets by $1,701,808 at March 31, 2000.
Management believes that the actions described above will provide the basis for
the Company to make the transition from a Development Stage Enterprise to
commercial operations. However, there is no assurance that the Company's present
plans will be successful.
NOTE 3. - CAPITAL TRANSACTIONS
In February 1999, Aethlon Medical (a non-operating public entity)
entered into a merger agreement with Hemex and Aethlon, Inc. whereby Aethlon
Medical issued 1,350,000 and 733,500 shares of its common stock to Hemex and
Aethlon, Inc., respectively, in exchange for 100% of their outstanding shares.
Hemex and Aethlon, Inc. survived as the operating entities and wholly-owned
subsidiaries of Aethlon Medical.
During the fiscal year ended March 31, 2000, the Company corrected
the accounting for the acquisition of Aethlon, Inc. to reflect an additional
liability in the amount of $69,000 which should have been recorded at the
date of acquisition. This correction has been treated as a prior period
adjustment, which results in a corresponding adjustment to paid in capital as
of March 31, 1999.
As a result of the merger, the Hemex shareholders became the majority
owners of the Company and have effective operating control. Accordingly, the
transaction was accounted for as a reverse acquisition whereby Hemex was deemed
to be the accounting acquirer of Aethlon Medical and Aethlon, Inc. through the
issuance of stock for their net monetary assets, followed by a recapitalization.
The assets and liabilities of Aethlon Medical and Aethlon, Inc. have been
recorded at their historical cost, which approximated their fair market value.
The results of operations include those of Aethlon Medical and Aethlon, Inc.
since the date of acquisition. Hemex has changed its fiscal year end from
December 31 to that of Aethlon Medical, with Aethlon, Inc. also adopting the
same fiscal year.
On January 10, 2000, the Company acquired from Richard H. Tullis, PhD
all the outstanding common stock of Syngen Research, Inc. in exchange for 65,000
share of the Company's common stock. Syngen Research, Inc. (d/b/a Aethlon
Laboratories, Inc.) became a wholly-owned subsidiary of the Company and will
engage primarily in the development of the virus removing device under the
direction of Dr. Tullis. The acquisition was accounted for using the purchase
method of accounting, and the results of operations of Aethlon Labs have been
included in the accompanying consolidated financial statements from the date
of acquisition.
The following is a proforma summary of the results of operations had
Aethlon Medical, Aethlon, Inc. and Hemex been combined as of April 1, 1998 and
had Aethlon Labs been acquired as of April 1, 1998:
<TABLE>
<CAPTION>
Year ended March 31 2000 1999
---- ----
<S> <C> <C>
Net loss $(1,311,975) $ (497,728)
=========== =============
Net loss per share $ (.49) $ (.20)
=========== =============
</TABLE>
F-9
<PAGE>
NOTE 4. - LEASES
The Company rents laboratory space in San Diego, California and
Amherst, New York and office space in La Jolla, California and Williamsville,
New York on a month-to- month basis. Total rent expense for the years ended
March 31, 2000 and 1999 was $55,183 and $32,429, respectively.
NOTE 5. - DEFERRED COMPENSATION
The Company has accrued but unpaid compensation obligations (deferred
compensation) with two of its present officers/stockholders and two stockholders
who are former officers. The Company has entered into an agreement with the
individuals, the terms of which require the Company to compensate the
individuals the amount owed as soon as the Company has funds available. To
facilitate the capital transaction described in Note 3, the employees have
agreed to accept a discounted amount as full payment of the deferred
compensation. As a result, the deferred compensation liability presented in the
accompanying financial statements has been discounted by 40 percent, reflecting
the amount of funds management estimates will be available from a proposed
private placement (see Note 2) to satisfy the payment of the deferred
compensation. The amounts discounted and forgiven by the employee/stockholders
in the amount of $217,223 was recorded as an increase in additional paid in
capital at March 31, 1999.
NOTE 6. - NOTES PAYABLE
During the year ended March 31, 2000, the Company entered into
arrangements for the issuance of up to $1,350,000 of private placement debt in
units of $25,000. The notes bear interest at 12% per annum and mature one year
from the date of issuance. Detachable warrants to purchase 12,500 shares of the
Company's common stock at a price of $5 per share for a five-year term were
issued with each unit. The warrants may be called by the Company upon meeting
certain per share market price goals. At March 31, 2000, notes aggregating
$1,017,500 had been issued under this program, and there were noteholder
warrants outstanding for 508,750 shares of stock.
The Company has allocated the proceeds from the private placement debt
to the warrants and notes on a pro-rata basis based upon the estimated fair
value of each financial instrument separately. Accordingly, $734,826 of the note
proceeds was allocated to the noteholder warrants. This amount is reflected as a
note discount, which is netted against the note payable balance in the
accompanying balance sheet and is also included as additional paid in capital -
warrants. The note discount is being amortized as additional interest expense
over the one-year term of the notes. Amortization in the year ended March 31,
2000 totaled $184,034, and the remaining unamortized note discount at March 31,
2000 was $550,792.
F-10
<PAGE>
The Company incurred cash fees of $114,750 and agreed to grant warrants
for 50,875 shares of common stock, valued at $246,113, in connection with this
private placement of debt which are being amortized over the one-year term of
the notes. These warrants will have the same terms as the warrants granted to
noteholders. Pending issuance of the warrants, the value of these warrants is
reflected in accounts payable at March 31, 2000. Amortization for the placement
fees during the year ended March 31, 2000 amounted to $87,124. In addition, the
Company has agreed to pay additional placement fees equal to 10% of the proceeds
from the exercise of warrants by noteholders at such time as noteholder warrants
are exercised.
In connection with certain 10% demand notes, in the amount of $64,500,
issued and repaid during the current fiscal year, the Company has agreed to
issue 14,250 shares of the Company's common stock as additional compensation to
the lender. Pending issuance of these shares, the Company's obligation for this
additional compensation, in the amount of $114,125, is included in accounts
payable.
Outstanding notes payable at March 31, 2000 were as follows:
<TABLE>
<S> <C>
Private placement notes, net of discount $466,708
Stockholder notes - 12% 35,000
Related party note 25,000
--------
Total $526,708
</TABLE>
NOTE 7. - INCOME TAXES
The Company has elected under Internal Revenue Code, Section 174, to
capitalize for income tax purposes all research and development expenditures
incurred in conjunction with its product development process. Net costs
associated with the research and development process amount to approximately
$4,430,000 at March 31, 2000. When the Company realizes benefits from such
expenditures, the costs will be amortized over a period of 60 months. The
related deferred tax asset at March 31, 2000 was approximately $1,019,000 and at
March 31,1999 it was approximately $742,000.
A valuation allowance has been provided for 100 percent of the deferred
tax asset as realization of the asset is contingent upon Food and Drug
Administration approval of the Hemopurifier and the Company generating
sufficient taxable income to offset the research and development amortization
expenses.
NOTE 8. - RELATED PARTY TRANSACTIONS
In addition to the stockholder loans payable, the officers of the
Company and other related entities have paid expenses on behalf of the Company.
The officers also have advanced the Company funds to cover short-term working
capital shortages. These non interest-bearing amounts have been included as
accounts payable - related parties in the accompanying financial statements.
F-11
<PAGE>
NOTE 9 - OPTIONS AND WARRANTS
In addition to the warrants for 508,750 shares of common stock issued
to noteholders (see Note 6), the Company has issued warrants for 3,750 shares
exercisable at $6 per share and has agreed to issue warrants for 15,000 shares
exercisable at $3 per share to certain parties in exchange for services
rendered. The value for these warrants is based on the estimated fair value of
the services rendered in the amount of $35,000.
In connection with the merger agreement among Aethlon Medical, Aethlon,
Inc., and Hemex, a commitment was made to grant an option to the Company's Chief
Executive Officer for 412,500 shares of common stock at $3 per share, the fair
market value on the date of that commitment. This grant was formalized in a
Stock Option Agreement dated April 1, 1999 which permits the option to be
exercised between September 10, 2000 and September 11, 2005.
The Company applies APB Opinion No. 25 in accounting for stock options.
Accordingly, no compensation expense has been charged to earnings for the option
referred to above since such option has an exercise price equal to 100% of
market value on the date of grant. Had the Company adopted the provisions of
FASB Statement No. 123, compensation expense for this option would have
increased the Company's net loss for the fiscal year ended March 31, 2000 from
$1,299,382 to $1,602,677, and the loss per share for this period would have
increased from $.50 to $.61.
The fair value of the option was estimated using the Black-Scholes
option pricing model using a risk-free interest rate of 5.51%, an expected term
of 7.1 years, and an annual standard deviation (volatility) of 15%. The
resultant fair value of this option is $1.06 per share.
NOTE 10 - SUBSEQUENT EVENT
On April 6, 2000, the Company acquired all the outstanding common stock
of Cell Activation, Inc. ("Cell") in exchange for 99,152 shares of common stock
of the Company. In addition, all the outstanding stock options of Cell were
exchanged for options to purchase 50,148 shares of common stock of the Company
at $.3933 per share. Following the transaction, Cell became a wholly-owned
subsidiary of the Company and will operate as part of Aethlon Labs. The
acquisition will be accounted for using the purchase method of accounting.
F-12
<PAGE>
NOTE 11 - FOURTH QUARTER ADJUSTMENTS
During the year ended March 31, 2000, the Company recognized an
adjustment in the fourth quarter relating to the issuance of detachable
warrants in connection with a private placement debt offering which took
place throughout the year. The value allocated to these warrants was
subsequently determined and recorded as a note discount and additional paid
in capital (See Note 6). The portion of the $734,826 discount that relates to
the second and third quarters amounts to $86,165 and $260,021, respectively.
The amortization of the discount which would have been recorded as debt
expense in these quarters amounts to approximately $14,000 and $54,000,
respectively.
Also related to this offering, the Company granted warrants to
purchase 50,875 shares of the Company's common stock as debt replacement
fees. The value allocated to these warrants was subsequently determined and
recorded (See Note 6). The portion of the $246,113 in deferred debt cost that
relates to the second and third quarters amounts to $25,113 and $76,981,
respectively. The amortization of the deferred debt costs which would have
been recorded as debt expense in the periods amounts to approximately $4,000
and $16,000, respectively.
NOTE 12 - CONTINGENCIES
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 Hemex Hemopurifier were assigned to the
Company. In addition to certain royalty payments to be made on future sales of
the patented product, the consideration for the acquired rights included the
issuance of 12,500 shares of the Company's common stock to the inventors on
March 23, 2000. Upon the issuance of the first US letters 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, then the number of
shares to be issued will be that number which equates to $100,000.
F-13
