As filed with the Securities and Exchange
Commission on April 17, 2015
Registration No. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933
AETHLON MEDICAL, INC. |
(Exact name of registrant as specified in its charter) |
|
Nevada |
(State or other jurisdiction of incorporation or organization) |
|
3826 |
(Primary Standard Industrial Classification Code Number) |
|
13-3632859 |
(I.R.S. Employer Identification Number) |
|
9635 Granite Ridge Drive, Suite 100
San Diego, California 92123
(858) 459-7800 |
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) |
|
James A. Joyce
9635 Granite Ridge Drive, Suite 100
San Diego, California 92123
(858) 459-7800 |
(Name, address, including zip code,
and telephone number, including area code, of agent for service) |
|
With copies of all correspondence to: |
|
Jennifer A. Post, Esq.
Raines Feldman LLP
9720 Wilshire Boulevard, Fifth Floor
Beverly Hills, California 90212
(310) 440-4100 |
John D. Hogoboom, Esq.
Lowenstein Sandler LLP
1251 Avenue of the Americas
New York, New York 10020
(973) 597-2500 |
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated
filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] |
Accelerated filer [_] |
Non-accelerated filer [_]
(Do not check if a smaller reporting company) |
Smaller reporting company [X] |
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered |
Proposed maximum aggregate offering price (1) (2) |
Amount of registration fee |
Common stock, par value $0.001 |
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Warrants to purchase shares of common stock |
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Shares of common stock issuable upon exercise of the warrants |
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Placement agent warrants |
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Shares of common stock issuable upon exercise of the placement agent warrants |
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Total |
$14,350,000 |
$1,668 |
(1) Estimated pursuant to Rule 457(o) of the Securities Act of 1933
solely for purposes of calculating the amount of the registration fee.
(2) Pursuant to Rule 416 of the Securities Act of 1933, this Registration
Statement also shall cover any additional shares of common stock that shall become issuable by reason of any stock dividend, stock
split, recapitalization, or other similar transaction by the registrant.
The registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act
of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section
8(a), may determine.
The information in this preliminary
prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are
not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS
Subject to completion, dated
___________, 2015
Aethlon Medical, Inc.
Up to ● Shares of Common Stock
Warrants to Purchase up to ● Shares
of Common Stock
We are offering up to● shares
of our common stock and warrants to purchase up to● shares of our common stock. Each share of our common stock is being sold
together with ● of a warrant. Each full warrant will be exercisable for one share of common stock at an exercise price equal
to ●% of the closing bid price of our common stock as of the close of the trading day immediately preceding the pricing of
this offering. The warrants will be immediately exercisable and will expire on the fifth anniversary of the original issuance date.
The shares of common stock and warrants are immediately separable and will be issued separately, but will be purchased together
in this offering.
Our common stock is quoted on the OTCQB Marketplace
under the symbol “AEMD.” On April ●, 2015, the closing bid price of our common stock as reported on the OTCQB
Marketplace was $● per share. We have applied to list our common stock on the NASDAQ Capital Market. We cannot assure you
that NASDAQ will approve our listing application and such approval is not a condition to this offering. There is no established
trading market for the warrants, and we do not expect an active trading market to develop. We do not intend to list the warrants
on any securities exchange or other trading market. Without an active trading market, the liquidity of the warrants will be limited.
Investing in our securities involves
risks. You should carefully read and consider the “Risk Factors” beginning on page ● of this prospectus before
investing.
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Per Share and Related Warrant |
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Total |
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Public offering price |
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$ |
● |
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$ |
● |
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Placement agent fees |
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$ |
● |
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$ |
● |
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Proceeds, before expenses, to us |
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$ |
● |
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$ |
● |
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We have engaged Roth Capital Partners,
LLC, or the placement agent, to act as our exclusive placement agent in connection with this offering. The placement agent may
engage one or more sub placement agents or selected dealers to assist with this offering. The placement agent is not purchasing
the securities offered by us, and is not required to sell any specific number or dollar amount of securities, but will assist us
in this offering on a commercially reasonable “best efforts” basis. There are no arrangements to place the funds raised
in this offering in an escrow, trust or similar account. We have agreed to (i) pay the placement agent a cash fee equal to 7% of
the gross proceeds of this offering provided by purchasers identified by the placement agent and 4% of the gross proceeds of this
offering provided by all other purchasers and (ii) issue to the placement agent or its designees “placement agent warrants”
to purchase shares of our common stock equal to 5% of the aggregate number of shares of common stock issued in this offering (excluding
shares issuable upon the exercise of warrants sold hereby) to purchasers identified by the placement agent and 3% of the aggregate
number of shares of common stock issued in this offering (excluding shares issuable upon the exercise of warrants sold hereby)
to all other purchasers. The placement agent warrants will have substantially the same terms as the warrants offered hereby, except
that the placement agent warrants will (i) be exercisable on a “cashless” basis, (ii) expire on the fifth anniversary
of the effectiveness of the registration statement of which this prospectus forms a part and (iii) comply with the requirements
of Rule 5110(g)(1) of the Financial Institutions Regulatory Authority, Inc., or FINRA. We also have agreed to reimburse the placement
agent for its reasonable out-of-pocket expenses up to $75,000. We estimate that the total expenses of this offering, excluding
the placement agent fees, will be approximately $●. Because there is no minimum offering amount required as a condition to
closing in this offering, the actual public offering amount, placement agent fees, and proceeds to us, if any, are not presently
determinable and may be substantially less than the total maximum offering amounts set forth above. See “Plan of Distribution”
beginning on page ● of this prospectus for more information on this offering and the placement agent arrangements. All costs
associated with the registration will be borne by us.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy
of this prospectus. Any representation to the contrary is a criminal offense.
Delivery of the shares of our common
stock and warrants is expected to be made on or about ●, 2015.
Roth Capital Partners
The date of this prospectus is , 2015.
AETHLON MEDICAL, INC.
TABLE OF CONTENTS
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Page |
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About this Prospectus |
1 |
Prospectus Summary |
1 |
The Offering |
2 |
Risk Factors |
3 |
Special Note Regarding Forward-Looking Statements |
27 |
Use of Proceeds |
28 |
Market Price for Common Equity and Related Stockholder Matters |
28 |
Dividend Policy |
32 |
Dilution |
32 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
33 |
Business |
51 |
Directors and Executive Officers |
66 |
Executive Compensation |
70 |
Security Ownership of Certain Beneficial Owners and Management |
74 |
Certain Relationships and Related Transactions and Director Independence |
75 |
Description of Capital Stock |
76 |
Description of Securities We Are Offering |
76 |
Plan of Distribution |
78 |
Notice to Investors |
81 |
Legal Matters |
82 |
Experts |
82 |
Where You Can Find More Information |
82 |
Index to Consolidated Financial Statements |
F-1 |
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ABOUT THIS PROSPECTUS
You should rely only on the information contained
in this prospectus. We have not authorized any person to provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction
where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this
document, regardless of the time of delivery of this prospectus or the time of issuance or sale of any securities. Our business,
financial condition, results of operations and prospects may have changed since that date. You should read this prospectus in its
entirety before making an investment decision. You should also read and consider the information in the documents to which we have
referred you in the section of this prospectus entitled “Where You Can Find More Information.”
For investors outside of the United States,
neither we nor the placement agent have done anything that would permit this offering or possession or distribution of this prospectus
in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves
about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.
PROSPECTUS SUMMARY
This summary highlights certain information
about us, this offering and selected information contained elsewhere in this prospectus. This summary is not complete and does
not contain all of the information that you should consider before deciding whether to invest in our securities. You should carefully
read the entire prospectus, including the information set forth in the section entitled “Risk Factors.”
Company Overview
Our mission is to create innovative medical
devices that address unmet medical needs in cancer, infectious disease, and other life-threatening conditions. Our Aethlon ADAPT™
(Adaptive Dialysis-Like Affinity Platform Technology) system provides a platform to develop medical devices that target the selective
removal of disease-promoting particles from the circulatory system. At present, the Aethlon ADAPT product pipeline includes the
Aethlon Hemopurifier® to address infectious disease and cancer, and a medical device being developed under a 5-year contract
from the Defense Advanced Research Projects Agency, or DARPA, to reduce the incidence of sepsis in combat-injured soldiers.
In June 2013, the U.S. Food and Drug Administration,
or FDA, approved an investigational device exemption that allows us to initiate human feasibility studies of our first device,
the Aethlon Hemopurifier, in the U.S. We have begun enrolling patients for the study at the DaVita Dialysis Medical Center in Houston,
Texas. In the treatment of infectious diseases, the Hemopurifier is designed for the single-use removal of viruses and shed glycoproteins
from circulation. In cancer-related therapy situations, we are exploring the potential use of the Hemopurifier to remove tumor-secreted
exosomes, which promote cancer progression. In vitro studies have demonstrated that our Hemopurifier can capture exosomes
underlying a broad-spectrum of cancer indications. To support our endeavors, we applied for and have received patent protection
for the capture of tumor-secreted exosomes.
Under our approved feasibility study protocol,
we will study ten end-stage renal disease patients who are infected with the Hepatitis C virus to demonstrate the safety of Hemopurifier
therapy. Assuming successful completion of this study, we will be able to initiate further stage studies required for market clearance
to treat Hepatitis C and other viral pathogens.
On September 30, 2011, we entered into a $6.8
million multi-year contract with DARPA. Under this contract, our tasks include the development of a dialysis-like device to prevent
sepsis, a fatal bloodstream infection that is often the cause of death in combat-injured soldiers.
Through our majority-owned subsidiary, Exosome
Sciences, Inc., or Exosome, we are also developing exosome-based products to diagnose and monitor neurological disorders and cancer.
Since inception, we have primarily financed
our operations through the private placement of our debt and equity securities. At December 31, 2014, we had current assets of
approximately $2,969,204, including cash on hand, and current liabilities of approximately $1,597,637. Between January 1, 2015
and March 31, 2015, we eliminated $207,245 of convertible note debt and related accrued interest from our balance sheet. We will
need to raise additional capital to fully fund the safety phase of our current U.S. clinical trial and any future clinical trials
and to continue our other research and development activities in the U.S. and abroad.
Corporate History
On March 10, 1999, Aethlon, Inc., a California
corporation, Hemex, Inc., a Delaware corporation and the accounting predecessor to Aethlon, Inc., and Bishop, Inc., a publicly
traded company, completed an Agreement and Plan of Reorganization structured to result in Bishop, Inc.'s acquisition of all of
the outstanding common shares of Aethlon, Inc. and Hemex, Inc. Under the plan's terms, Bishop, Inc. issued shares of its common
stock to the stockholders of Aethlon, Inc. and Hemex, Inc. such that Bishop, Inc. then owned 100% of each company. Upon completion
of the transaction, Bishop, Inc. was renamed Aethlon Medical, Inc. Our executive offices are located at 9635 Granite Ridge Drive,
Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. Our website address is www.aethlonmedical.com.
Our website and the information contained on our website are not incorporated into this prospectus or the registration statement
of which it forms a part.
THE OFFERING
Common stock offered |
Up to ● shares (assuming a combined public offering price of $● per share of our common stock and related warrant, the closing bid price of our common stock on April ●, 2015) |
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Warrants offered |
Warrants to purchase up to ● shares of our common stock (assuming a combined public offering price of $● per share of our common stock and related warrant, the closing bid price of our common stock on April ●, 2015). Each share of our common stock is being sold together with ● of a warrant. Each full warrant will be exercisable for one share of common stock at an exercise price equal to ●% of the closing bid price of our common stock as of the close of the trading day immediately preceding the pricing of this offering, will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. |
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Common stock outstanding prior to the offering (1) |
6,657,046 |
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Common stock outstanding after
the offering (1) |
● shares, or ● shares
if the warrants sold in this offering are exercised in full (assuming a combined public offering price of $● per share of
our common stock and related warrant, the closing bid price of our common stock on April ●, 2015) |
|
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Use of proceeds |
We intend to use the net proceeds
of this offering to continue clinical development of our product candidates and for working capital and other general corporate
purposes. See “Use of Proceeds” on page ● of this prospectus. |
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Risk factors |
You should read the “Risk
Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares
of our common stock. |
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Market symbol and trading |
Our common stock is quoted on
the OTCQB Marketplace under the symbol “AEMD.” We have applied to list our common stock on the NASDAQ Capital Market.
We cannot assure you that NASDAQ will approve our listing application and such approval is not a condition to this offering. There
is no established trading market for the warrants, and we do not expect an active trading market to develop. We do not intend
to list the warrants on any securities exchange or other trading market. Without an active trading market, the liquidity of the
warrants will be limited. |
_______________
(1) | | The number of shares of our common stock outstanding prior to and to be outstanding
immediately after this offering, as set forth in the above table, is based on 6,657,046 shares of our common stock outstanding
as of March 31, 2015 and excludes as of that date: |
| · | 501,690 shares of common stock issuable upon exercise of outstanding
stock options under our stock incentive plans at a weighted average exercise price of $11.00 per share; |
| · | 1,430,716 additional shares of common stock reserved for issuance
under outstanding warrants with a weighted average exercise price of $7.00 per share; |
| · | 30,857 additional shares of common stock reserved for future issuance
under our stock incentive plans; |
| · | ____________
shares of common stock issuable upon exercise of the warrants offered hereby; and |
| · | ____________
shares of common stock issuable upon exercise of warrants to be issued to the placement
agent in connection with this offering. |
Except as otherwise indicated herein, all information
in this prospectus gives effect to a one-for-50 reverse split of our authorized and outstanding common stock effected on April
14, 2015.
RISK FACTORS
An investment in our securities involves
a high degree of risk. You should carefully consider the risks described below as well as the other information in this prospectus
before deciding to invest in or maintain your investment in our company. The risks described below are not intended to be an all-inclusive
list of all of the potential risks relating to an investment in our securities. Any of the risk factors described below could significantly
and adversely affect our business, prospects, financial condition and results of operations. Additional risks and uncertainties
not currently known or that are currently considered to be immaterial may also materially and adversely affect our business. As
a result, the trading price or value of our securities could be materially adversely affected and you may lose all or part of your
investment.
Risks Relating to Our Financial Position and Need for Additional
Capital
We have incurred significant losses and expect to continue
to incur losses for the foreseeable future.
We have never been profitable. We have generated
revenues during the fiscal years ended March 31, 2013 and March 31, 2014, in the amounts of $1,230,004, and $1,623,769, respectively,
primarily from our contract with the Defense Advanced Research Projects Agency, or DARPA. During the nine month periods ended December
31, 2014 and December 31, 2013, we generated revenues in the amounts of $563,805 and $916,796, respectively, primarily from our
contract with DARPA. However, our revenues continue to be insufficient to cover our cost of operations. Future profitability,
if any, will require the successful commercialization of our Hemopurifier technology, other products that may emerge from our Aethlon
ADAPT platform or from additional government contract or grant income. We cannot assure you when or if we will be able to successfully
commercialize one or more of our products, or if commercialization is successful, whether we will ever be profitable.
We have received a qualification from our auditors regarding
our ability to continue as a going concern.
In their report accompanying our financial statements
for our fiscal year ended March 31, 2014, our independent registered public accounting firm noted, in an explanatory paragraph,
that we have a significant accumulated deficit and a working capital deficit, and that a substantial amount of additional capital
will be necessary to advance the development of our products to the point at which we may become commercially viable. Our independent
registered public accounting firm stated that those conditions raised substantial doubt about our ability to continue as a going
concern. If we are unable to continue as a going concern, we may have to liquidate our assets, and the values we receive for our
assets in liquidation or dissolution could be significantly lower than the values reflected in our financial statements. In addition,
the inclusion of an explanatory paragraph regarding substantial doubt about our ability to continue as a going concern and our
lack of cash resources may materially adversely affect our share price and our ability to raise new capital or to enter into critical
contractual relations with third parties.
Our internal control over financial reporting does not currently
meet the standards required by Section 404 of the Sarbanes-Oxley Act of 2002, and failure to achieve and maintain effective
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could result in
material misstatements of our annual or interim financial statements and have a material adverse effect on our business and share
price.
We are not currently required to make a formal
assessment of the effectiveness of our internal control over financial reporting for purposes of compliance with the Securities
and Exchange Commission’s rules that implement Section 404 of the Sarbanes-Oxley Act of 2002. We are, however, required
to comply with certain of these rules, which require management to certify financial and other information in our quarterly and
annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting.
This assessment must include the disclosure of any material weaknesses or significant deficiencies in our internal control over
financial reporting identified by our management or our independent registered public accounting firm. A material weakness is
a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility
that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that
is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial
reporting, including the audit committee of the Board of Directors.
In connection with our audits for the years
ended March 31, 2014 and 2013, and their review of our subsequent interim financial statements, our Chief Executive Officer
and Chief Financial Officer concluded that, as of the end of such periods, due to the material weaknesses in our internal controls
over financial reporting identified below, our disclosure controls and procedures are not effective in recording, processing, summarizing
and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934, or Exchange Act, and are not effective in ensuring that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
In assessing our internal controls and procedures
for fiscal 2014, our management identified a material weakness relating to a lack of sufficient segregation of duties, particularly
in cash disbursements. Specifically, this material weakness is such that the design of controls over the area of cash disbursements
relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company
assets.
Our management has also identified a material
weakness relating to a lack of sufficient personnel in the accounting function, due to our limited resources, with appropriate
skills, training and experience to perform the review processes to ensure the complete and proper application of generally accepted
accounting principles. Specifically, this material weakness led to segregation of duties issues and resulted in audit adjustments
to the annual consolidated financial statements and revisions to related disclosures.
We are in the process of developing and implementing
remediation plans to address these material weaknesses. We cannot assure you that our plans will sufficiently address the identified
deficiencies, nor can we assure you that there will not be material weaknesses or significant deficiencies in our internal controls
in the future. Additionally, in the event that our internal control over financial reporting is perceived as inadequate, or that
we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the
trading price of our common stock could decline.
We will require additional financing to sustain our operations,
and without it, we will not be able to continue operations.
We will require additional financing to complete
our planned clinical trials in the U.S., as well as fund all of our continued research and development activities for the Hemopurifier
and products on our Aethlon ADAPT platform. In addition, as we expand our activities, our overhead costs to support personnel,
laboratory materials and infrastructure will increase. Should the financing we require to sustain our working capital needs be
unavailable to us on reasonable terms, if at all, when we require it, we may be unable to support our research and U.S. Food and
Drug Administration, or FDA, clearance activities including our planned clinical trials. The failure to implement our research
and clearance activities would have a material adverse effect on our ability to commercialize our products. In addition, if we
do not raise operating capital on terms acceptable to us, we may be forced to cease operations.
We will need to raise additional funds through debt or equity
financings in the future to achieve our business objectives and to satisfy our cash obligations, which would dilute the ownership
of our existing stockholders.
We will need to raise additional funds through
debt or equity financings in order to complete our ultimate business objectives, including funding working capital to support development
and regulatory clearance of our products. We also may choose to raise additional funds in debt or equity financings if they are
available to us on reasonable terms to increase our working capital and to strengthen our financial position. Any sales of additional
equity or convertible debt securities would result in dilution of the equity interests of our existing stockholders, which could
be substantial. Also, new investors may require that we and certain of our stockholders enter into voting arrangements that give
them additional voting control or representation on our Board of Directors.
Risks Related to Our Business Operations
We face intense competition in the medical device industry.
We compete with numerous U.S. and foreign companies
in the medical device industry, and many of our competitors have greater financial, personnel and research and development resources
than we do. Our competitors are developing vaccine candidates, which could compete with the Hemopurifier medical device candidates
we are developing. Our commercial opportunities will be reduced or eliminated if our competitors develop and market products for
any of the diseases we target that:
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· |
have fewer or less severe adverse side effects; |
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· |
are more adaptable to various modes of dosing; |
|
· |
are easier to administer; or |
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· |
are less expensive than the products or product candidates we are developing. |
Even if we are successful in developing the
Hemopurifier and other Aethlon ADAPT based-products, and obtain FDA and other regulatory approvals necessary for commercializing
them, our products may not compete effectively with other successful products. Researchers are continually learning more about
diseases, which may lead to new technologies for treatment. Our competitors may succeed in developing and marketing products that
are either more effective than those that we may develop, alone or with our collaborators, or that are marketed before any products
we develop are marketed. Our competitors include fully integrated pharmaceutical companies and biotechnology companies as well
as universities and public and private research institutions. Many of the organizations competing with us have substantially greater
capital resources, larger research and development staffs and facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do. If our competitors develop more effective pharmaceutical treatments
for infectious disease or cancer, or bring those treatments to market before we can commercialize the Hemopurifier for such uses,
we may be unable to obtain any market traction for our products, or the diseases we seek to treat may be substantially addressed
by competing treatments. If we are unable to successfully compete against larger companies in the pharmaceutical industry, we may
never generate significant revenue or be profitable.
We have limited experience in identifying and working with
large scale contracts with medical device manufacturers; manufacture of our devices must comply with good manufacturing practices
in the U.S.
To achieve the levels of production necessary
to commercialize our Hemopurifier and other future Aethlon ADAPT-based products, we will need to secure large scale manufacturing
agreements with contract manufacturers which comply with good manufacturing practice standards and other standards prescribed by
various federal, state and local regulatory agencies in the U.S. and any other country of use. We have limited experience coordinating
and overseeing the manufacture of medical device products on a large scale. We cannot assure you that manufacturing and control
problems will not arise as we attempt to commercialize our products or that such manufacturing can be completed in a timely manner
or at a commercially reasonable cost. In addition, we cannot assure you that we will be able to adequately finance the manufacture
and distribution of our products on terms acceptable to us, if at all. If we cannot successfully oversee and finance the manufacture
of our products when they have obtained regulatory clearances, we may never generate revenue from product sales and we may never
be profitable.
Our Aethlon ADAPT technology may become obsolete.
Our Aethlon ADAPT products may be made unmarketable
by new scientific or technological developments where new treatment modalities are introduced that are more efficacious and/or
more economical than our Aethlon ADAPT products. The homeland security industry is growing rapidly with many competitors that are
trying to develop products or vaccines to protect against infectious disease. Any one of our competitors could develop a more effective
product which would render our technology obsolete. Further, our ability to achieve significant and sustained penetration of our
key target markets will depend upon our success in developing or acquiring technologies developed by other companies, either independently,
through joint ventures or through acquisitions. If we fail to develop or acquire, and manufacture and sell, products that satisfy
our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by quickly introducing
competitive products, then market acceptance of our products could be reduced and our business could be adversely affected. We
cannot assure you that our products will remain competitive with products based on new technologies.
Our use of hazardous materials, chemicals and viruses exposes
us to potential liabilities for which we may not have adequate insurance.
Our research and development involves the controlled
use of hazardous materials, chemicals and viruses. The primary hazardous materials include chemicals needed to construct the Hemopurifier
cartridges and the infected plasma samples used in preclinical testing of the Hemopurifier. All other chemicals are fully inventoried
and reported to the appropriate authorities, such as the fire department, who inspect the facility on a regular basis. We are subject
to federal, state, local and foreign laws governing the use, manufacture, storage, handling and disposal of such materials. Although
we believe that our safety procedures for the use, manufacture, storage, handling and disposal of such materials comply with the
standards prescribed by federal, state, local and foreign regulations, we cannot completely eliminate the risk of accidental contamination
or injury from these materials. We have had no incidents or problems involving hazardous chemicals or biological samples. In the
event of such an accident, we could be held liable for significant damages or fines.
We currently carry a limited amount of insurance
to protect us from damages arising from hazardous materials. Our product liability policy has a $3,000,000 limit of liability that
would cover certain releases of hazardous substances away from our facilities. For our facilities, our property policy provides
$25,000 in coverage for contaminant clean-up or removal and $50,000 in coverage for damages to the premises resulting from contamination.
Should we violate any regulations concerning the handling or use of hazardous materials, or should any injuries or death result
from our use or handling of hazardous materials, we could be the subject of substantial lawsuits by governmental agencies or individuals.
We may not have adequate insurance to cover all or any of such claims, if any. If we were responsible to pay significant damages
for violations or injuries, if any, we might be forced to cease operations since such payments could deplete our available resources.
Our success is dependent in part on a few key executive officers.
Our success depends to a critical extent on
the continued services of our Chief Executive Officer, James A. Joyce, our Chief Science Officer, Richard H. Tullis, and our President,
Rodney S. Kenley. If one or more of these key executive officers were to leave us, we would be forced to expend significant time
and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the
diversion of limited working capital. The unique knowledge and expertise of these individuals would be difficult to replace within
the biotechnology field. We can give you no assurances that we can find satisfactory replacements for these key executive officers
at all, or on terms that are not unduly expensive or burdensome to us. Although Mr. Joyce and Dr. Tullis have signed employment
agreements providing for their continued service to us, these agreements will not preclude them from leaving us should we be unable
to compete with offers for employment they may receive from other companies. We do not currently carry key man life insurance policies
on any of our key executive officers which would assist us in recouping our costs in the event of the loss of those officers. If
any of our key officers were to leave us, it could make it impossible, if not cause substantial delays and costs, to implement
our long term business objectives and growth.
Our inability to attract and retain qualified personnel could
impede our ability to achieve our business objectives.
We have five full-time employees consisting
of our Chief Executive Officer, our President, our Chief Science Officer, our Chief Financial Officer, and an executive assistant.
Exosome has three additional full-time employees, consisting of its Chief Science Officer, its Clinical Research Director, and
a research scientist. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
Although we believe that these employees and
consultants will be able to handle most of our additional administrative, research and development and business development in
the near term, we will nevertheless be required over the longer-term to hire highly skilled managerial, scientific and administrative
personnel to fully implement our business plan and growth strategies, including to mitigate the material weakness in our internal
controls over financial reporting described above. Due to the specialized scientific nature of our business, we are highly dependent
upon our ability to attract and retain qualified scientific, technical and managerial personnel. Competition for these individuals,
especially in San Diego, California, where many biotechnology companies are located, is intense and we may not be able to attract,
assimilate or retain additional highly qualified personnel in the future. We cannot assure you that we will be able to engage the
services of such qualified personnel at competitive prices or at all, particularly given the risks of employment attributable to
our limited financial resources and lack of an established track record. Also, if we are required to attract personnel from other
parts of the U.S. or abroad, we may have significant difficulty doing so due to the high cost of living in the Southern California
area and due to the costs incurred with transferring personnel to the area. If we cannot attract and retain qualified staff and
executives, we will be unable to develop our products and achieve regulatory clearance, and our business could fail.
We plan to grow rapidly which will strain our resources; our
inability to manage our growth could delay or derail implementation of our business objectives.
We will need to significantly expand our operations
to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships with
various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties.
This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational
and financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage,
train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain
on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees
that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements
to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels
of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and
retain our anticipated increased employee base. If we cannot manage our growth initiatives, we will be unable to commercialize
our products on a large scale in a timely manner, if at all, and our business could fail.
As a public company with limited financial resources undertaking
the launch of new medical technologies, we may have difficulty attracting and retaining executive management and directors.
The directors and management of publicly traded
corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well
as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing
additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management
are also becoming increasingly concerned with the availability of directors’ and officers’ liability insurance to pay
on a timely basis the costs incurred in defending such claims. While we currently carry directors’ and officers’ liability
insurance, such insurance is expensive and difficult to obtain. If we are unable to continue or provide directors’ and officers’
liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside
directors to serve on our Board of Directors. We may lose potential independent board members and management candidates to other
companies in the biotechnology field that have greater directors’ and officers’ liability insurance to insure them
from liability or to biotechnology companies that have revenues or have received greater funding to date which can offer greater
compensation packages. The fees of directors are also rising in response to their increased duties, obligations and liabilities.
In addition, our products could potentially be harmful to users, and we are exposed to claims of product liability including for
injury or death. We have limited insurance and may not be able to afford robust coverage even as our products are introduced into
the market. As a company with limited resources and potential exposures to management, we will have a more difficult time attracting
and retaining management and outside independent directors than a more established public or private company due to these enhanced
duties, obligations and potential liabilities.
If we fail to comply with extensive regulations of U.S. and
foreign regulatory agencies, the commercialization of our products could be delayed or prevented entirely.
Our Hemopurifier products are subject to extensive
government regulations related to development, testing, manufacturing and commercialization in the U.S. and other countries. The
determination of when and whether a product is ready for large-scale purchase and potential use will be made by the U.S. Government
through consultation with a number of governmental agencies, including the FDA, the National Institutes of Health, the Centers
for Disease Control and Prevention and the Department of Homeland Security. Our product candidates are in the pre-clinical and
clinical stages of development and have not received required regulatory approval from the FDA, or any foreign regulatory agencies,
to be commercially marketed and sold. The process of obtaining and complying with FDA and other governmental regulatory approvals
and regulations in the U.S. and in foreign countries is costly, time consuming, uncertain and subject to unanticipated delays.
Obtaining such regulatory approvals, if any, can take several years. Despite the time and expense exerted, regulatory approval
is never guaranteed. We also are subject to the following risks and obligations, among others:
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the FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied; |
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the FDA may require additional testing for safety and effectiveness; |
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the FDA may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them; |
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if regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and |
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the FDA may change their approval policies and/or adopt new regulations. |
Failure to comply with these or other regulatory
requirements of the FDA may subject us to administrative or judicially imposed sanctions, including:
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product seizure or detention; |
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total or partial suspension of productions. |
Delays in successfully completing our planned clinical trials
could jeopardize our ability to obtain regulatory approval.
Our business prospects will depend on our ability
to complete studies, clinical trials, obtain satisfactory results, obtain required regulatory approvals and successfully commercialize
our Hemopurifier product candidates. Completion of our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons, including:
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serious adverse events related to our medical device candidates; |
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unsatisfactory results of any clinical trial; |
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the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules; and |
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different interpretations of our pre-clinical and clinical data, which could initially lead to inconclusive results. |
Our development costs will increase if we have
material delays in any clinical trial or if we need to perform more or larger clinical trials than planned. If the delays are significant,
or if any of our product candidates do not prove to be safe or effective or do not receive required regulatory approvals, our financial
results and the commercial prospects for our product candidates will be harmed. Furthermore, our inability to complete our clinical
trials in a timely manner could jeopardize our ability to obtain regulatory approval.
If we or our suppliers fail to comply
with ongoing FDA or other foreign regulatory authority requirements, or if we experience unanticipated problems with our products,
these products could be subject to restrictions or withdrawal from the market.
Any product for which
we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional
activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and
other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers may be required to comply with the
FDA’s Quality System Regulation, or QSR. These FDA regulations cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with
applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by
the FDA. If we, or our manufacturers, fail to adhere to QSR requirements in the U.S., this could delay production of
our products and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive
relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition
or results of operations.
In addition, the FDA assesses compliance with the QSR through periodic announced and unannounced inspections
of manufacturing and other facilities. The failure by us or one of our suppliers to comply with applicable statutes and regulations
administered by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety
issues, could result in any of the following enforcement actions:
| · | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| · | unanticipated expenditures to address or defend such actions; |
| · | customer notifications or repair, replacement, refunds, recall, detention or seizure of our products; |
| · | operating restrictions or partial suspension or total shutdown of production; |
| · | refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products; |
| · | withdrawing 510(k) clearances or premarket approvals that have already been granted; |
| · | refusal to grant export approval for our products; or |
Any of these sanctions
could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our
key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements,
which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
If our products, or malfunction of our
products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which
can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical
device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may
have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to
death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these
events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event
involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or
agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending
ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and
may harm our reputation and financial results.
Our products may in the future be subject
to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority,
including a third-country authority, or the discovery of serious safety issues with our products, could have a significant adverse
impact on us.
The FDA and similar foreign
governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies
or defects in design or manufacture. In this case, the FDA, the authority to require a recall must be based on an FDA finding that
there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have
the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture.
Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires
that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated
or voluntary recall by us or one of our international distributors could occur as a result of an unacceptable risk to health, component
failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our
products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and
financial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet
our customers’ demands. We may also be subject to liability claims, be required to bear other costs, or take other actions
that may have a negative impact on our future sales and our ability to generate profits. Companies are required to maintain certain
records of recalls, even if they are not reportable to the FDA or another third-country competent authority. We may initiate voluntary
recalls involving our products in the future that we determine do not require notification of the FDA or another third-country
competent authority. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A
future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could
take enforcement action for failing to report the recalls when they were.
We are also required to
follow detailed recordkeeping requirements for all firm-initiated medical device corrections and removals. In addition, in
December of 2012, the FDA issued a draft guidance intended to assist the FDA and industry in distinguishing medical device
recalls from product enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of
the Federal Food, Drug, and Cosmetic Act, that change would generally constitute a medical device recall and require submission
of a recall report to the FDA.
We outsource almost all of our operational
and development activities, and if any party to which we have outsourced certain essential functions fails to perform its obligations
under agreements with us, the development and commercialization of our lead product candidate and any future product candidates
that we may develop could be delayed or terminated.
We generally rely on third-party
consultants or other vendors to manage and implement the day-to-day conduct of our operations, including conducting clinical trials
and manufacturing our current product candidates and any future product candidates that we may develop. Accordingly, we are and
will continue to be dependent on the timeliness and effectiveness of their efforts. Our dependence on third parties includes key
suppliers and third party service providers supporting the development, manufacture and regulatory approval of our products as
well as support for our information technology systems and other infrastructure. While our management team oversees these vendors,
failure of any of these third parties to meet their contractual, regulatory and other obligations or the development of factors
that materially disrupt the performance of these third parties could have a material adverse effect on our business. For example,
all of the key oversight responsibilities for the development and manufacture of our lead product candidate are conducted by our
management team but all activities are the responsibility of third party vendors.
If a clinical research
organization, or CRO, that we utilize is unable to allocate sufficient qualified personnel to our studies in a timely manner or
if the work performed by it does not fully satisfy the requirements of the FDA or other regulatory agencies, we may encounter substantial
delays and increased costs in completing our development efforts. Any manufacturer that we select may encounter difficulties in
the manufacture of new products in commercial quantities, including problems involving product yields, product stability or shelf
life, quality control, adequacy of control procedures and policies, compliance with FDA regulations and the need for further FDA
approval of any new manufacturing processes and facilities. If any of these occur, the development and commercialization of our
product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities
to continue such development and commercialization on our own. If we rely on only one source for the manufacture of the clinical
or commercial supplies of any of our product candidates or products, any production problems or supply constraints with that manufacturer
could adversely impact the development or commercialization of that product candidate or product.
If we or our contractors or service
providers fail to comply with regulatory laws and regulations, we or they could be subject to regulatory actions, which could affect
our ability to develop, market and sell our product candidates and any other or future product candidates that we may develop and
may harm our reputation.
If we or our manufacturers
or other third party contractors fail to comply with applicable federal, state or foreign laws or regulations, we could be subject
to regulatory actions, which could affect our ability to develop, market and sell our current product candidates or any future
product candidates under development successfully and could harm our reputation and lead to reduced or non-acceptance of our proposed
product candidates by the market. Even technical recommendations or evidence by the FDA through letters, site visits, and overall
recommendations to academia or biotechnology companies may make the manufacturing of a clinical product extremely labor intensive
or expensive, making the product candidate no longer viable to manufacture in a cost efficient manner. The mode of administration
may make the product candidate not commercially viable. The required testing of the product candidate may make that candidate no
longer commercially viable. The conduct of clinical trials may be critiqued by the FDA, or a clinical trial site’s Institutional
Review Board or Institutional Biosafety Committee, which may delay or make impossible clinical testing of a product candidate.
The Institutional Review Board for a clinical trial may stop a trial or deem a product candidate unsafe to continue testing. This
may have a material adverse effect on the value of the product candidate and our business prospects.
We will need to outsource and rely on
third parties for the clinical development and manufacture, sales and marketing of our current product candidates or any future
product candidates that we may develop, and our future success will be dependent on the timeliness and effectiveness of the efforts
of these third parties.
We do not have the required financial and human
resources to carry out on our own all the pre-clinical and clinical development for our current product candidates or any other
or future product candidates that we may develop, and do not have the capability and resources to manufacture, market or sell our
current product candidates or any future product candidates that we may develop. Our business model calls for the partial or full
outsourcing of the clinical and other development and manufacturing, sales and marketing of our product candidates in order to
reduce our capital and infrastructure costs as a means of potentially improving our financial position. Our success will depend
on the performance of these outsourced providers. If such providers fail to perform adequately, our development of product candidates
may be delayed and any delay in the development of our product candidates would have a material and adverse effect on our business
prospects.
We are and will be exposed to product
liability risks, and clinical and preclinical liability risks, which could place a substantial financial burden upon us should
we be sued.
Our business exposes us
to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical
devices. We cannot be sure that claims will not be asserted against us. A successful liability claim or series of claims brought
against us could have a material adverse effect on our business, financial condition and results of operations.
We cannot give assurances
that we will be able to continue to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or
that such insurance will provide adequate coverage against potential liabilities. Claims or losses in excess of any product liability
insurance coverage that we may obtain could have a material adverse effect on our business, financial condition and results of
operations.
Our Hemopurifier products may be used in connection
with medical procedures in which it is important that those products function with precision and accuracy. If our products do not
function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products from the market.
In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to function as designed,
or our products are designed inappropriately, we may be subject to lawsuits seeking significant compensatory and punitive damages.
The risk of product liability claims, product recalls and associated adverse publicity is inherent in the testing, manufacturing,
marketing and sale of medical products. We have recently obtained general clinical trial liability insurance coverage. We cannot
give assurances that our insurance coverage will to be adequate or available. We may not be able to secure product liability insurance
coverage on acceptable terms or at reasonable costs when needed. Any product recall or lawsuit seeking significant monetary damages
may have a material effect on our business and financial condition. Any liability for mandatory damages could exceed the amount
of our coverage. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit
or prevent commercialization of other future product candidates.
We have not received,
and may never receive, approval from the FDA to market a medical device in the United States.
Before
a new medical device can be marketed in the United States, it must first receive either premarket approval, or a PMA, or 510(k)
clearance from the FDA, unless an exemption exists. A PMA submission, which is a higher standard than a 501(k) clearance, is used
to demonstrate to the FDA that a new or modified device is safe and effective. The 510(k) is used to demonstrate that a device
is “substantially equivalent” to a predicate device (one that has been cleared by the FDA). We expect that any product
we seek regulatory approval for will require a PMA. The FDA approval process involves, among other things, successfully completing
clinical trials and filing for and obtaining a PMA. The PMA process requires us to prove the safety and effectiveness of our products
to the FDA’s satisfaction. This process, which includes preclinical studies and clinical trials, can take many years and
requires the expenditure of substantial resources and may include post-marketing surveillance to establish the safety and efficacy
of the product. Notwithstanding the effort and expense incurred, the process may never result in the FDA granting a PMA. Data obtained
from preclinical studies and clinical trials are subject to varying interpretations that could delay, limit or prevent regulatory
approval. Delays or rejections may also be encountered based upon changes in governmental policies for medical devices during the
period of product development. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
| · | our inability to demonstrate safety or effectiveness to the FDA’s satisfaction; |
| · | insufficient data from our preclinical studies and clinical trials to support approval; |
| · | failure of the facilities of our third-party manufacturer or suppliers to meet applicable requirements; |
| · | inadequate compliance with preclinical, clinical or other regulations; |
| · | our failure to meet the FDA’s statistical requirements for approval; and |
| · | changes in the FDA’s approval policies, or the adoption of new regulations that require additional
data or additional clinical studies. |
Modifications
to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products
cleared through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually takes from three to 12 months,
but may last longer. The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally
takes from one to three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained.
Any of our products considered to be a class III device, which are considered to pose the greatest risk and the approval of which
is governed by the strictest guidelines, will require the submission and approval of a PMA in order for us to market it in the
United States. We also may design new products in the future that could require the clearance of a 510(k).
Although we have
received approval to proceed with clinical trials in the United States under the investigational device exemption, we cannot
assure you that the current approval from the FDA to proceed will not be revoked, that the study will be successful, or that
the FDA PMA approval will eventually be obtained and not revoked. Even if we obtain approval, the FDA or other regulatory
authorities may require expensive or burdensome post-market testing or controls. Any delay in, or failure to receive or
maintain, clearance or approval for our future products could prevent us from generating revenue from these products or
achieving profitability. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory
enforcement or inquiries, or other increased scrutiny on us, could dissuade some physicians from using our products and
adversely affect our reputation and the perceived safety and efficacy of our products.
The approval requirements for medical
products used to fight bioterrorism are still evolving, and we cannot be certain any products we develop for such uses would meet
these requirements.
We are advancing
product candidates under governmental policies that regulate the development and commercialization of medical treatment
countermeasures against bioterror and pandemic threats. While we intend to pursue FDA market clearance to treat
infectious bioterror and pandemic threats, it is often not feasible to conduct human studies against these deadly high threat
pathogens. Thus, we may not be able to demonstrate the effectiveness of our treatment countermeasures through controlled
human efficacy studies. Additionally, a change in government policies could impair our ability to obtain regulatory approval
and there is no assurance that the FDA will approve any of our product candidates.
The Hemopurifier was used to treat one patient suffering from
Ebola, and we have received a supplement to our investigational device exemption to establish protocols to treat Ebola patients
in the U.S.; however you should not construe these events as demonstrating that the device is effective in treating Ebola.
In October 2014,
physicians at the Frankfurt University Hospital in Frankfurt, Germany administered Hemopurifier therapy in a 6.5-hour
treatment session to a patient infected with Ebola. This treatment was made on an emergency basis. The patient was
administered Hemopurifier therapy through special approval from The Federal Institute for Drugs and Medical Devices
(Bundesinstitut fur Arzneimittel und Medizinprodukte, BfArM), an independent federal higher authority within the portfolio of
the Federal Ministry of Health of Germany. While we believe the results of the treatment of the Ebola patient in Germany to
be positive with respect to the usage of the Hemopurifier to combat Ebola, no medical organization or regulatory
organization, inside or outside the U.S., has cleared the use of the device for Ebola treatment on a commercial basis.
In addition, although the FDA approved a supplement
to our investigational device exemption to establish a protocol for the treatment of Ebola patients in the U.S., this approval
is very limited and the results of such protocol and potential treatments, if any, cannot be predicted. The usefulness of the Hemopurifier
in treating Ebola is still unproven in any clinical or regulatory process in the U.S. or elsewhere. Even if we enroll patients
in the Ebola protocol, the results of such treatments may not demonstrate the safety and efficacy of the device, may be equivocal
or may otherwise not be sufficient to obtain approval of the Hemopurifier for any uses associated with Ebola. In addition, the
approval of the supplement to our investigational device exemption does not in any way ensure clearance or approval of the Hemopurifier
device for any purpose. In April 2015, we submitted a Humanitarian Use Devise submission to the FDA to support market clearance
of the Hemopurifier as a treatment for Ebola virus. If the application is designated by the FDA, we then may submit a Humanitarian
Device Exemption marketing application to the Center for Devices and Radiological Health for marketing review. We cannot assure
you that the Hemopurifier will be proven to be useful in the treatment of Ebola or that it will ever be approved by U.S. or foreign
regulatory agencies for such use, or if approved, successfully commercialized by us for such use. We may never commercialize the
Hemopurifier specifically for use in treating Ebola.
The results of our clinical trials may
not support our product candidate claims or may result in the discovery of adverse side effects.
Any research and
development, pre-clinical testing and clinical trial activities involving any products that we are or may develop will be
subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. In the future we
may conduct clinical trials to support approval of new products. Clinical studies must be conducted in compliance with FDA
regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to
support market clearance for these products. Even if our clinical trials are completed as planned, we cannot be certain that
their results will support our product candidate claims or that the FDA will agree with our conclusions regarding them.
Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and
we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical
trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses,
which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our
clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product
candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side
effects that are not currently part of the product candidate’s profile.
U.S. legislative or FDA regulatory reforms
may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market
and distribute our products after approval is obtained.
From time to time, legislation
is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval,
manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often
revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or
revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products.
In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect
our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance
or interpretations changed, and what the impact of such changes, if any, may be.
Lack of third-party coverage and reimbursement
for our devices could delay or limit their adoption.
In both the U.S. and international
markets, the use of medical devices is dependent in part on the availability of reimbursement from third-party payors, such as
government and private insurance plans. Healthcare providers that use medical devices generally rely on third-party payors to pay
for all or part of the costs and fees associated with the medical procedures being performed or to compensate them for their patient
care services. We cannot assure you that our future products will be considered cost-effective, that reimbursement will be available
in other sites or in other countries, including the U.S., if approved, or that reimbursement will be sufficient to allow sales
of our future products on a profitable basis. The coverage decisions of third-party payors will be significantly influenced by
the assessment of our future products by health technology assessment bodies. Such assessments are outside our control and t we
cannot assure you that such evaluations will be conducted or that they will have a favorable outcome.
If approved for use in
the U.S., we expect that any products that we develop will be purchased primarily by medical institutions, which will in turn bill
various third-party payors for the health care services provided to patients at their facility. Payors may include the Centers
for Medicare & Medicaid Services, or CMS, which administers the Medicare program and works in partnership with state governments
to administer Medicaid, other government programs and private insurance plans. The process involved in applying for coverage and
incremental reimbursement from CMS is lengthy and expensive. Further, Medicare coverage is based on our ability to demonstrate
the treatment is “reasonable and necessary” for Medicare beneficiaries. Even if products utilizing our Aethlon ADAPT™
system receive FDA and other regulatory clearance or approval, they may not be granted coverage and reimbursement by any payor,
including by CMS. For some governmental programs, such as Medicaid, coverage and reimbursement differ from state to state and some
state Medicaid programs may not pay adequate amounts for the procedure necessary to utilize products utilizing our Aethlon ADAPT™
system, or any payment at all. Moreover, many private payors use coverage decisions and payment amounts determined by CMS as guidelines
in setting their coverage and reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit
reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.
Adverse changes in reimbursement policies
and procedures by payors may impact our ability to market and sell our products.
Healthcare costs have
risen significantly over the past decade, and there have been and continue to be proposals by legislators, regulators and third-party
payors to decrease costs. Third-party payors are increasingly challenging the prices charged for medical products and services
and instituting cost containment measures to control or significantly influence the purchase of medical products and services.
For example, in the U.S.,
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively,
PPACA, among other things, reduced and/or limited Medicare reimbursement to certain providers. The Budget Control Act of 2011,
as amended by subsequent legislation, further reduces Medicare’s payments to providers by 2 percent through fiscal year 2024.
These reductions may reduce providers’ revenues or profits, which could affect their ability to purchase new technologies.
Furthermore, the healthcare industry in the U.S. has experienced a trend toward cost containment as government and private
insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers.
Legislation could be adopted in the future that limits payments for our products from governmental payors. In addition, commercial
payors such as insurance companies, could adopt similar policies that limit reimbursement for medical device manufacturers’
products. Therefore, we cannot be certain that our product or the procedures or patient care performed using our product will be
reimbursed at a cost-effective level. We face similar risks relating to adverse changes in reimbursement procedures and policies
in other countries where we may market our products. Reimbursement and healthcare payment systems vary significantly among international
markets. Our inability to obtain international reimbursement approval, or any adverse changes in the reimbursement policies of
foreign payors, could negatively affect our ability to sell our products and have a material adverse effect on our business and
financial condition.
Our financial performance may be adversely
affected by medical device tax provisions in the healthcare reform laws.
PPACA imposes, among other
things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the U.S. Under these
provisions, the Congressional Research Service predicts that the total cost to the medical device industry may be up to $20 billion
over the next decade. The Internal Revenue Service issued final regulations implementing the tax in December 2012, which requires,
among other things, bi-monthly payments and quarterly reporting. Once we market products, we will be subject to this excise tax
on our sales of certain medical devices in the United States. We anticipate that primarily all of our sales of medical devices
in the United States will be subject to this 2.3% excise tax.
Risks Related to Our Intellectual Property and Related Litigation
We rely upon licenses and patent rights
from third parties which are subject to termination or expiration.
We rely upon third party licenses and ownership
rights assigned from third parties for the development of specific uses for our Hemopurifier devices. For example, we are researching,
developing and testing cancer-related applications for our devices under patents assigned from the London Health Science Center
Research, Inc. Should any of our licenses be prematurely terminated for any reason, or if the patents and intellectual property
assigned to us or owned by such entities that we have licensed should be challenged or defeated by third parties, our research
efforts could be materially and adversely affected. We cannot assure you that any of our licenses or patents assigned to us will
continue in force for as long as we require for our research, development and testing of cancer treatments. We cannot assure you
that, should our licenses terminate, should the underlying patents and intellectual property be challenged or defeated, or should
patents and intellectual property assigned to us be challenged or defeated, suitable replacements can be obtained or developed
on terms acceptable to us, if at all. There is also the related risk that we may not be able to make the required payments under
any patent license or assignment agreement, in which case we may lose to ability to use one or more of the licensed or assigned
patents.
We could become subject to intellectual property litigation
that could be costly, result in the diversion of management’s time and efforts, require us to pay damages, prevent us from
selling our commercially available products and/or reduce the margins we may realize from our products.
The medical devices industry is characterized
by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes
a patent involves complex legal and factual issues, and the determination is often uncertain. There may be existing patents of
which we are unaware that our products under development may inadvertently infringe. The likelihood that patent infringement claims
may be brought against us increases as the number of participants in the infectious market increases and as we achieve more visibility
in the market place and introduce products to market.
Any infringement claim against us, even if without
merit, may cause us to incur substantial costs, and would place a significant strain on our financial resources, divert the attention
of management from our core business, and harm our reputation. In some cases, litigation may be threatened or brought by a patent
holding company or other adverse patent owner who has no relevant product revenues and against whom our patents may provide little
or no deterrence. If we were found to infringe any patents, we could be required to pay substantial damages, including triple damages
if an infringement is found to be willful. We also could be required to pay royalties and could be prevented from selling our products
unless we obtain a license or are able to redesign our products to avoid infringement. We may not be able to obtain a license enabling
us to sell our products on reasonable terms, or at all, and we cannot assure you that we would be able to redesign our products
in a way that would not infringe those patents. If we fail to obtain any required licenses or make any necessary changes to our
technologies or the products that incorporate them, we may be unable to commercialize one or more of our products or may have to
withdraw products from the market, all of which would have a material adverse effect on our business, financial condition and results
of operations.
If the combination of patents, trade secrets and contractual
provisions upon which we rely to protect our intellectual property is inadequate, our ability to commercialize our products successfully
will be harmed.
Our success depends significantly on our ability
to protect our proprietary rights to the technologies incorporated in our products. We currently have three issued U.S. patents
and nine pending U.S. patent applications. We also have fourteen issued foreign patents and have applied for five additional foreign
patents. Our issued patents begin to expire in 2019, with the last of these patents expiring in 2029, although terminal disclaimers,
patent term extension or patent term adjustment can shorten or lengthen the patent term. We rely on a combination of patent protection,
trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology.
However, these may not adequately protect our rights or permit us to gain or keep any competitive advantage.
The issuance of a patent is not conclusive as
to its scope, validity or enforceability. The scope, validity or enforceability of our issued patents can be challenged in litigation
or proceedings before the U.S. Patent and Trademark Office or foreign patent offices where our applications are pending. The U.S.
Patent and Trademark Office or foreign offices may deny or require significant narrowing of claims in our pending patent applications.
Patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection
or be issued in a form that is advantageous to us. Proceedings before the U.S. Patent and Trademark Office or foreign offices could
result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents.
The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S.,
if at all. Some of our patents may expire before we receive FDA approval to market our products in the U.S. or we receive approval
to market our products in a foreign country. Although we believe that certain patent applications and/or other patents issued more
recently will help protect the proprietary nature of the Hemopurifier treatment technology, we cannot assure you that this protection
will be sufficient to protect us during the development of that technology.
Our competitors may successfully challenge and
invalidate or render unenforceable our issued patents, including any patents that may issue in the future, which could prevent
or limit our ability to market our products and could limit our ability to stop competitors from marketing products that are substantially
equivalent to ours. In addition, competitors may be able to design around our patents or develop products that provide outcomes
that are comparable to our products but that are not covered by our patents.
We have also entered into confidentiality and
assignment of intellectual property agreements with all of our employees, consultants and advisors directly involved in the development
of our technology as one of the ways we seek to protect our intellectual property and other proprietary technology. However, these
agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information
in the event of unauthorized use or disclosure or other breaches of the agreements.
In the event a competitor infringes upon any
of our patents or other intellectual property rights, enforcing our rights may be difficult, time consuming and expensive, and
would divert management’s attention from managing our business. We cannot assure you that we will be successful on the merits
in any enforcement effort. In addition, we may not have sufficient resources to litigate, enforce or defend our intellectual property
rights.
We may rely on licenses for new technology,
which may affect our continued operations with respect thereto.
As we develop our technology, we may need to
license additional technologies to optimize the performance of our products. We may not be able to license these technologies on
commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed
products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies
can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon
a particular development path, which could seriously harm our business, financial position and results of our operations.
New technology may lead to our competitors developing superior
products which would reduce demand for our products.
Research into technologies similar to ours is
proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the development
of products similar to ours. These new technologies may, if successfully developed, offer significant performance or price advantages
when compared with our technologies. There is no assurance that our existing patents or our pending and proposed patent applications
will offer meaningful protection if a competitor develops a novel product based on a new technology.
If we are unable to protect our proprietary
technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact
our ability to remain in business.
Our ability to successfully commercialize our
products will depend on our ability to protect those products and our technology with domestic and foreign patents. We will also
need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable
scope of the claims of the patent. The patent positions of technology companies, including us, are uncertain and involve complex
legal and factual issues. We cannot assure you that our patents will prevent other companies from developing similar products
or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that
may prevent the sale of our products or require us to pay significant licensing fees in order to market our products.
From time to time, we may need to obtain licenses
to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are
unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may
be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or
that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore,
we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured
for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.
If we are required to engage in expensive and lengthy litigation
to enforce our intellectual property rights, such litigation could be very costly and the results of such litigation may not be
satisfactory.
Although we have entered into invention assignment
agreements with our employees and with certain advisors, and we routinely enter into confidentiality agreements with our contract
partners, if those employees, advisors or contract partners develop inventions or processes independently that may relate to products
or technology under development by us, disputes may arise about the ownership of those inventions or processes. Time-consuming
and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements. In addition,
we may be required to commence litigation to enforce such agreements if they are violated, and it is certainly possible that we
will not have adequate remedies for breaches of our confidentiality agreements as monetary damages may not be sufficient to compensate
us. In addition, we may be unable to fund the costs of such litigation to a satisfactory conclusion, which could leave us without
recourse to enforce contracts that protect our intellectual property rights.
Other companies may claim that our technology infringes on
their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive
and could result in our being prohibited from developing, marketing, selling or distributing our products.
Because of the complex and difficult legal and
factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not
be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products
or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development
or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation,
which will divert the attention of management away from the development of new products and the operation of our business. We cannot
assure investors that we would prevail in any such litigation. If we are found to have infringed on a third party’s intellectual
property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded
from manufacturing particular products or using particular technology.
Other parties may challenge certain of our foreign
patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection
afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents
in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability
to maintain patent protection for the same technology in other jurisdictions.
Risks Related to U.S. Government Contracts
Our revenues are almost entirely derived from one U.S. Government
contract.
We have derived and expect for the near future
to continue to derive substantially all of our revenue under our DARPA contract. If DARPA chooses not to continue our
contract in year five (commencing October 1, 2015 through September 30, 2016) of the contract, our revenues could be substantially
reduced. In addition, if we are unable to meet any of the DARPA contract milestones to the satisfaction of DARPA, if
at all, we may not earn payments under the contract. Any reduction in our revenues, or the termination of the DARPA contract for
any reason, could have a material and adverse effect on our business and operations. In addition, DARPA has the right to unilaterally
cancel the contract at any time.
We may not obtain additional U.S. Government contracts to
further develop our technology.
We can give no assurances that we will be successful
in obtaining additional government grants or contracts. The process of obtaining government contracts is lengthy with
the uncertainty that we will be successful in obtaining announced grants or contracts for therapeutics as a medical device technology.
Accordingly, we cannot be certain that we will be awarded any additional U.S. Government grants or contracts utilizing our Hemopurifier
platform technology.
U.S. Government agencies have special contracting requirements
including a right to audit us which create additional risks; a negative audit would be detrimental to us.
Our business plan to utilize the Aethlon ADAPT
system is likely to involve contracts with the U.S. Government. Such contracts typically contain unfavorable termination provisions
and are subject to audit and modification by the government at its sole discretion, which subjects us to additional risks. These
risks include the ability of the U.S. Government to unilaterally:
|
· |
suspend or prevent us for a period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations; |
|
· |
audit and object to our contract-related costs and fees, including allocated indirect costs; |
|
· |
control and potentially prohibit the export of our products; and |
|
· |
change certain terms and conditions in our contracts. |
As a U.S. Government contractor, we are required
to comply with applicable laws, regulations and standards relating to our accounting practices and would be subject to periodic
audits and reviews. As part of any such audit or review, the U.S. Government may review the adequacy of, and our compliance with,
our internal control systems and policies, including those relating to our purchasing, property, estimating, compensation and management
information systems. Based on the results of its audits, the U.S. Government may adjust our contract-related costs and fees, including
allocated indirect costs. In addition, if an audit or review uncovers any improper or illegal activity, we would possibly be subject
to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension
of payments, fines and suspension or prohibition from doing business with the U.S. Government. We could also suffer serious harm
to our reputation if allegations of impropriety were made against us. Although we have not had any government audits and reviews
to date, future audits and reviews could cause adverse effects. In addition, under U.S. Government purchasing regulations, some
of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs,
and some marketing expenses, would possibly not be reimbursable or allowed under such contracts. Further, as a U.S. Government
contractor, we would be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits
and other legal actions and liabilities to which purely private sector companies are not.
Our Defense Advanced Research Projects Agency Contract is
a fixed price contract, which may not adequately cover our costs in performance should those costs increase.
Our contract with DARPA is on a firm fixed price
basis, which means that we are required to deliver our products at a fixed price regardless of the actual costs we incur and to
absorb any costs in excess of the fixed price. If we have not accurately estimated the costs of expenses to perform the contract,
we may not have positive revenue and we may incur losses to cover our costs. We expect that our future contracts, if any,
with the U.S. Government also may be fixed price contracts. Estimating costs that are related to performance in accordance with
contract specifications is difficult, particularly where the period of performance is over several years. Our failure to anticipate
technical problems, estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability
of a fixed price contract or cause a loss, which could in turn harm our operating results.
As a U.S. Government contractor, we are subject to a number
of procurement rules and regulations.
Government contractors must comply with specific
procurement regulations and other requirements. These requirements, although customary in government contracts, impact our performance
and compliance costs. In addition, current U.S. Government budgetary constraints could lead to changes in the procurement environment,
including the Department of Defense’s recent initiative focused on efficiencies, affordability and cost growth and other
changes to its procurement practices. If and to the extent such changes occur, they could impact our results of operations and
liquidity, and could affect whether and, if so, how we pursue certain opportunities and the terms under which we are able to do
so.
In addition, failure to comply with these regulations
and requirements could result in reductions of the value of contracts, contract modifications or termination, and the assessment
of penalties and fines, which could negatively impact our results of operations and financial condition. Our failure to comply
with these regulations and requirements could also lead to suspension or debarment, for cause, from government contracting or subcontracting
for a period of time. Among the causes for debarment are violations of various statutes, including those related to procurement
integrity, export control, government security regulations, employment practices, protection of the environment, accuracy of records
and the recording of costs, and foreign corruption. The termination of our government contract as a result of any of these acts
could have a negative impact on our results of operations and financial condition and could have a negative impact on our reputation
and ability to procure other government contracts in the future.
In fulfilling our U.S. Government contract we depend on a
predictable supply of raw materials and components.
We are dependent upon the delivery by suppliers
of materials and the assembly by subcontractors of major components and subsystems used in our products in a timely and satisfactory
manner and in full compliance with applicable terms and conditions. Some products require relatively scarce raw materials. We are
generally subject to specific procurement requirements, which may, in effect, limit the suppliers and subcontractors we may utilize.
In some instances, we are dependent on sole-source suppliers. If any of these suppliers or subcontractors fails to meet our needs,
we may not have readily available alternatives. In addition, some of our suppliers or subcontractors may be impacted by the recent
global financial crisis, which could impair their ability to meet their obligations to us. If we experience a material supplier
or subcontractor problem, our ability to satisfactorily and timely complete our clinical trial or delivery obligations could be
negatively impacted which could result in reduced sales, termination of contracts and damage to our reputation and relationships
with clinical trial providers and if applicable, the U.S. Government. We could also incur additional costs in addressing such a
problem. Any of these events could have a negative impact on our results of operations and financial condition.
Risks Relating to Our Common Stock, this Offering and Our Corporate
Governance
Historically we have not paid dividends
on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never paid cash dividends on our common
stock. We intend to retain our future earnings, if any, to fund operational and capital expenditure needs of our business, and
we do not anticipate paying any cash dividends in the foreseeable future. Furthermore, future financing instruments may do the
same. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our common stockholders
in the foreseeable future.
Our stock price is speculative, and
there is a risk of litigation.
The trading price of
our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:
| · | revenue or results of operations in any quarter failing to meet the
expectations, published or otherwise, of the investment community; |
| · | reduced investor confidence in equity markets, due in part to corporate
collapses in recent years; |
| · | speculation in the press or analyst community; |
| · | wide fluctuations in stock prices, particularly with respect to the
stock prices for other medical device companies; |
| · | announcements of technological innovations by us or our competitors; |
| · | new products or the acquisition of significant customers by us or
our competitors; |
| · | changes in interest rates; |
| · | changes in investors’ beliefs as to the appropriate price-earnings
ratios for us and our competitors; |
| · | changes in recommendations or financial estimates by securities analysts
who track our common stock or the stock of other medical device companies; |
| · | sales of common stock by directors and executive officers; |
| · | rumors or dissemination of false or misleading information, particularly
through Internet chat rooms, instant messaging, and other rapid-dissemination methods; |
| · | conditions and trends in the medical device industry
generally; |
| · | the announcement of acquisitions or other significant transactions
by us or our competitors; |
| · | adoption of new accounting standards affecting our industry; |
| · | general market conditions; |
| · | domestic or international terrorism and other factors; and |
| · | the other factors described in this section. |
Fluctuations in the price of our common stock
may expose us to the risk of securities class action lawsuits. Although no such lawsuits are currently pending against us and we
are not aware that any such lawsuit is threatened to be filed in the future, there is no assurance that we will not be sued based
on fluctuations in the price of our common stock. Defending against such suits could result in substantial cost and divert management’s
attention and resources. In addition, any settlement or adverse determination of such lawsuits could subject us to significant
liability.
If at any time our
common stock is subject to the Securities and Exchange Commission’s penny stock rules, broker-dealers may experience difficulty
in completing customer transactions and trading activity in our securities may be adversely affected.
If at any time our common
stock is not listed on a national securities exchange, including the NASDAQ Capital Market, or we have net tangible assets of $5,000,000
or less and our common stock has a market price per share of less than $5.00, transactions in our common stock will be subject
to the Securities and Exchange Commission’s, or SEC’s, “penny stock” rules. If our common stock is subject
to the “penny stock” rules promulgated under the Exchange Act, broker-dealers may find it difficult to effectuate customer
transactions and trading activity in our securities may be adversely affected. For any transaction involving a penny stock, unless
exempt, the rules require:
| · | that a broker or dealer approve a person’s account for transactions in penny stocks; and |
| · | the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity
of the penny stock to be purchased. |
In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must:
| · | obtain financial information and investment experience objectives of the person; and |
| · | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in
highlight form:
| · | sets forth the basis on which the broker or dealer made the suitability determination; and |
| · | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute
transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose
of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks
of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
Our common stock has had an unpredictable trading volume which
means you may not be able to sell our shares at or near asking prices or at all.
Trading in our common shares in the over-the-counter
market historically has been volatile and often has been thin, meaning that the number of persons interested in purchasing our
common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to
a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or influence sales volume, and that even if we came
to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days or more when trading activity in our shares is minimal, as compared to a seasoned issuer which has
a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.
We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained,
or that current trading levels will be sustained.
The market price for our common stock is volatile; you may
not be able to sell our common stock at or above the price you have paid for them, which may result in losses to you.
The market for our common shares is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the indefinite future. In fact, during the 52-week period ended March 31, 2015, the high and
low closing sale prices of a share of our common stock were $28.50 and $5.00, respectively. The volatility in our share price is
attributable to a number of factors. First, as noted above, trading in our common shares often has been thin. As a consequence
of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence
the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event
that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which
could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative investment due to our
limited operating history, limited amount of revenue, lack of profit to date, and the uncertainty of future market acceptance for
our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market
more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add
to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results;
acceptance of our proprietary technology as a viable method of augmenting the immune response of clearing viruses and toxins from
human blood; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our capital
commitments and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the
market price of our common shares regardless of our operating performance. We cannot make any predictions or projections as to
what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain
their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time
will have on the prevailing market price.
The NASDAQ Capital Market may not list our common stock, which
could limit investors’ ability to effect transactions in our securities and subject us to additional trading restrictions.
We have applied to list our common stock on
the NASDAQ Capital Market, a national securities market. Although, after giving effect to this offering, we expect to meet, on
a pro forma basis, the NASDAQ Capital Market minimum initial listing standards, which generally mandate that we meet certain requirements
relating to shareholders’ equity, market capitalization, aggregate market value of publicly held shares, distribution
requirements and corporate governance standards, we cannot assure you that we will be able to meet those initial listing requirements.
If NASDAQ does not approve our application, our securities will continue to trade on the OTCQB and we could face significant material
adverse consequences, including:
| · | a limited availability of market quotations for our securities; |
| · | reduced liquidity with respect to our securities; |
| · | a limited amount of news and analyst coverage for our company; and |
| · | a decreased ability to issue additional securities or obtain additional
financing in the future. |
The National Securities Markets Improvement
Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which
are referred to as “covered securities.” Because we expect that our common stock and common stock issuable upon exercise
of the warrants will be listed on the NASDAQ Capital Market, we believe such securities will be covered securities. Although the
states would be preempted from regulating the sale of our securities, in that event, the federal statute does allow the states
to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can
regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed on the NASDAQ Capital
Market, our securities would not be covered securities and we would be subject to regulation in each state in which we offer our
securities.
Even if our application for listing of our common stock on
the NASDAQ Capital Market is approved, we cannot assure you that we will be able to comply with the continued listing standards
of the NASDAQ Capital Market.
Even if our application for listing of our common
stock on the NASDAQ Capital Market is approved, we cannot assure you that we will be able to comply with the listing standards
that we are required to meet in order to maintain a listing of our common stock on the NASDAQ Capital Market. Our failure to meet
those requirements may result in our common stock being delisted from the NASDAQ Capital Market.
The Depository Trust Company imposed restrictions upon electronic
trading of our common stock, which negatively affected liquidity of the stock and our ability to raise capital.
In September 2011, The Depository Trust Company
placed a "chill" on the electronic clearing of trades in our shares which led to some brokerage firms being unwilling
to accept certificates and/or electronic deposits of our stock. We have since been successful in lifting the restrictions and our
shares now clear electronically making more brokers willing to trade in our common stock. We cannot assure you that The Depository
Trust Company will not again place a chill on our common stock. A chill, if placed on our common stock, would affect the liquidity
of our shares which may make it difficult to purchase or sell shares in the open market. It may also have an adverse effect on
our ability to raise capital since investors may be unable to resell shares into the market. Our inability to raise capital on
terms acceptable to us, if at all, could have a material and adverse effect on our business and operations.
Our directors and officers own or control approximately 12%
of our outstanding common shares which may limit your ability to propose new management or influence the overall direction of the
business; this concentration of control may also discourage potential takeovers that could otherwise provide a premium to you.
As of March 31, 2015, our officers and directors
beneficially own or control approximately 12% of our outstanding common shares (assuming the exercise of all outstanding options
and warrants held by our officers and directors). These persons will have the ability to substantially influence all matters submitted
to our stockholders for approval and to control our management and affairs, including extraordinary transactions such as mergers
and other changes of corporate control, and going private transactions.
A large number of our common shares are issuable upon exercise
of outstanding convertible securities which, if exercise or converted, would be dilutive to your holdings.
As of March 31, 2015, there are outstanding
purchase options and warrants entitling the holders to purchase 1,932,405 common shares at a weighted average exercise price of
$7.92 per share. This includes 26,105 warrants that are conditional upon the exercise of other warrants or conversion of certain
convertible debt instruments. There are 98,043 shares underlying promissory notes convertible into common stock at a weighted average
exercise price of $5.60.
The exercise price for all of our outstanding
options and warrants, or the conversion price of our convertible notes, may be less than your cost to acquire our common shares.
In the event of the exercise or conversion of these securities, you could suffer substantial dilution of your investment in terms
of your percentage ownership in us as well as the book value of your common shares. In addition, the holders of the convertible
notes, common share purchase options or warrants may sell common shares in tandem with their exercise or conversion of those securities
to finance that exercise or conversion, or may resell the shares purchased in order to cover any income tax liabilities that may
arise from their exercise of the options or warrants or conversion of the notes.
Our issuance of additional common shares, or convertible securities,
would be dilutive to your holdings.
We are entitled under our Articles of Incorporation
to issue up to 10,000,000 shares of common stock. We have reserved for issuance 2,030,448 shares of common stock for existing
options, warrants and convertible notes. As of March 31, 2015, we have issued and outstanding 6,657,046 shares of common stock.
As a result, as of March 31, 2015 we had 1,312,505 common shares available for issuance to new investors or for use to satisfy
indebtedness or pay service providers. Upon the completion of the offering described in this prospectus, and assuming the offering
is fully subscribed, we would be issuing or reserving for issuance upon the exercise of the warrants offered hereby __________
shares of common stock and we would have __________ shares of common stock remaining available for future issuances.
Our Board of Directors may generally issue shares
of common stock, or options or warrants to purchase those shares, without further approval by our stockholders based upon such
factors as our Board of Directors may deem relevant at that time. It is likely that we will be required to issue a large amount
of additional securities to raise capital to further our development. It is also likely that we will be required to issue a large
amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their
services, both in the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we will not issue
additional shares of common stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate
at the time.
Our issuance of additional shares of common stock in satisfaction
of services, or to repay indebtedness, would be dilutive to your holdings.
Our Board of Directors may generally issue shares
of common stock to pay for debt or services, without further approval by our stockholders based upon such factors that our Board
of Directors may deem relevant at that time. For the past four fiscal years (ending March 31, 2014), we issued a total of 1,429,550
shares for debt to reduce our obligations. The average price discount of common stock issued for debt in this period, weighted
by the number of shares issued for debt in such period was 43% and 22.8% for the years ended March 31, 2014 and 2013, respectively.
During the period March 31, 2014 to December 31, 2014, we issued a total of 850,040 shares for debt to reduce our obligations.
The average price discount of common stock issued for debt in this period, weighted by the number of shares issued for debt in
such period was 74%.
For the past four fiscal years (ending March
31, 2014), we issued a total of 230,955 shares as payment for services. The average price discount of common stock issued for services
during this period, weighted by the number of shares issued was 16.0% and 11.8% for the years ended March 31, 2014 and 2013, respectively.
It is likely that we will issue additional securities to pay for services and reduce debt in the future. We cannot give you any
assurance that we will not issue additional shares of common stock at various discounts under circumstances we may deem appropriate
at the time.
Our officers and directors are entitled to indemnification
from us for liabilities under our articles of incorporation, which could be costly to us and may discourage the exercise of stockholder
rights.
Our Articles of Incorporation contains provisions
which eliminate the liability of our directors for monetary damages to our company and stockholders. Our by-laws also require us
to indemnify our officers and directors. We may also have contractual indemnification obligations under our agreements with our
directors, officers and employees. The foregoing indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors, officers and employees that we may be unable to
recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers
and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders
against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and
stockholders.
Our by-laws and Nevada law may discourage, delay or prevent
a change of control of our company or changes in our management, would have the result of depressing the trading price of our common
stock.
Provisions of Nevada anti-takeover law (NRS
78.378 et seq.) could have the effect of delaying or preventing a third party from acquiring us, even if the acquisition
arguably could benefit our stockholders. Various provisions of our by-laws may delay, defer or prevent a tender offer or takeover
attempt of us that a stockholder might consider in his or her best interest. Our by-laws may be adopted, amended or repealed by
the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the
election of directors, and except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal
the by-laws by a vote of not less than a majority of our directors. The interests of these stockholders and directors may not be
consistent with your interests, and they may make changes to the by-laws that are not in line with your concerns.
Our authorized but unissued shares of common
stock are available for our Board or Directors to issue without stockholder approval. We may use these additional shares for a
variety of corporate purposes, however, faced with an attempt to obtain control of us by means of a proxy context, tender offer,
merger or other transaction our Board of Directors acting alone and without approval of our stockholders can issue large amounts
of capital stock as part of a defense to a take-over challenge.
The existence of the foregoing provisions and
other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of
our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive
a premium for your common stock in an acquisition.
We incur substantial costs as a result of being a public company,
and our management expects to devote substantial time to public company compliance programs.
As a public company, we incur significant legal,
insurance, accounting and other expenses, including costs associated with public company reporting. We intend to invest resources
to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative
expenses and may divert management’s time and attention from product development and commercialization activities. If our
efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies
due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may
be harmed. These laws and regulations could make it more difficult and costly for us to obtain director and officer liability insurance
for our directors and officers, and we may be required to accept reduced coverage or incur substantially higher costs to obtain
coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified
members of our Board of Directors, particularly to serve on our audit and compensation committees. In addition, if we are unable
to continue to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain
the quotation of our common stock OTCQB Marketplace or any senior market to which we may apply for listing, which would likely
have a material adverse effect on the trading price of our common stock.
If securities or industry analysts do
not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our
stock price and trading volume could decline.
The trading market for our common stock will
be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage
by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts
who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline.
There is no minimum offering amount
required to consummate this offering.
There is no minimum offering
amount which must be raised in order for us to consummate this offering. Accordingly, the amount of money raised may not be sufficient
for us to meet our business objectives. Moreover, if only a small amount of money is raised, all or substantially all of the offering
proceeds may be applied to cover the offering expenses and we will not otherwise benefit from the offering. In addition, because
there is no minimum offering amount required, investors will not be entitled to a return of their investment if we are unable to
raise sufficient proceeds to meet our business objectives.
Management will have broad discretion
as to the use of the net proceeds from this offering, and we may not use these proceeds effectively.
We have not designated
any portion of the net proceeds from this offering to be used for any particular purposes. Our management will have broad discretion
in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results
of operations or enhance the value of our common stock. Accordingly, you will be relying on the judgment of our management with
regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess
whether the proceeds are being used appropriately. Our failure to apply these funds effectively could have a material adverse effect
on our business, delay the development of our product candidates and cause the price of our common stock to decline.
You will experience immediate and substantial
dilution in the net tangible book value per share of the common stock you purchase.
Since the public offering
price per share of our common stock and related warrant being offered is expected to be substantially higher than the net tangible
book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the common stock
you purchase in this offering. Our net tangible book value as of December 31, 2014 was approximately $● million, or $●
per share. After giving effect to the assumed sale of shares of our common stock in this offering at an assumed combined public
offering price of $● per share of common stock and related warrant (the closing bid price of our common stock on April ●,
2015), and after deducting the estimated placement agent fees and estimated offering expenses payable by us, and attributing no
value to the warrants sold in this offering, if you purchase shares of our common stock in this offering, you will suffer immediate
and substantial dilution of $● per share in the net tangible book value of the common stock you acquire. In the event that
you exercise your warrants, you will experience additional dilution to the extent that the exercise price of the warrants is higher
than the tangible book value per share of our common stock. See the section titled “Dilution” below for a more detailed
discussion of the dilution you would incur if you purchase shares of our common stock in this offering.
In addition, we have a
significant number of stock options and warrants outstanding. To the extent that outstanding stock options or warrants, including
the warrants offered in this prospectus, have been or may be exercised or other shares issued, you may experience further dilution.
Holders of our warrants will have no
rights as a common stockholder until they acquire our common stock.
Until you acquire shares
of our common stock upon exercise of your warrants, you will have no rights with respect to shares of our common stock issuable
upon exercise of your warrants. Upon exercise of your warrants, you will be entitled to exercise the rights of a common stockholder
only as to matters for which the record date occurs after the exercise date.
A large number of shares issued in this
offering may be sold in the market following this offering, which may depress the market price of our common stock.
A large number of shares issued
in this offering may be sold in the market following this offering, which may depress the market price of our common stock.
Sales of a substantial number of shares of our common stock in the public market following this offering could cause the
market price of our common stock to decline. If there are more shares of common stock offered for sale than buyers
are willing to purchase, then the market price of our common stock may decline to a market price at which buyers are willing
to purchase the offered shares of common stock and sellers remain willing to sell the shares. All of the shares of common
stock issued in the offering will be freely tradable without restriction or further registration under the Securities Act of
1933.
The warrants may not have any value.
Each warrant will have
an exercise price equal to ●% of the closing bid price of our common stock as of the close of the trading day immediately
preceding the pricing of this offering and will expire on the fifth anniversary of the date they first become exercisable. In the
event our common stock price does not exceed the exercise price of the warrants during the period when the warrants are exercisable,
the warrants may not have any value.
If our common stock is not listed on
a national securities exchange, U.S. holders of the warrants may not be able to exercise their warrants without compliance with
applicable state securities laws and the value of your warrants may be significantly reduced.
If our common stock is
not approved for listing on the NASDAQ Capital Market, or if our common stock is subsequently delisted from the NASDAQ Capital
Market and is not eligible to be listed on another national securities exchange, the exercise of the warrants by U.S. holders may
not be exempt from state securities laws. As a result, depending on the state of residence of a holder of the warrants, a U.S.
holder may not be able to exercise its warrants unless we comply with any state securities law requirements necessary to permit
such exercise or an exemption applies. Although we plan to use our reasonable efforts to assure that U.S. holders will be able
to exercise their warrants under applicable state securities laws if no exemption exists, there is no assurance that we will be
able to do so. As a result, in the event that the our common stock is not approved for listing on the NASDAQ Capital Market or
our common stock is delisted from the NASDAQ Capital Market and is not eligible to be listed on another securities exchange, your
ability to exercise your warrants may be limited. The value of the warrants may be significantly reduced if U.S. holders are not
able to exercise their warrants under applicable state securities laws.
There is no public market for the warrants
to purchase shares of our common stock being offered in this offering.
There is no established trading market for the
warrants, and we do not expect an active trading market to develop. We do not intend to list the warrants on any securities exchange
or other trading market. Without an active trading market, the liquidity of the warrants will be limited.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements
that are based on our management’s beliefs and assumptions and on information currently available to us. The forward-looking
statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”
These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties,
and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to
be materially different from any future results, levels of activity, performance or achievements expressed or implied by these
forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
| · | our ability to achieve sufficient market acceptance of any of our
products or product candidates; |
| · | our perception of the growth in the size of the potential market for
our products and product candidates; |
| · | our estimate of the advantages of our products; |
| · | our ability to become a profitable company; |
| · | our estimates regarding our needs for additional financing and our
ability to obtain such additional financing on suitable terms; |
| · | our ability to succeed in obtaining FDA clearance or approvals for
our product candidates; |
| · | the timing, costs and other limitations involved in obtaining regulatory
clearance or approval for any of our product candidates and, thereafter, continued compliance with governmental regulation of our
existing products and activities; |
| · | our ability to protect our intellectual property and operate our business
without infringing upon the intellectual property rights of others; |
| · | our ability to obtain sufficient quantities and satisfactory quality
of raw materials to meet our manufacturing needs; |
| · | our ability to secure manufacturing capacity to meet future demand;
|
| · | the timing of and our ability to conduct clinical trials; |
| · | our ability to perform under our government contracts and accurately
estimate our fixed costs under such contracts; and |
| · | our ability to attract and retain a qualified management team, research
team, scientific advisors and other qualified personnel. |
In some cases, you can identify forward-looking
statements by terms such as “may,” “could,” “will,” “should,” “would,”
“expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”
“predict,” “potential,” “project” or “continue” or the negative of these terms
or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking
statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our
control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations
include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one
or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results
may vary significantly from those implied or projected by the forward-looking statements.
Any forward-looking statement in this prospectus
reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions
relating to our operations, results of operations, industry and future growth. Except as required by law, we assume no obligation
to publicly update or revise any forward-looking statements contained in this prospectus, whether as a result of new information,
future events or otherwise. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of
1933 do not protect any forward-looking statements that we make in connection with this offering.
USE OF PROCEEDS
We estimate that the net proceeds
of this offering will be approximately $● million, assuming the sale of ● shares of our common stock and ● warrants
at a combined public offering price of $● per share of our common stock and related warrant, the closing bid price of our
common stock on April ●, 2015, after deducting estimated placement agent fees and estimated offering expenses payable by
us and assuming no exercise of the warrants offered hereby.
A $● increase (decrease) in
the assumed combined public offering price of $● per share of our common stock would increase (decrease) the expected net
cash proceeds of this offering to us by approximately $● million assuming the number of shares and warrants remains the same.
An increase (decrease) of ● in the assumed number of shares sold in this offering would increase (decrease) the expected
net cash proceeds of the offering to us by approximately $●, assuming a combined public offering price of $● per share.
We intend to use the net proceeds of this
offering to continue the clinical development of our product candidates and for working capital and other general corporate purposes.
Pending these uses, we intend to invest the net proceeds of this offering primarily in investment grade, interest-bearing instruments.
As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds we will have
upon completion of the offering. Accordingly, we will retain broad discretion over the use of these proceeds.
MARKET PRICE FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is quoted on the OTCQB Marketplace
under the trading symbol "AEMD." Trading in our common stock historically has been volatile and often has been thin.
The following table sets forth for the
calendar period indicated the quarterly high and low bid prices for our common stock as reported by the OTCQB Marketplace. The
prices represent quotations between dealers, without adjustment for retail markup, mark down or commission, and do not necessarily
represent actual transactions.
|
|
BID PRICE |
|
PERIOD |
|
HIGH |
|
|
LOW |
|
|
|
|
|
|
|
|
Calendar 2014: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
19.50 |
|
|
$ |
8.50 |
|
Third Quarter |
|
|
9.50 |
|
|
|
5.00 |
|
Second Quarter |
|
|
11.50 |
|
|
|
7.00 |
|
First Quarter |
|
|
13.50 |
|
|
|
8.00 |
|
|
|
|
|
|
|
|
|
|
Calendar 2013: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
9.00 |
|
|
|
6.50 |
|
Third Quarter |
|
|
14.50 |
|
|
|
5.00 |
|
Second Quarter |
|
|
7.00 |
|
|
|
4.00 |
|
First Quarter |
|
|
7.50 |
|
|
|
3.00 |
|
|
|
|
|
|
|
|
|
|
Calendar 2012: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
|
5.50 |
|
|
|
3.00 |
|
Third Quarter |
|
|
5.50 |
|
|
|
3.00 |
|
Second Quarter |
|
|
6.50 |
|
|
|
3.50 |
|
First Quarter |
|
|
9.00 |
|
|
|
2.50 |
|
There were approximately 186 record holders
of our common stock at March 31, 2015. The number of registered stockholders includes any beneficial owners of common shares held
in street name.
The transfer agent and registrar for our common
stock is Computershare Investor Services, located at 350 Indiana Street, Suite 800, Golden, Colorado 80401.
Equity Compensation Plans
Summary equity compensation plan data
The following table sets forth information,
as of March 31, 2015, about our equity compensation plans (including the potential effect of debt instruments convertible into
common stock) in effect as of that date:
Plan category |
|
(a)
Number of securities
to be issued
upon exercise
of outstanding
options, warrants
and rights
(1)(2) |
|
|
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights |
|
|
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
|
|
– |
|
|
$ |
– |
|
|
|
9,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders (1)(3)(4) |
|
|
501,690 |
|
|
$ |
11.00 |
|
|
|
30,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
501,690 |
|
|
$ |
11.00 |
|
|
|
40,657 |
|
(1) The description of the material terms of non-plan issuances
of equity instruments is discussed in Note 6 to the accompanying consolidated financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
(3) On June 8, 2009, our Board of Directors approved the grant to
Mr. James A. Joyce, our Chief Executive Officer, of 80,000 shares of restricted common stock. The market price of our stock on the
grant date was $12.00 per share and the shares vested in equal installments over a thirty-six-month period that commenced on June
30, 2010.
(4) On March 31, 2015 we had 30,857 shares available under our 2010
Stock Incentive Plan.
2000 Stock Option Plan
Our 2000 Stock Option Plan provides for the
grant of incentive stock options to our full-time employees (who may also be directors) and nonstatutory stock options to non-employee
directors, consultants, customers, vendors or providers of significant services. The exercise price of any incentive stock option
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 our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any nonstatutory stock option, must not be less than 75% of the fair market
value of the common stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is 10,000 options.
At March 31, 2015, all of the grants previously
made under the 2000 Stock Option Plan had expired and 200 restricted shares had been issued under the plan, with 9,800 available
for future issuance.
2003 Consultant Stock Plan
Our 2003 Consultant Stock Plan advances our
interests by helping us obtain and retain the services of persons providing consulting services upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or providing those persons with incentives or inducements
affording such persons an opportunity to become owners of our capital stock. Consultants or advisors are eligible to receive grants
under the plan program only if they are natural persons providing bona fide consulting services to us, with the exception of any
services they may render in connection with the offer and sale of our securities in a capital-raising transaction, or which may
directly or indirectly promote or maintain a market for our securities. The plan provides for the grant of common stock. No awards
may be issued after the ten-year anniversary of the date we adopted the plan, the termination date for the plan. We have periodically
amended the plan to increase the number of shares available for issuance under the plan with the approval of our Board of Directors.
We filed registration statements on Form S-8
with the Securities and Exchange Commission to register under the Securities Act of 1933, or Securities Act, the common shares
issuable under this plan as follows:
Date of Filing |
Number of Shares Registered |
March 29, 2004 |
20,000 |
August 29, 2005 |
40,000 |
August 9, 2007 |
40,000 |
July 10, 2009 |
20,000 |
February 17, 2010 |
30,000 |
We discontinued using this plan in October 2012.
2010 Stock Incentive Plan
In August 2010, we adopted the 2010 Stock Incentive
Plan, which provides incentives to attract, retain and motivate employees and directors whose present and potential contributions
are important to our success by offering them an opportunity to participate in our future performance through awards of options,
the right to purchase common stock, stock bonuses and stock appreciation rights and other awards. A total of 70,000 common shares
were initially reserved for issuance under the 2010 Stock Incentive Plan.
In August 2010, we filed a registration statement
on Form S-8 for the purpose of registering 70,000 common shares issuable under this plan under the Securities Act, and in July
2012, we filed a registration statement on Form S-8 for the purpose of registering 100,000 common shares issuable under this plan
under the Securities Act of 1933.
At March 31, 2015, we had 30,857 shares available
under this plan.
2012 Directors Compensation Program
In July 2012, our Board of Directors approved
a board compensation program that modifies and supersedes the 2005 Directors Compensation Program, which was previously in effect.
Under the 2012 program, in which only non-employee directors may participate, an eligible director will receive a grant of $35,000
worth of ten-year options to acquire shares of common stock, with such grant being valued at the exercise price based on the average
of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. In addition,
under this new program, eligible directors will receive cash compensation equal to $500 for each committee meeting attended and
$1,000 for each formal board meeting attended.
In the fiscal year ended March 31, 2013, our
Board of Directors granted ten-year options to acquire an aggregate of 33,342 shares of our common stock, all with an exercise
price of $3.80 per share, to our four outside directors under the new 2012 program.
In the fiscal year ended March 31, 2014, our
Board of Directors granted ten-year options to acquire an aggregate of 31,911 shares of our common stock, all with an exercise
price of $4.10 per share, to our five outside directors under the new 2012 program.
At March 31, 2015 we had issued 26,757 options
under the old 2005 program to outside directors and 79,309 options to employee-directors, 21,756 outside directors’ options
had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-directors’ options had been
forfeited and no options under the old 2005 program remained outstanding.
On June 6, 2014, our Board of Directors approved
certain changes to the 2012 program. Under this new program, a new eligible director will receive an initial grant of $50,000 worth
of options to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing
bid prices of the common stock for the five trading days preceding the first day of the fiscal year. These options will have a
term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. In addition,
at the beginning of each fiscal year, each existing director eligible to participate in the modified new 2012 program also will
receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary
of the date of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The
modified new 2012 program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee
chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.
Stand-alone grants
From time to time our Board of Directors grants
restricted stock or common share purchase options or warrants to selected directors, officers, employees and consultants as equity
compensation to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually
negotiated.
On June 8, 2009, our Board of Directors approved
the grant to Mr. Joyce of 80,000 shares of restricted common stock at a price per share of $12.00, the vesting and issuance of
which occurred in equal installments over a thirty-six-month period that commenced on June 30, 2010.
As of March 31, 2015, we had issued 499,763
options (of which 146,810 have been exercised or cancelled) and authorized the issuance of 80,000 shares of restricted stock outside
of the 2005 Directors Compensation Plan, the 2012 Directors Compensation Plan, the 2000 Stock Option Plan, the 2003 Consultant
Stock Plan and the 2010 Incentive Stock Plan.
DIVIDEND POLICY
We have not paid any dividends on our common
stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash dividends on our
common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition,
our anticipated capital requirements and other factors that the board of directors may think are relevant. However, we currently
intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion
of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
DILUTION
If you purchase shares of our common stock
in this offering, you will experience dilution to the extent of the difference between the price per share you pay in this offering
and the net tangible book value per share of our common stock immediately after this offering, assuming no value is attributed
to the warrants and such warrants are accounted for and classified as equity. Our net tangible book value as of December 31, 2014
was approximately $1.2 million, or approximately $10.00 per share. Net tangible book value per share represents our total tangible
assets less total tangible liabilities, divided by the number of shares of common stock outstanding as of December 31, 2014.
After
giving effect to the assumed sale by us of ● shares of our common stock and warrants to purchase ● shares of our common
stock in this offering at an assumed combined public offering price of $● per share of our common stock and related warrant
(the closing bid price of our common stock on April ●, 2015), and after deducting the estimated placement agent fees and
estimated offering expenses payable by us, our as adjusted net tangible book value as of December 31, 2014 would have been approximately
$● million, or approximately $● per share of common stock. This represents an immediate increase in net tangible book
value of approximately $● per share to existing shareholders and an immediate dilution of approximately $● per share
to new investors, attributing none of the assumed combined public offering price to the warrants offered hereby. The following
table illustrates this per share dilution:
Assumed combined public offering price per share and related warrant |
|
|
|
|
|
$ |
● |
|
Net tangible book value per share as of December 31, 2014 |
|
$ |
10.00 |
|
|
|
|
|
Increase in net tangible book value per share attributable to new investors |
|
$ |
● |
|
|
|
|
|
As adjusted net tangible book value per share as of December 31, 2014, after giving effect to this offering |
|
|
|
|
|
$ |
● |
|
Dilution per share to new investors in the offering |
|
|
|
|
|
$ |
● |
|
Each $● increase (decrease)
in the assumed combined public offering price of $● per share and related warrant would increase (decrease) our as adjusted
net tangible book value after this offering by $● million, or $● per share, and the dilution per share to new investors
by $● per share, assuming that the number of shares of common stock and related warrants offered by us, as set forth above,
remains the same and after deducting the estimated placement agent fees and estimated offering expenses payable by us. We may also
increase or decrease the number of shares of common stock and related warrants we are offering from the assumed number of shares
of common stock and related warrants set forth above. An increase (decrease) of ● shares of common stock and related warrants
in the number of shares of common stock and related warrants offered by us from the assumed number of shares of common stock and
related warrants set forth above at an assumed combined public offering price of $● (the closing bid price of our common
stock on April ●, 2015) would increase (decrease) our as adjusted net tangible book value after this offering by $●
million, or $● per share, and the dilution per share to new investors by $● per share, assuming that the assumed public
offering price remains the same and after deducting the underwriting discount and estimated offering expenses payable by us. The
information discussed above is illustrative only and will adjust based on the actual combined public offering price, the actual
number of shares and warrants that we offer in this offering, and other terms of this offering determined at pricing.
This table does not take into account
further dilution to new investors that could occur upon the exercise of outstanding options and warrants, including the warrants
offered in this offering, having a per share exercise price less than the public offering price per share in this offering.
The number of shares of our common
stock reflected in the discussion and the table above is based on ● shares of our common stock outstanding as of December
31, 2014 and excludes, as of that date:
| · | 501,690 shares of common stock issuable upon exercise of outstanding
stock options under our stock incentive plans at a weighted average exercise price of $11.00 per share; |
| · | 1,430,716 shares of common stock reserved for issuance under outstanding
warrants with a weighted average exercise price of $7.00 per share; |
| · | 30,857 additional shares of common stock reserved for future issuance
under our stock incentive plans. |
| · | ____________
shares of common stock issuable upon exercise of the warrants offered hereby; and |
| · | ____________
shares of common stock issuable upon exercise of warrants to be issued to the placement
agent in connection with this offering. |
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should
be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this prospectus.
Overview
We are a medical device company focused on creating
innovative devices that address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the
core of our developments is the Aethlon ADAPT system, a medical device platform that converges single or multiple affinity drug
agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles
from the entire circulatory system without loss of essential blood components.
In June 2013, the U.S. Food and Drug Administration,
or FDA, approved our investigational device exemption application to initiate a ten-patient human clinical trial in one location
in the United States to treat dialysis patients who are infected with the Hepatitis C virus. The principal investigator of that
clinical trial recently began recruiting patients. Successful outcomes of that human trial as well as at least one follow-on human
trial will be required by the FDA in order to commercialize our products in the U.S. The regulatory agencies of certain foreign
countries where we intend to sell this device will also require one or more human clinical trials.
Some of our patents may expire before we receive
FDA approval to market our products in the U.S. or we receive approval to market our products in a foreign country. However, we
believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of
the Hemopurifier treatment technology.
Through our majority-owned subsidiary, Exosome
Sciences, Inc., or Exosome, we are also studying potential diagnostic techniques for identifying and monitoring neurological conditions
and cancer. We consolidate Exosome’s activities in our consolidated financial statements.
Fiscal Years Ended March 31, 2014 and 2013
Results of Operations
Revenues
We recorded government contract revenue in the
fiscal years ended March 31, 2014 and 2013. This revenue arose from work performed under our government contract with
the Defense Advanced Research Projects Agency, or DARPA, and our subcontract with Battelle Memorial Institute, or Battelle, as
follows:
| |
Fiscal Year Ended 3/31/14 | | |
Fiscal year Ended 3/31/13 | | |
Change in Dollars | |
DARPA contract | |
$ | 1,466,482 | | |
$ | 1,230,004 | | |
$ | 236,478 | |
Battelle subcontract | |
| 157,287 | | |
| – | | |
| 157,287 | |
Total government contract revenue | |
$ | 1,623,769 | | |
$ | 1,230,004 | | |
$ | 393,765 | |
DARPA Contract
We entered into a contract with DARPA on September
30, 2011. Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal
bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a fixed-price contract
with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement
of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract,
we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government
for fixed payment amounts.
Originally, only the base year (year one of
the contract) was effective for the parties; however, DARPA subsequently exercised the option on the second, third and fourth
years of the contract. DARPA has the option to enter into the contract for year five. The milestones are comprised of planning,
engineering and clinical targets, the achievement of which in some cases will require the participation and contribution of third
party participants under the contract. We cannot assure you that we alone, or with third party participants, will meet such milestones
to the satisfaction of the government and in compliance with the terms of the contract or that we will be paid the full amount
of the contract revenues during any year of the contract term. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of
our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and
blood processing instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years
three through five.
In the fiscal year ended March 31, 2014, we
reported $1,466,482 in contract revenue for that fiscal year and in the fiscal year ended March 31, 2013, we reported $1,230,004
in contract revenue for that fiscal year.
As of March 31, 2014, we had invoiced DARPA
for contract payments totaling $4,054,675.
Battelle Subcontract
We entered into a subcontract agreement with
Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original
DARPA contract, and we are one of several subcontractors on that systems integration project. The Battelle subcontract is under
a time and materials basis and we began generating revenues under the subcontract in the three months ended September 30, 2013.
Our expected future revenue from the subcontract will be at the discretion of Battelle. The Battelle subcontract is our first cost-reimbursable
contract.
Our revenue under this contract is a function
of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates
for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost
of any consultants hired by us to perform work on the project. Each payment will require approval by the program manager at Battelle.
Operating Expenses
Consolidated operating expenses were $4,679,697
for the fiscal year ended March 31, 2014 compared to $4,805,358 in the fiscal year ended March 31, 2013, a decrease of $125,661.
The net decrease of $125,661 was due to a decrease in professional fees of $370,873, which was partially offset by an increase
in general and administrative expense of $185,007 and an increase in payroll and related expenses of $60,205.
The $370,873 decrease in our professional fees
primarily arose from a decrease in DARPA-related professional fees of $223,930 due to decreased use of consultants and a decrease
in non-DARPA-related professional fees of $187,922. Those decreases were partially offset by $40,979 in professional fees at Exosome.
The decrease in non-DARPA-related professional fees was primarily due to decreased activity in our Hepatitis C trial in India.
The $185,007 increase in general and administrative
expenses primarily arose from $130,367 in general and administrative expenses due to the commencement of operations by Exosome.
We also had a $65,862 increase in general and administrative expenses related to our government contracts, which was partially
offset by a $11,222 decrease in our other, non-DARPA-related general and administrative expenses.
The $60,205 increase in payroll and related
expenses was principally driven by $232,719 in payroll and related expenses due to the commencement of operations by Exosome. That
increase was partially offset by a $157,327 reduction in our stock-based compensation.
Other Expense
In the fiscal year ended March 31, 2014, we
recognized other expenses of $10,383,034 compared to $1,316,686 of other expense in the fiscal year ended March 31, 2013. The following
table breaks out the various components of our other expense over the fiscal years ended March 31, 2014 and 2013:
| |
Components of Other Expense in Fiscal Year Ended | |
| |
March 31, 2014 | | |
March 31, 2013 | | |
Change | |
| |
| | |
| | |
| |
Loss on debt conversion and on settlement of accrued interest and damages | |
$ | 40,257 | | |
$ | 139,839 | | |
$ | (99,582 | ) |
| |
| | | |
| | | |
| | |
Change in fair value of derivative liability | |
| 8,547,015 | | |
| 44,705 | | |
| 8,502,310 | |
| |
| | | |
| | | |
| | |
Interest and other debt expenses | |
| 1,287,221 | | |
| 1,132,314 | | |
| 154,907 | |
| |
| | | |
| | | |
| | |
Loss on litigation settlement | |
| 583,601 | | |
| – | | |
| 583,601 | |
| |
| | | |
| | | |
| | |
Other | |
| (75,060 | ) | |
| (172 | ) | |
| (74,888 | ) |
| |
| | | |
| | | |
| | |
Total other expense | |
$ | 10,383,034 | | |
$ | 1,316,686 | | |
$ | 9,066,348 | |
We recorded a loss on debt conversion and on
settlement of accrued interest and damages of $40,257 and $139,839 in the fiscal years ended March 31, 2014 and 2013, respectively.
In the both fiscal years, those losses arose from the conversion to equity of principal and accrued interest on certain notes payable.
Both periods include changes in the fair value
of derivative liability. For the fiscal year ended March 31, 2014, the change in the estimated fair value of derivative liability
was a loss of $8,547,015 and for the fiscal year ended March 31, 2013, the change in the estimated fair value of derivative liability
was a loss of $44,705.
We also recorded litigation settlement expense
of $583,601 in the fiscal year ended March 31, 2014.
Other income included a gain of $75,000 related
to the extinguishment of accrued damages as a result of the litigation settlement in the fiscal year ended March 31, 2014 as well
as interest income in both fiscal years.
Our interest and other debt expense increased
by $154,907 from the fiscal year ended March 31, 2013 to the fiscal year ended March 31, 2014. The following table breaks out the
various components of our interest expense over the fiscal years ended March 31, 2014 and 2013:
| |
Components of Interest Expense and Other Debt Expenses in Fiscal Year Ended | |
| |
March 31, 2014 | | |
March 31, 2013 | | |
Change | |
| |
| | |
| | |
| |
Interest expense | |
$ | 425,725 | | |
$ | 526,110 | | |
$ | (100,385 | ) |
| |
| | | |
| | | |
| | |
Amortization of deferred financing costs | |
| 863 | | |
| 127,200 | | |
| (126,337 | ) |
| |
| | | |
| | | |
| | |
Amortization of note discounts | |
| 4,284 | | |
| 467,158 | | |
| (462,874 | ) |
| |
| | | |
| | | |
| | |
Note restructuring expense | |
| 856,349 | | |
| – | | |
| 856,349 | |
| |
| | | |
| | | |
| | |
Non-cash interest expense | |
| – | | |
| 11,846 | | |
| (11,846 | ) |
| |
| | | |
| | | |
| | |
Total interest expense | |
$ | 1,287,221 | | |
$ | 1,132,314 | | |
$ | 154,907 | |
As a result of the above factors, our net loss
before noncontrolling interests increased from $(4,892,040) for the fiscal year ended March 31, 2013 to $(13,438,962) for the fiscal
year ended March 31, 2014.
Liquidity and Capital Resources
At March 31, 2014, we had a cash balance of
$1,250,279 and a working capital deficit of $14,169,471. This compares to a cash balance of $125,274 and a working capital deficit
of $9,276,618 at March 31, 2013. Between April 1, 2014 and July 9, 2014, we raised aggregate proceeds of $320,800 through private
equity transactions and collected $135,376 under our DARPA contract and Battelle subcontract. Significant additional financing
must be obtained in order to provide a sufficient source of operating capital and to allow the Company to continue to operate as
a going concern. In addition, we will need to raise capital to complete the recently approved human clinical trial in the U.S.
During the period after March 31, 2014, we raised capital to support our operations. See the discussions in the sections below
entitled “Three and Nine-Month Periods Ended December 31, 2014 and 2013” and “Material Changes During the Period
September 30, 2014 to March 31, 2015.”
We do not expect revenue from operations will
be sufficient to satisfy our funding requirements in the near term, and accordingly, our ability to continue operations and 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. Future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved
in obtaining regulatory approvals, competing technological and market developments, as well as our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing
negative cash flows and net losses for the foreseeable future.
Cash Flows
Cash flows from operating, investing and financing
activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows (in thousands):
| |
(In thousands) For the year ended | |
| |
March 31, 2014 | | |
March 31, 2013 | |
Cash (used in) provided by: | |
| | | |
| | |
Operating activities | |
$ | (2,139 | ) | |
$ | (2,099 | ) |
Investing activities | |
| (96 | ) | |
| – | |
Financing activities | |
| 3,360 | | |
| 2,080 | |
Net increase (decrease) in cash | |
$ | 1,125 | | |
$ | (19 | ) |
Net Cash from Operating Activities.
We used cash in our operating activities due
to our losses from operations. Net cash used in operating activities was approximately $2,139,000 in fiscal 2014 compared to net
cash used in operating activities of approximately $2,099,000 in fiscal 2013, an increase of $40,000. The $40,000 increase
was primarily due to changes in our operating assets and liabilities.
Net Cash from Investing Activities.
During the fiscal year ended March 31, 2014,
we used approximately $96,000 in cash for purchases of equipment. During the fiscal year ended March 31, 2013, we did not purchase
any equipment or have any other investing activities.
Net Cash from Financing Activities.
Net cash generated from financing activities
increased from approximately $2,080,000 in the fiscal year ended March 31, 2013 to approximately $3,360,000 in the fiscal year
ended March 31, 2014. Included in net cash provided by financing activities in fiscal 2014 were approximately $3,177,000 from the
issuance of common stock and $400,000 from the issuance of notes payable, which was partially offset by approximately $217,000
in repayments of notes payable in cash. In fiscal 2013, we received approximately $2,110,000 from the issuance of common
stock, which was partially offset by approximately $30,000 in repayments of notes payable and related accrued interest in cash.
Convertible Notes Payable and Warrants
Amended and Restated 12% Series A Convertible Notes
In June 2010, we entered into Amended and Restated
12% Series A Convertible Promissory Notes, in the principal amount of $900,000, with the holders of certain promissory notes previously
issued by us. These notes matured on December 31, 2010. In connection with the amendments we paid $54,001 of accrued and default
interest through the date of the restructuring, liquidated damages of $205,000 and $54,003 of prepaid interest through the expiration
date in the aggregate amount of $313,004 through the issuance of units at a fixed rate of $10.00 per unit. Each unit consists of
one share of our common stock and one common stock purchase warrant to purchase one share of our common stock at a fixed exercise
price of $10.00 per share exercisable until February 2016. We also increased the annual interest rate from ten percent
to twelve percent. We also agreed to change the exercise prices on all of the warrants held by the noteholders to $10.00 per share,
to change certain formerly contingent warrants to non-contingent warrants and to extend the expiration date of their warrants to
February 2016. As of December 31, 2013 the notes were in default. We accrued interest at the revised default rate of 20% following
December 31, 2010.
On June 24, 2014, we entered into an agreement
with the Ellen R. Weiner Family Revocable Trust, a holder of one of the notes to convert past due combined principal and interest
balance of $1,003,200 into an aggregate of 466,365 restricted shares of our common stock and five-year warrants to acquire up to
136,190 shares of our common stock at an exercise price of $2.10 per share and 7,944 shares of our common stock at an exercise
price of $5.40 per share. In connection with these changes, the trust agreed to waive the anti-dilution price protection in the
warrants.
In exchange for the trust’s conversion
in full of the note and accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants,
we also issued to the trust 1,500 restricted shares of common stock as a service fee, changed the exercise price of all of the
previously issued warrants to $2.10 per share and extended the expiration date of all of the previously issued warrants to July
1, 2018.
On July 8, 2014, we entered into an agreement
with the Estate of Allan Bird, a holder of a one of the notes that was in default. In the agreement, the estate agreed to extend
the expiration date of the note to April 1, 2016, and to convert approximately $116,970 of accrued interest into an aggregate of
51,837 restricted shares of our common stock. The estate received five-year warrants to acquire 46,429 shares of our common stock
at an exercise price of $2.10 per share and 2,708 shares of our common stock at an exercise price of $5.40.
We also issued to the estate 500 restricted
shares of common stock as a service fee, changed the exercise price of all of the previously issued warrants to $2.10 per share
and extended the expiration date of all of the previously issued warrants to July 1, 2018.
December 2006 10% Convertible Notes
In January 2014, we paid off the remaining December
2006 10% Note and the related accrued interest balance with a cash payment of $35,055. That payment represented the sum of the
$17,000 principal balance and $18,055 of accrued interest.
2008 10% Convertible Notes
One 2008 10% Convertible Note in the amount
of $25,000, which matured in January 2010 remained outstanding at March 31, 2014. On September 17, 2014, we issued the holder 9,564
shares of restricted common stock and warrants to acquire up to 4,782 shares of common stock at an exercise price of $7.00 per
share upon conversion of the entire outstanding principal amount of $25,000 and accrued interest of $20,906.
October and November 2009 10% Convertible Notes
In October and November 2009, we raised $430,000
from the sale to accredited investors of 10% convertible notes. The notes matured at various dates between April 2011 and May 2011
and are convertible into our common stock at a fixed conversion price of $12.50 per share prior to maturity. The investors
also received matching three year warrants to purchase unregistered shares of our common stock at a price of $12.50 per share.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against
the principal of the notes. We are amortizing this discount using the effective interest method over the term of the notes.
Deferred financing costs of $20,250 incurred
in connection with this financing were issued in the form of a convertible note with warrants on the same terms as those received
by the investors. We capitalized the $20,250 of deferred financing costs and amortized them over the term of the notes using
the effective interest method.
In July 2012, we issued 9,228 shares of common
stock to the holder of the one of the notes in the principal amount of $25,000 in exchange for the value of the principal and related
accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and one-half
of a stock purchase warrant on June 29, 2012. The 9,228 share issuance was priced based on 80% of the trailing five day average
before issuance to be consistent with the equity unit structure. As part of that structure, the noteholder also received seven
year warrants to purchase 4,614 share of common stock at a price of $5.35 per share. The $16,149 value of the warrant was calculated
using the binomial lattice valuation methodology. We recorded a loss on conversion of $45,796 on the conversions in the quarter
ended September 30, 2012.
The following
table shows the conversions into principal of the October and November 2009 Convertible Notes by fiscal year:
Activity in October and November 2009 Convertible Notes |
Initial principal balance, including $250,000 of deferred financing costs |
|
$ |
450,250 |
|
Conversions during the fiscal year ended March 31, 2010 |
|
|
(70,000 |
) |
Conversions during the fiscal year ended March 31, 2011 |
|
|
(175,000 |
) |
Conversions during the fiscal year ended March 31, 2012 |
|
|
(130,250 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(25,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
– |
|
Balance as of March 31, 2014 |
|
$ |
50,000 |
|
In September 2013, we agreed to extend the expiration
date of certain warrants of one of the note holders by two years in exchange for the extension to April 22, 2015 of the maturity
date of a $50,000 note previously issued to the holder. Management assessed the change in the value of the note and related warrants
before and after that extension and determined that the change in value related to the change in terms was not significant.
April 2010 10% Convertible Note
In April 2010, we raised $75,000 from the sale
to an accredited investor of a 10% convertible note. The convertible note matured in October 2011 and is convertible into our common
stock at a fixed conversion price of $12.50 per share prior to maturity. The investor also received three year warrants to purchase
6,000 unregistered shares of our common stock at a price of $12.50 per share.
We measured the fair value of the warrants and
the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. We amortized this
discount using the effective interest method over the term of the note. As of March 31, 2014,
there have not been any conversions of the note.
In September 2013, we agreed to extend the expiration
date of certain warrants of the note holder by two years in exchange for the extension of the maturity date of the $75,000 note
to October 21, 2015. Management assessed the change in the value of the notes and related warrants before and after that extension
and determined that the change in value related to the change in terms was not significant.
September 2010 10% Convertible Notes
On September 3, 2010, we entered into a subscription
agreement with three accredited investors providing for the issuance and sale of convertible promissory notes and corresponding
warrants in the aggregate principal amount of $1,430,000. The closing resulted in the issuance and sale of (i) convertible promissory
notes in the aggregate principal amount of $743,600, (ii) five-year warrants to purchase an aggregate of 74,360 shares of our common
stock at an exercise price of $15.56 per share, and (iii) five-year warrants to purchase an aggregate of 74,360 shares of our common
stock at an exercise price of $21.79 per share. The convertible promissory notes bear interest compounded monthly at the annual
rate of ten percent (10%) and matured on September 3, 2011. The aggregate gross cash proceeds were $650,000, the balance of the
principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes are convertible
at the option of the holders into shares of our common stock at a price per share equal to eighty percent (80%) of the average
of the three lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the principal market on which the
common stock trades or is quoted for the ten (10) trading days preceding the proposed conversion date. Subject to adjustment as
described in the notes, the conversion price may not be more than $15.00 nor less than $10.00.
On March 31, 2014, we amended these notes to
extend the maturity date to April 1, 2016, which permits us to classify them as long-term liabilities. The non-default interest
rate for all of the notes was set at twelve percent per annum. We also agreed to increase the outstanding principal amount of the
notes by 12% from a total of $693,260 to a total of $776,451.
During the period from October 2011 to February
2014, the investors converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding
under these notes and certain other convertible promissory notes previously issued to them by us. Certain anti-dilution provisions
applicable to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly,
we issued to the investors an additional 90,142 shares of our common stock, which represents the additional shares of common stock
that would have been issued to the investors had such conversions been effected at $2.10 per share.
The amendments also set the conversion price
of the notes, as well as the exercise price at which shares of our common stock can be purchased under the warrants, at $2.10 per
share. By virtue of the amendments, the expiration dates of the warrants also were extended from dates between September 3, 2015
and September 23, 2016 to January 1, 2017.
The following
table shows the activity in these notes by fiscal year:
Activity in September 2010 10% Convertible Notes |
Initial principal balance |
|
$ |
743,600 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(405,500 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(30,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(25,000 |
) |
Increase in principal balance due to 12% extension fee |
|
|
33,972 |
|
Balance as of March 31, 2014 |
|
$ |
317,072 |
|
April 2011 10% Convertible
Notes
In April
2011, we entered into a subscription agreement with two accredited investors providing for the issuance and sale of convertible
promissory notes and corresponding warrants which resulted in the issuance and sale by us of (i) convertible promissory notes in
the aggregate principal amount of $385,000, (ii) five-year warrants to purchase an aggregate of 80,080 shares of our common
stock at an exercise price of $6.25 per share, and (iii) five-year warrants to purchase an aggregate of 80,080 shares of our
common stock at an exercise price of $8.75 per share. The convertible promissory notes bear interest compounded monthly at the
annual rate of ten percent and matured on April 1, 2012. The aggregate gross cash proceeds to us were $350,000, the balance of
the principal amount representing a due diligence fee and an original issuance discount. The convertible promissory notes were
convertible at the option of the holders into shares of our common stock at a price per share equal to eighty percent (80%) of
the average of the three lowest closing bid prices of the common stock as reported by Bloomberg L.P. for the principal market on
which the common stock trades or is quoted for the ten (10) trading days preceding the proposed conversion date. Subject to adjustment
as described in the notes, the conversion price may not be more than $10.00 nor less than $5.00. There are no registration requirements
with respect to the shares of common stock underlying the notes or the warrants.
In addition,
we issued (i) five-year warrants to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $6.25 per
share, and (ii) five-year warrants to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $8.75
per share to the purchasers. These warrants were issued as an anti-dilution adjustment
under certain common stock purchase warrants held by the purchasers that were acquired from us in September 2010.
On March 31, 2014, we entered into amendments
with three accredited investors with respect to notes and warrants previously issued by us on various dates between December 5,
2007 and September 23, 2011, including these notes.
Prior to the amendments, the notes were past
maturity and were in default, resulting in the accrual of interest at the applicable default interest rate. The amendments extended
the maturity date of each of the notes to April 1, 2016 and provided for a non-default interest rate for all of the notes at twelve
percent per annum, which represents a reduction from the default interest rates of fifteen percent at which interest had been accruing.
By entering into the amendments, we also agreed to increase the outstanding principal amount of the notes by 12% from a total of
$693,260 to a total of $776,451.
During the period from October 2011 to February
2014, the investors had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding
under the Notes and certain other convertible promissory notes previously issued to them by us. Certain anti-dilution provisions
applicable to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Thus,
we issued to the investors an aggregate of 90,142 shares of our common stock, which represents the additional shares of common
stock that would have been issued to the Investors had such conversions been effected at $2.10 per share.
The amendments also set the conversion price
of the notes, as well as the exercise price at which shares of our common stock can be purchased under the warrants, at $2.10 per
share. In addition, the warrants also were extended from dates between September 3, 2015 and September 23, 2016 to January 1, 2017.
As of
March 31, 2014, there have not been any conversions of these notes and the 12% extension fee noted above increased the principal
balance by $48,048 to a principal balance of $ 448,448.
July and August 2011 10% Convertible Notes
During the three months ended September 30,
2011, we raised $357,656 in 10% convertible notes. Those notes had a fixed conversion price of $4.50 per share and carried an interest
rate of 10%. The convertible notes matured in July and August 2012. We also issued those investors five year warrants to purchase
79,479 shares of common stock at $6.25 per share.
We measured the fair value of the warrants and
the beneficial conversion feature of the notes and recorded a $257,926 discount against the principal of the notes. We amortized
this discount using the effective interest method over the term of the note. As of September
30, 2013, there were no conversions of the notes, which were extended to July 16, 2014.
Effective July 14, 2012, holders of three notes
totaling $100,000 agreed to extend the expiration date of their notes to July 13, 2013. Subsequent to June 30, 2013, the holders
of the three notes agreed to extend their notes to July 16, 2014. As part of the extension, we agreed to capitalize accrued interest
of $20,027 into the principal balance. Effective March 31, 2014, the holders of the three notes converted all of their principal
and accrued interest into 28,774 shares of our common stock at the contractual conversion price of $4.50 per share.
At March 31, 2014, the outstanding principal
balance was $257,655, all of which was in default. We recorded interest at the default interest rate of 15%.
September 2011 Convertible Notes
On September 23, 2011, we entered into a subscription
agreement with two accredited investors providing for the issuance and sale of convertible promissory notes and corresponding warrants
in the aggregate principal amount of $253,760. The warrants carried a five-year term to purchase an aggregate of 72,503 shares
of our common stock at an exercise price of $5.00 per share. The convertible promissory notes do not bear an interest rate and
matured on September 23, 2012. The aggregate net cash proceeds to us were $175,000, the balance of the principal amount representing
a due diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders
into shares of our common stock at a price per share equal to $3.50. Subject to adjustments as described in the notes, the conversion
price may not be more than $3.50.
We measured the fair value of the warrants and
the beneficial conversion feature of the notes and recorded a $168,804 discount against the principal of the notes. We amortized
this discount using the effective interest method over the term of the note.
On March 31, 2014, we entered into separate
amendments with three accredited investors who own certain convertible promissory notes and warrants previously issued by us on
various dates between December 5, 2007 and September 23, 2011, including these notes.
The amendments extended the maturity date of
each of the notes to April 1, 2016, and the non-default interest rate for all of the notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the amendments, we also
agreed to increase the outstanding principal amount of the notes by 12% from a total of $693,260 to a total of $776,451.
During the period from October 2011 to February
2014, the investors had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding
under the notes and certain other convertible promissory notes previously issued to them by us. Certain anti-dilution provisions
applicable to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly,
pursuant to the amendments, we issued to the investors an aggregate of 90,142 shares of our common stock, which represents the
additional shares of common stock that would have been issued to the Investors had such conversions been effected at $2.10 per
share.
The amendments also set the conversion price
of the notes, as well as the exercise price at which shares of our common stock can be purchased under the warrants, at $2.10 per
share. Additionally, under the amendments, the expiration dates of the warrants also were extended from dates between September
3, 2015 and September 23, 2016 to January 1, 2017.
The following
table shows the conversions into principal of these notes by fiscal year:
Activity in September 2011 Convertible Notes |
Initial principal balance |
|
$ |
253,760 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(15,000 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(60,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(169,000 |
) |
Increase in principal balance due to extension fee |
|
|
1,171 |
|
Balance as of March 31, 2014 |
|
$ |
10,931 |
|
Law Firm Note Number 1
On March 22, 2012, we entered into a promissory
note with our corporate law firm for the amount of $75,000, which represented the majority of the amount we then owed to that firm.
The promissory note originally had a maturity date of December 31, 2012 and bears interest at five percent per annum. The note
is convertible at the option of the holder into shares of our common stock at a 10% discount to the market price of the common
stock on the date prior to conversion with a floor price on such conversions of $4.00 per share. During the quarter ended June
30, 2013, the parties agreed to extend the maturity date of the note to October 1, 2013 and subsequent to September 30, 2013, the
expiration date of this note was again extended to October 1, 2014. On November 7, 2014, we paid in full the outstanding principal
balance and related accrued interest with a cash payment of $50,000 and an issuance of 3,400 shares of common stock upon conversion
at a conversion price of $10.50 per share.
Law Firm Note Number 2
On June 4, 2013, we entered into a promissory
note with our corporate law firm for the amount of $47,000, which represented approximately 50% of the amount we owed to that firm
for services in 2012. The promissory note had a maturity date of October 1, 2014 and bears interest at five percent per annum.
The note was convertible at the option of the holder into shares of our common stock at a 10% discount to the market price of the
common stock on the date prior to conversion with a floor price on such conversions of $3.50 per share. Effective March 31, 2014,
the holder converted this note and all related accrued interest into 6,041 shares of our common stock at a conversion price of
$8.00 per share.
Securities Issued for Services
We have issued securities in payment of services
to reduce our obligations and to avoid using our cash resources. In the fiscal year ended March 31, 2014 we issued 61,423 common
shares for services of which 31,362 were restricted and were for investor relations services and corporate communications services.
Included in the 61,423 common shares issued for services are 30,061 shares, registered under Form S-8 registration statements,
which were issued as follows: 1,423 for financial consulting, 8,381 for scientific consulting and 20,256 for legal services. The
average price discount of common shares issued for these services, weighted by the number of shares issued for services in this
period, was approximately 16.0%.
Securities Issued for Debt
We have also issued securities for debt to reduce
our obligations to avoid using our cash resources. In the fiscal year ended March 31, 2014 we issued 211,480 restricted common
shares for repayment in full of notes, including accrued interest, in the aggregate amount of $726,776. The price discount of the
common stock issued for debt was approximately 43.2%.
Prospects for Debt Conversion
We seek, where possible, to convert our debt
and accounts payable to stock and/or warrants in order to reduce our cash liabilities. Our success at accomplishing this depends
on several factors including market conditions, investor acceptance and other factors, including our business prospects. All conversions
are done under an exemption from registration under Section 4(a)(2) of the Securities Act of 1933.
Going Concern
Our independent registered public accounting
firm has stated in their audit report on our March 31, 2014 consolidated financial statements that our working capital deficiency
and our accumulated deficit are conditions that, among others, raise substantial doubt about our ability to continue as a going
concern.
Three and Nine-Month Periods Ended December 31, 2014 and 2013
Results of Operations
Three Months Ended December 31, 2014 Compared to the Three
Months Ended December 31, 2013
Revenues
We recorded government contract revenue in the
three months ended December 31, 2014 and 2013. This revenue arose from work performed under our government contract
with DARPA and our subcontract with Battelle as follows:
|
|
Three Months Ended 12/31/14 |
|
|
Three Months Ended 12/31/13 |
|
|
Change in Dollars |
|
DARPA Contract |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
Battelle Subcontract |
|
|
33,434 |
|
|
|
76,313 |
|
|
|
(42,879 |
) |
Total Government Contract Revenue |
|
$ |
33,434 |
|
|
$ |
76,313 |
|
|
$ |
(42,879 |
) |
DARPA Contract
We entered into a contract with DARPA on September
30, 2011. Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal
bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a fixed-price contract
with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement
of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract,
we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government
for fixed payment amounts.
Originally, only the base year (year one of
the contract) was effective for the parties, however, DARPA subsequently exercised the option on the second, third and fourth years
of the contract. DARPA has the option to enter into the contract for year five. The milestones are comprised of planning, engineering
and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants
under the contract. We cannot assure you that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the contract term. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of
our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and
blood processing instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years
three through five. We recently completed a re-budgeting of the expected costs on the remaining years of the DARPA contract based
on the reduced milestones and have concluded that the reductions in our costs due to the scaled back level of work will almost
entirely offset the anticipated revenue levels based on current assumptions.
We did not invoice DARPA for any milestones
during either the three months ended December 31, 2014 or the three months ended December 31, 2013.
Battelle Subcontract
We entered into a subcontract agreement with
Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original
DARPA contract, and we are one of several subcontractors on that systems integration project. The Battelle subcontract is cost-reimbursable
under a time and materials basis. We began generating revenues under the subcontract during the nine months ended December 31,
2013.
Our revenue under this contract is a function
of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates
for those employees). Battelle engages us as needed. Each payment requires approval by the program manager at Battelle.
During the three months ended December 31, 2014,
we invoiced Battelle $33,434 and in the three months ended December 31, 2013, we invoiced Battelle $76,313, a $42,879 reduction.
Operating Expenses
Consolidated operating expenses for the three
months ended December 31, 2014 were $1,120,414 in comparison with $1,308,655 for the comparable quarter a year ago. This decrease
of $188,241, or 14.4%, was due to a decrease in professional fees of $471,202, which was partially offset by increases in payroll
and related expenses of $145,646 and increases in general and administrative expenses of $137,315.
The $471,202 decrease in our professional fees
was due to a decrease in our DARPA-related professional fees of $128,646 and a decrease in our non-DARPA-related professional fees
of $344,535, which were partially offset by an increase of $1,981 in Exosome’s professional fees.
The $145,646 increase in payroll and related
expenses was due to an increase in the Exosome payroll of $64,588, an increase in our other payroll of $35,908, and an increase
in stock-based compensation of $45,150.
The $137,315 increase in general and administrative
expenses was primarily due to an increase in the non-DARPA-related general and administrative expenses of $156,163. General and
administrative expenses at Exosome increased by $10,436 and we had a decrease of $29,284 in our DARPA-related general and administrative
expenses. Our clinical trial expenses of $192,243 in the December 2014 period drove the increased general and administrative expenses
at Aethlon as there was no comparable expense in the corresponding prior period.
Other Expense
Other expense consists primarily of losses on
conversion or extinguishment of debt, the change in the fair value of our derivative liability, other expense and interest expense.
Other expense for the three months ended December 31, 2014 was other expense of $515,025 in comparison with other expense of $1,035,269
for the comparable quarter a year ago.
Loss on Extinguishment of Debt and Other
We recorded a loss on extinguishment of debt
of $222,939 for the three months ended December 31, 2014 that related to the conversion to equity of $189,087 in principal and
accrued interest related to two notes payable. We did not recognize any losses on extinguishment of debt in the three months ended
December 31, 2013.
The three months ended December 31, 2014 also
included a charge of $143,363 for the change in fair value related to the extension of the warrants of a note holder in exchange
for a postponement in the agreed payment date of his notes.
The three months ended December 31, 2013 included
a $1,000,000 provision related to litigation.
Change in Fair Value of Derivative Liability
We did not record a change in the fair value
of derivative liabilities in the three months ended December 31, 2014. For the three months ended December 31, 2013, the change
in the estimated fair value of derivative liability was a gain of $78,175.
Interest Expense
Interest expense was $148,723 for the three
months ended December 31, 2014 compared to $113,444 in the corresponding prior period, an increase of $35,279. The various components
of our interest expense are shown in the following table:
|
|
Quarter Ended |
|
|
Quarter Ended |
|
|
|
|
|
|
12/31/14 |
|
|
12/31/13 |
|
|
Change |
|
Interest Expense |
|
$ |
39,151 |
|
|
$ |
112,875 |
|
|
$ |
(73,724 |
) |
Amortization of Deferred Financing Costs |
|
|
47,480 |
|
|
|
– |
|
|
|
47,480 |
|
Amortization of Note Discounts |
|
|
62,092 |
|
|
|
569 |
|
|
|
61,523 |
|
Total Interest Expense |
|
$ |
148,723 |
|
|
$ |
113,444 |
|
|
$ |
35,279 |
|
As noted in the above table, the most significant
factors in the $35,279 increase in interest expense was the $73,724 decrease in the interest expense that was primarily due to
lower levels of notes outstanding in the 2014 period; however, that reduction was more than offset by the $61,523 increase in the
amortization of note discounts and a $47,480 increase in the amortization of deferred financing costs. The increases in our amortization
of note discounts and of deferred financing costs occurred as a result of our convertible note financing in November 2014.
Net Loss
As a result of the decreased expenses noted
above, our net loss before noncontrolling interests was approximately $1,602,000 for the quarter ended December 31, 2014 compared
to the net loss before noncontrolling interests of approximately $2,268,000 in the quarter ended December 31, 2013.
Basic and diluted loss attributable to common
stockholders were ($0.26) for the three month period ended December 31, 2014 compared to ($0.56) for the three month period ended
December 31, 2013.
Nine Months Ended December 31, 2014 Compared to the Nine Months
Ended December 31, 2013
Revenues
We recorded government contract revenue in the
nine months ended December 31, 2014 and 2013. This revenue arose from work performed under our government contract with
DARPA and our subcontract with Battelle as follows:
|
|
Nine Months Ended 12/31/14 |
|
|
Nine Months Ended 12/31/13 |
|
|
Change in Dollars |
|
DARPA Contract |
|
$ |
444,723 |
|
|
$ |
808,739 |
|
|
$ |
(364,016 |
) |
Battelle Subcontract |
|
|
119,082 |
|
|
|
108,057 |
|
|
|
11,025 |
|
Total Government Contract Revenue |
|
$ |
563,805 |
|
|
$ |
916,796 |
|
|
$ |
(352,991 |
) |
DARPA Contract
We entered into a contract with DARPA on September
30, 2011. Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal
bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a fixed-price contract
with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement
of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract,
we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government
for fixed payment amounts.
Originally, only the base year (year one of
the contract) was effective for the parties, however, DARPA subsequently exercised the option on the second, third and fourth years
of the contract. DARPA has the option to enter into the contract for year five. The milestones are comprised of planning, engineering
and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants
under the contract. We cannot assure you that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the contract term. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of
our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and
blood processing instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years
three through five. We completed a re-budgeting of the expected costs on the remaining years of the DARPA contract based on the
reduced milestones and have concluded that the reductions in our costs due to the scaled back level of work will almost entirely
offset the anticipated revenue levels based on current assumptions.
During the nine months ended December 31, 2014,
we invoiced DARPA for three milestones totaling $444,723 while in the nine months ended December 31, 2013, we invoiced DARPA for
four milestones totaling $808,739.
We entered into a subcontract agreement with
Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original
DARPA contract, and we are one of several subcontractors on that systems integration project. The Battelle subcontract is cost-reimbursable
under a time and materials basis. We began generating revenues under the subcontract during the nine months ended December 31,
2013.
Our revenue under this contract is a function
of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates
for those employees). Battelle engages us as needed. Each payment requires approval by the program manager at Battelle.
During the nine months ended December 31, 2014,
we invoiced Battelle $119,082 and in the nine months ended December 31, 2013, we invoiced Battelle $108,057, an $11,025 increase.
Operating Expenses
Consolidated operating expenses for the nine
months ended December 31, 2014 were $3,423,985 in comparison with $3,162,730 for the comparable period a year ago. This
increase of $261,255, or 8.3%, was due to increases in payroll and related expenses of $447,206 and increases in general and administrative
expenses of $226,398, which were partially offset by a decrease in professional fees of $412,349.
The $447,206 increase in payroll and related
expenses was due to an increase in the Exosome payroll of $325,567, an increase in our other payroll of $6,410, and an increase
in stock-based compensation of $115,229. The increase in Exosome’s payroll was due to the commencement of Exosome’s
operations in the third quarter of 2013.
The $226,398 increase in general and administrative
expenses was primarily due to an increase in the non-DARPA-related general and administrative expenses at Aethlon of $194,230.
General and administrative expenses at Exosome increased by $107,423, and we had a decrease of $75,255 in our DARPA-related general
and administrative expenses. Our clinical trial expenses of $192,243 in the December 2014 period drove the increased general
and administrative expenses as there was no comparable expense in the corresponding prior period and Exosome’s general and
administrative expenses in the 2013 period only covered approximately three months of operating activities.
The $412,349 decrease in our professional fees
was due to a decrease in our DARPA-related professional fees of $229,716 and a decrease in our non-DARPA-related professional fees
of $272,332, which were partially offset by an increase of $89,699 in Exosome’s professional fees.
Other Expense
Other expense consists primarily of losses on
extinguishment of debt, the change in the fair value of our derivative liability, other expense and interest expense. Other (income)
expense for the nine months ended December 31, 2014 was other expense of $3,190,947 in comparison with other expense of $3,674,845
for the comparable period a year ago.
Loss on Extinguishment of Debt and Other
We recorded a loss on extinguishment of debt
of $2,754,062 for the nine months ended December 31, 2014. That loss arose from the payments of accrued interest on our 12% Series
A convertible notes that were in the form of units (common stock plus warrants) combined with a loss that related to the conversion
to equity of $268,845 in principal and accrued interest related to three notes payable. The nine months ended December 31, 2013
contained $40,256 in losses on debt conversion.
The nine months ended December 31, 2014 also
included a charge of $143,363 for the change in fair value related to the extension of the warrants of a note holder in exchange
for a postponement in the agreed payment date of his notes.
Change in Fair Value of Derivative Liability
We did not record a change in the fair value
of derivative liabilities in the nine months ended December 31, 2014 and all derivative liabilities were extinguished as of June
30, 2014. For the nine months ended December 31, 2013, the change in the estimated fair value of derivative liability was a loss
of $2,304,702.
Interest Expense
Interest expense was $293,522 for the nine months
ended December 31, 2014 compared to $329,887 in the corresponding prior period, a decrease of $36,365. The various components of
our interest expense are shown in the following table:
|
|
Nine Months Ended |
|
|
Nine Months Ended |
|
|
|
|
|
|
12/31/14 |
|
|
12/31/13 |
|
|
Change |
|
Interest Expense |
|
$ |
162,448 |
|
|
$ |
324,740 |
|
|
$ |
(162,292 |
) |
Amortization of Deferred Financing Costs |
|
|
68,982 |
|
|
|
863 |
|
|
|
68,119 |
|
Amortization of Note Discounts |
|
|
62,092 |
|
|
|
4,284 |
|
|
|
57,808 |
|
Total Interest Expense |
|
$ |
293,522 |
|
|
$ |
329,887 |
|
|
$ |
(36,365 |
) |
As noted in the above table, the most significant
factor in the $36,365 decrease in interest expense was the $162,292 decrease in the interest expense that was primarily due to
lower levels of notes outstanding in the 2014 period. Other smaller factors in the change in our total interest expense were increases
in the amortization of deferred financing costs of $68,119 and in the amortization of note discounts of $57,808. The increases
in our amortization of note discounts and of deferred financing costs occurred as a result of our convertible note financing in
November 2014.
Net Loss
As a result of the increased expenses and decreased
revenues noted above, our net loss before noncontrolling interests for the nine months ended December 31, 2014 was approximately
$6,051,000 compared to approximately $5,921,000 for the nine month period ended December 31, 2013.
Basic and diluted loss attributable to common
stockholders were ($1.12) for the nine month period ended December 31, 2014 compared to ($1.57) for the period ended December 31,
2013.
Liquidity and Capital Resources
At December 31, 2014, we had a cash balance
of $2,775,735 and working capital of $1,371,567. This compares to a cash balance of $1,250,279 and a working capital deficit of
$14,169,471 at March 31, 2014. Between January 1, 2015 and February 10, 2015, under the Battelle subcontract we billed $8,207 and
collected $12,290. Our cash at December 31, 2014 plus additional funds raised to date subsequent to December 31, 2014 are not sufficient
to meet our funding requirements during the next twelve months. Significant additional financing must be obtained in order to provide
a sufficient source of operating capital and to allow us to continue to operate as a going concern. In addition, we will need to
raise capital to complete the recently approved human clinical trial in the U.S.
We do not expect revenue from operations will
be sufficient to satisfy our funding requirements in the near term, and accordingly, our ability to continue operations and 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. Future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved
in obtaining regulatory approvals, competing technological and market developments, as well as our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing
negative cash flows and net losses for the foreseeable future. Assuming that we receive the full amount of the offering proceeds
(approximately $7,000,000), we believe that we will have sufficient revenue to complete the current clinical trial and continue
operations for at least twelve months; however, we cannot assure that such funds will be sufficient to fund other clinical trial
opportunities or other research and development activities that we may have the need or opportunity to undertake during such period.
Should the U.S. Government elect not to exercise
the option for year five of our DARPA contract, the effects may be material to us. The loss of revenues from the DARPA contract
would have a material impact on our revenues, operating cash flows and liquidity.
Cash Flows
Cash flows from operating, investing and financing
activities, as reflected in the accompanying Condensed Consolidated Statements of Cash Flows, are summarized as follows (in thousands):
| |
(In thousands) For the nine months ended | |
| |
December 31, 2014 | | |
December 31, 2013 | |
Cash (used in) provided by: | |
| | | |
| | |
Operating activities | |
$ | (3,152 | ) | |
$ | (1,584 | ) |
Investing activities | |
| – | | |
| (61 | ) |
Financing activities | |
| 4,677 | | |
| 3,375 | |
Net increase in cash | |
$ | 1,525 | | |
$ | 1,730 | |
Net cash from operating activities. We used cash in our operating
activities due to our losses from operations. Net cash used in operating activities was approximately $3,152,000 in the nine months
ended December 31, 2014 compared to $1,584,000 in the nine months ended December 31, 2013, an increase of $1,568,000. The
$1,568,000 increase was primarily due to our increased operating loss.
Net cash from investing activities. We did not have any investing
activities in the nine months ended December 31, 2014. In the nine months ended December 31, 2013, we purchased approximately $61,000
of property and equipment.
Net cash from financing activities. Net cash generated from
financing activities increased from approximately $3,375,000 in the nine months ended December 31, 2013 to $4,677,000 in the nine
months ended December 31, 2014.
An increase in working capital during the nine
months ended December 31, 2014 in the amount of approximately $15,541,000 changed our working capital position to approximately
$1,372,000 at December 31, 2014 from a negative working capital of approximately ($14,169,000) at March 31, 2014. The most significant
factors in the increase in working capital noted above were a decrease in derivative liability of approximately $10,679,000, a
reduction in the current portion of our convertible notes payable and notes payable of approximately $1,880,000, and an increase
in cash of approximately $1,525,000.
At the date of this filing, we plan to invest significantly into purchases of our raw materials
and into our contract manufacturing arrangement subject to successfully raising additional capital.
Critical Accounting Policies
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires us to make a number of estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions
affect the reported amounts of expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions
based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable
in the circumstances; however, actual results may differ from these estimates under different future conditions. We believe that
the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in
that they require the most difficult, subjective or complex judgments, form the basis for the accounting policies deemed to be
most critical to us. These critical accounting estimates relate to revenue recognition, stock purchase warrants issued with notes
payable, beneficial conversion feature of convertible notes payable, impairment of intangible assets and long lived assets, stock
compensation, deferred tax asset valuation allowance, and contingencies.
Fair Value Measurements
We measure the fair value of applicable financial
and non-financial instruments based on the following fair value hierarchy:
|
· |
Level 1: Quoted market prices in active markets for identical assets or liabilities. |
|
· |
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. |
|
· |
Level 3: Unobservable inputs that are not corroborated by market data. |
The hierarchy noted above requires us to minimize
the use of unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of derivative liabilities is
determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record
derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of
operations.
Revenue Recognition
With respect to revenue recognition, we entered
into a government contract with DARPA and have recognized revenue during the fiscal years ended March 31, 2014 and 2013 of $1,466,482
and $1,230,004, respectively, under such contract. We adopted the Milestone method of revenue recognition for the DARPA contract
under ASC 605-28 “Revenue Recognition – Milestone Method” and we believe we meet the requirements under ASC 605-28
for reporting contract revenue under the Milestone Method for the fiscal years ended March 31, 2014 and 2013.
We also recognize revenue under for a secondary
smaller contract under a time and materials non-fixed price basis where we recognize revenue as the services are performed.
Stock Purchase Warrants
We grant warrants in connection with the issuance
of certain notes payable and other financing transactions. When such warrants are classified as equity, we measure the relative
estimated fair value of such warrants which represents a discount from the face amount of the notes payable. Such discounts are
amortized to interest expense over the term of the notes. We analyze such warrants for classification as either equity or derivative
liabilities and value them based on binomial lattice models.
Beneficial Conversion Feature of 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 of which we measure the estimated fair value in circumstances in which the conversion feature is not required to be separated
from the host instrument and accounted for separately, and record that value in the consolidated financial statements as a discount
from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.
Share-based Compensation
We account for share-based compensation awards
using the fair-value method and record such expense based on the grant date fair value in the consolidated financial statements
over the requisite service period.
Derivative Instruments
We evaluate free-standing derivative instruments
(or embedded derivatives) to properly classify such instruments within equity or as liabilities in our financial statements. Our
policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument
is reassessed at each reporting date. If the classification changes as a result of events during a reporting period, the instrument
is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract
may be reclassified.
Instruments classified as derivative liabilities
are remeasured each reporting period (or upon reclassification) and the change in fair value is recorded on our consolidated statement
of operations in other expense (income).
Deferred Tax Asset Valuation Allowance
Deferred tax assets are recognized for the future
tax consequences attributable to the difference between the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is
more likely than not that some portion of the deferred tax assets may not be realized.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to
investors.
Material Changes Subsequent to December 31, 2014
In addition to the billings and collections
on our government contracts noted above, the following discussion details specific transactions we entered into after December
31, 2014 that effect our liquidity and capital resources:
Debt Reduction
Subsequent to December 31, 2014, we paid off
the remaining principal and interest on the two remaining 12% Notes with cash payments totaling $68,063 and all of the 12% Notes
were cancelled.
Note Conversions
Subsequent to December 31, 2014, we issued an
aggregate of 98,688 shares of common stock to two accredited investors upon the conversion of an aggregate of $207,245 of unpaid
principal and accrued interest due under promissory notes we previously issued to the investors. The conversion price per share
was $2.10 based on prior anti-dilution price adjustments.
Warrant Exercises
Subsequent to December 31, 2014, we issued an
aggregate of 3,574 shares of common stock to an accredited investor upon the exercise of a previously issued warrant. The warrant
was exercised on a cashless or “net” basis. Accordingly, we did not receive any proceeds from such exercise. The cashless
exercise of such warrant resulted in the cancellation of a previously issued warrant to purchase an aggregate of 5,176 shares of
common stock.
BUSINESS
Overview and Corporate History
We create medical devices to address unmet therapeutic
needs in infectious disease, cancer and other life-threatening conditions. Our lead product is the Aethlon Hemopurifier, a
device that selectively targets the rapid elimination of circulating viruses and tumor-secreted exosomes that promote cancer progression.
Through our majority-owned subsidiary, Exosome Sciences, Inc., or Exosome, we are also developing exosome-based products
to diagnose and monitor neurological disorders and cancer. In addition, we operate under a Department of Defense contract through
the Defense Advanced Research Projects Agency, or DARPA, related to the development of a sepsis treatment device. We also operate
under a second Department of Defense contract as a subcontractor.
On March 10, 1999, Aethlon, Inc., a California
corporation, Hemex, Inc., a Delaware corporation and the accounting predecessor to Aethlon, Inc., and Bishop, Inc., a publicly
traded company, completed an Agreement and Plan of Reorganization structured to result in Bishop, Inc.'s acquisition of all of
the outstanding common shares of Aethlon, Inc. and Hemex, Inc. Under the plan's terms, Bishop, Inc. issued shares of its common
stock to the stockholders of Aethlon, Inc. and Hemex, Inc. such that Bishop, Inc. then owned 100% of each company. Upon completion
of the transaction, Bishop, Inc. was renamed Aethlon Medical, Inc. Our executive offices are located at 9635 Granite Ridge Drive,
Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. All references to “us” or “we”
are references to Aethlon Medical, Inc., combined with its subsidiary.
Target Market and Strategy
Our business is divided into three areas. First,
we are advancing our lead product, the Aethlon Hemopurifier, which targets the removal of circulating viruses and shed glycoproteins
to treat infectious viral pathogens. In oncology indications, the Hemopurifier targets the removal of circulating exosomes, which
are secreted by tumors to aid in cancer progression.
The second focus is government contracting.
We operate under two Department of Defense contracts related to a program entitled “Dialysis-Like Therapeutics.” One
is a contract with DARPA, and the other is a subcontract with Battelle Memorial Institute, or Battelle. Under these
contracts, our tasks include the development of a dialysis-like device to prevent sepsis, a fatal bloodstream infection that is
often the cause of death in combat-injured soldiers.
The third facet is conducted through Exosome,
which is developing exosome-based products to diagnose and monitor neurological disorders and cancer.
We have developed
the Hemopurifier primarily for use as an adjunct therapy to improve the benefit of infectious disease and cancer therapies marketed
by pharmaceutical organizations. For example, a clinical trial protocol administered at the Medanta Medicity Institute in India
was designed to treat Hepatitis C patients as they began their standard of care drug regimen as a means to reduce the time it normally
takes for the virus to become undetectable in the patient’s blood. At
completion of the Medanta Medicity study, we reported that patients who received the Hemopurifier therapy protocol had higher rapid
virologic response and sustained virologic response rates as compared to what would normally be expected for Hepatitis C virus
infected individuals who receive standard of care interferon-ribavirin drug therapy alone. We are also studying the use of our
Hemopurifier as a first-line therapeutic solution against viral pathogens that are not treatable with antiviral drugs as well as
viral pathogens that have evolved to become drug resistant.
Our Lead Device: The Aethlon Hemopurifier
The Aethlon Hemopurifier is a device that
selectively targets the rapid elimination of circulating viruses and tumor-secreted exosomes that promote cancer progression. More
specifically, the Hemopurifier addresses antiviral drug-resistance in Hepatitis C virus and Human Immunodeficiency Virus-infected
individuals; serves as a countermeasure against viral pathogens not addressed by drug or vaccine therapies; and, we believe, represents
the first therapeutic strategy to address cancer promoting exosomes. In clinical studies conducted in India, safety and efficacy
observations of Hemopurifier therapy have been observed in both Hepatitis C virus and Human Immunodeficiency Virus-infected individuals.
We have recently initiated patient recruitment for the first U.S. Food and Drug Administration, or FDA, approved studies of Hemopurifier
therapy in the U.S.
The Scientific Mechanism of the Hemopurifier
The Hemopurifier is an extracorporeal
device designed for the single-use removal of viruses, viral toxins, and deleterious exosomes from the circulatory system of treated
patients. Delivery of Hemopurifier therapy can occur through the established infrastructure of continuous renal replacement therapy
and dialysis instruments routinely found in hospitals and clinics worldwide. Many extracorporeal techniques, such as dialysis or
plasmapheresis, are designed to remove circulating particles solely by molecule size. However, the Hemopurifier incorporates a
lectin affinity agent that is designed to bind to a unique high mannose signature that is abundant on the surface of tumor-derived
exosomes and glycoproteins that reside on the outer membrane of infectious viruses. The Hemopurifier is designed to provide a broad-spectrum
mechanism to inhibit the presence of certain cancer and infectious disease related particles. A single treatment with the Hempurifier
can last from three to six and one half hours in duration.
The Hemopurifier - Antiviral Drug-Resistance; Planned U.S. Clinical
Trials
The Hemopurifier provides a novel methodology
to target mutant viral strains that trigger antiviral drug resistance in both Human Immunodeficiency Virus and Hepatitis C virus
infections. In Hepatitis C virus care, we believe the Hemopurifier is positioned to address drug resistance associated with emerging
all-antiviral therapies and also to accelerate Hepatitis C virus depletion at the outset of peginterferon+ribavirin therapy.
Based on previous studies we conducted in India,
safety and efficacy observations of Hemopurifier therapy have been observed in both disease conditions. As a result of these outcomes,
we have received an opportunity to initiate the first FDA-approved feasibility study of Hemopurifier therapy in the United States.
The feasibility study is now enrolling Hepatitis C virus-infected patients to be treated at DaVita MedCenter Dialysis in Houston,
Texas. There is one patient enrolled in the study, who enrolled in February 2015. The principal investigator for the study will
be Dr. Stephen Z. Fadem, who is co-medical director of DaVita MedCenter Dialysis.
Successful completion of this study will permit
us to initiate further stage studies that are required for market clearance to treat Hepatitis C virus and other viral pathogens
in the U.S. Our feasibility study protocol calls for the enrollment of ten Hepatitis C virus-infected end stage renal disease patients
who have not received any pharmaceutical therapy for their Hepatitis C virus infection for at least 30 days. The protocol will
consist of a control phase of three consecutive standard dialysis treatments during week one followed by the inclusion of our Hemopurifier
during a total of six dialysis sessions conducted during weeks two and three. The rate of adverse events observed during the Hemopurifier
therapy phase will be compared to the rate experienced during the control phase. Per-treatment changes of viral load will be observed
through quantitative polymerase chain reaction analysis. Additionally, we plan to measure the number of viral copies of Hepatitis C
virus captured within the Hemopurifier during each treatment session.
On February 14, 2014, we entered into an
agreement with Total Renal Research, Inc. (dba DaVita Clinical Research). Pursuant to the agreement, Da Vita
Clinical Research is conducting site management administrative services for a study. The agreement with DaVita Clinical
Research requires us to pay certain expenses related to the study protocol projected to be less than $200,000, including
certain start-up and close-out costs, patient compensation and project management fees. Additional activities and completion
of the clinical trials will require us to pay additional costs estimated to be $650,000. We will also be responsible for the
fees for any third-party consulting physicians, including Dr. Fadem, utilized in connection with the study and other
pass-through expenses if incurred. The work order under this agreement was effective as of May 16, 2014 and will continue in
effect until completion of the services being provided by DaVita Clinical Research.
The Hemopurifier - Antiviral Studies in
India
Previously, we conducted Hepatitis C virus treatment
studies at the Apollo Hospital, Fortis Hospital, and most recently the Medanta Medicity Institute in India.
In the Medanta Medicity Institute study, twelve
Hepatitis C virus-infected individuals were enrolled to receive three six-hour Hemopurifier treatments during the first three days
of a 48-week peginterferon+ribavirin treatment regimen. The study was conducted under the leadership of Dr. Vijay Kher at the Medanta
Medicity Institute, a multi-specialty medical institute established to be a premier center for medical tourism in India. Dr. Kher’s
staff reported that Hemopurifier therapy was well tolerated and without device-related adverse events in the twelve treated patients.
Of these twelve patients, ten completed the
Hemopurifier-peginterferon+ribavirin treatment protocol, including eight genotype-1 patients and two genotype-3 patients. Eight
of the ten patients achieved a sustained virologic response, which is the clinical definition of treatment cure and is defined
as undetectable Hepatitis C virus in the blood 24 weeks after the completion of the 48-week peginterferon+ribavirin drug regimen.
Both genotype-3 patients achieved a sustained virologic response, while six of the eight genotype-1 patients achieved a sustained
virologic response.
Of the ten patients who completed the full treatment
protocol, five also achieved a rapid virologic response, defined as undetectable Hepatitis C virus in the blood at day 30 of therapy.
Rapid virologic response represents the clinical endpoint that best predicts sustained virologic response cure rates resulting
from peginterferon+ribavirin therapy. As a point of reference, the landmark Individualized Dosing Efficacy vs Flat Dosing to Assess
Optimal Pegylated Interferon Therapy study of 3,070 Hepatitis C virus genotype-1 patients documented that 10.35% (n=318/3070) of
peginterferon+ribavirin-treated patients achieved a rapid virologic response. Patients who achieved a rapid virologic response
had sustained virologic response rates of 86.2% (n=274/318) versus sustained virologic response rates of 32.5% (n=897/2752) in
non-rapid virologic response patients. Two of the genotype-1 patients who achieved a rapid virologic response also achieved
an immediate virologic response, defined as undetectable Hepatitis C virus in the blood seven days after initiation of Hemopurifier-peginterferon+ribavirin
treatment protocol. The earliest measured report of undetectable Hepatitis C virus in blood in the Individualized Dosing Efficacy
vs Flat Dosing to Assess Optimal Pegylated Interferon Therapy study was on day 14 of the study.
Data from two patients was not included in the
reported Hemopurifier-peginterferon+ribavirin dataset. One of these patients was a genotype-5 patient who discontinued peginterferon+ribavirin
therapy at day 180, yet still achieved a sustained virologic response. The second patient was a genotype-3 patient who also achieved
a sustained virologic response, yet was unable to tolerate peginterferon+ribavirin therapy and discontinued therapy at day-90.
Overall, ten of the twelve patients who enrolled in the study achieved a sustained virologic response and seven of the twelve patients
achieved a rapid virologic response.
Hemopurifier - Human Immunodeficiency Virus; Single Proof Study
In addition to treating Hepatitis C virus-infected
individuals, we have conducted a single proof-of-principle treatment study related to the treatment of Human Immunodeficiency Virus.
In the study, Hemopurifier therapy reduced viral load by 93% in a Human Immunodeficiency Virus-Acquired Immunodeficiency Syndrome-infected
individual without the administration of antiviral drug therapy. The study protocol provided for 12 Hemopurifier treatments,
each four hours in duration, which were administered over the course of one month.
Researchers at the Morehouse School of Medicine
have since discovered that the Hemopurifier is able to capture exosomes that transport negative regulatory factor protein, which
is reported to suppress the immune response in Human Immunodeficiency Virus-infected individuals.
The Hemopurifier - Viral Pathogens Not Addressed by Drug Therapies
The protocol design of our forthcoming FDA-approved
study was originally designed as a human safety challenge and model for addressing drug and vaccine resistant bioterror and emerging
pandemic threats. In vitro studies conducted by leading government and non-government researchers have demonstrated that
the Hemopurifier is able to capture a broad-spectrum of some of world’s deadliest viral pathogens. These include: Dengue
hemorrhagic fever, Ebola hemorrhagic fever, Lassa hemorrhagic fever, H5N1 avian influenza, H1N1 swine flu virus, the reconstructed
1918 influenza virus, West Nile virus and Vaccinia and Monkeypox, which serve as models for human smallpox infection. Human efficacy
studies are not permissible against high-threat bioterror and pandemic threats.
The following table lists some of the key viral
pathogens captured during in vitro studies and the name of the research institute that ran the study.
Virus Type |
Collaborator |
Ebola Virus |
United States Army Medical Research Institute of Infectious Diseases/Center for Disease Control |
Dengue Fever |
National Institute of Virology/World Health Organization |
Lassa Hemorrhagic Fever |
Southwest Foundation for Biomedical Research |
West Nile Virus |
Battelle |
H5N1 Avian Flu |
Battelle |
1918-r Spanish Flu |
Battelle |
2009 H1N1 Swine Flu |
Battelle |
The Hemopurifier - Candidate to Treat Cancer
In “Extracellular Vesicles: Emerging Targets
for Cancer Therapy,” a review article sponsored by the National Cancer Institute and published in the July 2014 issue of
Trends in Molecular Medicine, we were the sole organization referenced to have a therapeutic candidate to address tumor-secreted
exosomes, which have been discovered to suppress the immune system of cancer patients, seed the creation and spread of metastasis,
promote angiogenesis, trigger resistance to chemotherapy, and transport primary cancer therapeutic targets of the biopharmaceutical
industry. To date, we have received an issued patent that protects the use of our Hemopurifier to remove immunosuppressive extracellular
vesicles or exosomes from the blood of cancer patients. Through internal research and external research collaborations, we
have demonstrated that the affinity lectin immobilized in our Hemopurifier is able to bind exosomes underlying a broad-spectrum
of disease indications including cancer.
We believe that Hemopurifier therapy could play
a role in the emerging immuno-oncology industry as an adjunct that can combine with established and emerging cancer therapies without
adding drug toxicity. More specifically, we believe that a mechanism to inhibit exosome immune suppression should be clinically
tested in combination with drugs designed to stimulate the immune response.
On April 9, 2015, we entered into an investigator-initiated
clinical trial agreement with the University of California, Irvine, or UCI, pursuant to which UCI will conduct a five-year clinical
study protocol entitled “Plasma Exosome Concentration in Cancer Patients Undergoing Treatment.” The protocol will seek
to enroll five individuals in each of nine defined tumor types for a total study population of up to 45 subjects. The tumor types
include the following forms of cancer: breast adenocarcinoma, colorectal, gastric and gastroesophageal, pancreatic, cholangiocarcinoma,
lung, head and neck, melanoma and ovarian adenocarcinoma. The principal investigator of the study is Edward Nelson, M.D. The budget
for the protocol provides for (i) $19,032 in startup charges; (ii) $8,039 in protocol-related variable pass-through charges; and
(iii) per subject visit charges of $3,359 per subject, for a total subject visit charge of $151,155 for 45 subjects. We will bear
these costs. UCI may disseminate the results of the clinical trial through presentation and publication but may not disclose any
of our confidential information.
Exosome Sciences, Inc. - Diagnostic Candidates
Through our majority-owned subsidiary Exosome,
we are developing exosome-based product candidates to diagnose and monitor neurological disorders and cancer. Since it began operations
in 2013, Exosome researchers have disclosed that they have isolated brain-specific biomarkers associated with Alzheimer's Disease
and Chronic Traumatic Encephalopathy. Specific to Chronic Traumatic Encephalopathy, Exosome is participating in a research
collaboration with The Boston University CTE Center to study the correlation of a biomarker known as tausome with Chronic Traumatic
Encephalopathy. On April 16, 2015, Boston University School of Medicine announced preliminary, unpublished findings related to
the study, which showed that researchers were able to isolate and quantify the presence of tausomes in the blood. The results
are preliminary and additional research is required. Researchers at Exosome are also studying lectin-based affinity techniques
to isolate cancer related exosomes.
Exosome researchers have demonstrated the ability
to identify, quantify, and characterize circulating Glioblastoma multiforme exosomes, which hold promise as a disease biomarker
to identify the early detection of this aggressive form of cancer and monitor response to therapy. We believe that the discovery
of circulating glioblastoma multiforme exosomes may offer a potential new paradigm in glioblastoma multiforme exosomes clinical
management through a platform technology to predict tumor regression or progression.
U.S. Government Contract with the Defense Advanced Research Projects
Agency
On September 30, 2011, we entered into a $6.8
million multi-year contract with the Defense Advanced Research Projects Agency, or DARPA, part of the Department of Defense, resulting
from our response to a program entitled “Dialysis-Like Therapeutics.” Under this contract, our tasks include
the development of a dialysis-like device to prevent sepsis, a fatal bloodstream infection that is often the cause of death in
combat-injured soldiers.
The initial award from DARPA was a fixed-price
contract with potential total payments to us of $6,794,389 over the course of five years. As noted below, such contract was subsequently
reduced by $858,469. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award
during each year of the contract. Under the terms of the contract, we are required to perform certain incremental work towards
the achievement of specific milestones against which we will invoice the government for fixed payment amounts.
Originally, only the base year (year one of
the contract) was effective for the parties, however, DARPA subsequently exercised the option on the second, third and fourth years
of the contract. DARPA has the option to enter into the contract for year five. The milestones are comprised of planning, engineering
and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants
under the contract. We cannot assure you that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the remaining contract term. We cannot assure you that DARPA will exercise its option to continue the contract
for year five. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of
our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and
blood processing instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years
three through five.
The DARPA contract requires us to perform certain
scientific research and development activities geared toward the achievement of specific milestones set forth in the contract.
During the fiscal years ended March 31, 2013 and March 31, 2014, we recognized revenue of $1,230,004 and $1,466,467, respectively,
under the DARPA contract. During the fiscal year ended March 31, 2015, we recognized revenue of $630,887 under the DARPA contract.
Based on the DARPA contract, as now in force, we may achieve up to an additional $1,154,293 in revenue under the DARPA contract
during the fiscal years ending March 31, 2016 and March 31, 2017.
Subcontract with Battelle Memorial Institute
We entered into a subcontract agreement with
Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the DARPA
contract, and we are one of several subcontractors on that systems integration project. We began generating revenues under the
subcontract in the three months ended September 30, 2013. Through March 31, 2015, we have billed $288,818 and collected $284,577.
Our expected future revenue from the subcontract will be at the discretion of Battelle. The Battelle subcontract is our first cost-reimbursable
contract.
Our revenue under this contract is a function
of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates
for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost
of any consultants hired by us to perform work on the project. Each payment will require approval by the program manager at Battelle.
Research and Development Costs
A substantial portion of our operating budget
is used for research and development activities. The cost of research and development, all of which has been charged to operations,
amounted to approximately $1,509,000 and $1,440,000 in the fiscal years ended March 31, 2014 and 2013, respectively. For the nine
months ended December 31, 2014 and 2013, we recorded research and development costs of approximately $748,000 and $1,178,000, respectively.
Intellectual Property
We currently own or have license rights to a
number of U.S. and foreign patents and patent applications and endeavor to continually improve our intellectual property position.
We consider the protection of our technology, whether owned or licensed, to the exclusion of use by others, to be vital to our
business. While we intend to focus primarily on patented or patentable technology, we may also rely on trade secrets, unpatented
property, know-how, regulatory exclusivity, patent extensions and continuing technological innovation to develop our competitive
position. We also own certain trademarks.
Patents
We have been exclusively assigned all rights
and title to and interest in an invention and related worldwide patent rights for a method to treat cancer under an assignment
agreement with the London Health Science Center Research, Inc. The invention provides for the "Depression of anticancer immunity
through extracorporeal removal of microvesicular particles" (including exosomes) for which the U.S. Patent and Trademark Office
issued a patent in 2012 (patent #8,288,172) and for which we have filed additional patent applications domestically and abroad
(patent applications #US13/623662, #US14/180093, #US14/185033, #EP7,752,778.6, #HK9,104,740.6, #IN8139/DELNP/2008 and #CA2644855).
Please see the tables below for more information regarding these patents and patent applications.
The agreement provides for an upfront payment
of 800 shares of restricted common stock and a 2% royalty on any future net sales. We are also responsible for paying certain patent
application and filing costs. Under the assignment agreement, the London Health Science Center Research, Inc. sold and assigned
all of its rights, title and interest in the worldwide patents to us.
The following table lists all of our issued
patents and patent applications, including their ownership status:
Patents Issued in the United States
PATENT # |
PATENT NAME |
ISSUANCE
DATE |
OWNED OR
LICENSED |
EXPIRATION
DATE |
8,288,172 |
Extracorporeal removal of microvesicular particles (exosomes) (method patent) |
10/16/12 |
Owned |
3/30/29 |
7,226,429 |
Method for removal of viruses from blood by lectin affinity hemodialysis |
6/5/07 |
Owned |
1/20/25 |
6,528,057 |
Method for removal of HIV and other viruses from blood |
3/4/03 |
Licensed |
8/30/19 |
Patent Applications in the United States
APPLICATION # |
APPLICATION NAME |
FILING
DATE |
OWNED OR
LICENSED |
14/490,418 |
Method for removal of viruses from blood by lectin affinity hemodialysis |
9/18/14 |
Owned |
12/600236 |
Device and method for purifying virally infected blood |
5/12/11 |
Owned |
14/512129 |
Affinity capture of circulating biomarkers |
10/10/14 |
Owned |
13/623662 |
Extracorporeal removal of microvesicular particles |
9/20/12 |
Owned |
13/808561 |
Methods and compositions for quantifying exosomes |
8/14/13 |
Owned |
14/180093 |
Extracorporeal removal of microvesicular particles |
2/13/14 |
Owned |
14/185033 |
Extracorporeal removal of microvesicular particles |
2/20/14 |
Owned |
61/982190 |
Methods for delivering regional citrate anticoagulation during extracorporeal blood treatments |
4/21/14 |
Owned |
PCT/US2015/
017800 |
Brain specific exosome based diagnostics and extracorporeal therapies |
2/26/15 |
Owned |
Foreign Patents
PATENT # |
PATENT NAME |
ISSUANCE
DATE |
OWNED OR
LICENSED |
EXPIRATION
DATE |
2,353,399 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Russia) |
4/27/09 |
Owned |
1/20/24 |
770,344 |
Method for removal of HIV and other viruses from blood (Australia) |
6/3/04 |
Licensed |
8/30/19 |
DE69929986 |
Method for removal of HIV and other viruses from blood (Germany) |
2/22/06 |
Licensed |
8/30/19 |
1,109,564 |
Method for removal of HIV and other viruses from blood (France) |
2/22/06 |
Licensed |
8/30/19 |
1,109,564 |
Method for removal of HIV and other viruses from blood (Great Britain) |
2/22/06 |
Licensed |
8/30/19 |
1,109,564 |
Method for removal of HIV and other viruses from blood (Italy) |
2/22/06 |
Licensed |
8/30/19 |
2342203 |
Method for removal of HIV and other viruses from blood (Canada) |
3/1/11 |
Licensed |
8/30/19 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Belgium) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Ireland) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Italy) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Great Britain) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (France) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Germany) |
7/17/13 |
Owned |
1/20/24 |
2,516,403 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Canada) |
8/12/14 |
Owned |
1/20/24 |
Foreign Patent Applications
|
|
FILING |
OWNED OR |
APPLICATION # |
APPLICATION NAME |
DATE |
LICENSED |
EP20070752778 |
Extracorporeal removal of microvesicular particles (exosomes) (Europe) |
3/9/07 |
Owned |
9,104,740.6 |
Extracorporeal removal of microvesicular particles (exosomes) (Hong Kong) |
3/9/07 |
Owned |
8139/DELNP/2008 |
Extracorporeal removal of microvesicular particles (exosomes) (India) |
3/9/07 |
Owned |
2644855 |
Extracorporeal removal of microvesicular particles (Canada) |
3/9/07 |
Owned |
EP20110804372 |
Methods and compositions for quantifying exosomes (Europe) |
7/7/11 |
Owned |
_______________
We expect that our ability to enforce our patents
and proprietary rights in many countries will be adversely impacted due to possible changes in law, our lack of familiarity with
foreign law, or our lack of professional resources in jurisdictions outside the U.S. We cannot guarantee that any patents issued
or licensed to us, including within the U.S., will provide us with competitive advantages or will not be challenged by others,
or will not expire prior to our successful commercialization of our products. Furthermore, we cannot be certain that others will
not independently develop similar products or will not design around patents issued or licensed to us. We cannot guarantee that
patents that are issued will not be challenged, invalidated or infringed upon or designed around by others, or that the claims
contained in such patents will not infringe the patent claims of others, or provide us with significant protection against competitive
products, or otherwise be commercially valuable. We may need to acquire licenses under patents belonging to others for technology
potentially useful or necessary to us. If any such licenses are required, we cannot be certain that they will be available on terms
acceptable to us, if at all. To the extent that we are unable to obtain patent protection for our products or technology, our business
may be materially adversely affected by competitors who develop substantially equivalent technology.
Trademarks
We have obtained registered trademarks in the
U.S. for the marks Exosome Sciences®, Hemopurifier and Aethlon Medical, Inc. and have applied for the Tausome trademark in
the U.S., which application is currently pending. We have applied for trademark protection on Hemopurifier in India and that application
is currently pending. We also have common law trademark rights in Aethlon ADAPT™ and ELLSA™.
Licensing and Assignment Agreements
Effective January 1, 2000, we entered into an
agreement with a related party under which an invention and related patent rights for a method of removing Human Immunodeficiency
and other viruses from the blood using the Hemopurifier were assigned to us by the inventors in exchange for an 8.75% royalty to
be paid on future net sales of the patented product or process and shares of our common stock. On March 4, 2003, the related patent
(patent #6,528,057) was issued and we issued 3,922 shares of restricted common stock to that related party. The license runs for
the life of the patent, which expires in August 2019.
On November 7, 2006, we entered into an exclusive
assignment agreement with the London Health Science Center Research, Inc. under which an invention and related patent rights for
a method to treat cancer were assigned to us. The invention provides for the "Extracorporeal removal of microvesicular particles"
for which the U.S. Patent and Trademark Office allowed a patent (patent #8,288,172) in the U.S. as of October 2012. The agreement
provides for an upfront payment of 800 shares of restricted common stock and a 2% royalty on any future net sales. We are also
responsible for paying certain patent application and filing costs. Under the assignment agreement, we own the patents outright
for the life of the patent, which expires in March 2029. Under certain circumstances, ownership of the patents may revert back
to the London Health Science Center Research, Inc. if there is an uncured substantial breach of the assignment agreement.
Industry
The industry for treating infectious disease
and cancer is extremely competitive, and companies developing new treatment procedures face significant capital and regulatory
challenges. Additionally, as the Hemopurifier is a new device, we have the additional challenge of establishing medical industry
support, which will be driven by treatment data resulting from clinical studies of each disease condition that we pursue. The industry
includes pharmaceutical companies and medical device companies competing to treat illnesses on a worldwide basis.
Competition
We are advancing our Hemopurifier as a treatment
strategy to enhance and prolong current drug therapies by removing the viral strains that cause drug resistance. We are also advancing
the Hemopurifier as a tool for cancer treatment in conjunction with existing, and to be developed, cancer therapies. The Hemopurifier
also may prolong life for infected patients who have become drug resistant or have been infected with a viral pathogen for which
there is no drug or vaccine therapy. We believe our Hemopurifier augments the benefit of drug therapies and should not be considered
a competitor to such treatments. However, if the industry considered the Hemopurifier to be a potential replacement for drug therapy,
or a device that limited the need or volume of existing drug therapies, then the marketplace for the Hemopurifier would be extremely
competitive. We believe our Hemopurifier is the sole therapeutic device able to selectively remove viruses and immunosuppressive
proteins from circulation. However, we are aware that Asahi Kasei Kurary Medical based in Japan has created a double filtration
plasmapheresis system that indiscriminately removes particles from blood in a certain molecule range that includes Hepatitis C
virus. Asahi Kasei Kurary Medical is now marketing this device in Japan as an adjunct therapy for Hepatitis C virus. We may also
face competition from producers of antiviral drugs and vaccines.
Government Regulation of Medical Devices
The Hemopurifier is subject to regulation by
numerous regulatory bodies, primarily the FDA, and comparable international regulatory agencies. These agencies require manufacturers
of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling,
marketing, storage, distribution, advertising and promotion, and post-marketing surveillance reporting of medical devices. Devices
are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation
program be conducted before a device receives approval for commercial distribution. Failure to obtain approval or clearance to
market our product and products under development and to meet the ongoing requirements of these regulatory authorities could prevent
us from commercializing the Hemopurifier and future products in the U.S. and elsewhere.
Hemopurifier Investigational Device Exemption and Supplement
In 2013, the FDA approved
our investigational device exemption to initiate human clinical studies in the U.S. as a feasibility study. We were
required to reach agreement with the internal review board of DaVita MedCenter Dialysis prior to beginning our U.S. clinical
trial. We are also required to obtain patients' informed consent that complies with both FDA requirements and state and
federal privacy regulations. We, the FDA or the internal review board at each site at which a clinical trial is being
performed may suspend a clinical trial at any time for various reasons, including a belief that the risks to study subjects
outweigh the benefits. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and
efficacy of the device, may be equivocal or may otherwise not be sufficient to obtain approval of the product. The
investigational device exemption is part of the FDA’s clearance process. This process is discussed in detail in the
“Pre-Marketing Regulations in the U.S.” section below.
In December 2014, the FDA approved our request
for a supplement to our investigational device exemption to establish a protocol to clinically investigate the use of the Hemopurifier
for the treatment of Ebola-infected patients in the U.S. Under the supplement, we may treat up to 20 Ebola-infected persons, at
no more than 10 institutions in the U.S., using the supplement protocol; however, this is not a clinical trial. We must clearly
distinguish data collected in the supplement protocol from data collected in our chronic Hepatitis C virus clinical trial (discussed
above). Prior to treating Ebola-infected patients, we must comply with specified patient protection procedures established by the
applicable institution including its institutional review board. Also, we must report any unanticipated adverse events resulting
from the supplement protocol to the FDA within 10 working days. Even if the protocol is established, and patients are treated,
the results of such treatments may not demonstrate the safety and efficacy of the device. In addition, we cannot assure you that
any Ebola-infected individuals will be treated under this protocol.
Pre-Marketing Regulations in the U.S.
Unless an exemption applies,
each medical device distributed commercially in the United States requires either prior 510(k) clearance or premarket approval,
or PMA, from the FDA. The FDA classifies medical devices into one of three classes. Class I devices are subject to only general
controls, such as establishment registration and device listing, labeling, medical device reporting, and prohibitions against adulteration
and misbranding. Class II medical devices generally require prior 510(k) clearance before they may be commercially marketed in
the United States. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable
devices, or devices deemed not substantially equivalent to a predicate device, are placed in Class III, generally requiring submission
of a PMA supported by clinical trial data. Our Hemopurifier is a Class III product, and we believe that products utilizing our
Aethlon ADAPT™ system will be considered to be Class III products and thus will require submission and approval of a PMA.
In the future, we may develop new products that are considered to be Class II and require the clearance of a 510(k).
510(k) Clearance Pathway
To obtain 510(k) clearance,
a premarket notification must be submitted to FDA demonstrating that the proposed device is substantially equivalent to a previously
cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called
for the submission of premarket approval applications. FDA’s 510(k) clearance pathway usually takes from three to twelve
months, but it can take significantly longer. The FDA may require additional information, including clinical data, to make a determination
regarding substantial equivalence.
After a device receives
510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new
or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, require premarket approval.
The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), or a premarket approval,
but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with
a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device
until 510(k) clearance or premarket approval is obtained. If the FDA requires a 510(k) holder to seek 510(k) clearance or premarket
approval for any modifications to a previously cleared product, the 510(k) holder also may be required to cease marketing or recall
the modified device until this clearance or approval is obtained.
Premarket Approval
Pathway
A PMA must be supported
by extensive data, including but not limited to data obtained from technical, preclinical and clinical studies and relating to
manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
After a PMA submission
is sufficiently complete, the FDA will accept the application and begin an in-depth review, which generally takes between one and
three years, but may take significantly longer. During this review period, the FDA will typically request additional information
or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may be convened to
review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The FDA may or
may not accept the panel’s recommendation. In addition, the FDA will conduct a pre-approval inspection of the manufacturing
facility to ensure compliance with Quality System Regulation, or QSR. New PMA applications or PMA supplements are required for
modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to
the device’s indication for use, manufacturing process, labeling and design. PMA supplements often require submission of
the same type of information as a PMA application, except that the supplement is limited to information needed to support any changes
from the device covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory
panel.
Clinical Trials
Clinical trials are almost
always required to support a PMA. To perform a clinical trial in the United States for a significant risk device, FDA requires
the device sponsor to file an Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior
to commencing the human clinical trial. An IDE amendment or supplement must also be submitted before initiating a significant change
to the clinical protocol or device under an existing IDE. The IDE application must be supported by appropriate data, such as animal
and laboratory testing results, and any available data on human clinical experience, showing that it is safe to test the device
in humans and that the testing protocol is scientifically sound.
The IDE must be approved
in advance by the FDA for a specific number of patients. Clinical trials conducted in the U.S. for significant risk devices
may begin once the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, overseeing
the welfare of the research subjects and responsible for that particular clinical trial. Under its regulations, the FDA responds
to an IDE or an IDE amendment within 30 days. The FDA may approve the IDE or amendment, grant an approval with certain conditions,
or identify deficiencies and request additional information. It is common for the FDA to require additional information before
approving an IDE or amendment for a new trial, and thus final FDA approval on a submission may require more than the initial 30
days. The FDA may also require that a small-scale feasibility study be conducted before a pivotal trial may commence. In a feasibility
trial, the FDA limits the number of patients, sites and investigators that may participate. Feasibility trials are typically structured
to obtain information on safety and to help determine how large a pivotal trial should be to obtain statistically significant results.
Clinical trials are subject to extensive recordkeeping
and reporting requirements. Our clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial
sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. We are also
required to obtain the patients’ informed consent in form and substance that complies with both FDA requirements and state
and federal privacy and human subject protection regulations. We, the FDA or the IRB may suspend a clinical trial at any time for
various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed,
the results of clinical testing may not adequately demonstrate the safety and effectiveness of the device or may otherwise not
be sufficient to obtain FDA approval to market the product in the U.S.
Post-Marketing Regulations in the U.S.
Should our Hemopurifier device be cleared for
market use in the U.S. by the FDA, numerous regulatory requirements continue to apply. These include:
|
· |
the FDA's Quality System Regulation which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
|
· |
labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or off-label uses; |
|
· |
clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use; |
|
· |
medical device reporting regulations, which require that
manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in
a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; |
|
· |
product listing and establishment registration, which helps facilitate
FDA inspections and other regulatory action; and |
|
· |
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device. |
The regulations also require that we report
to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury.
We will also be required
to register with FDA as a medical device manufacturer within 30 days of commercial distribution of our products and must obtain
all necessary state permits or licenses to operate our business. As a manufacturer, we are subject to announced and unannounced
inspections by FDA to determine our compliance with quality system regulation and other regulations, and these inspections may
include the manufacturing facilities of our suppliers. Failure by us or by our suppliers to comply with applicable regulatory requirements
can result in enforcement action by the FDA or state authorities, which may include any of the following sanctions:
| · | untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
| · | unanticipated expenditures to address or defend such actions; |
| · | customer notifications for repair, replacement, refunds; |
| · | recall, detention or seizure of our products; |
| · | operating restrictions or partial suspension or total shutdown of production; |
| · | refusing or delaying our requests for premarket approval of new products or modified products; |
| · | withdrawing PMA approvals that have already been granted; |
| · | refusal to grant export approval for our products; or |
Compliance with U.S. Health Care Laws
We must comply with various U.S. federal and
state laws, rules and regulations pertaining to healthcare fraud and abuse, including anti-kickback regulations, as well as other
healthcare laws in connection with the commercialization of our products. Fraud and abuse laws are interpreted broadly and enforced
aggressively by various state and federal agencies, including the U.S. Department of Justice, the U.S. Office of Inspector General
for the Department of Health and Human Services and various state agencies.
The U.S. federal Anti-Kickback Statute, 42 U.S.C.
§ 1320a-7b, prohibits persons, including a medical device manufacturer (or a party acting on its behalf), from knowingly or
willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for a service or product or the purchasing, ordering, arranging for, or recommending the ordering of,
any service or product for which payment may be made by Medicare, Medicaid or any other federal healthcare program. This statute
has been interpreted to apply to arrangements between medical device manufacturers on one hand and healthcare providers on the
other. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted
to include anything of value, such as cash payments, gifts or gift certificates, discounts, waiver of payments, credit arrangements,
ownership interests, the furnishing of services, supplies or equipment, and the provision of anything at less than its fair market
value. Courts have broadly interpreted the scope of the law, holding that it may be violated if merely one purpose of an arrangement
is to induce referrals, irrespective of the existence of other legitimate purposes. The Anti-Kickback Statute prohibits many arrangements
and practices that are lawful in businesses outside of the healthcare industry. Although there are a number of statutory exemptions
and regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to
scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for
safe harbor protection from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by the
recently enacted Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Affordability Reconciliation
Act of 2010, collectively, the Affordable Care Act or ACA, which, among other things, amends the intent requirement of the federal
Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to
violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes
of the federal False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines against any person
who is determined to have presented or caused to be presented claims to a federal healthcare program that the person knows or should
know is for an item or service that was not provided as claimed or is false or fraudulent. In addition to the federal Anti-Kickback
Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language of the federal law, although
they do not always have the same scope, exceptions, safe harbors or sanctions. In some states, these anti-kickback laws apply not
only to payments made by government healthcare programs but also to payments made by other third-party payors, including commercial
insurance companies.
We may also be subject to various federal and
state marketing laws, such as the federal Physician Payments Sunshine Act, which generally require certain types of expenditures
in the United States and the particular states to be tracked and reported. The federal Physician Payment Sunshine Act, being implemented
as the Open Payments Program, requires certain pharmaceutical and medical device manufacturers to engage in extensive tracking
of payments or transfers of value to physicians and teaching hospitals, maintenance of a payments database, and public reporting
of the payment data. Device manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s
Health Insurance Program are required to track and report such payments. Moreover, several states have enacted legislation requiring
pharmaceutical and medical device companies to establish marketing compliance programs or even prohibit providing meals to prescribers
or other marketing related activities. Compliance with such requirements may require investment in infrastructure to ensure that
tracking and reporting is performed properly. Although compliance programs can mitigate the risk of investigation and prosecution
for violations of these laws, the risks cannot be entirely eliminated.
International Regulation
International development and sales of medical
devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. For
example, the primary regulatory authority with respect to medical devices in Europe is that of the European Union. The unification
of these countries into a common market has resulted in the unification of laws, standards and procedures across these countries,
which may expedite the introduction of medical devices like those we are offering and developing.
The European Union has adopted numerous directives
and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices
that comply with the requirements of relevant directives will be entitled to bear CE Conformity Marking, indicating that the device
conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout
the European Union. Actual implementation of these directives, however, may vary on a country-by-country basis.
To date, we have not begun any process to obtain
the CE Mark and have no immediate plans to test or commercialize the Hemopurifier in any European Union countries.
Manufacturing
Manufacturing of our Hemopurifier occurs in
collaboration with a contract manufacturer based in San Diego, California that is compliant with the Good Manufacturing Practice
regulations promulgated by the FDA. Our contract manufacturer is registered with the FDA. We also have received an export
license from the FDA that allows the export our Hemopurifier for commercial purposes to India. To date, our manufacture of the
Hemopurifier has been limited to quantities necessary to support our clinical studies.
Sources and Suppliers
We are not dependent on any specific vendors
for the materials used in our Hemopurifier. The key raw materials in the Hemopurifier include the affinity lectin Galanthus nivalis
agglutinin, pharmaceutical grade diatomaceous earth, plasmapheresis cartridges and certain chemical binding agents. The affinity
lectin is available from several life science supply companies in the U.S. Diatomaceous earth is available from several life science
supply companies in the U.S. To date, we have purchased plasmapheresis cartridges from one vendor in Europe however similar cartridges
are commercially available from vendors on a worldwide basis should that European vendor cease to be available for any reason,
including prohibitive pricing. The chemical binding agents are available from a number of life science supply companies on a worldwide
basis. We typically purchase our raw materials on purchase order basis. Therefore, we remain subject to risks of supply shortages
and price increases that potentially could materially adversely affect our financial condition and operating results if and when
we begin large scale manufacture of the Hemopurifier.
The key raw materials used by Exosome Sciences,
Inc. in its research are blood samples supplied by research partners and a number of chemical and lab products commercially available
from vendors on a worldwide basis. Exosome Sciences, Inc. is not dependent on any specific vendors for the materials used in its
research activities.
Sales and Marketing
We do not currently have any sales and
marketing capability. With respect to commercialization efforts in the future, we intend to build or contract for
distribution, sales and marketing capabilities for any product candidate that is approved. From time to time, we have had
and are having strategic discussions with potential collaboration partners for our product candidates, although no assurance
can be given that we will be able to enter into one or more collaboration agreements for our product candidates on acceptable
terms, if at all.
Product Liability
The risk of product liability claims, product
recalls and associated adverse publicity is inherent in the testing, manufacturing, marketing and sale of medical products. We
have limited clinical trial liability insurance coverage. We cannot assure you that future insurance coverage will be adequate
or available. We may not be able to secure product liability insurance coverage on acceptable terms or at reasonable costs when
needed. Any liability for mandatory damages could exceed the amount of our coverage. A successful product liability claim against
us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity
about our products and business and inhibit or prevent commercialization of other future product candidates.
Employees
We have five full-time employees consisting
of our Chief Executive Officer, our President, our Chief Science Officer, our Chief Financial Officer, and an executive assistant.
Exosome has three additional full-time employees, consisting of its Chief Science Officer, its Clinical Research Director, and
a research scientist. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
We believe our employee relations are good.
None of our employees are represented by a labor union or are subject to collective-bargaining agreements.
Description of properties
We currently lease approximately 2,576 square
feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 under a 39-month gross plus utilities
lease that commenced on December 1, 2014 with an initial rental rate of $6,054 per month. We believe this new leased facility will
be satisfactory for our office needs over the term of the lease.
We also lease approximately 1,667 square feet
of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $3,917 per month on a
one-year gross plus utilities lease that previously was scheduled to expire in October 2014 and was recently extended to expire
in October 2015. We believe this new leased facility will be satisfactory for our laboratory needs over the term of the lease
Our Exosome Sciences, Inc. subsidiary leases
approximately 2,055 square feet of office and laboratory space at 11 Deer Park Drive, South Brunswick, NJ at the rate of $3,596
per month on a one-year gross plus utilities lease that previously was scheduled to expire in October 2014 and was recently extended
to in October 2015. We believe this new leased facility will be satisfactory for Exosome Science, Inc.’s operational needs
over the term of the lease.
Legal proceedings
We may be involved from time to time in various
claims, lawsuits, and/or disputes with third parties or breach of contract actions incidental to the normal course of our business
operations. We are currently not involved in any litigation or any pending legal proceedings.
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of our directors
and executive officers as of March 31, 2015 are listed below:
NAMES |
TITLE OR POSITION |
AGE |
James A. Joyce (1) |
Chairman, Chief Executive Officer and Secretary |
53 |
|
|
|
Richard H. Tullis, PhD (2) |
Vice President, Chief Science Officer and Director |
70 |
|
|
|
Rodney S. Kenley (3) |
President and Director |
65 |
|
|
|
James B. Frakes (4) |
Chief Financial Officer and Senior Vice President - Finance |
58 |
|
|
|
Franklyn S. Barry, Jr. |
Director |
75 |
|
|
|
Edward G. Broenniman |
Director |
79 |
|
|
|
Chetan S. Shah, MD |
Director |
46 |
_______________
(1) Effective June 1, 2001, Mr. Joyce was appointed our President
and Chief Executive Officer, replacing Mr. Barry, who continues as a member of the Board of Directors. Mr. Joyce resigned from
the position of President upon the appointment of Mr. Kenley to such position on October 27, 2010.
(2) Effective June 1, 2001, Dr. Tullis was appointed as our Chief
Science Officer.
(3) Effective October 27, 2010, Mr. Kenley was appointed as our
President.
(4) Effective September 27, 2010, Mr. Frakes was appointed as our
Chief Financial Officer.
Certain additional information concerning the
individuals named above is set forth below. This information is based on information furnished us by each individual noted.
James A. Joyce, Chairman, CEO and Secretary.
Mr. Joyce is the founder of Aethlon Medical,
Inc. and has been the Chairman of the Board and Secretary since March 1999. On June 1, 2001, our Board of Directors appointed Mr.
Joyce with the additional role of CEO. Mr. Joyce also serves as the Executive Chairman of Exosome Sciences, Inc. In 1992, Mr. Joyce
founded and was the sole stockholder of James Joyce & Associates, an organization that provided management consulting and corporate
finance advisory services to CEOs and CFOs of publicly traded companies. Previously, from 1989 to 1991, Mr. Joyce was Chairman
and Chief Executive Officer of Mission Labs, Inc. Prior to that Mr. Joyce was a principal in charge of U.S. operations for London
Zurich Securities, Inc. Mr. Joyce is a graduate of the University of Maryland. We believe that Mr. Joyce is qualified to serve
as our director because of his role in founding our company and his prior experience, including his experience in the extracorporeal
industry and in the financial markets.
Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
Dr. Tullis has been Vice President and a director
of our company since January 2000 and Chief Science Officer since June 2001. Dr. Tullis has extensive biotechnology management
and research experience, and is the founder of Syngen Research, formerly 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 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-hosphorochloridites. 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 University
of Hawaii.
Rodney S. Kenley, President and Director
Mr. Kenley has been President and a Director
since October 2010. He has 38 years of experience in healthcare, most of which have been spent in the extracorporeal blood purification
arena. Mr. Kenley held several positions at Baxter Healthcare (Travenol) from 1977 through 1990 including International Marketing
Manager, Business Unit Manager for Peritoneal and Hemodialysis products, Manager of New Business Development, Director of Worldwide
Product Planning, Director of Advanced Product Development, and VP of Electronic Drug Infusion. Mr. Kenley founded Aksys Ltd.
in January 1991 to develop and commercialize his concept of a daily home hemodialysis system which was commercially launched in
2002 as the PHD system. In 2004, Mr. Kenley initiated the development of a second-generation home hemodialysis system in partnership
with DEKA Research & Development Corporation in Manchester, New Hampshire. In 2007, the assets of Aksys Ltd. were acquired
by DEKA, where Mr. Kenley was employed prior to joining Aethlon Medical, Inc. Mr. Kenley received his Bachelor of Arts degree
in Biology and Chemistry from Wabash College, a Master’s of Science degree in Molecular Biology from Northwestern University
and a Masters of Management from the Kellogg School of Management, also at Northwestern University. We believe that Mr. Kenley
is qualified to serve as our director as a result of his experience in developing extracorporeal blood purification products.
James B. Frakes, Chief Financial Officer and Senior Vice President
– Finance
Mr. Frakes joined Aethlon Medical, Inc. in January
2008 and brought 16 consecutive years of financial responsibility for publicly traded companies, as well as specific knowledge
and experience in equity and debt transactions, acquisitions, public reporting and Sarbanes-Oxley Section 404 internal control
requirements. Mr. Frakes also serves as the Chief Financial Officer of Exosome Sciences, Inc. He previously served as the CFO for
Left Behind Games Inc., a start-up video game company. Prior to 2006, he served as CFO of NTN Buzztime, Inc., an interactive entertainment
company. Mr. Frakes received an MBA from the University of Southern California and completed his BA with Honors at Stanford
University.
Franklyn S. Barry, Jr.
Mr. Barry was President and Chief Executive
Officer of Hemex from April 1997 through May 31, 2001 and our President and CEO from March 10, 1999 to May 31, 2001, when he returned
to consulting until he retired in 2013. He became a director of Aethlon Medical, Inc. 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 Merchants Mutual Insurance Company. We believe that Mr. Barry is qualified
to serve as our director because of his extensive management experience.
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon
Medical, Inc. in March 1999. He has been the Managing Director of The Piedmont Group, LLC, a venture advisory firm, since 1978.
Mr. Broenniman recently served on the Board of Directors of publicly traded QuesTech (acquired by CACI International), and currently
serves on the Boards of two 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. We believe that Mr. Broenniman is qualified to serve as our director because of
his extensive management experience.
Chetan S. Shah, MD
Dr. Shah became a director of Aethlon Medical,
Inc. in June 2013. Dr. Shah is a board certified Otolaryngologist. He is an Advisory Board Member at The Bank of Princeton, and
a partner and Board member of the Surgery Center at Hamilton as well as Physician Management Systems and Princeton Eye & Ear,
which he founded in 2009. Dr. Shah serves on the board of two other private companies. He holds teaching positions and serves on
multiple hospital committees in the area and is on the Audiology and Speech Language Pathology Committee for the State of New Jersey.
He also is a member of the Board of Medical Examiners for the State of New Jersey. Dr. Shah received his Bachelor’s degree
and Medical Degree from Rutgers University and Robert Wood Johnson Medical School. We believe that Dr. Shah is qualified to serve
as our director because of his medical background as both a board certified Otolaryngologist and a member of various medical boards
and hospital committees in New Jersey.
Board of Directors
Our Board of Directors has the responsibility
for establishing broad corporate policies and for overseeing our overall performance. Members of the Board of Directors are kept
informed of our business activities through discussions with the CEO, 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 our next annual meeting of stockholders. Our Board of Directors presently has an Audit Committee and
a Compensation Committee, on each of which Messrs. Barry and Broenniman and Dr. Shah serve. Mr. Barry is Chairman of the Audit
Committee, and Dr. Shah is Chairman of the Compensation Committee.
In July 2012, our Board of Directors approved
a board compensation program that modifies and supersedes the 2005 Directors Compensation Program, which was previously in effect.
Under the 2012 program, in which only non-employee directors may participate, an eligible director will receive a grant of $35,000
worth of ten-year options to acquire shares of common stock, with such grant being valued at the exercise price based on the average
of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. In addition,
under this new program, eligible directors will receive cash compensation equal to $500 for each committee meeting attended and
$1,000 for each formal board meeting attended.
In the fiscal year ended March 31, 2013, our
Board of Directors granted ten-year options to acquire an aggregate of 33,342 shares of our common stock, all with an exercise
price of $3.80 per share, to our four outside directors under the new 2012 program.
In the fiscal year ended March 31, 2014, our
Board of Directors granted ten-year options to acquire an aggregate of 31,911 shares of our common stock, all with an exercise
price of $4.10 per share, to our five outside directors under the new 2012 program.
In the fiscal year ended March 31, 2015, our
Board of Directors granted ten-year options to acquire an aggregate of 11,053 shares of our common stock, all with an exercise
price of $9.50 per share, to our three outside directors under the new 2012 program.
At March 31, 2015 we had issued 26,757 options
under the old 2005 program to outside directors and 79,309 options to employee-directors, 21,756 outside directors’ options
had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-directors’ options had been
forfeited and no options under the old 2005 program remained outstanding.
On June 6, 2014, our Board of Directors approved
certain changes to the 2012 program. Under this new program, a new eligible director will receive an initial grant of $50,000 worth
of options to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing
bid prices of the common stock for the five trading days preceding the first day of the fiscal year. These options will have a
term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. In addition,
at the beginning of each fiscal year, each existing director eligible to participate in the modified new 2012 program also will
receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary
of the date of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The
modified new 2012 program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee
chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.
Family Relationships
There are no family relationships between or
among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
There are no arrangements or understandings
between any two or more of our directors or executive officers or between any of our directors or executive officers and any other
person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement,
plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current
Board of Directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly
or indirectly participate in or influence the management of our affairs.
Involvement in Legal Proceedings
To the best of our knowledge, during the past
ten years, none of the following occurred with respect to a present or former director or executive officer of our company: (1)
any bankruptcy petition filed by or against such person or 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; (4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission 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; and (5) being the subject of, or a party to, any federal or state judicial or administrative
order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal
or state securities or commodities law or regulation, law or regulation respecting financial institutions or insurance companies
or law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of,
or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its
members or associated persons.
EXECUTIVE COMPENSATION
The following executive compensation disclosure
reflects all compensation awarded to, earned by or paid to the executive officers below for the fiscal years ended March 31, 2015
and March 31, 2014. The following table summarizes all compensation for fiscal years 2015 and 2014 received by our Chief Executive
Officer, and our three most highly compensated executive officers who earned more than $100,000 in fiscal year 2015.
SUMMARY COMPENSATION TABLE FOR 2015 AND 2014
FISCAL YEARS
NAMED EXECUTIVE OFFICER AND PRINCIPAL POSITION |
|
YEAR |
|
|
SALARY
($) |
|
|
BONUS
($) |
|
|
STOCK
AWARDS ($)(5) |
|
|
OPTION
AWARDS ($)(5) |
|
|
NON-
EQUITY
INCENTIVE PLAN
COMPEN-
SATION
($) |
|
|
NON- QUALIFIED DEFERRED COMPEN-
SATION
EARNINGS
($) |
|
|
ALL
OTHER COMP.
($) |
|
|
TOTAL ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Joyce (1) |
|
|
2015 |
|
|
$ |
347,500 |
|
|
$ |
95,000 |
|
|
$ |
– |
|
|
$ |
246,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
688,500 |
|
CHIEF EXECUTIVE OFFICER |
|
|
2014 |
|
|
$ |
330,000 |
|
|
$ |
70,000 |
|
|
$ |
– |
|
|
$ |
180,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
580,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard H. Tullis, PhD (2) |
|
|
2015 |
|
|
$ |
195,000 |
|
|
$ |
5,000 |
|
|
$ |
– |
|
|
$ |
8,200 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
208,200 |
|
VICE PRESIDENT AND CHIEF SCIENCE OFFICER |
|
|
2014 |
|
|
$ |
195,000 |
|
|
$ |
-- |
|
|
$ |
– |
|
|
$ |
45,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James B. Frakes (3) |
|
|
2015 |
|
|
$ |
206,250 |
|
|
$ |
31,500 |
|
|
$ |
– |
|
|
$ |
41,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
278,750 |
|
CHIEF FINANCIAL OFFICER AND SVP-FINANCE |
|
|
2014 |
|
|
$ |
180,000 |
|
|
$ |
3,000 |
|
|
$ |
– |
|
|
$ |
45,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
228,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rodney S. Kenley (4) |
|
|
2015 |
|
|
$ |
257,500 |
|
|
$ |
15,000 |
|
|
$ |
– |
|
|
$ |
41,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
313,500 |
|
PRESIDENT |
|
|
2014 |
|
|
$ |
240,000 |
|
|
$ |
-- |
|
|
$ |
– |
|
|
$ |
45,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
285,000 |
|
_______________
(1) The aggregate number of stock awards and stock option
awards issued to Mr. Joyce and outstanding as of March 31, 2015 is 68,000 (see share restricted stock grant below) and
217,143, respectively. Mr. Joyce received a $5,000 salary increase from $325,000 to $330,000 effective July 1, 2013. In June,
2014, Mr. Joyce received a $20,000 salary increase from $330,000 to $350,000.
Mr. Joyce was granted 80,000 shares of restricted common stock,
at a price per share of $12.00, which vested in equal installments over a thirty-six month period that commenced on June 30, 2010.
Mr. Joyce has accepted all 80,000 shares of the grant and all such shares have vested. Of these shares, Mr. Joyce currently owns
68,000 shares.
(2) The aggregate number of stock awards and stock option
awards issued to Dr. Tullis and outstanding as of March 31, 2015 is zero and 46,000, respectively. On November 7, 2014, we
paid Dr. Tullis $5,000 for accrued expenses reimbursable to him. In January 2015, we paid Dr. Tullis $93,377 in payment of
accrued salary.
(3) Mr. Frakes was appointed as Chief Financial Officer on
September 27, 2010 after previously serving as Senior Vice President-Finance on a part-time basis. The aggregate number of stock
awards and stock option awards issued to Mr. Frakes and outstanding as of March 31, 2015 is zero and 25,000, respectively. In June
2014, Mr. Frakes received a $30,000 salary increase from $180,000 to $210,000.
(4) Mr. Kenley was appointed President on October 27,
2011. The aggregate number of stock awards and stock option awards issued to Mr. Kenley and outstanding as of
March 31, 2015 is zero and 35,000, respectively. In June, 2014, Mr. Kenley received a $20,000 salary increase from $240,000
to $260,000.
(5) See note 6 to our financial statements for the years ended March
31, 2014 and 2013 regarding the assumptions made in valuing the stock/option awards in the above table.
Employment Agreements
We 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. Effective January 1, 2005, Mr. Joyce's salary was increased from
$180,000 to $205,000 per year. Under the terms of the agreement, his employment continues at a salary of $205,000 per year for
successive one-year periods, unless given notice of termination 60 days prior to the anniversary of his employment agreement. Effective
April 1, 2006. Mr. Joyce's salary was increased from $205,000 to $240,000. His salary was subsequently increased to $265,000 per
year and effective May 1, 2008, his salary was increased from $265,000 to $290,000 per year. Effective April 1, 2010, his salary
was increased from $290,000 to $325,000 per year. Effective July 2013, his salary was increased from $325,000 to $330,000 per year.
In June 2014, his salary was increased from $330,000 to $350,000 per year.
During the fiscal year ended March 31, 2015,
Mr. Joyce earned bonuses totaling $50,000 from us and bonuses totaling $45,000 from Exosome Sciences, Inc. All of those bonuses
were based upon targets established by our compensation committee.
We entered into an employment agreement with
Dr. Tullis effective January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief Science Officer. His compensation
under the agreement was modified in June 2001 from $80,000 to $150,000 per year. Effective January 1, 2005, Dr. Tullis' salary
was increased from $150,000 to $165,000 per year. Under the terms of the agreement, his employment continues at a salary of $165,000
per year for successive one-year periods, unless given notice of termination 60 days prior to the anniversary of his employment
agreement. Dr. Tullis was granted 5,000 stock options to purchase our common stock in connection the completing certain milestones,
such as the initiation and completion of certain clinical trials, the submission of proposals to the U.S. Food and Drug Administration,
or FDA, and the filing of a patent application. Effective April 1, 2006, Dr. Tullis’ salary was increased to $180,000 per
year. Effective April 1, 2010, his salary was increased from $180,000 to $195,000 per year.
During the fiscal year ended March 31, 2015,
Dr. Tullis earned a bonus of $5,000 from us. The bonus was based upon targets established by our compensation committee.
Both Mr. Joyce's and Dr. Tullis' agreements
provide for medical insurance and disability benefits, one year of severance pay if their employment is terminated by us without
cause or due to change in our control before the expiration of their agreements, and allow for bonus compensation and stock option
grants as determined by our Board of Directors. Both agreements also contain restrictive covenants preventing competition with
us and the use of confidential business information, except in connection with the performance of their duties for us, for a period
of two years following the termination of their employment with us.
On September 27, 2010, Mr. Frakes was appointed
our Chief Financial Officer. We have not entered into a written employment agreement with Mr. Frakes. As Chief Financial Officer,
Mr. Frakes receives an annual salary of $180,000 and medical insurance benefits. In June 2014, his salary was increased from $180,000
to $210,000 per year. During the fiscal year ended March 31, 2015, Mr. Frakes earned bonuses totaling $30,000 from us and a bonus
of $1,500 from Exosome Sciences, Inc. All of those bonuses were based upon targets established by our compensation committee.
Mr. Kenley was appointed our President on October
27, 2010. Pursuant to a written offer of employment executed by us and Mr. Kenley, he receives an annual salary of $240,000 and
medical insurance benefits. In June 2014, his salary was increased from $240,000 to $260,000 per year. During the fiscal year ended
March 31, 2015, Mr. Kenley earned bonuses totaling $15,000 from us. All of those bonuses were based upon targets established by
our compensation committee.
Outstanding Equity Awards at 2015 Fiscal Year-End
The following table sets forth certain information
concerning stock option awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2015 FISCAL YEAR
END
|
|
OPTIONS AWARDS |
NAME |
|
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE
(#) |
|
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE
(#) |
|
EQUITY
INCENTIVE PLAN AWARDS
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED
OPTIONS
UNEXERCISABLE
(#) |
|
OPTION
EXERCISE
PRICE
($) |
|
DATE OF
OPTION
EXPIRATION |
James A. Joyce |
|
57,143(1) |
|
– |
|
– |
|
$10.50 |
|
12/18/15 |
|
|
50,000(2) |
|
– |
|
– |
|
$18.00 |
|
09/21/17 |
|
|
40,000(3) |
|
– |
|
– |
|
$12.50 |
|
02/21/19 |
|
|
50,000(4) |
|
– |
|
– |
|
$12.50 |
|
09/27/20 |
|
|
10,000(5) |
|
30,000 |
|
– |
|
$5.00 |
|
07/01/23 |
|
|
10,000(10) |
|
30,000 |
|
|
|
$9.50 |
|
06/06/24 |
|
|
|
|
|
|
|
|
|
|
|
Richard H. Tullis |
|
15,000(6) |
|
– |
|
– |
|
$20.50 |
|
06/14/18 |
|
|
20,000(7) |
|
– |
|
– |
|
$12.50 |
|
09/27/20 |
|
|
2,500(5) |
|
7,500 |
|
– |
|
$5.00 |
|
07/01/23 |
|
|
333(10) |
|
667 |
|
|
|
$9.50 |
|
06/06/24 |
|
|
|
|
|
|
|
|
|
|
|
James B. Frakes |
|
10,000(8) |
|
– |
|
– |
|
$12.50 |
|
09/27/20 |
|
|
2,500(5) |
|
7,500 |
|
– |
|
$5.00 |
|
07/01/23 |
|
|
1,667(10) |
|
3,333 |
|
|
|
$9.50 |
|
06/06/24 |
|
|
|
|
|
|
|
|
|
|
|
Rodney S. Kenley |
|
17,083(9) |
|
2,917 |
|
– |
|
$12.50 |
|
10/27/20 |
|
|
2,500(5) |
|
7,500 |
|
– |
|
$5.00 |
|
7/01/23 |
|
|
1,667(10) |
|
3,333 |
|
|
|
$9.50 |
|
06/06/24 |
Note: We have omitted the stock awards columns of the above table
because we have no disclosure applicable to those columns.
(1) This option was fully vested as of March 31, 2010 and as a result
of the Option Suspension Agreement, the expiration date was extended by 100 days. Subsequent to March 31, 2010, the expiration
date of this option was extended to December 18, 2015 (see Item 13 to the Financial Statements).
(2) The option vested 20,000 shares at grant, with 10,000 shares
vesting each annual anniversary date through June 13, 2010 and as a result of the Option Suspension Agreement, the expiration date
was extended by 100 days.
(3) The option vested 20,000 at grant, with 10,000 shares vesting
on December 31, 2009 and December 31, 2010 and as a result of the Option Suspension Agreement, the expiration date was extended
by 100 days.
(4) The option vested 20,000 at grant, with 10,000 vesting on each
anniversary date through September 27, 2013.
(5) This option vests ratably on July 1, 2014, July 1, 2015 and
July 1, 2016.
(6) This option was fully vested as of December 15, 2011.
(7) The option was fully vested as of September 27, 2011.
(8) The option was fully vested as of September 27, 2011.
(9) The option vested 5,000 on October 27, 2011 and the remaining
15,000 vested over the 36 months following that date.
(10) This option vests ratably on June 6, 2014, June 6, 2015 and
June 6, 2016.
Director Compensation for 2015 Fiscal Year
The following director compensation disclosure
reflects all compensation awarded to, earned by or paid to the directors below for the fiscal year ended March 31, 2015.
|
|
Fees Earned
or Paid in Cash
($) |
|
|
Stock
Awards
($) |
|
|
Option
Awards
($) |
|
|
Non-Equity
Incentive
Plan
Compensation
($) |
|
|
Nonqualified
Deferred
Compensation
Earnings
($) |
|
|
All
Other
Compensation
($) |
|
|
Total
($) |
|
James A. Joyce (1) |
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
– |
|
Richard H. Tullis (2) |
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
– |
|
Rodney S. Kenley (3) |
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
– |
|
Edward G. Broenniman (4) |
|
$ |
38,000 |
|
|
|
– |
|
|
$ |
30,211 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
68,211 |
|
Franklyn S. Barry, Jr. (5) |
|
$ |
39,000 |
|
|
|
– |
|
|
$ |
30,211 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
69,211 |
|
Chetan S. Shah, MD (6) |
|
$ |
39,000 |
|
|
|
– |
|
|
$ |
30,211 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
69,211 |
|
(1) All compensation received by Mr. Joyce in fiscal year 2014 is
disclosed in the Summary Compensation Table above. Mr. Joyce received no compensation as a director in fiscal year 2014.
(2) All compensation received by Dr. Tullis in fiscal year 2014
is disclosed in the Summary Compensation Table above. Dr. Tullis received no compensation as a director in fiscal year 2014.
(3) All compensation received by Mr. Kenley in fiscal year 2014
is disclosed in the Summary Compensation Table above. Mr. Kenley received no compensation as a director in fiscal year 2014.
(4) The aggregate number of stock awards and options awards issued
and outstanding as of March 31, 2015 are 0 and 43,431. Mr. Broenniman received stock option grants of 3,684 shares on June 6, 2014,
8,537 shares on March 14, 2014, and 9,211 shares on July 24, 2012 for his service as an outside director. The June 2014 option
vested 3,684 shares on March 31, 2015, the March 2014 option vested all 8,537 shares at grant and the 2012 option vested 3,961
at grant, with 5,250 vesting in the June 2013 quarter. On October 21, 2014 and November 7, 2014, we paid Mr. Broenniman an aggregate
of $10,063 for accrued Board of Directors fees and expenses reimbursable to him. In January 2015, we paid $84,500 to Mr. Broenniman
in payment of accrued Board of Directors fees and amounts accrued for services rendered to us by him prior to the 1999 reorganization
among Aethlon, Inc., Hemex, Inc. and us.
(5) The aggregate number of stock awards and options awards issued
and outstanding as of March 31, 2015 are 0 and 41,431. Mr. Barry received stock option grants of 3,684 shares on June 6, 2014,
8,537 shares on March 14, 2014 and 9,211 shares on July 24, 2012 for his service as an outside director. The June 2014 option vested
3,684 shares on March 31, 2015, the March 2014 option vested all 8,537 shares at grant and the 2012 option vested 3,961 at grant,
with 5,250 vesting in the June 2013 quarter. On October 21, 2014 and November 7, 2014, we paid Mr. Barry an aggregate of $10,944
for accrued Board of Directors fees and expenses reimbursable to him. In January 2015, we paid $271,810 to Mr. Barry in payment
of accrued director fees and amounts accrued for services rendered to us by him prior to the 1999 reorganization among Aethlon,
Inc., Hemex, Inc. and us.
(6) The aggregate number of stock awards and options awards issued
and outstanding as of March 31, 2015 are 0 and 11,205. Dr. Shah received stock option grants of 3,684 on June 6, 2014 and 7,520
shares on July 24, 2012 for his service as an outside director. The June 2014 option vested 3,684 shares on March 31, 2015, and
the 2014 option vested all 7,520 shares at grant. In January 2015, we paid $14,500 to Dr. Shah in payment of accrued director fees.
Directors Compensation Program
We maintain a board compensation program, in
which only non-employee directors may participate. Please see the “Equity Compensation Plans” section of this prospectus
for more information on the program.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table sets forth information as
of March 31, 2015, with respect to the ownership of our common stock, by (i) each person known by us to be the beneficial owner
of more than five percent (5%) of the outstanding shares of each class of our capital stock, (ii) each of our directors and director
nominees (if any), (iii) each of our named executive officers and (iv) all of our executive officers and directors as a group.
The term "executive officer" is defined as the President/Chief Executive Officer, Secretary, Chief Financial Officer/Treasurer,
any vice-president in charge of a principal business function (such as administration or finance), or any other person who performs
similar policy making functions for us. We believe that each individual or entity named has sole investment and voting power with
respect to shares of common stock indicated as beneficially owned by them, subject to community property laws where applicable,
excepted where otherwise noted:
TITLE OF CLASS |
|
NAME AND ADDRESS |
|
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP (1)(2) |
|
PERCENT OF
BENEFICIAL OWNERSHIP |
|
Common Stock |
|
James A. Joyce, Chief Executive Officer and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
293,143 shares
(3) |
|
|
4.3% |
|
Common Stock |
|
Richard H. Tullis, PhD, Chief Scientific Officer and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
48,208 shares (4) |
|
|
* |
|
Common Stock |
|
Rodney S. Kenley, President and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
24,567 shares (5) |
|
|
* |
|
Common Stock |
|
James B. Frakes, Chief Financial Officer
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
14,367 shares (6) |
|
|
* |
|
Common Stock |
|
Franklyn S. Barry, Jr., Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
43,553 shares (7) |
|
|
* |
|
Common Stock |
|
Edward G. Broenniman, Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
49,075 shares (8) |
|
|
* |
|
Common Stock |
|
Chetan Shah, MD, Director (11)
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
387,826 shares (9) |
|
|
5.7% |
|
Common Stock |
|
Ellen R Weiner Family Revocable Trust (11)
10645 N. Tatum Blvd., Suite 200-166
Phoenix, AZ 85028 |
|
809,405 shares (10) |
|
|
11.6% |
|
Common Stock |
|
Estate of Allen S. Bird
9960 West Cheyenne Avenue, Suite 110
Las Vegas, NV 89129 |
|
294,612 shares (10) |
|
|
4.4% |
|
Common Stock |
|
All Current Directors and Executive Officers as a Group (7 members) |
|
860,738 shares |
|
|
12.0% |
|
* Less than 1%
(1) Based on 6,657,046 shares of common stock outstanding on
our transfer records as of March 31, 2015.
(2) Calculated pursuant to Rule 13d-3(d)(1) of the Securities
Exchange Act of 1934. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion
privileges exercisable by a person within 60 days are deemed outstanding for the purpose of calculating the number and percentage
owned by such person but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed.
Except where otherwise noted, we believe that each individual or entity named has sole investment and voting power with respect
to the shares of common stock indicated as beneficially owned by such person, subject to community property laws, where applicable.
(3) Includes 57,143 stock options exercisable at $10.50 per
share, 50,000 stock options exercisable at $18.00 per share, 90,000 stock options exercisable at $12.50 per share, 10,000 stock
options exercisable at $5.00 per share and 10,000 stock options exercisable at $9.50 per share.
(4) Includes 15,000 stock options exercisable at $20.50 per
share, 20,000 stock options exercisable at $12.50 per share 2,500 stock options exercisable at $5.00 per share and 333 stock options
exercisable at $9.50 per share.
(5) Includes 20,000 stock options exercisable at $12.50 per
share, 2,500 stock options exercisable at $5.00 per share and 1,667 stock options exercisable at $9.50 per share.
(6) Includes 10,000 stock options exercisable at $12.50 per
share, 2,500 stock options exercisable at $5.00 per share and 1,667 stock options exercisable at $9.50 per share.
(7) Includes 10,000 stock options exercisable at $20.50 per
share, 10,000 stock options exercisable at $12.50 per share, 9,211 stock options exercisable at $3.80 per share, 8,537 stock options
exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(8) Includes 10,000 stock options exercisable at $20.50 per
share, 12,000 stock options exercisable at $12.50 per share, 9,211 stock options exercisable at $3.80 per share, 8,537 stock options
exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(9) Includes warrants to purchase 109,320 shares of common
stock at exercise prices ranging from $4.65 per share to $6.60 per share, 7,520 stock options exercisable at $4.10 per share and
3,684 stock options exercisable at $9.50 per share.
(10) Includes common stock issuable upon exercise of warrants
held by the Ellen R. Weiner Family Revocable Trust and common stock issuable upon exercise of warrants held by the Estate of Allan
S. Bird. The trust owns 319,533 warrants to purchase common shares at prices ranging from $2.10 to $5.40 per share. The estate
owns 103,098 warrants to purchase common shares at prices ranging from $2.10 to $5.40 per share. Mr. Bird was Ms. Weiner's father-in-law.
The Ellen R. Weiner Family Trust disclaims any beneficial ownership of the estate's warrants and underlying common stock. The Estate
of Mr. Bird disclaims any beneficial ownership of the trust's warrants and underlying common stock.
(11) More-than-5% stockholder.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AND DIRECTOR INDEPENDENCE
The following describes all transactions since
April 1, 2013, and all proposed transactions, in which we were or are to be a participant and the amount involved exceeds the lesser
of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which
any related person had or will have a direct or indirect material interest.
Between March 2012 and June 2013, Dr. Chetan
Shah, one of our directors, participated in several private equity placements with us under which he invested an aggregate amount
of $625,556 and in return received 170,000 restricted shares of our common stock and seven year warrants to purchase 85,000 shares
of our common stock.
In June 2013, we borrowed $80,000 at a 10% interest
rate from Mr. Phillip Ward, one of our former directors. We repaid that loan and paid accrued interest of $133 to Mr. Ward in June
2013.
In July 2013, we borrowed $400,000 from Mr.
Ward and Dr. Shah under 90-day notes bearing 10% interest. If we did not pay back those loans by October 9, 2013, then the notes
would bear interest at a penalty rate of 12% and the noteholders would have the right at their discretion (i) to convert their
principal and accrued interest into shares of common stock at $4.40 per share and (ii) receive warrants to purchase common stock
equal to 50% of the principal converted under the notes, with an exercise price of $6.60 per share. We subsequently repaid Mr.
Ward’s note in cash. That repayment extinguished all potential common stock and warrant issuance provisions of Mr. Ward’s
note. On July 24, 2014, we issued to Dr. Shah an aggregate of 50,079 shares of restricted common stock and a seven-year warrant
to issue up to 25,040 shares of common stock at an exercise price of $6.60 per share upon the conversion of an aggregate of $220,349
of unpaid principal and accrued interest due under his note. The amount converted represented the entire amount outstanding under
Dr. Shah’s note.
On March 14, 2014, our Board of Directors granted
to our three outside directors ten-year options to acquire an aggregate of 31,911 shares of our common stock at an exercise price
of $4.10 per share.
On June 6, 2014, our Board of Directors granted
to our directors and our Chief Financial Officer ten-year options to acquire an aggregate of 52,053 shares of our common stock
at an exercise price of $9.50 per share.
In July 2014, Exosome Sciences, Inc. paid a
bonus of $15,000 to Mr. Joyce.
In October 2014, Exosome Sciences, Inc. paid
bonuses of $15,000 to Mr. Joyce and $1,500 to Mr. Frakes.
On October 20, 2014, we issued to Dr. Shah 42,222
shares of common stock and three-year warrants to acquire up to 42,222 shares of common stock with exercise prices ranging from
$4.65 to $5.50 per share. The common stock and warrants were issued to Dr. Shah upon his cash exercise, for an aggregate of $214,000,
of previously issued warrants for 42,222 shares held by him.
On October 21, 2014 and November 7, 2014, we
paid Mr. Franklyn Barry and Mr. Edward Broenniman, two of our outside directors, an aggregate of $10,944 and $10,063, respectively,
for accrued Board of Directors fees and expenses reimbursable to them. On November 7, 2014, we paid Dr. Tullis $5,000 for accrued
expenses reimbursable to him.
In December 2014, we paid bonuses of $25,000
to Mr. Joyce, $15,000 to Mr. Kenley, $15,000 to Mr. Frakes and $5,000 to Dr. Tullis.
In December 2014, Exosome Sciences, Inc. paid
Mr. Joyce a bonus of $15,000.
In January 2015, we made the following payments
to certain of our officers and directors:
| · | bonuses of $25,000 to Mr. Joyce and $15,000 to Mr. Frakes; |
| · | $93,377 to Dr. Tullis in payment of accrued salary; |
| · | $14,500 to Dr. Shah in payment of accrued director fees; |
| · | $84,500 to Mr. Broenniman in payment of accrued director fees and
amounts accrued for services rendered to us prior to the 1999 reorganization among Aethlon, Inc., Hemex, Inc. and us; and |
| · | $271,810
to Mr. Barry in payment of accrued director fees and amounts accrued for services rendered to us prior to the 1999 reorganization
among Aethlon, Inc., Hemex, Inc. and us. |
Director Independence
Each of Mr. Barry, Mr. Broenniman and Dr. Shah
is an independent director as that term is defined by NASDAQ Stock Market Rule 5605(a)(2). We currently have a compensation committee
and an audit committee. Of the members of our Board of Directors, each of Mr. Barry, Mr. Broenniman and Dr. Shah meets the NASDAQ
Stock Market's independence standards for members of such committees.
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital consists of 10,000,000
shares of common stock, par value $0.001 per share. As of March 31, 2015, there were issued and outstanding 6,657,046 shares of
common stock.
Common Shares
The holders of our common stock are entitled
to one vote (or consent) per share on all matters to be voted on by the stockholders. Holders of common stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. If we liquidate, dissolve
or wind up, holders of common stock are entitled to share ratably in all assets remaining after payment of all debts and other
liabilities. Holders of common stock have no preemptive, conversion or subscription rights. There are no redemption or sinking
fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, validly issued, fully paid and nonassessable.
Except as otherwise required by Nevada law, all
stockholder action is taken by the vote of a majority of common stock voting as a single class present at a meeting of stockholders
at which a quorum consisting of a majority of the outstanding shares of common stock is present in person or proxy.
Options and Warrants Convertible into Common Shares
As of March 31, 2015, there were outstanding
common share purchase options entitling the holders to purchase 501,690 common shares at a weighted average exercise price of $11.00
per share and warrants entitling the holders to purchase up to 1,430,716 common shares at a weighted average exercise price of
$7.00 per share.
DESCRIPTION OF SECURITIES
WE ARE OFFERING
We are offering (i) shares
of our common stock and (ii) warrants to purchase shares of our common stock. Each share of our common stock is being sold together
with ● of a warrant. Each full warrant will be exercisable for one share of common stock. The shares of common stock and
warrants are immediately separable and will be issued separately, but will be purchased together in this offering. We are also
registering the shares of common stock issuable from time to time upon exercise of the warrants offered hereby.
Common Stock
The material terms and
provisions of our common stock and each other class of our securities which qualifies or limits our common stock are described
under the caption “Description of Capital Stock” in this prospectus.
Warrants
The following summary
of certain terms and provisions of warrants that are being offered hereby is not complete and is subject to, and qualified in its
entirety by, the provisions of the warrant, the form of which has been filed as an exhibit to the registration statement of which
this prospectus is a part. Prospective investors should carefully review the terms and provisions of the form of warrant for a
complete description of the terms and conditions of the warrants.
Duration and Exercise
Price
Each warrant offered hereby
will have an exercise price equal to●% of the closing bid price of our common stock as of the close of the trading day immediately
preceding the pricing of this offering. The warrants will be immediately exercisable and will expire on the fifth anniversary of
the original issuance date. The warrants will be issued separately from the common stock, and may be transferred separately immediately
thereafter. Warrants will be issued in certificated form only.
Exercisability
The warrants will be exercisable,
at the option of each holder, in whole or in part, by delivering to us a duly executed exercise notice accompanied by payment in
full for the number of shares of our common stock purchased upon such exercise (except in the case of a cashless exercise as discussed
below). A holder (together with its affiliates) may not exercise any portion of the warrant to the extent that the holder would
own more than 4.99% of the outstanding common stock after exercise, except that upon at least 61 days’ prior notice from
the holder to us, the holder may increase the amount of ownership of outstanding stock after exercising the holder’s warrants
up to 9.99% of the number of shares of our common stock outstanding immediately after giving effect to the exercise, as such percentage
ownership is determined in accordance with the terms of the warrants.
Cashless Exercise
If, at the time a holder
exercises its warrant, there is no effective registration statement registering, or the prospectus contained therein is not available
for an issuance of the shares underlying the warrant to the holder, then in lieu of making the cash payment otherwise contemplated
to be made to us upon such exercise in payment of the aggregate exercise price, the holder may elect instead to receive upon such
exercise (either in whole or in part) the net number of shares of common stock determined according to a formula set forth in the
warrant.
Fundamental Transactions
In the event of any fundamental
transaction, as described in the warrants and generally including any merger with or into another entity, sale of all or substantially
all of our assets, tender offer or exchange offer, or reclassification of our common stock, then upon any subsequent exercise of
a warrant, the holder will have the right to receive as alternative consideration, for each share of our common stock that would
have been issuable upon such exercise immediately prior to the occurrence of such fundamental transaction, the number of shares
of common stock of the successor or acquiring corporation or of our company, if it is the surviving corporation, and any additional
consideration receivable upon or as a result of such transaction by a holder of the number of shares of our common stock for which
the warrant is exercisable immediately prior to such event.
Transferability
Subject to applicable
laws and the restriction on transfer set forth in the warrant, the warrant may be transferred at the option of the holder upon
surrender of the warrant to us together with the appropriate instruments of transfer.
No Listing
There is no established
trading market for the warrants, and we do not expect an active trading market to develop. We do not intend to list the warrants
on any securities exchange or other trading market. Without an active trading market, the liquidity of the warrants will be limited.
Right as a Shareholder
Except as otherwise provided
in the warrants or by virtue of such holder’s ownership of shares of our common stock, the holders of the warrants do not
have the rights or privileges of holders of our common stock, including any voting rights, until they exercise their warrants.
Waivers and Amendments
Subject to certain exceptions, any term of the
warrants may be amended or waived with our written consent and the written consent of the holders of at least a majority of the
then-outstanding warrants.
PLAN OF DISTRIBUTION
Roth Capital Partners, LLC, which we
refer to as the placement agent, has agreed to act as the exclusive placement agent in connection with this offering subject to
the terms and conditions of a placement agent agreement, dated ●, 2015. The placement agent is not purchasing or selling
any of the securities offered by this prospectus, nor is it required to arrange the purchase or sale of any specific number or
dollar amount of the securities, but has agreed to use its commercially reasonable “best efforts” to arrange for the
sale of all of the securities offered hereby. We will enter into subscription agreements directly with investors in connection
with this offering and we may not sell the entire amount of the securities offered pursuant to this prospectus. The combined public
offering price per share and related warrant has been determined based upon arm’s-length negotiations between the purchasers
and us. There are no arrangements to place the funds raised in this offering in an escrow, trust or similar account.
The placement agent proposes to arrange
for the sale to one or more purchasers of the securities offered pursuant to this prospectus through direct subscription agreements
between the purchasers and us.
Commissions and Expenses
We have agreed to pay the placement
agent a cash fee equal to 7% of the gross proceeds of this offering provided by purchasers identified by the placement agent and
4% of the gross proceeds of this offering of securities provided by all other purchasers.
The following table shows the cash
placement agent fees we payable to the placement agent in connection with this offering, assuming the purchase of all of the securities
offered hereby:
|
|
Per Share of Common Stock and Related Warrant |
|
|
Total |
|
Public offering price |
|
$ |
|
|
|
$ |
|
|
Placement agent fees |
|
$ |
|
|
|
$ |
|
|
In addition, we have agreed to issue
to the placement agent, or its designees, warrants to purchase shares of our common stock equal to 5% of the aggregate number of
shares of common stock issued in this offering (excluding shares issuable upon the exercise of warrants sold hereby) to purchasers
identified by the placement agent and 3% of the aggregate number of shares of common stock issued in this offering (excluding shares
issuable upon the exercise of warrants sold hereby) to all other purchasers. Except as described below, the placement agent warrants
will have substantially the same terms as the warrants offered hereby. The placement agent warrants will be exercisable on a cashless
exercise basis at any time after the 180th day after the effective date of the registration statement of which this prospectus
is a part and will expire on 5:00 p.m. (New York time) on the fifth anniversary of the effective date of the registration statement
of which this prospectus is a part. As required by the rules and regulations of the Financial Institutions Regulatory Authority,
Inc., or FINRA, neither the placement agent warrants nor any securities issued upon exercise of the placement agent warrants may
be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call
transaction that would result in the effective economic disposition of such securities by any person for a period of 180 days immediately
following the date hereof, except the transfer of any security:
| · | by operation of law or by reason of our reorganization; |
| · | to any FINRA member firm participating in this offering and the officers or partners thereof, if all securities so transferred
remain subject to the lock-up restriction described above for the remainder of the time period; |
| · | if the aggregate amount of our securities held by the placement agent or related person do not exceed 1% of the securities
being offered; |
| · | that is beneficially owned on a pro-rata basis by all equity owners of an investment fund, provided that no participating member
manages or otherwise directs investments by the fund, and participating members in the aggregate do not own more than 10% of the
equity in the fund; or |
| · | the exercise or conversion of any security, if all securities received remain subject to the lock-up restriction set forth
above for the remainder of the time period. |
This prospectus also covers the sale of the placement agent
warrants and the shares of our common stock issuable upon the exercise of the placement agent warrants.
Because there is no minimum offering
amount required as a condition to closing in this offering, the actual total offering commissions, if any, are not presently determinable
and may be substantially less than the maximum amount set forth above. We have also agreed to reimburse the placement agent for
its out-of-pocket expenses in an aggregate amount not to exceed $75,000.
Our obligation to issue and sell the
securities offered hereby to the purchasers is subject to the conditions set forth in the subscription agreements, which may be
waived by us at our discretion. A purchaser’s obligation to purchase the securities offered hereby is subject to the conditions
set forth in his or her subscription agreement as well, which may also be waived.
We currently anticipate that the sale
of the securities offered hereby will be completed on or about ________, 2015. We estimate the total offering expenses of this
offering that will be payable by us, excluding the placement agent fee, will be approximately $●, which includes legal and
printing costs, various other fees and reimbursement of the placements agent’s expenses. At the closing, The Depository Trust
Company will credit the shares of common stock to the respective accounts of the investors. We will mail warrants directly to the
investors at the respective addresses set forth in their subscription agreement with us.
Indemnification
We have agreed to indemnify the placement
agent against liabilities under the Securities Act of 1933, or Securities Act. We have also agreed to contribute to payments the
placement agent may be required to make in respect of such liabilities.
Lock-up Agreements
We and our officers and directors have
agreed, subject to certain exceptions, for a period of 90 days after the date of this prospectus, not to offer, sell, contract
to sell, pledge, grant any option to purchase, make any short sale or otherwise dispose of, directly or indirectly any shares of
our common stock or any securities convertible into or exchangeable for shares of our common stock either owned as of the date
hereof or thereafter acquired without the prior written consent of the placement agent. This 90-day period may be extended if (1)
during the last 17 days of the 30-day period, we issue an earnings release or material news or a material event regarding us occurs
or (2) prior to the expiration of the 90-day period, we announce that we will release earnings results during the 16-day period
beginning on the last day of the 90-day period, then the period of such extension will be 18-days, beginning on the issuance of
the earnings release or the occurrence of the material news or material event. If after any announcement described in clause (2)
of the preceding sentence, we announce that we will not release earnings results during the 16-day period, the lock-up period shall
expire the later of the expiration of the 90-day period and the end of any extension of such period made pursuant to clause (1)
of the preceding sentence. The placement agent may, in its sole discretion and at any time or from time to time before the termination
of the lock-up period, without notice, release all or any portion of the securities subject to lock-up agreements.
Electronic Distribution
This prospectus may be made available
in electronic format on websites or through other online services maintained by the placement agent, or by an affiliate. Other
than this prospectus in electronic format, the information on the placement agent’s website and any information contained
in any other website maintained by the placement agent is not part of this prospectus or the registration statement of which this
prospectus forms a part, has not been approved and/or endorsed by us or the placement agent, and should not be relied upon by investors.
The foregoing does not purport to be
a complete statement of the terms and conditions of the placement agent agreement and subscription agreements. A copy of the placement
agent agreement and the form of subscription agreement with the investors are included as exhibits to the registration statement
of which this prospectus forms a part. See “Where You Can Find More Information” on page ●.
Regulation M Restrictions
The placement agent may be deemed to
be an underwriter within the meaning of Section 2(a)(11) of the Securities Act, and any commissions received by it and any profit
realized on the resale of the units sold by it while acting as a principal might be deemed to be underwriting discounts or commissions
under the Securities Act. As an underwriter, the placement agent would be required to comply with the requirements of the Securities
Act and the Securities Exchange Act of 1934, or Exchange Act, including, without limitation, Rule 415(a)(4) under the Securities
Act and Rule 10b-5 and Regulation M under the Exchange Act. These rules and regulations may limit the timing of purchases and sales
of units by the placement agent acting as a principal. Under these rules and regulations, the placement agent:
| · | must not engage in any stabilization activity in connection with our securities; and |
| · | must not bid for or purchase any of our securities or attempt to induce any person to purchase any of our securities, other
than as permitted under the Exchange Act, until it has completed its participation in the distribution. |
Other
From time to time, the placement agent
and its affiliates have provided, and may in the future provide, various investment banking, financial advisory and other services
to us and our affiliates for which services they have received, and may in the future receive, customary fees. In the course of
their businesses, the placement agent and its affiliates may actively trade our securities or loans for their own account or for
the accounts of customers, and, accordingly, the placement agent and its affiliates may at any time hold long or short positions
in such securities or loans. Except as described in the following sentence and except for services provided in connection with
this offering, the placement agent has not provided any investment banking or other financial services during the 180-day period
preceding the date of this prospectus and we do not expect to retain the placement agent to perform any investment banking or
other financial services for at least 90 days after the date of this prospectus. The placement agent acted as our exclusive placement
agent in connection with our December 2014 private placement of units consisting of shares of our common stock and warrants to
purchase shares of our common stock for which we paid the placement agent a cash fee of $231,000 and issued to the placement agent
five-year warrants to acquire 11,000 shares of our common stock at an exercise price of $15.00 per share.
NOTICE TO INVESTORS
Notice to Investors in the United
Kingdom
In relation to each Member State of
the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer
to the public of any securities which are the subject of the offering contemplated by this prospectus may not be made in that Relevant
Member State except that an offer to the public in that Relevant Member State of any such securities may be made at any time under
the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
(a) to legal entities which are authorized
or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest
in securities;
(b) to any legal entity which has two
or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000
and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
(c) by the underwriter to fewer than
100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive); or
(d) in any other circumstances falling
within Article 3(2) of the Prospectus Directive, provided that no such offer of these securities shall result in a requirement
for the publication by the issuer or the underwriter of a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision,
the expression an “offer to the public” in relation to any of the securities in any Relevant Member State means the
communication in any form and by any means of sufficient information on the terms of the offer and any such securities to be offered
so as to enable an investor to decide to purchase any such securities, as the same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
The placement agent has represented,
warranted and agreed that:
(a) it has only communicated or caused
to be communicated and will only communicate or cause to be communicated any invitation or inducement to engage in investment activity
(within the meaning of section 21 of the Financial Services and Markets Act 2000 (the FSMA)) received by it in connection with
the issue or sale of any of the securities in circumstances in which section 21(1) of the FSMA does not apply to the issuer; and
(b) it has complied with and will comply
with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise
involving the United Kingdom.
European Economic Area
In particular, this document does not
constitute an approved prospectus in accordance with European Commission’s Regulation on Prospectuses no. 809/2004 and no
such prospectus is to be prepared and approved in connection with this offering. Accordingly, in relation to each Member State
of the European Economic Area which has implemented the Prospectus Directive (being the Directive of the European Parliament and
of the Council 2003/71/EC and including any relevant implementing measure in each Relevant Member State) (each, a Relevant Member
State), with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State
(the Relevant Implementation Date) an offer of securities to the public may not be made in that Relevant Member State prior to
the publication of a prospectus in relation to such securities which has been approved by the competent authority in that Relevant
Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant
Member State, all in accordance with the Prospectus Directive, except that it may, with effect from and including the Relevant
Implementation Date, make an offer of securities to the public in that Relevant Member State at any time:
| · | to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities; |
| · | to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a
total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in the
last annual or consolidated accounts; or |
| · | in any other circumstances which do not require the publication by the Issuer of a prospectus pursuant to Article 3 of the
Prospectus Directive. |
For the purposes of this provision, the expression an “offer
of securities to the public” in relation to any of the securities in any Relevant Member State means the communication in
any form and by any means of sufficient information on the terms of the offer and the securities to be offered so as to enable
an investor to decide to purchase or subscribe for the securities, as the same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State. For these purposes the securities offered hereby are “securities.”
LEGAL MATTERS
Raines Feldman LLP has passed upon the validity
of the shares of common stock offered by this prospectus. Jennifer A. Post, a partner of the firm, owns approximately 16,000 shares
of our common stock. Lowenstein Sandler LLP is acting as counsel to the placement agent in connection with this offering.
EXPERTS
Squar, Milner, Peterson, Miranda & Williamson,
LLP has audited the financial statements included in this prospectus as of March 31, 2014 and March 31, 2013 and for each of the
years then ended. We have included such financial statements in reliance on the report of such firm, appearing elsewhere herein,
given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange
Commission, or SEC, a registration statement on Form S-1 under the Securities Act of 1933 with respect to the shares of common
stock and warrants offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all
of the information set forth in the registration statement or the exhibits filed with the registration statement. For further information
about us and the common stock and warrants offered hereby, we refer you to the registration statement and the exhibits filed with
the registration statement. Statements contained in this prospectus regarding the contents of any contract or any other document
that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in
all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement.
A copy of the registration statement and the filed exhibits may be inspected without charge at the public reference room maintained
by the SEC, located at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of the registration statement may
be obtained from that office at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information about the public
reference room. The SEC also maintains a website that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the website is www.sec.gov.
We are subject to the information and reporting
requirements of the Securities Exchange Act of 1934, or Exchange Act, and, in accordance with this law, are required to file periodic
reports, proxy statements and other information with the SEC. These periodic reports, proxy statements and other information are
available for inspection and copying at the SEC’s public reference facilities and the website of the SEC referenced above.
We make available free of charge, on or through the investor relations section of our website, annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a)
or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to,
the SEC. The information found on our website is not part of this prospectus.
The representations, warranties
and covenants made by us in any agreement that is filed as an exhibit to the registration statement of which this prospectus is
a part were made solely for the benefit of the parties to such agreement, including, in some cases, for the purpose of allocating
risk among the parties to such agreements, and should not be deemed to be a representation, warranty or covenant to you. Moreover,
such representations, warranties or covenants were made as of an earlier date. Accordingly, such representations, warranties and
covenants should not be relied on as accurately representing the current state of our affairs.
This prospectus includes statistical and other
industry and market data that we obtained from industry publications and research, surveys and studies conducted by third parties.
Industry publications and third-party research, surveys and studies generally indicate that they have gathered their information
from sources they believe to be reliable, although they do not guarantee the accuracy or completeness of such information. While
we believe that these industry publications and third-party research, surveys and studies are reliable, we have not independently
verified such data.
AETHLON MEDICAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page |
Audited Consolidated Financial Statements (Revised) |
|
|
|
Report of Independent Registered Public Accounting Firm |
F-2 |
|
|
Consolidated Balance Sheets as of March 31, 2014 and 2013 |
F-3 |
|
|
Consolidated Statements of Operations for the Years Ended March 31, 2014 and 2013 |
F-4 |
|
|
Consolidated Statements of Deficit for the Years Ended March 31, 2014 and 2013 |
F-5 |
|
|
Consolidated Statements of Cash Flows for the Years Ended March 31, 2014 and 2013 |
F-7 |
|
|
Notes to Consolidated Financial Statements |
F-9 |
|
|
Interim Condensed Consolidated Financial Statements (Revised) |
|
|
|
Condensed Consolidated Balance Sheets as of December 31, 2014 (unaudited) and March 31, 2014 |
F-41 |
|
|
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2014 and 2013 (unaudited) |
F-42 |
|
|
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2014 and 2013 (unaudited) |
F-43 |
|
|
Notes to Condensed Consolidated Financial Statements (unaudited) |
F-45 |
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets
of Aethlon Medical, Inc. and Subsidiary (the "Company") as of March 31, 2014 and 2013 and the related consolidated statements
of operations, deficit and cash flows for each of the years in the two-year period ended March 31, 2014. 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 standards of the
Public Company Accounting Oversight Board (United States). 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. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. 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 consolidated financial position of Aethlon Medical, Inc. and
Subsidiary as of March 31, 2014 and 2013 and the consolidated results of their operations and their cash flows for each of
the years in the two-year period ended March 31, 2014 in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 1, the accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred continuing losses
from operations and at March 31, 2014 is in default on certain debt agreements, has negative working capital of approximately $14,169,000
and an accumulated deficit of approximately $74,833,000. 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, among others,
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.
Subsequent to March 31, 2014, as more fully discussed in
Note 16, the Company entered into amended debt agreements with certain creditors which resulted in conversion of debt into
common stock and the elimination of warrant and convertible debt price protection features. As a result, derivative
liabilities of approximately $10,679,000 were reclassified to equity and certain debt holders converted their debt and
accrued interest into equity in the approximate amount of $1,235,000. Due to the significance of these subsequent events, the
Company has included an unaudited pro forma balance sheet as of March 31, 2014 alongside its historical balance sheets to
present the effect of these subsequent events as if they had occurred on March 31, 2014.
As more fully discussed in Note 1, the Company effected a 1-for-50
reverse stock split on April 14, 2015. All share and per share amounts in the accompanying consolidated financial statements and
related notes have been retroactively revised to reflect such split. Our previously issued audit report dated July 14, 2014 on
the Company’s March 31, 2014 and 2013 consolidated financial statements is unmodified with respect to the stock split matter.
/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
NEWPORT BEACH, CALIFORNIA
APRIL 17, 2015
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| |
| | |
| | |
Pro Forma | |
| |
March 31, 2014 | | |
March 31, 2013 | | |
March 31, 2014 (Note 16) | |
| |
| | |
| | |
(unaudited) | |
ASSETS | |
| | | |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | | |
| | |
Cash | |
$ | 1,250,279 | | |
$ | 125,274 | | |
$ | 1,250,279 | |
Accounts receivable | |
| 95,177 | | |
| 208,781 | | |
| 95,177 | |
Deferred financing costs | |
| 83,191 | | |
| 863 | | |
| 83,191 | |
Prepaid expenses | |
| 50,699 | | |
| 29,602 | | |
| 50,699 | |
| |
| | | |
| | | |
| | |
TOTAL CURRENT ASSETS | |
| 1,479,346 | | |
| 364,520 | | |
| 1,479,346 | |
| |
| | | |
| | | |
| | |
NON-CURRENT ASSETS | |
| | | |
| | | |
| | |
Property and equipment, net | |
| 84,279 | | |
| 145 | | |
| 84,279 | |
Patents, net | |
| 112,489 | | |
| 121,653 | | |
| 112,489 | |
Deposits | |
| 18,988 | | |
| 10,376 | | |
| 18,988 | |
TOTAL NON-CURRENT ASSETS | |
| 215,756 | | |
| 132,174 | | |
| 215,756 | |
| |
| | | |
| | | |
| | |
TOTAL ASSETS | |
$ | 1,695,102 | | |
$ | 496,694 | | |
$ | 1,695,102 | |
| |
| | | |
| | | |
| | |
LIABILITIES AND DEFICIT | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | | |
| | |
Accounts payable | |
$ | 517,651 | | |
$ | 822,832 | | |
$ | 517,651 | |
Due to related parties | |
| 839,070 | | |
| 736,070 | | |
| 839,070 | |
Notes payable | |
| 390,000 | | |
| 321,381 | | |
| 390,000 | |
Convertible notes payable, current portion | |
| 1,367,655 | | |
| 2,367,631 | | |
| 482,655 | |
Derivative liabilities | |
| 10,679,067 | | |
| 3,588,239 | | |
| – | |
Other current liabilities | |
| 1,855,374 | | |
| 1,804,985 | | |
| 1,280,124 | |
| |
| | | |
| | | |
| | |
TOTAL CURRENT LIABILITIES | |
| 15,648,817 | | |
| 9,641,138 | | |
| 3,509,500 | |
| |
| | | |
| | | |
| | |
NONCURRENT LIABILITIES | |
| | | |
| | | |
| | |
Convertible notes payable, noncurrent portion | |
| 776,451 | | |
| – | | |
| 1,001,451 | |
TOTAL NONCURRENT LIABILITIES | |
| 776,451 | | |
| – | | |
| 1,001,451 | |
| |
| | | |
| | | |
| | |
TOTAL LIABILITIES | |
| 16,425,268 | | |
| 9,641,138 | | |
| 4,510,951 | |
| |
| | | |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES (Note 13) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
STOCKHOLDERS’ DEFICIT | |
| | | |
| | | |
| | |
Common stock, $0.001 par value, 10,000,000 and 5,000,000 shares authorized at March 31, 2014 and 2013, respectively; 4,499,480 and 3,473,484 issued and outstanding at March 31, 2014 and 2013, respectively (Revised – Note 1) | |
| 4,497 | | |
| 3,473 | | |
| 5,020 | |
Additional paid-in capital (Revised – Note 1) | |
| 59,879,624 | | |
| 52,327,408 | | |
| 74,363,728 | |
Accumulated deficit | |
| (74,832,557 | ) | |
| (61,475,325 | ) | |
| (77,401,867 | ) |
| |
| | | |
| | | |
| | |
TOTAL AETHLON MEDICAL, INC STOCKHOLDERS’ DEFICIT | |
| (14,948,436 | ) | |
| (9,144,444 | ) | |
| (3,034,119 | ) |
| |
| | | |
| | | |
| | |
NONCONTROLLING INTERESTS | |
| 218,270 | | |
| – | | |
| 218,270 | |
| |
| | | |
| | | |
| | |
TOTAL DEFICIT | |
| (14,730,166 | ) | |
| (9,144,444 | ) | |
| (2,815,849 | ) |
| |
| | | |
| | | |
| | |
TOTAL LIABILITIES AND DEFICIT | |
$ | 1,695,102 | | |
$ | 496,694 | | |
$ | 1,695,102 | |
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
| |
Years Ended March 31, | |
| |
2014 | | |
2013 | |
REVENUES: | |
| | | |
| | |
Government contract revenue | |
$ | 1,623,769 | | |
$ | 1,230,004 | |
Total revenues | |
| 1,623,769 | | |
| 1,230,004 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Professional fees | |
| 1,521,397 | | |
| 1,892,270 | |
Payroll and related | |
| 2,227,194 | | |
| 2,166,989 | |
General and administrative | |
| 931,106 | | |
| 746,099 | |
| |
| 4,679,697 | | |
| 4,805,358 | |
OPERATING LOSS | |
| (3,055,928 | ) | |
| (3,575,354 | ) |
| |
| | | |
| | |
OTHER (INCOME) EXPENSE | |
| | | |
| | |
Loss on debt conversion | |
| 40,257 | | |
| 139,839 | |
Change in fair value of derivative liabilities | |
| 8,547,015 | | |
| 44,705 | |
Loss on litigation settlement | |
| 583,601 | | |
| – | |
Other expenses | |
| (75,060 | ) | |
| (172 | ) |
Interest and other debt expenses | |
| 1,287,221 | | |
| 1,132,314 | |
| |
| 10,383,034 | | |
| 1,316,686 | |
| |
| | | |
| | |
NET LOSS BEFORE NONCONTROLLING INTERESTS | |
| (13,438,962 | ) | |
| (4,892,040 | ) |
| |
| | | |
| | |
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | |
| (81,730 | ) | |
| – | |
| |
| | | |
| | |
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | |
$ | (13,357,232 | ) | |
$ | (4,892,040 | ) |
| |
| | | |
| | |
Basic and diluted net loss per share available to common stockholders (Revised – Note 1) | |
$ | (3.44 | ) | |
$ | (1.64 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding - basic and diluted (Revised – Note 1) | |
| 3,881,179 | | |
| 2,984,472 | |
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Revised –
Note 1)
| |
ATTRIBUTABLE TO AETHLON MEDICAL, INC. | | |
| | |
| |
| |
COMMON STOCK | | |
ADDITIONAL PAID IN | | |
ACCUMULATED | | |
NON- CONTROLLING | | |
TOTAL | |
| |
SHARES | | |
AMOUNT | | |
CAPITAL | | |
DEFICIT | | |
INTERESTS | | |
DEFICIT | |
BALANCE - MARCH 31, 2012 | |
| 2,350,317 | | |
$ | 2,350 | | |
$ | 47,285,314 | | |
$ | (56,583,285 | ) | |
$ | – | | |
$ | (9,295,621 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for cash | |
| 594,491 | | |
| 594 | | |
| 2,109,240 | | |
| – | | |
| – | | |
| 2,109,834 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuances of common stock upon conversions of notes payable | |
| 438,823 | | |
| 439 | | |
| 1,694,620 | | |
| – | | |
| – | | |
| 1,695,059 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for services | |
| 57,924 | | |
| 58 | | |
| 258,977 | | |
| – | | |
| – | | |
| 259,035 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Patent license fees paid with issuance of common stock | |
| 4,929 | | |
| 5 | | |
| 17,245 | | |
| – | | |
| – | | |
| 17,250 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Reclassification of derivative liability into equity | |
| – | | |
| – | | |
| 45,081 | | |
| – | | |
| – | | |
| 45,081 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for interest | |
| 2,320 | | |
| 2 | | |
| 11,844 | | |
| – | | |
| – | | |
| 11,846 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loss on debt conversion | |
| 24,680 | | |
| 25 | | |
| 139,814 | | |
| – | | |
| – | | |
| 139,839 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| – | | |
| – | | |
| 765,273 | | |
| – | | |
| – | | |
| 765,273 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (4,892,040 | ) | |
| – | | |
| (4,892,040 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE - MARCH 31, 2013 | |
| 3,473,484 | | |
$ | 3,473 | | |
$ | 52,327,408 | | |
$ | (61,475,325 | ) | |
$ | – | | |
$ | (9,144,444 | ) |
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF DEFICIT
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
(Revised – Note
1)
| |
ATTRIBUTABLE TO AETHLON MEDICAL, INC. | | |
| | |
| |
| |
COMMON STOCK | | |
ADDITIONAL PAID IN | | |
ACCUMULATED | | |
NON- CONTROLLING | | |
TOTAL | |
| |
SHARES | | |
AMOUNT | | |
CAPITAL | | |
DEFICIT | | |
INTERESTS | | |
DEFICIT | |
BALANCE - MARCH 31, 2013 | |
| 3,473,484 | | |
$ | 3,473 | | |
$ | 52,327,408 | | |
$ | (61,475,325 | ) | |
$ | – | | |
$ | (9,144,444 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuances of common stock upon conversions of notes payable | |
| 211,480 | | |
| 211 | | |
| 726,565 | | |
| – | | |
| – | | |
| 726,776 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for cash - Aethlon | |
| 337,455 | | |
| 337 | | |
| 1,676,695 | | |
| – | | |
| – | | |
| 1,677,032 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for cash - ESI | |
| – | | |
| – | | |
| 1,200,000 | | |
| | | |
| 300,000 | | |
| 1,500,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock for services | |
| 61,423 | | |
| 61 | | |
| 392,032 | | |
| – | | |
| – | | |
| 392,093 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock under convertible debt restructuring | |
| 90,142 | | |
| 90 | | |
| 856,259 | | |
| – | | |
| – | | |
| 856,349 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock under stock option exercises for accrued expenses | |
| 3,171 | | |
| 3 | | |
| 12,997 | | |
| – | | |
| – | | |
| 13,000 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Reclassification of derivative liability into equity | |
| – | | |
| – | | |
| 1,456,187 | | |
| – | | |
| – | | |
| 1,456,187 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock under cashless warrant exercises | |
| 254,325 | | |
| 254 | | |
| (254 | ) | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Shares issued under restricted stock grant | |
| 68,000 | | |
| 68 | | |
| (68 | ) | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Issuance of common stock on litigation settlement | |
| – | | |
| – | | |
| 583,601 | | |
| – | | |
| – | | |
| 583,601 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Loss on debt conversion | |
| – | | |
| – | | |
| 40,256 | | |
| – | | |
| – | | |
| 40,256 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Stock-based compensation expense | |
| – | | |
| – | | |
| 607,946 | | |
| – | | |
| – | | |
| 607,946 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net loss | |
| – | | |
| – | | |
| – | | |
| (13,357,232 | ) | |
| (81,730 | ) | |
| (13,438,962 | ) |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BALANCE - MARCH 31, 2014 | |
| 4,499,480 | | |
$ | 4,497 | | |
$ | 59,879,624 | | |
$ | (74,832,557 | ) | |
$ | 218,270 | | |
$ | (14,730,166 | ) |
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (13,438,962 | ) | |
$ | (4,892,040 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 21,087 | | |
| 10,484 | |
Debt restructuring cost | |
| 856,349 | | |
| 139,839 | |
Non-cash interest expense | |
| – | | |
| 11,846 | |
Loss on litigation settlement | |
| 583,601 | | |
| – | |
Change in estimated fair value of derivative liabilities | |
| 8,547,015 | | |
| 44,705 | |
Loss on debt conversion | |
| 40,256 | | |
| – | |
Fair market value of equity instruments issued for services | |
| 392,093 | | |
| 259,035 | |
Stock based compensation | |
| 607,946 | | |
| 765,273 | |
Patent license fees paid with issuance of common stock | |
| – | | |
| 17,250 | |
Amortization of debt discount and deferred financing costs | |
| 5,147 | | |
| 594,358 | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 113,604 | | |
| 191,333 | |
Prepaid expenses | |
| (21,097 | ) | |
| 1,850 | |
Other assets | |
| (8,612 | ) | |
| – | |
Accounts payable and other current liabilities | |
| 46,602 | | |
| 751,210 | |
Due to related parties | |
| 116,000 | | |
| 6,000 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (2,138,971 | ) | |
| (2,098,857 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| (96,056 | ) | |
| – | |
| |
| | | |
| | |
Net cash used in investing activities | |
| (96,056 | ) | |
| – | |
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2014 AND 2013
| |
2014 | | |
2013 | |
Cash flows from financing activities: | |
| | | |
| | |
Principal repayments of notes payable | |
| (217,000 | ) | |
| (29,610 | ) |
Proceeds from the issuance of notes payable | |
| 400,000 | | |
| – | |
Net proceeds from the issuance of common stock | |
| 3,177,032 | | |
| 2,109,834 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 3,360,032 | | |
| 2,080,224 | |
| |
| | | |
| | |
Net increase (decrease) in cash | |
| 1,125,005 | | |
| (18,633 | ) |
| |
| | | |
| | |
Cash at beginning of year | |
| 125,274 | | |
| 143,907 | |
| |
| | | |
| | |
Cash at end of year | |
$ | 1,250,279 | | |
$ | 125,274 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information - Cash paid during the year for: | |
| | | |
| | |
Interest | |
$ | 13,950 | | |
$ | 2,821 | |
Income taxes | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Supplement information for non-cash investing and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Conversion of debt, accrued liabilities and accrued interest to common stock | |
$ | 726,776 | | |
$ | 1,695,059 | |
Reclassification of accounts payable to convertible notes payable | |
$ | 47,000 | | |
$ | – | |
Reclassification of accrued interest to convertible notes payable | |
$ | 20,027 | | |
$ | – | |
Recording deferred financing costs associated with notes payable and convertible notes payable | |
$ | 83,191 | | |
$ | 7,500 | |
Reclassification of warrant derivative liability into equity | |
$ | 1,456,187 | | |
$ | 45,081 | |
Issuance of shares under cashless warrant exercises | |
$ | 12,717 | | |
$ | – | |
Exercise of stock option for accrued expenses | |
$ | 13,000 | | |
$ | – | |
Reclassification of note payable to convertible notes payable | |
$ | – | | |
$ | 75,000 | |
Stock issued under restricted stock grant | |
$ | 3,400 | | |
$ | – | |
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. and subsidiary ("Aethlon", the
"Company", "we" or "us") is a medical device company focused on creating innovative devices that
address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments
is the Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges
single or multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that
selectively remove harmful particles from the entire circulatory system without loss of essential blood components. On June 25,
2013, the United States Food and Drug Administration (FDA) approved an Investigational Device Exemption (IDE) that allows us to
initiate human feasibility studies of the Aethlon Hemopurifier® in the United States. Under the feasibility study protocol,
we will enroll ten end-stage renal disease patients who are infected with the Hepatitis C virus (HCV) to demonstrate the safety
of Hemopurifier therapy. Successful completion of this study will allow us the opportunity to initiate pivotal studies that are
required for market clearance to treat HCV and other disease conditions in the United States.
Successful outcomes of human trials will also be required by
the regulatory agencies of certain foreign countries where we intend to sell this device. Some of our patents may expire before
FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or
other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology.
In October 2013, our subsidiary, Exosome Sciences, Inc. (“ESI”),
commenced operations with a focus on advancing exosome-based strategies to diagnose and monitor the progression of cancer, infectious
disease and other life-threatening conditions.
Our common stock is quoted on the OTCQB marketplace administered
by the OTC Markets Group under the symbol "AEMD."
REVERSE STOCK SPLIT
On April 14, 2015, the Company completed a 1-for-50 reverse
stock split. Accordingly, authorized common stock was reduced from 500,000,000 shares to 10,000,000 shares, and each 50 shares
of outstanding common stock held by stockholders were combined into one share of common stock. The accompanying consolidated financial
statements and accompanying notes have been retroactively revised to reflect such reverse stock split as if it had occurred on
April 1, 2012. All shares and per share amounts have been revised accordingly.
UNAUDITED PRO FORMA BALANCE SHEET INFORMATION
During June and July 2014, we entered into agreements with two
existing convertible note holders to convert one note into common stock and to extend the second note and to restructure warrants
related to the original note issuances removing certain price protection features from such warrants. The transaction resulted
in not only the conversion of debt to equity but also the reclassification of such warrants from derivative liabilities to equity.
As further explained in Note 16, we have presented an unaudited March 31, 2014 pro forma balance sheet to reflect such transactions
as if they had occurred on March 31, 2014.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its majority-owned and controlled subsidiary, ESI. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company classifies the noncontrolling interests in ESI as part of consolidated
net loss in the fiscal year ended March 31, 2014 and includes the accumulated amount of noncontrolling interests as part of stockholders’
equity. For the fiscal year ended March 31, 2013, ESI was a wholly-owned subsidiary. During the fiscal year ended March 31, 2014,
Aethlon Medical, Inc. reduced its ownership percentage to 80% by ESI’s issuance of 300,000 shares of ESI common stock in
exchange for cash of $1,500,000.
The losses at ESI during the fiscal year ended March 31, 2014
reduced the noncontrolling interests on our consolidated balance sheet by $81,730 from $300,000 to $218,270 at March 31, 2014.
GOING CONCERN
The accompanying consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and
satisfaction of liabilities in the ordinary course of business. We have incurred continuing losses from operations and at March
31, 2014 are in default on certain debt agreements, have negative working capital of approximately $14,169,000, and an accumulated
deficit of approximately $74,833,000. These factors, among other matters, raise substantial doubt about our ability to continue
as a going concern. A significant amount of additional capital will be necessary to advance the development of our products to
the point at which they may become commercially viable. We intend to fund operations, working capital and other cash requirements
for the fiscal year ending March 31, 2015 through debt and/or equity financing arrangements as well as through revenues and related
cash receipts under our government contracts (see Note 11).
We are currently addressing our liquidity issue by seeking
additional investment capital through private placements of common stock and debt and by applying for additional grants issued
by government agencies in the United States. We believe that our cash on hand and funds expected to be received from additional
private investment will be sufficient to meet our liquidity needs for fiscal 2015. However, no assurance can be given that we
will receive any funds in addition to the funds we have received to date.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
The successful outcome of future activities cannot be determined
at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or
generate positive operating results.
Subsequent to March 31, 2014, we completed several significant
transactions related to our convertible notes (see Note 16).
The consolidated financial statements do not include any adjustments
related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue as a going concern.
RISKS AND UNCERTAINTIES
We operate in an industry that is subject to intense competition,
government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including
financial, operational, technological, regulatory, and including the potential risk of business failure.
USE OF ESTIMATES
We prepare our consolidated financial statements in conformity
with GAAP, which requires 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 consolidated financial statements and reported amounts of
revenues and expenses during the reporting periods. Significant estimates made by management include, among others, realization
of long-lived assets, valuation of derivative liabilities, estimating fair value associated with debt and equity transactions and
valuation of deferred tax assets. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Accounting standards define "cash and cash equivalents"
as any short-term, highly liquid investment that is both readily convertible to known amounts of cash and so near their maturity
that they present insignificant risk of changes in value because of changes in interest rates. For the purpose of financial statement
presentation, we consider all highly liquid investment instruments with original maturities of three months or less when purchased,
or any investment redeemable without penalty or loss of interest to be cash equivalents. As of March 31, 2014 and 2013,
we had no assets that were classified as cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our cash, accounts receivable, accounts
payable, and other current liabilities approximates their estimated fair values due to the short-term maturities of those financial
instruments. The carrying amount of the notes payable approximates their fair value due to the short maturity of the notes and
since the interest rates approximate current market interest rates for similar instruments. Derivative liabilities recorded in
connection with warrants and embedded conversion features of certain convertible notes payable are reported at their estimated
fair value, with changes in fair value being reported in results of operations (see Note 10).
Management has concluded that it is not practical to determine
the estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated
at arm's length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an
independent valuation would not be practicable due to the lack of data regarding similar instruments, if any, and the associated
potential costs.
Other than our derivative liabilities, we do not have any assets
or liabilities that are measured at fair value on a recurring basis and, during the years ended March 31, 2014 and 2013, did not
have any assets or liabilities that were measured at fair value on a nonrecurring basis except as described in Note 10 under derivative
liabilities.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at two financial institutions in checking
accounts and related cash management accounts. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation
("FDIC") up to $250,000. Our March 31, 2014 cash balances were approximately $1,000,000 over such insured amount.
We do not believe that the Company is exposed to any significant risk with respect to its cash.
All of our accounts receivable at March 31, 2014 and 2013 and
all of our revenue in the fiscal years ended March 31, 2014 and 2013 were directly from the U.S. Department of Defense or from
a subcontract under Battelle, which is a prime contractor with the U.S. Department of Defense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of the related assets, which range from two 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 consolidated statements of operations.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised –
Note 1)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the difference between the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is
more likely than not that some portion of the deferred tax assets may not be realized.
LONG-LIVED ASSETS
Long-lived assets are 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, an impairment loss is recognized. We believe
no impairment charges were necessary during the fiscal years ended March 31, 2014 and 2013.
LOSS PER SHARE
Basic loss per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted loss
per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were
dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential
common shares have been excluded as their effect would be antidilutive.
As of March 31, 2014 and 2013, a total of 2,861,492 and 2,854,024
potential common shares, consisting of shares underlying outstanding stock options, warrants and convertible notes payable were
excluded as their inclusion would be antidilutive.
SEGMENTS
Historically, we operated in one segment that was based on our
development of therapeutic devices. However in the December 2013 quarter, we initiated the operations of ESI to develop diagnostic
tests. As a result, we now operate in two segments, Aethlon for therapeutic applications and ESI for diagnostic applications (See
Note 14).
DEFERRED FINANCING COSTS
Costs related to the issuance of debt are capitalized and amortized
to interest expense over the life of the related debt using the effective interest method. We recorded amortization
expense related to our deferred offering costs of $863 and $127,200 during the fiscal years ended March 31, 2014 and 2013, respectively.
REVENUE RECOGNITION
DARPA Contract -- With respect to revenue recognition, we entered
into a government contract with DARPA and have recognized revenue of $1,466,482 and $1,230,004 under that contract during the fiscal
years ended March 31, 2014 and 2013, respectively. We adopted the Milestone method of revenue recognition for the DARPA contract
under ASC 605-28 “Revenue Recognition – Milestone Method” and we believe we meet the requirements under ASC 605-28
for reporting contract revenue under the Milestone Method for the fiscal years ended March 31, 2014 and 2013.
In order to account for this contract, we identify the deliverables
included within the contract and evaluate which deliverables represent separate units of accounting based on if certain criteria
are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated
among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved. A vendor’s assessment that it expects to achieve a milestone does not necessarily
mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part
on either: (a) the vendor’s performance; or (b) a specific outcome resulting from the vendor’s performance.
(3) If achieved, the event would result in additional payments
being due to the vendor.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved. A vendor’s assessment that it expects to achieve a milestone does not necessarily
mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part
on either: (a) the vendor’s performance; or (b) a specific outcome resulting from the vendor’s performance.
(3) If achieved, the event would result in additional payments
being due to the vendor.
A milestone does not include events for which the occurrence
is either: (a) contingent solely upon the passage of time; or (b) the result of a counterparty’s performance.
The policy for recognizing deliverable consideration contingent
upon achievement of a milestone must be applied consistently to similar deliverables.
The assessment of whether a milestone is substantive is performed
at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following
for the milestone to be considered substantive:
(1) The consideration is commensurate with either: (a) the vendor’s
performance to achieve the milestone; or (b) the enhancement of the value of the delivered item or items as a result of a specific
outcome resulting from the vendor’s performance to achieve the milestone;
(2) The consideration relates solely to past performance; and
(3) The consideration is reasonable relative to all of the deliverables
and payment terms (including other potential milestone consideration) within the arrangement.
A milestone is not considered substantive if any portion of
the associated milestone consideration relates to the remaining deliverables in the unit of accounting (i.e., it does not relate
solely to past performance). To recognize the milestone consideration in its entirety as revenue in the period in which the milestone
is achieved, the milestone must be substantive in its entirety. Milestone consideration cannot be bifurcated into substantive and
nonsubstantive components. In addition, if a portion of the consideration earned from achieving a milestone may be refunded or
adjusted based on future performance, the related milestone is not considered substantive.
See Note 11 for the additional disclosure information required
under ASC 605-28.
Battelle Subcontract -- We entered into a subcontract agreement
with Battelle Memorial Institute (“Battelle”) in March 2013. Battelle was chosen by DARPA to be the prime contractor
on the systems integration portion of the original DARPA contract and we are one of several subcontractors on that systems integration
project. The Battelle subcontract is cost-reimbursable under a time and materials basis. We began generating revenues under the
subcontract during the three months ended September 30, 2013 and for the fiscal year 2014 recorded revenue of $157,287.
Our revenue under this contract is a function of cost reimbursement
plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees).
Battelle engages us as needed. Each payment requires approval by the program manager at Battelle.
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under
stock participation plans are accounted for under the fair value method. Accordingly, share-based compensation is measured when
all granting activities have been completed, generally the grant date, based on the fair value of the award. The exercise price
of options is generally equal to the market price of the Company's common stock (defined as the closing price as quoted on the
OTCBB on the date of grant). Compensation cost recognized by the Company includes (a) compensation cost for all equity incentive
awards granted prior to April 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the
original provisions of the then current accounting standards, and (b) compensation cost for all equity incentive awards granted
subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent accounting
standards. We use a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 6).
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
The following table summarizes share-based compensation expenses
relating to shares and options granted and the effect on loss per common share during the years ended March 31, 2014 and 2013:
| |
March 31, 2014 | | |
March 31, 2013 | |
Vesting of Stock Options | |
$ | 541,588 | | |
$ | 355,578 | |
Incremental fair value of option Modifications | |
| 1,914 | | |
| 23,028 | |
Vesting Expense Associated with CEO Restricted Stock Grant | |
| 64,444 | | |
| 386,667 | |
Total Stock-Based Compensation Expense | |
$ | 607,946 | | |
$ | 765,273 | |
| |
| | | |
| | |
Basic and diluted loss per common share | |
$ | (0.16 | ) | |
$ | (0.26 | ) |
We account for transactions involving services provided by third
parties where we issue equity instruments as part of the total consideration using the fair value of the consideration received
(i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.
In transactions, when the value of the goods and/or services are not readily determinable and (1) the fair value of the equity
instruments is more reliably measurable and (2) the counterparty receives equity instruments in full or partial settlement of the
transactions, we use the following methodology:
a) For transactions where goods have already been delivered
or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date
of issuance).
b) For transactions where the instruments are issued on a fully
vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.
c) For any transactions not meeting the criteria in (a) or (b)
above, we re-measure the consideration at each reporting date based on its then current stock value.
We review share-based compensation on a quarterly basis for
changes to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture
rate for all expense amortization after March 31, 2006 is recognized in the period the forfeiture estimate is changed. The effect
of forfeiture adjustments for the fiscal year ended March 31, 2014 was insignificant.
PATENTS
Patents include both foreign and domestic patents. There were
several patents pending at March 31, 2014. We capitalize the cost of patents and patents pending, some of which were acquired,
and amortize such costs over the shorter of the remaining legal life or their estimated economic life, upon issuance of the patent.
The unamortized costs of patents and patents pending are subject to our review for impairment under our long-lived asset policy
above.
STOCK PURCHASE WARRANTS
We grant warrants in connection with the issuance of convertible
notes payable and the issuance of common stock for cash. When such warrants are classified as equity and issued in connection with
debt, we measure the relative estimated fair value of such warrants and record it as a discount from the face amount of the convertible
notes payable. Such discounts are amortized to interest expense over the term of the notes using the effective interest method.
Warrants issued in connection with common stock for cash, if classified as equity, are considered issued in connection with equity
transactions and the warrant fair value is recorded to additional paid-in-capital. Lastly, warrants not meeting equity classification
are recorded as derivative instruments.
DERIVATIVE INSTRUMENTS
We evaluate free-standing derivative instruments (or embedded
derivatives) to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to
settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed
at each reporting date. If the classification changes as a result of events during a reporting period, the instrument is reclassified
as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
Instruments classified as derivative liabilities are remeasured
each reporting period (or upon reclassification) and the change in fair value is recorded on our consolidated statement of operations
in other (income) expense.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
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"). We measure the estimated fair value of the BCF in circumstances in which the conversion feature is not required
to be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements
as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.
REGISTRATION PAYMENT ARRANGEMENTS
We account for contingent obligations to make future payments
or otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction
agreements, and any such contingent obligations are recognized only when it is determined that it is probable that the Company
will become obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development costs are expensed as incurred.
We incurred approximately $1,509,000 and $1,440,000 of research and development expenses for the years ended March 31, 2014 and
2013, respectively, which are included in various operating expenses in the accompanying consolidated statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our consolidated financial statements.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
Management is evaluating significant recent accounting pronouncements
that are not yet effective for the Company, including the new accounting standard on revenue recognition, ASU 2014-09 (Topic 606),
and has not yet concluded whether any such pronouncements will have a significant effect on the Company’s future consolidated
financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following:
| |
March 31, 2014 | | |
March 31, 2013 | |
Furniture and office equipment, at cost | |
$ | 385,088 | | |
$ | 289,031 | |
Accumulated depreciation | |
| (300,809 | ) | |
| (288,886 | ) |
| |
$ | 84,279 | | |
$ | 145 | |
Depreciation expense for the years ended March 31, 2014 and
2013 approximated $12,000 and $1,000, respectively.
3. PATENTS
Patents consist of the following:
| |
March 31, 2014 | | |
March 31, 2013 | |
Patents | |
$ | 157,442 | | |
$ | 157,442 | |
Patents pending and trademarks | |
| 54,203 | | |
| 54,203 | |
Accumulated amortization | |
| (99,156 | ) | |
| (89,992 | ) |
| |
$ | 112,489 | | |
$ | 121,653 | |
Amortization expense for patents for the years ended March 31,
2014 and 2013 approximated $9,000. Future amortization expense on patents is estimated to be approximately $9,000 per year based
on the estimated life of the patents. The weighted average remaining life of our patents is approximately 6.5 years.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
4. NOTES PAYABLE
Notes payable consist of the following:
| |
March 31, 2014 | | |
March 31, 2013 | |
| |
Principal Balance | | |
Accrued Interest | | |
Principal Balance | | |
Accrued Interest | |
12% Notes payable, past due | |
$ | 185,000 | | |
$ | 353,813 | | |
$ | 185,000 | | |
$ | 326,062 | |
10% Note payable, past due | |
| 5,000 | | |
| 6,375 | | |
| 5,000 | | |
| 5,875 | |
| |
| | | |
| | | |
| | | |
| | |
Directors’ Note(s) | |
| 200,000 | | |
| 14,516 | | |
| – | | |
| – | |
Tonaquint Note | |
| – | | |
| – | | |
| 131,381 | | |
| 1,629 | |
Total | |
$ | 390,000 | | |
$ | 374,704 | | |
$ | 321,381 | | |
$ | 333,566 | |
During the fiscal year ended March 31, 2014, we recorded interest
expense of $59,901 related to the contractual interest rates of our notes payable.
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings (the "12% Notes"). On April 21, 2010,
a holder of $100,000 of the 12% Notes converted his principal balance and $71,758 of accrued interest into 13,741 shares of common
stock at an agreed conversion price of $12.50 per share. At March 31, 2014, the 12% Notes were past due, in default, and bearing
interest at the default rate of 15%.
10% NOTES
At March 31, 2014, one 10% Note in the amount of $5,000,
which is past due and in default, remained outstanding and it bears interest at the default rate of 15%.
Management's plans to satisfy the remaining outstanding balance
on these 12% and 10% Notes include converting the notes to common stock at market value or repayment with available funds.
TONAQUINT NOTE
On June 28, 2011, in conjunction with our satisfying all balances
owed under a convertible note, we entered into a Termination Agreement with Tonaquint, Inc. under which both parties agreed that
in consideration of the termination of a warrant, the waiving of all fees, penalties, the creation of the selling program and other
factors, we agreed to issue an unsecured non-convertible promissory note (the "New Note") in the principal amount of
$360,186, which provides for annual interest at a rate of 6%, payable monthly in either cash or our stock, at our option. The New
Note originally had a maturity date of April 30, 2012. We subsequently extended the note
initially to July 31, 2012 and then to July 31, 2013 and subsequently to August 31, 2013. We also recorded into principal $12,500
of the lender’s legal fees related to documentation of the extension agreement.
During the fiscal year
ended March 31, 2014, we issued 30,809 shares of common stock to convert $136,060 of principal and accrued interest (see Note 6).
As a result of those conversions, the Tonaquint Note was paid off in full during the September 2013 quarter. We recorded a loss
on conversion of $40,256 on those conversions during the fiscal year ended March 31, 2014.
The following table shows
the conversions into principal of the Tonaquint Note by fiscal year:
Initial principal balance | |
$ | 360,186 | |
Lender’s legal fees | |
| 12,500 | |
Conversions during the fiscal year ended March 31, 2013 | |
| (241,305 | ) |
Conversions during the fiscal year ended March 31, 2014 | |
| (131,381 | ) |
Balance as of March 31, 2014 | |
$ | – | |
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
DIRECTORS’ NOTES
In July 2013, we borrowed
$400,000 from two of our directors under two 90 day notes for $200,000 each bearing 10% interest (the “Notes”). At
the discretion of the holders, if not paid off by October 9, 2013, the noteholders were entitled to (i) convert their principal
and accrued interest into shares of common stock at $4.40 per share (the “Conversion Price”) and (ii) receive warrants
to purchase common stock equal to 50% of the principal converted under the Notes, with an exercise price of $6.60 per share. Additionally,
there was a provision for a penalty interest rate of 12%.
That potential conversion
price and warrant exercise price were based on the same pricing mechanism that we have used in prior equity unit financings since
March 2012 (see Note 6) which are based on 80% of the then current market price of our common stock and with the warrant exercise
price based on 120% of the same then current market price. We initially reserved 138,636 shares of common stock to support the
conversion of the Notes and accrued interest in full as well as the exercise of the warrants in full (should such conversion and/or
issuance occur).
During the fiscal year
ended March 31, 2014, the principal of $200,000 and accrued interest of $9,367 were paid on one of the notes, which extinguished
all potential common stock and warrant issuance provisions related to that Note.
The holder of the second
Note agreed to extend the expiration date of his Note to July 31, 2014.
5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consisted of the following at March
31, 2014:
| |
Principal | | |
Unamortized Discount | | |
Net Amount | | |
Accrued Interest | |
Convertible Notes Payable – Current Portion: | |
| | | |
| | | |
| | | |
| | |
Amended and Restated Series A 12% Convertible Notes, past due | |
$ | 885,000 | | |
$ | – | | |
$ | 885,000 | | |
$ | 575,250 | |
2008 10% Convertible Notes, past due | |
| 25,000 | | |
| – | | |
| 25,000 | | |
| 19,167 | |
October & November 2009 10% Convertible Notes | |
| 50,000 | | |
| – | | |
| 50,000 | | |
| 26,097 | |
April 2010 10% Convertible Note | |
| 75,000 | | |
| – | | |
| 75,000 | | |
| 31,438 | |
July and August 2011 10% Convertible Notes, past due | |
| 257,655 | | |
| – | | |
| 257,655 | | |
| 90,256 | |
Law Firm Note | |
| 75,000 | | |
| – | | |
| 75,000 | | |
| 7,604 | |
Total – Convertible Notes Payable – Current Portion | |
| 1,367,655 | | |
| – | | |
| 1,367,655 | | |
| 749,812 | |
| |
| | | |
| | | |
| | | |
| | |
Convertible Notes Payable – Non-Current Portion: | |
| | | |
| | | |
| | | |
| | |
September 2010 12% Convertible Notes | |
| 317,072 | | |
| – | | |
| 317,072 | | |
| 35,034 | |
April 2011 12% Convertible Notes | |
| 448,448 | | |
| – | | |
| 448,448 | | |
| 12,117 | |
September 2011 12% Convertible Notes | |
| 10,931 | | |
| – | | |
| 10,931 | | |
| – | |
Total – Convertible Notes Payable – Non-Current Portion | |
| 776,451 | | |
| – | | |
| 776,451 | | |
| 47,151 | |
Total Convertible Notes Payable | |
$ | 2,144,106 | | |
$ | – | | |
$ | 2,144,106 | | |
$ | 796,963 | |
There were no discounts remaining on any of our Convertible
Notes Payable as of March 31, 2014.
During the fiscal year ended March 31, 2014, we recorded interest
expense of $354,949 related to the contractual interest rates of our convertible notes and interest expense of $4,284 related to
the amortization of debt discounts on the convertible notes for a total of $359,233.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
Convertible Notes Payable consisted of the following at March
31, 2013:
| |
Principal | | |
Unamortized Discount | | |
Net Amount | | |
Accrued Interest | |
Amended and Restated Series A 12% Convertible Notes, past due | |
$ | 885,000 | | |
$ | – | | |
$ | 885,000 | | |
$ | 398,250 | |
2008 10% Convertible Notes, past due | |
| 25,000 | | |
| – | | |
| 25,000 | | |
| 15,417 | |
December 2006 10% Convertible Notes, past due | |
| 17,000 | | |
| – | | |
| 17,000 | | |
| 15,888 | |
October & November 2009 10% Convertible Notes | |
| 50,000 | | |
| (389 | ) | |
| 49,611 | | |
| 20,000 | |
April 2010 10% Convertible Note | |
| 75,000 | | |
| (3,895 | ) | |
| 71,105 | | |
| 23,938 | |
September 2010 10% Convertible Notes, past due | |
| 308,100 | | |
| – | | |
| 308,100 | | |
| 52,393 | |
April 2011 10% Convertible Notes, past due | |
| 400,400 | | |
| – | | |
| 400,400 | | |
| 100,100 | |
July and August 2011 10% Convertible Notes, $257,656 past due | |
| 357,655 | | |
| – | | |
| 357,655 | | |
| 68,704 | |
September 2011 Convertible Notes, past due | |
| 178,760 | | |
| – | | |
| 178,760 | | |
| – | |
Law Firm Note | |
| 75,000 | | |
| – | | |
| 75,000 | | |
| 3,854 | |
Total – Convertible Notes Payable | |
$ | 2,371,915 | | |
$ | (4,284 | ) | |
$ | 2,367,631 | | |
$ | 698,544 | |
During the fiscal year ended March 31, 2013, we recorded interest
expense of $459,199 related to the contractual interest rates of our convertible notes and interest expense of $467,158 related
to the amortization of debt discounts on the convertible notes for a total of $926,357.
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated Series A
12% Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of certain promissory notes previously
issued by the Company, extending the due date to December 31, 2010 on the aggregate principal balance of $900,000. During the fiscal
year ended March 31, 2013, the holders of $15,000 of the Notes converted their principal and related accrued interest into common
stock. The balance remaining at March 31, 2014 and 2013 was $885,000 and is past due as of March 31, 2014. Such notes bear a default
annual interest rate of 20%.
Subsequent to year end on June 24, 2014,
we entered into an agreement with the Ellen R. Weiner Family Revocable Trust (the “Trust”), a holder of a Series A
12% Convertible Note (the “Note”), whereby the Trust converted a past due combined principal and interest balance of
$1,003,200 (principal of $660,000 and interest of $343,200) into restricted common stock.
Additionally, the Trust agreed to waive
anti-dilution price protection underlying warrants previously issued to the Trust. Under its agreement, the Trust converted the
entire $1,003,200 past due principal and interest balance on the Note
In exchange for the Trust’s conversion in full of the
Note and accrued interest and for the waivers of anti-dilution price protection in previously issued warrants, we (1) issued five-year
warrants to acquire up to 136,190 shares of our common stock at an exercise price of $2.10 per share and up to 7,944 shares of
our common stock at an exercise price of $5.40 per share (collectively, the “Conversion Securities”); (2) issued 1,500
restricted shares of common stock as a service fee; (3) changed the exercise price of all of the previously issued warrants to
the Trust to $2.10 per share; and (4) extended the expiration date of all of the previously issued warrants to the Trust to July
1, 2018.
We continue to hold discussions with the holder of the remaining
note in this grouping regarding either an extension to the note or a conversion of the note but there can be no assurance that
we will be able to do so on terms that we deem acceptable or at all. We are recording interest at the default rate of 20% on the
remaining note.
DECEMBER 2006 10% CONVERTIBLE NOTES
In January 2014, we paid off the remaining balance of the December
2006 10% Convertible Notes and the related accrued interest balance with a cash payment of $35,055. Such payment represented the
sum of the $17,000 in principal balance and $18,055 in accrued interest.
AETHLON MEDICAL,
INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
2008 10% CONVERTIBLE NOTES
One 2008 10% Convertible Note in the amount of $25,000 which
matured in January 2010 remained outstanding and past due at March 31, 2014. Such note is convertible into our common stock at
$25.00 per share. We are recording interest at the default rate of 15%.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale
to accredited investors of 10% convertible notes ("October & November 2009 10% Convertible Notes"). The October &
November 2009 10% Convertible Notes matured at various dates between April 2011 and May 2011 and are convertible into our common
stock at a fixed conversion price of $12.50 per share. The investors also received matching three year warrants to purchase
unregistered shares of our common stock at an exercise price of $12.50 per share. We measured the fair value of the warrants and
the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. Such discount was
fully amortized at March 31, 2014.
In July 2012, we issued 9,228 shares of common stock and 4,614
warrants to purchase common stock to the holder of a $25,000 note in this grouping in exchange for the conversion of such note
and related accrued interest of $8,000 (for a total of $33,000). The warrants expired in 2012 and are exercisable at $5.35 per
share (see Note 6). We recorded a loss on conversion of $45,796.
The following table shows
the conversions into principal of the October and November 2009 Convertible Notes by fiscal year:
Activity in October & November 2009 10% Convertible Notes |
Initial principal balance | |
$ | 450,250 | |
Conversions during the fiscal year ended March 31, 2010 | |
| (70,000 | ) |
Conversions during the fiscal year ended March 31, 2011 | |
| (175,000 | ) |
Conversions during the fiscal year ended March 31, 2012 | |
| (130,250 | ) |
Conversions during the fiscal year ended March 31, 2013 | |
| (25,000 | ) |
Conversions during the fiscal year ended March 31, 2014 | |
| – | |
Balance as of March 31, 2014 | |
$ | 50,000 | |
On March 31, 2012, we agreed to extend the expiration date and
to change the exercise price of certain warrants of one of the note holders by two years in exchange for the extension of $50,000
of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same
two year period. We recorded a charge of $77,265 relating to this modification.
In September 2013, we agreed to extend the expiration date of
certain warrants of one of the note holders by two years in exchange for the extension of $50,000 of the October & November
2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same two year period. Management
assessed the change in the value of the notes and related warrants before and after that extension and determined that the change
in value related to the change in terms was not significant.
APRIL 2010 10% CONVERTIBLE NOTE
In April 2010, we raised $75,000 from the sale to an accredited
investor of a 10% convertible note. The convertible note was originally scheduled to mature in October 2011 and is convertible
into our common stock at a fixed conversion price of $12.50 per share prior to maturity. The investor also received three year
warrants to purchase 300,000 unregistered shares of our common stock at a price of $12.50 per share.
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a 100% discount against the principal of the notes. We amortized this discount using
the effective interest method over the term of the note. As of March 31, 2014, there have
not been any conversions of the April 2010 10% Convertible Note.
On March 31, 2012, we agreed to extend the expiration date and
to change the exercise price of certain warrants of the note holder by two years in exchange for his extension of $50,000 of the
October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note by that same two year period.
In September 2013, we agreed to extend the expiration date of
certain warrants of one of the note holders by two years in exchange for the extension of $50,000 of the October & November
2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same two year period. Management
assessed the change in the value of the notes and related warrants before and after that extension and determined that the change
in value related to the change in terms was not significant.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
SEPTEMBER 2010 10% CONVERTIBLE NOTES
On September 3, 2010, we entered into a Subscription Agreement
with three accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory
notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial closing under the Subscription Agreement
resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $743,600, (ii) five-year
warrants to purchase an aggregate of 74,360 shares of our common stock at an exercise price of $15.56 per share, and (iii) five-year
warrants to purchase an aggregate of 74,360 shares of our common stock at an exercise price of $21.79 per share. The convertible
promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and mature on April 1, 2016 (see below).
The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due diligence fee and an original
issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock
at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as
reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days
preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than
$15.00 nor less than $10.00. There are no registration requirements with respect to the shares of common stock underlying the notes
or the warrants.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the September 2010 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were
in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity
date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of fifteen percent at which interest had been accruing. By entering into the Amendments,
we also agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260 to a total of
$776,451.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also provide that if all of our currently outstanding
promissory notes and warrants that contain antidilution adjustment provisions (other than the Investors’ Notes and Warrants)
are amended to remove, or the holders thereof waive, such provisions, then any similar antidilution provisions in the Investors’
Notes and Warrants will automatically be deemed removed. In addition, for so long as the Investors’ Notes and Warrants are
outstanding, we will not be permitted to issue any common stock or common stock equivalents (or modify, with equivalent effect,
any outstanding common stock or common stock equivalents) at a lower price than the then-current conversion price of the Notes
and exercise price of the Warrants (with certain issuances to be excepted from this general provision). If our other note and warrant
holders agree to waive the antidilution provisions of their securities on the same basis as agreed to by the Investors, then we
will no longer be required to report a derivative liability in its financial statements with the accompanying quarterly adjustments
to its financial statements and will transfer the amount shown as a derivative liability to equity.
The Amendments also set the conversion price of the Notes, as
well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue
of the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015 and September 23,
2016 to January 1, 2017.
The following table shows
the activity in the September 2010 10% Convertible Notes by fiscal year:
Activity in the September 2010 10% Convertible Notes |
Initial principal balance | |
$ | 743,600 | |
Conversions during the fiscal year ended March 31, 2012 | |
| (405,500 | ) |
Conversions during the fiscal year ended March 31, 2013 | |
| (30,000 | ) |
Conversions during the fiscal year ended March 31, 2014 | |
| (25,000 | ) |
Increase in principal balance due to 12% extension fee | |
| 33,972 | |
Balance as of March 31, 2014 | |
$ | 317,072 | |
AETHLON MEDICAL,
INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
APRIL 2011 10% CONVERTIBLE
NOTES
In April 2011, we entered
into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the issuance and sale
of convertible promissory notes and corresponding warrants in the aggregate principal amount of $385,000. The closing under the
Subscription Agreement resulted in the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount
of $385,000, (ii) five-year warrants to purchase an aggregate of 80,080 shares of our common stock at an exercise price of
$6.25 per share, and (iii) five-year warrants to purchase an aggregate of 80,080 shares of our common stock at an exercise
price of $8.75 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of 10% and mature
on April 1, 2016 (see below). The aggregate gross cash proceeds to us were $350,000, the balance of the principal amount representing
a due diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders
into shares of our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid
prices of the common stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted
for the ten (10) trading days preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion
price may not be more than $10.00 nor less than $5.00. There are no registration requirements with respect to the shares of common
stock underlying the notes or the warrants.
In addition, we issued
(i) five-year warrants to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $6.25 per share, and
(ii) five-year warrants to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $8.75 per share
to the Purchasers. These warrants were issued as an antidilution adjustment under certain common stock purchase warrants held by
the Purchasers that were acquired from us in September 2010.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the April 2011 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were
in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity
date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the Amendments, we also
agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260 to a total of $776,451.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also provide that if all of our currently outstanding
promissory notes and warrants that contain antidilution adjustment provisions (other than the Investors’ Notes and Warrants)
are amended to remove, or the holders thereof waive, such provisions, then any similar antidilution provisions in the Investors’
Notes and Warrants will automatically be deemed removed. In addition, for so long as the Investors’ Notes and Warrants are
outstanding, we will not be permitted to issue any common stock or common stock equivalents (or modify, with equivalent effect,
any outstanding common stock or common stock equivalents) at a lower price than the then-current conversion price of the Notes
and exercise price of the Warrants (with certain issuances to be excepted from this general provision).
The Amendments also set the conversion price of the Notes, as
well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue
of the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015 and September 23,
2016 to January 1, 2017.
As of March 31, 2014,
there have not been any conversions of the April 2011 10% Convertible Notes and the 12% extension fee noted above increased the
principal balance by $48,048 to a principal balance of $448,448.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised
$357,656 in 10% convertible notes. Those notes had a fixed conversion price of $4.50 per share and carried an interest rate of
10%. The convertible notes matured in July and August 2012. We also issued those investors five year warrants to purchase 79,479
shares of common stock at $6.25 per share.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a $257,926 discount against the principal of the notes. We amortized this discount
using the effective interest method over the term of the note.
Effective March 31, 2014, the holders of the three notes totaling
$100,000 converted all of their principal and accrued interest into 28,774 shares of our common stock at the contractual conversion
price of $4.50 per share.
At March 31, 2014, the remaining outstanding principal balance
was $257,655, all of which was in default. We are recording interest at the default interest rate of 15%.
SEPTEMBER 2011 CONVERTIBLE NOTES
In September 2011, we issued $253,760 of convertible notes,
convertible at $3.50 per share. Such notes originally matured in September 2012.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the September 2011 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were
in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity
date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the Amendments, we also
agreed to increase the currently outstanding principal amount of the Notes by 12%, which in the case of the September 2011 Notes,
they increased from $9,760 to $10,931
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also provide that if all of our currently outstanding
promissory notes and warrants that contain antidilution adjustment provisions (other than the Investors’ Notes and Warrants)
are amended to remove, or the holders thereof waive, such provisions, then any similar antidilution provisions in the Investors’
Notes and Warrants will automatically be deemed removed. In addition, for so long as the Investors’ Notes and Warrants are
outstanding, we will not be permitted to issue any common stock or common stock equivalents (or modify, with equivalent effect,
any outstanding common stock or common stock equivalents) at a lower price than the then-current conversion price of the Notes
and exercise price of the Warrants (with certain issuances to be excepted from this general provision). If our other note and warrant
holders agree to waive the antidilution provisions of their securities on the same basis as agreed to by the Investors, then we
will no longer be required to report a derivative liability in its financial statements with the accompanying quarterly adjustments
to its financial statements and will transfer the amount shown as a derivative liability to equity.
The Amendments also set the conversion price of the Notes, as
well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue
of the Amendments, the expiration dates of the Warrants also were extended to January 1, 2017.
The following table shows
the conversions into principal of the September 2011 Convertible Notes by fiscal year:
Activity in the September 2011 Convertible Notes |
Initial principal balance | |
$ | 253,760 | |
Conversions during the fiscal year ended March 31, 2012 | |
| (15,000 | ) |
Conversions during the fiscal year ended March 31, 2013 | |
| (60,000 | ) |
Conversions during the fiscal year ended March 31, 2014 | |
| (169,000 | ) |
Increase in principal balance due to extension fee | |
| 1,171 | |
Balance as of March 31, 2014 | |
$ | 10,931 | |
AETHLON MEDICAL,
INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
LAW FIRM NOTE NUMBER 1
On March 22, 2012, we entered into a Promissory Note with our
corporate law firm for the amount of $75,000, which represented the majority of the amount we owed to that firm at that time. The
Promissory Note originally had a maturity date of December 31, 2012 and bears interest at 5% per annum. The note is convertible
at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date
prior to conversion with a floor price on such conversions of $4.00 per share. The holder subsequently agreed to extend the Maturity
Date of the Note first to October 1, 2013, then to September 30, 2013, and now the expiration date of this note is again extended
to October 1, 2014. As of March 31, 2014, there have not been any conversions of the Law
Firm Note.
LAW FIRM NOTE NUMBER 2
On June 4, 2013, we entered into a Promissory Note with our
corporate law firm for the amount of $47,000, which represented approximately 50% of the amount we owed to that firm for services
in 2012. The Promissory Note had a maturity date of October 1, 2014 and bore interest at 5% per annum. The note was convertible
at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date
prior to conversion with a floor price on such conversions of $3.50 per share.
Effective March 31, 2014, our law firm converted this note and
all related accrued interest into 6,041 shares of our common stock at a conversion price of $8.00 per share.
6. EQUITY TRANSACTIONS
COMMON STOCK AND WARRANTS
Aethlon Medical, Inc. Equity Transactions in the Fiscal Year
Ended March 31, 2014
Common Stock Issuances in the Fiscal Year Ended March 31,
2014:
In June 2013, we completed a unit subscription agreement with
three accredited investors pursuant to which we issued 31,605 shares of our common stock and 15,802 warrants to purchase our common
stock for net cash proceeds of $128,000. Such warrants have an exercise price of $6.05 per share.
In June 2013, we issued to our CEO the remaining 68,000 shares
under his restricted share grant, all of which were vested.
During the three months ended June 30, 2013, we issued 73,506
shares of restricted common stock to the holders of three notes issued by the Company in exchange for the partial conversion of
principal and interest in an aggregate amount of $246,500 at an average conversion price of $3.35 per share.
During the three months ended June 30, 2013, we issued 4,455
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $4.88
per share in payment for legal services valued at $21,750 based on the value of the services provided.
In August 2013, we completed a unit subscription agreement with
four accredited investors (the “Purchasers”) pursuant to which we issued 18,018 shares of our common stock and 9,009
warrants to purchase our common stock in exchange for net cash proceeds of $100,000. Such warrants have an exercise price of $8.35
per share.
During the three months ended September 30, 2013, we issued
18,670 shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price
of $6.83 per share in payment for legal and scientific consulting services valued at $127,593 based on the value of the services
provided.
During the three months ended September 30, 2013, we issued
23,367 shares of restricted common stock at an average price of $4.92 per share in payment for investor relations and public relations
services valued at $115,000 based on the value of the services provided.
During the three months ended September 30 2013, we issued 55,907
shares of restricted common stock to the holders of four notes issued by the Company in exchange for the partial or full conversion
of principal and interest in an aggregate amount of $173,960 at an average conversion price of $3.11 per share.
During the three months ended December 31, 2013, we entered
into a unit purchase agreement and subscription agreements with 32 accredited investors pursuant to which we issued 287,344 shares
of our common stock and warrants to purchase our common stock for gross cash proceeds of $1,795,900. Such warrants have an exercise
price of $11.00 per share. A FINRA registered broker-dealer was engaged as placement agent in connection with the above Unit Purchase
Agreement. We paid the placement agent an aggregate cash fee in the amount of $270,508 and will issue the placement agent or its
designees warrants to purchase an aggregate of 43,102 shares of our common stock. We also paid $78,360 in other costs and fees,
including legal fees, blue sky fees and escrow costs. The net proceeds that we received totaled $1,447,032.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
During the three months ended December 31 2013, we issued 29,304
shares of restricted common stock to the holders of two notes issued by us in exchange for the partial or full conversion of accrued
interest in an aggregate amount of $80,000 at an average conversion price of $2.73 per share.
During the three months ended March 31 2014, we issued 52,764
shares of restricted common stock to the holders of five notes issued by us in exchange for the partial or full conversion of accrued
interest in an aggregate amount of $226,316 at an average conversion price of $4.29 per share.
During the three months ended March 31, 2014, we issued 6,935
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $9.41
per share in payment for legal services valued at $65,250 based on the value of the services provided.
During the three months ended March 31, 2014, we issued 7,996
shares of restricted common stock at an average price of $7.82 per share in payment for investor relations and public relations
services valued at $62,500 based on the value of the services provided.
On March 31, 2014, we entered into extension agreements with
three noteholders (see Note 5). In conjunction with the extension agreements, we agreed to issue to the noteholders an aggregate
90,142 shares of restricted common stock as a result of the noteholders invoking the antidilution protection on their notes.
In March 2014, a former director exercised 3,659 in vested stock
options through the contribution of $2,000 in cash and $13,000 in accrued expenses owed to him based on the exercise price of $4.10
per share.
During the fiscal year ended March 31, 2014, we issued 254,325
shares of restricted common stock in connection with cashless warrant exercises discussed elsewhere in this footnote.
Exosome Sciences, Inc. Equity Transactions in the Fiscal
Year Ended March 31, 2014
On November 21, 2013, ESI, prior to the transaction described
herein, a wholly owned diagnostic subsidiary of ours, entered into a stock purchase agreement with twelve accredited investors
pursuant to which such investors purchased an aggregate of 220,000 shares of ESI’s common stock at a purchase price of $5.00
per share, for an aggregate purchase price of $1,100,000 in cash.
On December 13, 2013, ESI entered into a second stock purchase
agreement with three accredited investors, pursuant to which such investors purchased an aggregate of 80,000 shares of ESI’s
common stock at a purchase price of $5.00 per share, for an aggregate purchase price of $400,000 in cash.
The aggregate gross proceeds received by ESI under these two
transactions above were $1,500,000. As a result of these transactions the Company’s percentage ownership of the outstanding
common stock of ESI was reduced from 100% to 80%.
One of the investors was Dr. Chetan Shah, a director of the
Company. Dr. Shah purchased 70,000 ESI shares for an aggregate purchase price of $350,000.
Common Stock Issuances in the Fiscal Year Ended March 31,
2013:
During the fiscal year ended March 31, 2013, we issued 456,595
shares of restricted common stock to holders of notes issued by the Company in exchange for the partial or full conversion of principal
and interest of several notes payable in an aggregate amount of $1,707,052 at an average conversion price of $3.74 per share based
upon the conversion formulae in the respective notes.
During the fiscal year ended March 31, 2013, we issued 38,656
restricted shares of common stock to service providers for investor relations, corporate communications and business development
services valued at $170,849 based upon the fair value of the shares issued. The average issuance price on the restricted share
issuances was approximately $4.42 per share.
During the fiscal year ended March 31, 2013, we issued 19,267
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $4.58
per share in payment for scientific consulting services valued at $88,186 based on the value of the services provided.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
On April 5, 2012, we completed a unit subscription agreement
with one accredited investor (the “Purchaser”) pursuant to which we issued 50,000 shares of our common stock and
25,000 warrants to purchase our common stock for net cash proceeds of $200,000. Such warrants have an exercise price of $6.25 per
share.
On June 19, 2012, we completed a unit subscription agreement
whereby we issued 164,444 shares of our common stock and 82,222 warrants to purchase our common stock at an exercise price of $5.40
per share in exchange for net cash proceeds of $592,000.
On June 26, 2012, we completed a unit subscription agreement
whereby we issued 2,796 shares of our common stock and 1,398 warrants to purchase our common stock at an exercise price of $5.35
per share in exchange for net cash proceeds of $10,000.
In July 2012, we issued 9,228 shares of common stock to the
holder of a $25,000 October & November 2009 10% Convertible Note (See Note 5) in exchange for the value of the principal and
related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and
one-half of a stock purchase warrant on June 29, 2012 (See Note 6). As part of that structure, the noteholder also received seven
year warrants to purchase 4,614 shares of our common stock at an exercise price of $5.35 per share.
On August 29, 2012, we completed a unit subscription agreement
with seven accredited investors pursuant to which we issued 67,750 shares of our common stock and 33,875 warrants to purchase our
common stock in exchange for net cash proceeds of $271,000. Such warrants have an exercise price of $6.00 per share.
Between October 2012 and December 2012, we completed several
unit subscription agreements with several accredited investors pursuant to which we issued 157,572 shares of our common stock and
78,786 warrants to purchase our common stock for net cash proceeds of $498,000. Such warrants have an exercise price based upon
120% of the average of the closing prices of our common stock for the five-day period immediately preceding the respective investment
transaction date.
In January 2013, we issued 4,929 shares of restricted common
stock to the owner of a patent as a patent license payment valued at $17,250.
Between January 2013 and March 2013, we completed several unit
subscription agreements with several accredited investors pursuant to which we issued 151,928 shares of our common stock and 75,964
warrants to purchase our common stock for net cash proceeds of $538,834. Such warrants have an exercise price based upon 120% of
the average of the closing prices of our common stock for the five-day period immediately preceding the respective investment transaction
date.
A summary of the aggregate warrant activity for the years ended
March 31, 2014 and 2013 is presented below:
| |
Year Ended March 31, | |
| |
2014 | | |
2013 | |
| |
Warrants | | |
Weighted Average Exercise Price | | |
Warrants | | |
Weighted Average Exercise Price | |
Outstanding, beginning of year | |
| 1,512,946 | | |
$ | 5.50 | | |
| 1,196,157 | | |
$ | 7.00 | |
Granted | |
| 290,610 | | |
$ | 9.00 | | |
| 334,209 | | |
$ | 5.50 | |
Exercised | |
| (254,324 | ) | |
$ | 4.00 | | |
| – | | |
$ | – | |
Cancelled/Forfeited | |
| (135,042 | ) | |
$ | 5.50 | | |
| (17,420 | ) | |
$ | 12.50 | |
Outstanding, end of year | |
| 1,414,190 | | |
$ | 5.00 | | |
| 1,512,946 | | |
$ | 5.50 | |
Exercisable, end of year | |
| 1,414,190 | | |
$ | 5.00 | | |
| 1,512,946 | | |
$ | 5.50 | |
Weighted average estimated fair value of warrants granted | |
| | | |
$ | 4.50 | | |
| | | |
$ | 3.50 | |
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
The following outlines the significant weighted average assumptions
used to estimate the fair value of warrants granted utilizing the Binomial Lattice option pricing model:
|
Year Ended March 31, |
|
2014 |
|
2013 |
Risk free interest rate |
1.3%-2.04% |
|
0.86%-1.56% |
Average expected life |
5 to 7 years |
|
5 to 7 years |
Expected volatility |
91.2% - 98.5% |
|
90.3% - 94.3% |
Expected dividends |
None |
|
None |
The detail of the warrants outstanding and exercisable as of
March 31, 2014 is as follows:
|
|
Warrants Outstanding |
|
|
Warrants Exercisable |
|
Range of
Exercise Prices |
|
Number
Outstanding |
|
|
Weighted Average
Remaining
Life (Years) |
|
|
Weighted Average
Exercise Price |
|
|
Number
Outstanding |
|
|
Weighted Average
Exercise Price |
|
$5.00 or Below |
|
|
741,896 |
|
|
|
2.42 |
|
|
$ |
2.50 |
|
|
|
741,896 |
|
|
$ |
2.50 |
|
$5.50 - $9.50 |
|
|
437,520 |
|
|
|
4.74 |
|
|
$ |
6.50 |
|
|
|
437,520 |
|
|
$ |
6.50 |
|
$10.00 - $12.50 |
|
|
234,774 |
|
|
|
5.05 |
|
|
$ |
10.50 |
|
|
|
234,774 |
|
|
$ |
10.50 |
|
|
|
|
1,414,190 |
|
|
|
|
|
|
|
|
|
|
|
1,414,190 |
|
|
|
|
|
STOCK OPTIONS:
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan (the "Plan"), adopted by
us in August 2000, provides for the grant of incentive stock options ("ISOs") to our 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 our 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 our outstanding
common stock, 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 our common stock on the date of grant. The amount reserved under the Plan
is 10,000 options.
At March 31, 2012, all of the grants previously made under the
Plan had expired and 200 restricted shares had been issued under the 2000 Stock Option Plan, with 9,800 available for future issuance.
2003 CONSULTANT STOCK PLAN
Our 2003 Consultant Stock Plan, as amended from time to time
(the "Stock Plan"), adopted by us in August 2003, advances our interests by helping us obtain and retain the services
of persons providing consulting services upon whose judgment, initiative, efforts and/or services we are substantially dependent,
by offering to or providing those persons with incentives or inducements affording such persons an opportunity to become owners
of our common stock. Over several years, we issued 150,000 shares under the Stock Plan and discontinued using the Stock Plan in
October 2012.
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan (the
"Incentive Plan"), which provides incentives to attract, retain and motivate employees and directors whose present and
potential contributions are important to the success of the Company by offering them an opportunity to participate in our future
performance through awards of options, the right to purchase common stock, stock bonuses and stock appreciation rights and other
awards. A total of 70,000 common shares were initially reserved for issuance under the Incentive Plan.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
In August 2010, we filed a registration statement on Form S-8
for the purpose of registering 70,000 common shares issuable under the Incentive Plan under the Securities Act of 1933 and in July
2012, we filed a registration statement on Form S-8 for the purpose of registering an additional 100,000 common shares issuable
under the Incentive Plan under the Securities Act of 1933.
In May 2013, we issued to a scientific advisory board member
and a scientific consultant a three year option to purchase 2,500 shares of our common stock at a price of $5.50 per share.
At March 31, 2014, we had 48,913 shares available under the
Incentive Plan.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a new Board Compensation
Program (the “New Program”), which modifies and supersedes the 2005 Directors Compensation Program (the “2005
Program”) that was previously in effect. Under the New Program, in which only non-employee Directors may participate, an
eligible Director will receive a grant of $35,000 worth of ten year options to acquire shares of our common stock, with such grant
being valued at the exercise price based on the average of the closing bid prices of our common stock for the five trading days
preceding the first day of the fiscal year. In addition, under the New Program, eligible Directors will receive cash compensation
equal to $500 for each committee meeting attended and $1,000 for each formal Board meeting attended.
In the fiscal year ended March 31, 2013, our Board of Directors
granted under the New Program, to our four outside directors, ten year options to acquire an aggregate of 33,342 shares of our
common stock, all with an exercise price of $3.80 per share.
In the fiscal year ended March 31, 2014, our Board of Directors
granted under the New Program, to our five outside directors, ten year options to acquire an aggregate of 31,911 shares of our
common stock, all with an exercise price of $4.10 per share.
At March 31, 2014 under the 2005 Program, we had issued 26,757
options to outside directors and 79,309 options to employee-directors. Of such amounts, 10,291 outside directors’ options
had been forfeited, 5,000 outside directors’ options had been exercised, and 73,431 options remained outstanding.
On June 6, 2014, our Board of Directors approved certain changes
to the New Program. Under the modified New Program, a new eligible Director will receive an initial grant of $50,000 worth of options
to acquire shares of our common stock, with such grant being valued at the exercise price based on the average of the closing bid
prices of our common stock for the five trading days preceding the first day of the fiscal year. These options will have a term
of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. In addition, at
the beginning of each fiscal year, each existing Director eligible to participate in the modified New Program also will receive
a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of our common stock
for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary of the date
of grant. In lieu of per meeting fees, under the modified New Program eligible Directors will receive an annual Board cash retainer
fee of $30,000. The modified New Program also provides for the following annual cash retainer fees: Audit Committee Chair - $5,000,
Compensation Committee chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000, and Lead independent
director - $15,000.
STAND-ALONE GRANTS
From time to time our Board of Directors grants restricted stock
or common share purchase options or warrants to selected directors, officers, employees and consultants as equity compensation
to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually negotiated.
On June 8, 2009, our board of directors approved the grant to
Mr. Joyce of 80,000 shares of restricted common stock at a price per share of $12.00, the vesting and issuance of which occurred
in equal installments over a thirty-six-month period that commenced on June 30, 2010. Mr. Joyce may, from time to time, defer acceptance
of the shares. However, all shares must be issued and accepted by Mr. Joyce by the expiration of the thirty-six-month vesting period.
Mr. Joyce has accepted all 80,000 shares of the grant. However, the 12,000 shares previously accepted by Mr. Joyce were pledged
as collateral for a loan and have been retained and/or sold by the lender and are no longer owned by Mr. Joyce.
In July 2013, our compensation committee and Board of Directors
approved the issuance of four stock option grants to four of our executives. The options carried an exercise price of $5.00 per
share, have a ten year life and vest over the following schedule: 25% on July 1, 2014, 25% on July 1, 2015, 25% on July 1, 2016
and 25% on July 1, 2017. The numbers of shares underlying each of the stock option grants were as follows: 40,000 shares to our
chief executive officer and 10,000 shares each to our president, chief science officer and chief financial officer.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
During the three months ended March 31, 2014, a former director
exercised 3,659 in vested stock options through the contribution of $2,000 in cash and $13,000 in accrued expenses owed to him
based on the exercise price of $4.10 per share.
As of March 31, 2014, we have issued 451,363 options (of which
67,379 have been exercised or cancelled) and authorized the issuance of 80,000 shares of restricted stock outside of the 2005 Directors
Compensation Plan, the 2012 Directors Compensation Plan, the 2000 Stock Option Plan, the 2003 Consultant Stock Plan and the 2010
Incentive Stock Plan.
In the fiscal year ended March 31, 2014, our Board of Directors
granted, to our five outside directors, ten year options to acquire an aggregate of 31,911 shares of our common stock, all with
an exercise price of $4.10 per share.
The following is a summary of the stock options outstanding
at March 31, 2014 and 2013 and the changes during the years then ended:
|
|
Year Ended March 31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
Options |
|
|
Weighted Average
Exercise Price |
|
|
Options |
|
|
Weighted Average
Exercise Price |
|
Outstanding, beginning of year |
|
|
421,916 |
|
|
$ |
14.00 |
|
|
|
388,574 |
|
|
$ |
15.50 |
|
Granted |
|
|
104,411 |
|
|
$ |
4.50 |
|
|
|
33,342 |
|
|
$ |
4.00 |
|
Exercised |
|
|
(3,659 |
|
) |
$ |
4.00 |
|
|
|
– |
|
|
$ |
– |
|
Cancelled/Forfeited |
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
Outstanding, end of year |
|
|
522,668 |
|
|
$ |
12.50 |
|
|
|
421,916 |
|
|
$ |
14.00 |
|
Exercisable, end of year |
|
|
449,751 |
|
|
$ |
13.50 |
|
|
|
382,833 |
|
|
$ |
14.500.29 |
|
Weighted average estimated fair value of options granted |
|
|
|
|
|
$ |
6.50 |
|
|
|
|
|
|
$ |
4.00 |
|
The following outlines the significant weighted average assumptions
used to estimate the fair value with respect to stock options utilizing the Binomial Lattice option pricing model for the years
ended March 31, 2014 and March 31, 2013:
|
Year Ended March 31, |
|
2014 |
|
2013 |
Risk free interest rate |
0.38% to 2.65% |
|
1.44% |
Average expected life |
3 to 10 years |
|
10 years |
Expected volatility |
91.05% to 102.67% |
|
117.53% |
Expected dividends |
None |
|
None |
The detail of the options outstanding and exercisable as of
March 31, 2014 is as follows:
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
Range of
Exercise Prices |
|
|
Number
Outstanding |
|
|
Weighted
Average
Remaining
Life (Years) |
|
|
Weighted
Average
Exercise
Price |
|
|
Number
Outstanding |
|
|
Weighted
Average
Exercise
Price |
|
$4.00 - $5.50 |
|
|
|
134,094 |
|
|
|
9.68 years |
|
|
$ |
4.50 |
|
|
|
64,094 |
|
|
$ |
4.00 |
|
$10.50 - $12.50 |
|
|
|
224,143 |
|
|
|
4.28 years |
|
|
$ |
12.00 |
|
|
|
221,226 |
|
|
$ |
12.00 |
|
$18.00 - $20.50 |
|
|
|
164,431 |
|
|
|
2.68 years |
|
|
$ |
19.00 |
|
|
|
164,431 |
|
|
$ |
19.00 |
|
|
|
|
|
|
522,668 |
|
|
|
|
|
|
|
|
|
|
|
449,751 |
|
|
|
|
|
We recorded stock-based compensation expense related to share
issuances and to options granted totaling $607,946 and $765,273 for the fiscal years ended March 31, 2014 and 2013, respectively.
These expenses were recorded as stock compensation included in payroll and related expenses in the accompanying consolidated statement
of operations for the years ended March 31, 2014 and 2013.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
Our total stock-based compensation for fiscal years ended March
31, 2014 and 2013 included the following:
| |
March 31, 2014 | | |
March 31, 2013 | |
Vesting of restricted stock grant | |
$ | 64,444 | | |
$ | 386,668 | |
Incremental fair value of option modifications | |
| 1,914 | | |
| 23,027 | |
Vesting of stock options | |
| 541,588 | | |
| 355,578 | |
Total Stock-Based Compensation | |
$ | 607,946 | | |
$ | 765,273 | |
As of March 31, 2014, we had $270,952 of remaining unrecognized
stock option expense, which is expected to be recognized over a weighted average remaining vesting period of 2.07 years.
On March 31, 2014, our stock options had a negative intrinsic
value since the closing price on that date of $8.50 per share was below the weighted average exercise price of our stock options.
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain of our officers and other related parties have advanced
us funds, agreed to defer compensation and/or paid expenses on our behalf to cover working capital deficiencies. These unsecured
and non-interest-bearing liabilities have been included as due to related parties in the accompanying consolidated balance sheets.
Other related party transactions are disclosed elsewhere in
these notes to consolidated financial statements.
8. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
| |
March 31, | | |
March 31, | |
| |
2014 | | |
2013 | |
Accrued interest | |
$ | 1,165,335 | | |
$ | 1,032,110 | |
Accrued legal fees | |
| 179,465 | | |
| 179,465 | |
Accrued liquidated damages | |
| 362,800 | | |
| 437,800 | |
Other accrued liabilities | |
| 147,774 | | |
| 155,610 | |
Total other current liabilities | |
$ | 1,855,374 | | |
$ | 1,804,985 | |
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
9. INCOME TAXES
For the years ended March 31, 2014 and 2013, we had no income
tax expense due to our net operating losses and 100% deferred tax asset valuation allowance.
At March 31, 2014 and 2013, we had net deferred tax assets as
detailed below. These deferred tax assets are primarily composed of capitalized research and development costs and tax net operating
loss carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a 100%
valuation has been established to offset the net deferred tax assets.
Significant components of our net deferred tax assets at March
31, 2014 and 2013 are shown below:
| |
YEAR ENDED MARCH 31, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Deferred tax assets: | |
| | | |
| | |
Capitalized research and development | |
$ | 3,442,000 | | |
$ | 3,442,000 | |
Net operating loss carryforwards | |
| 15,193,000 | | |
| 14,793,000 | |
Total deferred tax assets | |
| 18,635,000 | | |
| 18,235,000 | |
| |
| | | |
| | |
Total deferred tax liabilities | |
| – | | |
| – | |
| |
| | | |
| | |
Net deferred tax assets | |
| 18,635,000 | | |
| 18,235,000 | |
Valuation allowance for deferred tax assets | |
| (18,635,000 | ) | |
| (18,235,000 | ) |
| |
| | | |
| | |
Net deferred tax assets | |
$ | – | | |
$ | – | |
At March 31, 2014, we had tax net operating loss carryforwards
for federal and state purposes approximating $39 million and $30 million, which begin to expire in the year 2020.
The provision for income taxes on earnings subject to income
taxes differs from the statutory federal rate for the years ended March 31, 2014 and 2013 due to the following:
| |
2014 | | |
2013 | |
| |
| | |
| |
Income taxes (benefit) at federal statutory rate of 34% | |
$ | (4,541,000 | ) | |
$ | (1,663,000 | ) |
State income tax, net of federal benefit | |
| (156,000 | ) | |
| (285,000 | ) |
Tax effect on non-deductible expenses and credits | |
| 4,297,000 | | |
| 215,000 | |
Change in valuation allowance1 | |
| 400,000 | | |
| 1,733,000 | |
| |
$ | – | | |
$ | – | |
Pursuant to Internal Revenue Code Sections 382, use of our tax
net operating loss carryforwards may be limited.
ASC 740, “Income Taxes”, clarifies the accounting
for uncertainty in income taxes recognized in an entity's financial statements, and prescribes recognition thresholds and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the
impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. Our practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. During the years ended March 31, 2014 and 2013, we did not recognize any interest
or penalties relating to tax matters.
At and for the years ended March 31, 2014 and 2013, management
does not believe the Company has any uncertain tax positions. Accordingly, there are no unrecognized tax benefits at March
31, 2014 or March 31, 2013.
Our tax returns for the years 2010 and forward are subject to
examination by the Internal Revenue Service and 2009 and forward by the California Franchise Tax Board. We are currently not under
examination by any taxing authorities.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
10. FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES"
(“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent
to initial recognition.
ASC 820 requires that assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical
assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs
that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market
data.
The hierarchy noted above requires us to minimize the use of
unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined
based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative
liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations. Our
fair value measurements at the reporting date were as follows:
At March 31, 2014:
Description | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
Derivative Liabilities | |
$ | – | | |
$ | – | | |
$ | 10,679,067 | |
Total Assets | |
$ | – | | |
$ | – | | |
$ | 10,679,067 | |
At March 31, 2013:
Description | |
Quoted Prices in Active Markets for Identical Assets (Level 1) | | |
Significant Other Observable Inputs (Level 2) | | |
Significant Unobservable Inputs (Level 3) | |
Derivative Liabilities | |
$ | – | | |
$ | – | | |
$ | 3,588,239 | |
Total Assets | |
$ | – | | |
$ | – | | |
$ | 3,588,239 | |
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented for the fiscal years ended March 31, 2014 and 2013, in connection with our
April 2011 convertible note, July & August 2011 10% convertible notes and the September 2011 convertible note offerings and
with respect to warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
|
Fiscal Year Ended March 31, 2014 |
Risk free interest rate |
0.02% - 0.79% |
Average expected life |
0.25 – 2.8 years |
Expected volatility |
58.0% - 103.1% |
Expected dividends |
None |
|
Fiscal Year Ended March 31, 2013 |
Risk free interest rate |
0.05% - 1.56% |
Average expected life |
0.25 – 3.6 years |
Expected volatility |
76.0% - 107.1% |
Expected dividends |
None |
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the year ended March 31, 2014:
| |
April 1,
2013 | | |
Recorded New Derivative Liabilities | | |
Change in estimated fair value recognized in
results of operations | | |
Reclassification of Derivative Liability to Paid
in capital | | |
March 31,
2014 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 3,588,239 | | |
$ | – | | |
$ | 5,729,780 | | |
$ | 1,361,048 | | |
$ | 10,679,067 | |
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised –
Note 1)
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the year ended March 31, 2013:
| |
April 1,
2012 | | |
Recorded New Derivative Liabilities | | |
Change in estimated fair value recognized in
results of operations | | |
Reclassification of Derivative Liability to Paid
in capital | | |
March 31,
2013 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 3,588,615 | | |
$ | – | | |
$ | (44,705 | ) | |
$ | 44,329 | | |
$ | 3,588,239 | |
11. DARPA CONTRACT AND RELATED REVENUE RECOGNITION
As discussed in Note 1, we entered into a contract with the
DARPA on September 30, 2011. Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence
of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a
fixed-price contract with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require
the achievement of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms
of the contract, we will perform certain incremental work towards the achievement of specific milestones against which we will
invoice the government for fixed payment amounts.
Originally, only the base year (year one of the contract) was
effective for the parties, however, DARPA subsequently exercised the option on the second and third years of the contract. DARPA
has the option to enter into the contract for years four and five. The milestones are comprised of planning, engineering and clinical
targets, the achievement of which in some cases will require the participation and contribution of third party participants under
the contract. There can be no assurance that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the contract term. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of our contract in
years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and blood processing
instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years three through
five. We recently completed a rebudgeting of the expected costs on the remaining years of the DARPA contract based on the reduced
milestones and have concluded that the reductions in our costs due to the scaled back level of work will almost entirely offset
the anticipated revenue levels based on current assumptions.
Fiscal Year Ended March 31, 2014
As a result of achieving eight milestones in the fiscal year
ended March 31, 2014, we reported $1,466,482 in contract revenue for that fiscal year. The details of the eight milestones achieved
during the fiscal year ended March 31, 2014 were as follows:
Milestone 2.3.2.2 – Formulate initial design work based
on work from the previous phase. Begin to build and test selected instrument design and tubing sets. The milestone payment was
$195,581. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based
solely on another party's efforts. We demonstrated that we were able to formulate the initial design work and to build and test
selected instrument design and tubing sets as part of our submission for approval. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter.
Milestone 2.3.2.2 – Write and test software and conduct
ergonomic research. Begin discussions with the systems integrator. The milestone payment was $195,581. Management considers this
milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts.
We obtained wrote and tested software and conducted ergonomic research and began discussions with the systems integrator. The report
was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.3.3.2 – Cartridge construction with optimized
affinity matrix design for each potential target. Complete the capture agent screening. The milestone payment was $208,781. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We completed the cartridge construction with optimized affinity matrix design for each potential target and completed
the capture agent screening. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
Milestone M5 – Target capture > 90% in 24 hours for
at least three targets in blood or blood components. The milestone payment was $208,781. Management considers this milestone to
be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated
that we were able to capture > 90% in 24 hours for at least three of the agreed targets in blood or blood components. The report
was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone M3 – Conduct a series of experiments aimed at
characterizing the contribution of several alternate fluidic designs and methods of perfusing plasma filters and affinity columns
in the performance of affinity plasmapheresis. The milestone payment was $195,576. Management considers this milestone to be substantive
as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that we had
conducted the relevant series of experiments. The report was accepted by the contracting officer's representative and the invoice
was submitted thereafter.
Milestone 2.4.2.1 – Evaluate contribution of manufacturing
process variables to binding capacity of affinity resin. The milestone payment was $197,362. Management considers this milestone
to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated
that we had evaluated the contribution of manufacturing process variables to binding capacity of affinity resin. The report was
accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.4.1.1 – Design and fabricate optimized configuration(s)
of hemopurification device(s) that contain(s) a combination of hemofilters, plasma filters and affinity columns. The milestone
payment was $186,164. Management considers this milestone to be substantive as it was not dependent on the passage of time nor
was it based solely on another party's efforts. We demonstrated that we had designed and fabricated optimized configuration of
hemopurification devices. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.4.2.3 – Perform biocompatibility tests for
the combination ADAPT device to confirm the combination cartridge does not present additional risk. The milestone payment was $78,641.
Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we had performed biocompatibility tests for the combination ADAPT device to confirm
the combination cartridge does not present additional risk. The report was accepted by the contracting officer's representative
and the invoice was submitted thereafter.
Fiscal Year Ended March 31, 2013
As a result of achieving six milestones in the fiscal year ended
March 31, 2013, we reported $1,230,004 in contract revenue for that fiscal year. The details of the six milestones achieved during
the fiscal year ended March 31, 2013 were as follows:
Milestone 2.2.2.3 – Perform preliminary quantitative real
time PCR to measure viral load, and specific DNA or RNA targets. The milestone payment was $216,747. Management considers this
milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts.
We demonstrated that we were able to measure viral load of one or more targets as part of our submission for approval. The
report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.2.1.4 – Obtain all necessary IRB documentation
and obtain both institutional and Government approval in accordance with IRB documentation submission guidance prior to conducting
human or animal testing. The milestone payment was $183,367. Management considers this milestone to be substantive as it was not
dependent on the passage of time nor was it based solely on another party's efforts. We obtained all of the required
documentation from both institutional and Government authorities. The report was accepted by the contracting officer's representative
and the invoice was submitted thereafter.
Milestone M2 – Target capture > 50% in 24 hours for
at least one target in blood or blood components. The milestone payment was $216,747. Management considers this milestone to be
substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated
that we were able to capture > 50% in 24 hours of one of the agreed targets in blood or blood components. The report was accepted
by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.3.3.1 – Build the ADAPT capture cartridges
with the identified affinity agents. Measure the rate of capture of the specific targets from in ex vivo recirculation experiments
from cell culture and blood. The milestone payment was $208,781. Management considers this milestone to be substantive as it was
not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that we were
able build the ADAPT capture cartridges with the identified affinity agents and to measure the rate of capture of the specific
targets from in ex vivo recirculation experiments from cell culture and blood. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
Milestone 2.3.2.1 – Demonstrate the effectiveness of the
prototype device in vivo in animals preventing platelet activation or clotting in at least a 2 hour blood pumping experiment at
75 mL/min blood flow. The milestone payment amount was $195,581. Management considers this milestone to be substantive as it was
not dependent on the passage of time nor was it based solely on another party's efforts. The prototype device was successfully
used in vivo in animals preventing platelet activation or clotting in at least a 2 hour blood pumping experiment at 75 mL/min blood
flow. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone M4 – Target capture > 50% in 24 hours for
at least 5 targets in blood or blood components. The milestone payment was $208,781. Management considers this milestone to be
substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated
that we were able to capture > 50% in 24 hours for at least 5 of the agreed targets in blood or blood components. The report
was accepted by the contracting officer's representative and the invoice was submitted thereafter.
12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the fiscal years ended March 31,
2014 and 2013, we did not deem any unusual or infrequently occurring items or adjustments to be material to our fourth quarter
results.
13. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
We entered into an employment agreement with our Chairman of
the Board (“Chairman”) effective April 1, 1999. The agreement, which is cancelable by either party upon sixty days’
notice, will be in effect until the Chairman retires or ceases to be employed by us. Under the terms of the agreement, if the Chairman
is terminated he may become eligible to receive a salary continuation payment in the amount of at least twelve months' base salary,
which was increased to $350,000 per year in June 2014.
We entered into an employment agreement with Dr. Tullis (“Tullis”)
effective January 10, 2000 as our Chief Science Officer ("CSO"). Under the terms of the agreement, if Tullis is terminated
he may become eligible to receive a salary continuation payment in the amount of twelve months base salary, which is $195,000 per
year.
LEASE COMMITMENTS
We currently rent approximately 2,300 square feet of executive
office space at 8910 University Center Lane, Suite 660, San Diego, CA 92122 at the rate of $6,475 per month on a four year lease
that expires in September 2014. We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road,
Suite 109, San Diego, California 92121 at the rate of $2,917 per month on a two year lease that expires in October 2014. We
are currently searching for new space in the greater San Diego area.
Our Exosome Sciences, Inc. subsidiary rents approximately 2,055
square feet of office and laboratory space at 11 Deer Park Drive, South Brunswick, NJ at the rate of $3,425 per month on a one
year lease that expires in October 2014. Our current plans are to renew the lease prior to expiration.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
Rent expense approximated $163,000 and $123,000 for the fiscal
years ended March 31, 2014 and 2013, respectively. As of March 31, 2014, commitments under the lease agreements are as follows:
| |
2015 | |
8910 University Center Lane, Suite 660, San Diego, CA 92122 office lease | |
$ | 43,795 | |
| |
| | |
11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 office lease | |
| 22,755 | |
| |
| | |
11 Deer Park Drive, South Brunswick, NJ | |
| 23,975 | |
Total Lease Commitments | |
$ | 90,525 | |
LEGAL MATTERS
From time to time, claims are made against us in the ordinary
course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or
more products or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period
could have a material adverse effect on our results of operations for that period or future periods. Other than as mentioned here,
we are not presently a party to any pending or threatened legal proceedings.
On February 24, 2014, we entered into a Settlement Agreement
and General Release (the “Settlement Agreement”) with Gemini Master Fund, Ltd., a Cayman Islands company ("Gemini"),
which, among other things, resulted in the dismissal with prejudice of the complaint filed by Gemini against us on July 5, 2012
in the Supreme Court of the State of New York, County of New York, entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index
No. 652358/2012 (the "Complaint").
In the Complaint, Gemini sought relief both in the form of money
damages and delivery of shares of our common stock. The Complaint alleged, among other things, that we were in default of a convertible
promissory note ("Convertible Note") originally issued to Gemini on February 12, 2010 by failing to pay the Convertible
Note in full and by failing to honor certain requests by Gemini to convert the principal and interest under the Convertible Note
into shares of our common stock. The Complaint also alleged that we failed to issue shares upon the presentation of exercise notices
under warrants originally issued to Gemini in 2009 and 2010 (respectively, the "2009 Warrant" and the "2010 Warrant").
In the Complaint, Gemini alleged it was entitled to 447,788
shares of common stock upon conversion of the balance of the Convertible Note and Gemini alleged that it was entitled to receive
607,416 shares of common stock pursuant to the 2009 Warrant and the 2010 Warrant, for a combined sum of 1,055,204 common shares.
In response, we provided documentation that the Convertible
Note had been paid in full in cash and accepted by Gemini prior to the filing of the Complaint. In addition, we had maintained
on our books the total number of shares required to be issued under the 2009 Warrant, the 2010 Warrant and the 2008 Warrant (defined
below) combined was 127,200 shares.
The Settlement Agreement required us to issue a total of 150,457
shares of common stock into an escrow and those shares were to be released to Gemini ratably over a ten-month period. The shares
were issued upon partial exercise of the 2009 Warrant and 2010 Warrant as well as under a third warrant, issued by us to Gemini
in 2008 (the "2008 Warrant"). No shares were issued as consideration for the alleged default under the Convertible Note
or in consideration of the releases granted in the Settlement Agreement. In addition, our insurance company paid Gemini $150,000
in cash. Upon the completion of the share issuances, the 2008 Warrant, the 2009 Warrant and the 2010 Warrants were canceled. In
addition, under the Settlement Agreement, the Convertible Note (and any other agreement to pay Gemini or issue stock or anything
else of value to Gemini) was extinguished and fully satisfied.
As we previously had 127,200 shares of common stock reserved
for issuance under the three Warrants described above, the settlement increased our fully diluted shares outstanding by 23,257
shares.
Following the performance of the settlement terms described
above, a Stipulation of Dismissal was filed with the Court, permanently terminating the litigation. The Settlement Agreement also
provided for mutual and full releases of all other claims between Gemini and us.
The Company accrued an estimate of $1,000,000 for such matter
at December 31, 2013 and expensed such amount during the quarter ended December 31, 2013. Upon final settlement, management determined
that the expense was approximately $583,000. Accordingly, during the fourth quarter of the year ended March 31, 2014, the Company
recorded a credit to expense of approximately $417,000 related to this matter.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
14. SEGMENTS
We operate our businesses principally through two reportable
segments: Aethlon, which represents our therapeutic business activities, and ESI, which represents our diagnostic business activities.
Our reportable segments have been determined based on the nature of the potential products being developed. ESI did not have any
operations in the fiscal year ended March 31, 2013.
Aethlon’s revenue is generated primarily from government
contracts to date and ESI does not yet have any revenues. We have not included any allocation of corporate overhead to the ESI
segment.
The following tables set forth certain information regarding
our segments and other operations that conforms to the consolidated balance sheet and statement of operations presented in this
Report:
| |
Fiscal Years Ended March 31, | |
| |
2014 | | |
2013 | |
Revenues: | |
| | | |
| | |
Aethlon | |
$ | 1,623,769 | | |
$ | 1,230,004 | |
ESI | |
| – | | |
| – | |
Total Revenues | |
$ | 1,623,769 | | |
$ | 1,230,004 | |
| |
| | | |
| | |
Operating Losses: | |
| | | |
| | |
Aethlon | |
$ | (2,651,863 | ) | |
$ | (3,575,354 | ) |
ESI | |
| (404,065 | ) | |
| – | |
Total Operating Loss | |
$ | (3,055,928 | ) | |
$ | (3,575,354 | ) |
| |
| | | |
| | |
Net Losses: | |
| | | |
| | |
Aethlon | |
$ | (13,357,232 | ) | |
$ | (4,892,040 | ) |
ESI | |
| (81,730 | ) | |
| – | |
Net Loss Before Non-Controlling Interests | |
$ | (13,438,962 | ) | |
$ | (4,892,040 | ) |
| |
| | | |
| | |
Cash: | |
| | | |
| | |
Aethlon | |
$ | 208,259 | | |
$ | 125,274 | |
ESI | |
| 1,042,020 | | |
| – | |
Total Cash | |
$ | 1,250,279 | | |
$ | 125,274 | |
| |
| | | |
| | |
Total Assets: | |
| | | |
| | |
Aethlon | |
$ | 597,026 | | |
$ | 496,694 | |
ESI | |
| 1,098,076 | | |
| – | |
Total Assets | |
$ | 1,695,102 | | |
$ | 496,694 | |
| |
| | | |
| | |
Capital Expenditures: | |
| | | |
| | |
Aethlon | |
$ | 37,313 | | |
$ | – | |
ESI | |
| 58,743 | | |
| – | |
Capital Expenditures | |
$ | 96,056 | | |
$ | – | |
| |
| | | |
| | |
Depreciation and Amortization: | |
| | | |
| | |
Aethlon | |
$ | 11,549 | | |
$ | 10,484 | |
ESI | |
| 9,538 | | |
| – | |
Total Depreciation and Amortization | |
$ | 21,087 | | |
$ | 10,484 | |
| |
| | | |
| | |
Interest Expense: | |
| | | |
| | |
Aethlon | |
$ | 1,282,638 | | |
$ | 1,132,314 | |
ESI | |
| 4,583 | | |
| – | |
Total Interest Expense | |
$ | 1,287,221 | | |
$ | 1,132,314 | |
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note
1)
15. SUBSEQUENT EVENTS (UNAUDITED)
Management has evaluated events subsequent to March 31, 2014
through the date that the accompanying consolidated financial statements were filed with the Securities and Exchange Commission
for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
Government Contracts
Subsequent to March 31, 2014, we billed $197,362 under our DARPA
contract and billed $62,696 under the Battelle subcontract and we collected $135,376 under both contracts.
Common Stock Issuances
Subsequent to March 31, 2014, we issued 4,383 shares of common
stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $8.73 per share in
payment for internal controls, legal and scientific consulting services valued at $38,268 based on the value of the services provided.
Subsequent to March 31, 2014, we completed unit subscription
agreements with seven accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased an aggregate
of $320,800 of restricted common stock at an average price of $7.32 per share. The common stock purchase price under the subscription
agreement was determined to be 80% of the average closing price of our common stock for the five-day period immediately preceding
the date of each subscription agreement, resulting in the issuance of 43,849 shares of common stock.
Each Purchaser also received one common stock purchase warrant
for each two shares of common stock purchased under his subscription agreement. The warrant exercise price was calculated based
upon 120% of the average of the closing prices of our common stock for the five-day period immediately preceding the parties entering
into their subscription agreement.
Stock Option Grants
On June 6, 2014, our Board of Directors approved the following
grants of options to certain officers and directors of the Company:
|
· |
To Mr. James A. Joyce, an option to acquire an aggregate of 30,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The option vested as to 10,000 shares on the grant date and will vest as to an additional 10,000 shares on each of the first two anniversaries of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
|
· |
To Mr. Rodney S. Kenley, an option to acquire an aggregate of 5,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The option vested as to 1,666 shares on the grant date and will vest as to an additional 1,666 shares on the first anniversary of the grant date and 81,667 shares on the second anniversary of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
|
· |
To Mr. James B. Frakes, an option to acquire an aggregate of 5,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The option vested as to 1,666 shares on the grant date and will vest as to an additional 1,666 shares on the first anniversary of the grant date and 1,667 shares on the second anniversary of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
Changes to 2012 Board Compensation Program
In July 2012, the Board approved a Board Compensation Program
(the “2012 Program”), which modified and superseded the 2005 Directors Compensation Program that had been in effect
previously. On June 6, 2014, the Board approved certain changes to the 2012 Program. Under the modified 2012 Program, in which
only non-employee Directors may participate, a new eligible Director will receive an initial grant of $50,000 worth of options
to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices
of our common stock for the five trading days preceding the first day of the fiscal year. These options will have a term of ten
years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant.
At the beginning of each fiscal year, each existing Director
eligible to participate in the 2012 Program also will receive a grant of $35,000 worth of options valued at the exercise price
based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal
year. Such options will vest on the first anniversary of the date of grant. In lieu of per meeting fees, under the 2012 Program
eligible Directors will receive an annual Board retainer fee of $30,000. The modified 2012 Program also provides for the following
annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Audit Committee member - $4,000, Compensation
Committee member - $4,000 and Lead independent director - $15,000.
All of the foregoing actions - the changes in base salaries,
the option grants and the changes to the Directors Compensation Program discussed herein - were approved and recommended by the
Company’s Compensation Committee prior to approval by the Board.
Convertible Notes Payable – See Note 16 below
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
NOTE 16 – PRO FORMA BALANCE SHEET (UNAUDITED)
Management has presented unaudited pro forma balance sheet information
as if the subsequent events discussed below had occurred on March 31, 2014. Such pro forma information is subject to future adjustment
as management determines the final accounting for such transactions.
Weiner Note Conversion
On June 24, 2014, we entered into an agreement
with the Ellen R. Weiner Family Revocable Trust (the “Trust”), a holder of a Series A 12% Convertible Note (the “Note”)
(see Note 5), which previously was classified as being in default. As per the agreement, the Trust converted a past due combined
principal and interest balance of $1,003,200 into restricted common stock.
Additionally, the Trust agreed to waive
anti-dilution price protection underlying warrants previously issued to the Trust. On June 26, 2014, three other parties who held
similar warrants also agreed to waive their anti-dilution price protection. As a result of the debt conversion and elimination
of warrant anti-dilution price protection, $3.7 million of our previously classified derivative liability will convert into equity
based on the fair value of securities on our fiscal year-end date of March 31, 2014.
As a result of the note conversion and
derivative liability reclassification into equity, our balance sheet equity will increase by approximately $4.7 million.
Under its agreement, the Trust converted the entire $1,003,200
past due principal and interest balance on the Note, which previously was in default, into an aggregate of 466,365 restricted shares
of our common stock and five-year warrants to acquire up to 136,190 shares of our common stock at an exercise price of $2.10 per
share and up to 7,944 shares of our common stock at an exercise price of $5.40 per share (collectively, the “Conversion Securities”).
In exchange for the Trust’s conversion in full of the
Note and accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants, in addition
to the Conversion Securities, we issued to the Trust 1,500 restricted shares of common stock as a service fee, changed the exercise
price of all of the previously issued warrants to $2.10 per share and extended the expiration date of all of the previously issued
warrants to July 1, 2018.
Bird Estate Extension
On July 8, 2014, we entered into a restructuring
agreement (the “Agreement”) with the Estate of Allan Bird (the “Estate”), a holder of a Series A 12% Convertible
Note (the “Note”), which previously was classified as being in default. In the Agreement, the Estate agreed to extend
the expiration date of the Note to April 1, 2016, to convert approximately $116,970 of accrued interest to equity, and to waive
anti-dilution price protection underlying the Note and warrants previously issued to the Estate.
|
· |
As a result of the waiver of all anti-dilution price protection by the Estate, we will reclassify to equity $1,238,292 from derivative liability. |
|
· |
Also, the execution of the Agreement results in the waiver of anti-dilution price protection under agreements with three other note and warrant holders, which will cause an additional $5,724,761 of derivative liability to be reclassified from liability to equity. |
|
· |
In addition, as a result of a note conversion and waiver of anti-dilution price protection previously reported on Form 8-K on June 30, 2014, a combined $4,719,214 of principal, accrued interest and derivative liability has been reclassified into equity. |
|
· |
Based on the Agreement, the elimination of antidilution provisions and the note and accrued interest conversions, all previously reported derivative liabilities will be reclassified into equity. |
Under the Agreement, the Estate converted
the entire $116,970 past due interest balance on the Note, which previously was in default, into an aggregate of 51,837 restricted
shares of our common stock. The Estate received five-year warrants to acquire up to 46,429 shares of our common stock at an exercise
price of $2.10 per share (which exercise price was the result of certain contractual price adjustments previously made during 2011).
Based on our common stock prices during a period of negotiation with the Estate including during calendar year 2013, the Estate
also received five-year warrants to acquire up to 2,708 shares of our common stock at an exercise price of $5.40 (collectively
known as the “Conversion Securities”).
In exchange for the Estate’s extension
of the Note, conversion of accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants,
in addition to the Conversion Securities, we also issued to the Estate 500 restricted shares of common stock as a service fee and
extended the expiration date of all of the previously issued warrants to July 1, 2018.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2014 AND 2013
(Revised – Note 1)
Pro Forma References
The unaudited pro forma balance sheet information as of
March 31, 2014 assumes (1) conversion of one of the Amended and Restated Series A 12% Convertible Notes (the Trust Note)
in the principal amount of $660,000 as well as $343,200 of related accrued interest into 466,000 million shares of
common stock, (2) the extension of the other Amended and Restated Series A 12% Convertible Note (the Estate Note) and
conversion of $116,970 of related accrued interest into 52,000 million shares of common stock, (3) reduction of accrued
interest balance by $85,800 for the Trust Note and by $29,280 for the Estate Note, (4) the waiver of price antidilution
protection on certain warrants in exchange for an extension on those warrants with a corresponding fair value change based on
June 24, 2014 inputs of $96,469 for the Trust warrant extension and based on July 8, 2014 inputs of $29,679 for the Estate
warrants, (5) the reclassification of $10,679,067 of our derivative liability into paid in capital based upon the fair
value of those derivatives at March 31, 2014, (6) calculation of a loss on the payment of shares and warrants as part of the
conversion of accrued interest with an estimated fair value of $1,876,421 to the Trust and $665,571 to the Estate, and (7)
the payment of 1,500 restricted shares of common stock to the Trust as a fee, valued at $12,000 and the payment of 500
restricted shares of common stock, valued at $4,250.
The following unaudited pro forma information has been prepared
as though these subsequent event transactions had occurred on March 31, 2014. The pro forma references refer to the above
paragraph.
| |
Aethlon Medical, Inc. Consolidated Balance Sheet March 31, | | |
Pro Forma Adjustments | | |
| |
Pro Forma Consolidated Balance Sheet March 31, | |
| |
2014 | | |
Amount | | |
Reference | |
2014 | |
| |
| | |
| | |
| |
| |
ASSETS | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
CURRENT ASSETS | |
| | | |
| | | |
| |
| | |
Cash | |
$ | 1,250,279 | | |
$ | – | | |
| |
$ | 1,250,279 | |
Accounts receivable | |
| 95,177 | | |
| – | | |
| |
| 95,177 | |
Deferred financing costs | |
| 83,191 | | |
| – | | |
| |
| 83,191 | |
Prepaid expenses | |
| 50,699 | | |
| – | | |
| |
| 50,699 | |
| |
| | | |
| | | |
| |
| | |
TOTAL CURRENT ASSETS | |
| 1,479,346 | | |
| – | | |
| |
| 1,479,346 | |
| |
| | | |
| | | |
| |
| | |
NON-CURRENT ASSETS | |
| | | |
| | | |
| |
| | |
Property and equipment, net | |
| 84,279 | | |
| – | | |
| |
| 84,279 | |
Patents, net | |
| 112,489 | | |
| – | | |
| |
| 112,489 | |
Deposits | |
| 18,988 | | |
| – | | |
| |
| 18,988 | |
| |
| | | |
| | | |
| |
| | |
TOTAL NONCURRENT ASSETS | |
| 215,756 | | |
| – | | |
| |
| 215,756 | |
| |
| | | |
| | | |
| |
| | |
TOTAL ASSETS | |
$ | 1,695,102 | | |
$ | – | | |
| |
$ | 1,695,102 | |
| |
| | | |
| | | |
| |
| | |
LIABILITIES AND DEFICIT | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
CURRENT LIABILITIES | |
| | | |
| | | |
| |
| | |
Accounts payable | |
$ | 517,651 | | |
$ | – | | |
| |
$ | 517,651 | |
Due to related parties | |
| 839,070 | | |
| | | |
| |
| 839,070 | |
Notes payable, net | |
| 390,000 | | |
| | | |
| |
| 390,000 | |
Convertible notes payable, current portion | |
| 1,367,655 | | |
| (885,000 | ) | |
(1) & (2) | |
| 482,655 | |
Derivative liabilities | |
| 10,679,067 | | |
| (10,679,067 | ) | |
(5) | |
| – | |
Other current liabilities | |
| 1,855,374 | | |
| (575,250 | ) | |
(1), (2) &(3) | |
| 1,280,124 | |
| |
| | | |
| | | |
| |
| | |
TOTAL CURRENT LIABILITIES | |
| 15,648,817 | | |
| (12,139,317 | ) | |
| |
| 3,509,500 | |
| |
| | | |
| | | |
| |
| | |
NONCURRENT LIABILITIES | |
| | | |
| | | |
| |
| | |
Convertible notes payable, non-current portion | |
| 776,451 | | |
| 225,000 | | |
(2) | |
| 1,001,451 | |
TOTAL NONCURRENT LIABILITIES | |
| 776,451 | | |
| 225,000 | | |
| |
| 1,001,451 | |
| |
| | | |
| | | |
| |
| | |
TOTAL LIABILITIES | |
| 16,425,268 | | |
| (11,914,317 | ) | |
| |
| 4,510,951 | |
| |
| | | |
| | | |
| |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
STOCKHOLDERS' DEFICIT | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
Common stock (Revised – Note 1) | |
| 4,497 | | |
| 523 | | |
(1), (5), (6) & (7) | |
| 5,020 | |
Additional paid in capital (Revised – Note 1) | |
| 59,879,624 | | |
| 14,483,104 | | |
(1), (4), (5), (6) & (7) | |
| 74,362,728 | |
Accumulated deficit | |
| (74,832,557 | ) | |
| (2,569,310 | ) | |
(2), (3), (4), (5), (6) & (7) | |
| (77,401,867 | ) |
| |
| | | |
| | | |
| |
| | |
TOTAL AETHLON MEDICAL, INC. STOCKHOLDERS' DEFICIT | |
| (14,948,436 | ) | |
| 11,914,317 | | |
| |
| (3,034,119 | ) |
| |
| | | |
| | | |
| |
| | |
Noncontrolling interests | |
| 218,270 | | |
| – | | |
| |
| 218,270 | |
| |
| | | |
| | | |
| |
| | |
TOTAL DEFICIT | |
| (14,730,166 | ) | |
| 11,914,317 | | |
| |
| (2,815,849 | ) |
| |
| | | |
| | | |
| |
| | |
TOTAL LIABILITIES AND DEFICIT | |
$ | 1,695,102 | | |
$ | – | | |
| |
$ | 1,695,102 | |
[Interim Financial Statements and Accompanying
Notes Begin on Next Page]
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
| |
December 31, 2014 (Unaudited) | | |
March 31, 2014 | |
| |
| | |
| |
ASSETS | |
| | | |
| | |
Current assets | |
| | | |
| | |
Cash | |
$ | 2,775,735 | | |
$ | 1,250,279 | |
Accounts receivable | |
| 15,226 | | |
| 95,177 | |
Deferred financing costs | |
| 131,489 | | |
| 83,191 | |
Prepaid expenses and other current assets | |
| 46,754 | | |
| 50,699 | |
Total current assets | |
| 2,969,204 | | |
| 1,479,346 | |
| |
| | | |
| | |
Property and equipment, net | |
| 63,138 | | |
| 84,279 | |
Patents and patents pending, net | |
| 105,616 | | |
| 112,489 | |
Deposits | |
| 18,537 | | |
| 18,988 | |
Total assets | |
$ | 3,156,495 | | |
$ | 1,695,102 | |
| |
| | | |
| | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities | |
| | | |
| | |
Accounts payable | |
$ | 324,337 | | |
$ | 517,651 | |
Accrued expenses | |
| 440,419 | | |
| 1,855,374 | |
Due to related parties | |
| 810,381 | | |
| 839,070 | |
Notes payable | |
| 22,500 | | |
| 390,000 | |
Convertible notes payable, current portion | |
| – | | |
| 1,367,655 | |
Derivative liabilities | |
| – | | |
| 10,679,067 | |
Total current liabilities | |
| 1,597,637 | | |
| 15,648,817 | |
| |
| | | |
| | |
Noncurrent liabilities | |
| | | |
| | |
Convertible notes payable, noncurrent portion | |
| 264,252 | | |
| 776,451 | |
Total noncurrent liabilities | |
| 264,252 | | |
| 776,451 | |
| |
| | | |
| | |
Total liabilities | |
| 1,861,889 | | |
| 16,425,268 | |
| |
| | | |
| | |
Commitments and Contingencies (Note 13) | |
| | | |
| | |
| |
| | | |
| | |
Stockholders' Equity (Deficit) | |
| | | |
| | |
Common stock, par value $0.001 per share; 10,000,000 shares authorized as of December 31, 2014 and March 31, 2014; 6,554,784 and 4,499,480 shares issued and outstanding as of December 31, 2014 and March 31, 2014, respectively (Revised – Note 1) | |
| 6,552 | | |
| 4,497 | |
Additional paid-in capital (Revised – Note 1) | |
| 81,953,468 | | |
| 59,879,624 | |
Accumulated deficit | |
| (80,743,001 | ) | |
| (74,832,557 | ) |
Total Aethlon Medical, Inc. stockholders’ equity (deficit) before noncontrolling interests | |
| 1,217,019 | | |
| (14,948,436 | ) |
| |
| | | |
| | |
Noncontrolling interests | |
| 77,587 | | |
| 218,270 | |
| |
| | | |
| | |
Total equity (deficit) | |
| 1,294,606 | | |
| (14,730,166 | ) |
| |
| | | |
| | |
Total liabilities and deficit | |
$ | 3,156,495 | | |
$ | 1,695,102 | |
See accompanying notes.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Month Periods Ended
December 31, 2014 and 2013
(Unaudited)
| |
Three Months Ended December 31, 2014 | | |
Three Months Ended December 31, 2013 | | |
Nine Months Ended December 31, 2014 | | |
Nine Months Ended December 31, 2013 | |
| |
| | | |
| | | |
| | | |
| | |
REVENUES | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Government contract revenue | |
$ | 33,434 | | |
$ | 76,313 | | |
$ | 563,805 | | |
$ | 916,796 | |
| |
| | | |
| | | |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Professional fees | |
| 82,029 | | |
| 553,231 | | |
| 792,463 | | |
| 1,204,812 | |
Payroll and related expenses | |
| 570,939 | | |
| 425,293 | | |
| 1,735,979 | | |
| 1,288,773 | |
General and administrative | |
| 467,446 | | |
| 330,131 | | |
| 895,543 | | |
| 669,145 | |
Total operating expenses | |
| 1,120,414 | | |
| 1,308,655 | | |
| 3,423,985 | | |
| 3,162,730 | |
OPERATING LOSS | |
| (1,086,980 | ) | |
| (1,232,342 | ) | |
| (2,860,180 | ) | |
| (2,245,934 | ) |
| |
| | | |
| | | |
| | | |
| | |
OTHER EXPENSE | |
| | | |
| | | |
| | | |
| | |
Loss on debt conversion | |
| 222,939 | | |
| – | | |
| 2,754,062 | | |
| 40,256 | |
(Gain)/loss on change in fair value of derivative liability | |
| – | | |
| (78,175 | ) | |
| – | | |
| 2,304,702 | |
Interest and other debt expenses | |
| 148,723 | | |
| 113,444 | | |
| 293,522 | | |
| 329,887 | |
Other expense | |
| 143,363 | | |
| 1,000,000 | | |
| 143,363 | | |
| 1,000,000 | |
Total other expense | |
| 515,025 | | |
| 1,035,269 | | |
| 3,190,947 | | |
| 3,674,845 | |
NET LOSS BEFORE NONCONTROLLING INTERESTS | |
| (1,602,005 | ) | |
| (2,267,611 | ) | |
| (6,051,127 | ) | |
| (5,920,779 | ) |
| |
| | | |
| | | |
| | | |
| | |
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | |
| (51,548 | ) | |
| (37,061 | ) | |
| (140,683 | ) | |
| (37,061 | ) |
| |
| | | |
| | | |
| | | |
| | |
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | |
$ | (1,550,457 | ) | |
$ | (2,230,550 | ) | |
$ | (5,910,444 | ) | |
$ | (5,883,718 | ) |
| |
| | | |
| | | |
| | | |
| | |
BASIC AND DILUTED LOSS PER COMMON SHARE (Revised – Note 1) | |
$ | (0.26 | ) | |
$ | (0.56 | ) | |
$ | (1.12 | ) | |
$ | (1.57 | ) |
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED (Revised – Note 1) | |
| 6,032,126 | | |
| 3,963,066 | | |
| 5,254,459 | | |
| 3,750,111 | |
See accompanying notes.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the Nine Months Ended December 31, 2014
and 2013
(Unaudited)
| |
Nine Months Ended December 31, 2014 | | |
Nine Months Ended December 31, 2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (6,051,127 | ) | |
$ | (5,920,779 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 28,014 | | |
| 14,159 | |
Stock based compensation | |
| 338,580 | | |
| 223,351 | |
Fair market value of common stock, warrants and options issued for services | |
| 225,158 | | |
| 264,343 | |
Change in fair value of derivative liabilities | |
| – | | |
| 2,304,702 | |
Loss on extension of warrants | |
| 143,363 | | |
| – | |
Loss on debt conversion | |
| 2,754,062 | | |
| 40,256 | |
Amortization of debt discount and deferred financing costs | |
| 131,074 | | |
| 5,147 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| 79,951 | | |
| 163,772 | |
Prepaid expenses and other current assets | |
| 4,396 | | |
| 4,052 | |
Accounts payable and accrued expenses | |
| (776,559 | ) | |
| 1,268,625 | |
Due to related parties | |
| (28,689 | ) | |
| 48,500 | |
Net cash used in operating activities | |
| (3,151,777 | ) | |
| (1,583,872 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| – | | |
| (61,493 | ) |
Net cash used in investing activities | |
| – | | |
| (61,493 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from the issuance of notes payable | |
| 415,000 | | |
| 400,000 | |
Principal repayments of notes payable | |
| (500,920 | ) | |
| (200,000 | ) |
Net proceeds from the issuance of common stock | |
| 4,763,153 | | |
| 3,175,032 | |
Net cash provided by financing activities | |
| 4,677,233 | | |
| 3,375,032 | |
| |
| | | |
| | |
Net increase in cash | |
| 1,525,456 | | |
| 1,729,667 | |
| |
| | | |
| | |
Cash at beginning of period | |
| 1,250,279 | | |
| 125,274 | |
| |
| | | |
| | |
Cash at end of period | |
$ | 2,775,735 | | |
$ | 1,854,941 | |
See accompanying notes.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS (CONTINUED)
For the Nine Months Ended December 31, 2014
and 2013
(Unaudited)
| |
Nine Months Ended December 31, 2014 | | |
Nine Months Ended December 31, 2013 | |
Supplemental disclosures of cash flow information: | |
| | |
| |
| |
| | |
| |
Cash paid during the period for: | |
| | |
| |
| |
| | |
| |
Interest | |
$ | 435,139 | | |
$ | 13,950 | |
| |
| | | |
| | |
Supplemental disclosures of non-cash investing and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Debt and accrued interest converted to common stock | |
$ | 2,065,787 | | |
$ | 500,460 | |
| |
| | | |
| | |
Reclassification of warrant derivative liability into equity | |
$ | 10,679,067 | | |
$ | 316,876 | |
| |
| | | |
| | |
Reclassification of accounts payable to convertible notes payable | |
$ | – | | |
$ | 47,000 | |
| |
| | | |
| | |
Deferred financing costs recorded | |
$ | 117,280 | | |
$ | – | |
| |
| | | |
| | |
Reclassification of accrued interest to convertible notes payable | |
$ | 25,766 | | |
$ | 20,027 | |
| |
| | | |
| | |
Debt discount related to warrants and beneficial conversion feature | |
$ | 527,780 | | |
$ | – | |
| |
| | | |
| | |
Cashless exercise of warrants | |
$ | 21,516 | | |
$ | – | |
See accompanying notes.
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
December 31, 2014
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
Aethlon Medical, Inc. and subsidiary ("Aethlon", the
"Company", "we" or "us") is a medical device company focused on creating innovative devices that
address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments
is the Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges
single or multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that
selectively remove harmful particles from the entire circulatory system without loss of essential blood components. On June 25,
2013, the United States Food and Drug Administration (FDA) approved an Investigational Device Exemption (IDE) that allows us to
initiate human feasibility studies of the Aethlon Hemopurifier® in the United States. Under the feasibility study protocol,
we will enroll ten end-stage renal disease patients who are infected with the Hepatitis C virus (HCV) to demonstrate the safety
of Hemopurifier therapy. Successful completion of this study will allow us the opportunity to initiate pivotal studies that are
required for market clearance to treat HCV and other disease conditions in the United States.
Successful outcomes of human trials will also be required by
the regulatory agencies of certain foreign countries where we intend to sell this device. Some of our patents may expire before
FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or
other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology.
In October 2013, our subsidiary, Exosome Sciences, Inc., commenced
operations with a focus on advancing exosome-based strategies to diagnose and monitor the progression of cancer, infectious disease
and other life-threatening conditions.
Our common stock is quoted on the OTCQB marketplace administered
by the OTC Markets Group under the symbol "AEMD."
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and applicable sections of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments necessary to make the financial statements not misleading have been included. The condensed consolidated
balance sheet as of March 31, 2014 was derived from our audited consolidated financial statements. Operating results for the nine
months ended December 31, 2014 are not necessarily indicative of the results that may be expected for the year ending March 31,
2015. For further information, refer to our Annual Report on Form 10-K for the year ended March 31, 2014, which includes audited
consolidated financial statements and footnotes as of March 31, 2014 and 2013 and for the years then ended.
REVERSE STOCK SPLIT
On April 14, 2015, we completed a 1-for-50 reverse stock split.
Accordingly, authorized common stock was reduced from 500,000,000 shares to 10,000,000 shares, and each 50 shares of outstanding
common stock held by stockholders was combined into one share of common stock.
The accompanying condensed consolidated financial statements
and accompanying notes have been retroactively revised to reflect such reverse stock split as if it had occurred on April 1, 2013.
All shares and per share amounts have been revised accordingly.
NOTE 2. LIQUIDITY
The accompanying consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates, among other things, the realization of assets and
satisfaction of liabilities in the ordinary course of business. We have incurred continuing losses from operations and have an
accumulated deficit of approximately $80,743,000. These factors, among other matters, raise substantial doubt about our ability
to continue as a going concern. A significant amount of additional capital will be necessary to advance the development of our
products to the point at which they may become commercially viable. We intend to fund operations, working capital and other cash
requirements for the fiscal year ending March 31, 2015 through debt and/or equity financing arrangements as well as through revenues
and related cash receipts under our government contracts (see Note 12).
During the nine months ended December 31, 2014, we converted
a past due convertible note in the amount of $660,000 and related accrued interest into equity and also restructured and extended
a formerly past due convertible note in the amount of $225,000 (that note was subsequently converted into equity – see Note
5). We also eliminated the antidilution price protection on all the remaining notes and warrants which held such price protection.
The combination of all of those actions allowed us to reclassify our derivative liability in the amount of $10,679,067 into equity
during the quarter ended June 2014.
In addition, during the nine months ended December 31, 2014,
we raised approximately $4,763,000 through the issuance of common stock to investors and approximately $415,000 through the issuance
of convertible notes.
We are currently addressing our liquidity issue by seeking additional
investment capital through private placements of common stock and debt and by applying for additional grants issued by government
agencies in the United States. We believe that our cash on hand and funds expected to be received from additional private investments
will be sufficient to meet our liquidity needs for fiscal 2015. However, no assurance can be given that we will receive any funds
in the form of revenues or in connection with capital raising activities in addition to the funds we have already received.
The successful outcome of future contract-based and fundraising
activities cannot be determined at this time and there is no assurance that, even if achieved, we will have sufficient funds to
execute our intended business plan or generate positive operating results.
The consolidated financial statements do not include any adjustments
related to this uncertainty and as to the recoverability and classification of asset carrying amounts or the amount and classification
of liabilities that might result should the Company be unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies presented
below is designed to assist the reader in understanding our condensed consolidated financial statements. Such financial statements
and related notes are the representations of our management, who are responsible for their integrity and objectivity. These accounting
policies conform to GAAP in all material respects, and have been consistently applied in preparing the accompanying condensed
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements
include the accounts of Aethlon Medical, Inc. and its majority-owned and controlled subsidiary, Exosome Sciences, Inc. All significant
intercompany balances and transactions have been eliminated in consolidation. The Company classifies the noncontrolling interests
in Exosome Sciences, Inc. as part of consolidated net loss in the nine months ended December 31, 2014 and includes the accumulated
amount of noncontrolling interests as part of stockholders’ equity. During the fiscal year ended March 31, 2014, Exosome
Sciences, Inc. raised capital in the amount of $1,500,000 in exchange for the issuance of 300,000 shares of Exosome Sciences, Inc.
common stock to Exosome Sciences, Inc.’s investors, representing 20% of Exosome Sciences, Inc.’s issued and outstanding
capital stock. As a result, Aethlon Medical, Inc.’s ownership of Exosome Sciences, Inc. was reduced to 80%. If a further
change in Aethlon Medical Inc.’s ownership of Exosome Sciences, Inc. results in loss of control and deconsolidation, any
retained ownership interest will be remeasured with the gain or loss reported in our statement of operations.
The losses at Exosome Sciences, Inc. during the nine months
ended December 31, 2014 reduced the noncontrolling interests on our consolidated balance sheet by $140,683 from $218,270 at March
31, 2014 to $77,587 at December 31, 2014.
USE OF ESTIMATES
We prepare our condensed consolidated financial statements in
conformity with GAAP, which requires 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 consolidated financial statements and reported
amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, among others,
realization of long-lived assets, estimating fair value associated with debt and equity transactions and valuation of deferred
tax assets. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Accounting standards define "cash and cash equivalents"
as any short-term, highly liquid investment that is both readily convertible to known amounts of cash and so near their maturity
that they present insignificant risk of changes in value because of changes in interest rates. For the purpose of financial statement
presentation, we consider all highly liquid investment instruments with original maturities of three months or less when purchased,
or any investment redeemable without penalty or loss of interest to be cash equivalents. As of December 31, 2014 and March 31,
2014, we had no assets that were classified as cash equivalents.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at two financial institutions in checking
accounts and related cash management accounts. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation
("FDIC") up to $250,000. Our December 31, 2014 cash balances were approximately $2,275,000 over such insured amount.
We do not believe that the Company is exposed to any significant risk with respect to its cash.
All of our accounts receivable at December 31, 2014 and March
31, 2014 and all of our revenue in the nine month periods ended December 31, 2014 and 2013 were directly from the U.S. Department
of Defense or from a subcontract under Battelle Memorial Institute, which is a prime contractor with the U.S. Department of Defense,
and as such no allowance for uncollectable accounts receivable was deemed necessary at December 31, 2014 or March 31, 2014.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our cash, accounts receivable, accounts
payable, and other current liabilities approximate their estimated fair values due to the short-term maturities of those financial
instruments. The carrying amount of the notes payable approximates their fair value due to the short maturity of the notes and
since the interest rate approximates current market interest rates for similar instruments.
Management has concluded that it is not practical to determine
the estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated
at arm's length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an
independent valuation would not be practicable due to the lack of data regarding similar instruments, if any, and the associated
potential costs.
See Note 9 with respect to derivative liabilities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets, which range from two 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 consolidated statements of operations.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the difference between the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is
more likely than not that some portion of the deferred tax assets may not be realized.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Long-lived assets are 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, an impairment loss is recognized. We believe
no impairment charges were necessary during the three and nine month periods ended December 31, 2014 and 2013.
LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted loss
per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional
common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were
dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential
common shares have been excluded as their effect would be antidilutive.
As of December 31, 2014 and 2013, a total of 2,205,525 and 2,902,111
potential common shares, consisting of shares underlying outstanding stock options, warrants and convertible notes payable were
excluded as their inclusion would be antidilutive.
SEGMENTS
Historically, we operated in one segment that was based on our
development of therapeutic devices. However in the December 2013 quarter, we initiated the operations of Exosome Sciences, Inc.
to develop diagnostic tests. As a result, we now operate in two segments, Aethlon for therapeutic applications and Exosome Sciences,
Inc. for diagnostic applications (See Note 14).
DEFERRED FINANCING COSTS
Costs related to the issuance of debt are capitalized and amortized
to interest expense over the life of the related debt using the effective interest method. We recorded amortization
expense related to our deferred offering costs of $68,982 and $863 during the nine month periods ended December 31, 2014 and 2013,
respectively.
REVENUE RECOGNITION
DARPA Contract -- With respect to revenue recognition, we entered
into a government contract with DARPA and have recognized revenue under such contract. We adopted the Milestone method of revenue
recognition for the DARPA contract under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 605-28 “Revenue Recognition – Milestone Method” and we believe we meet the requirements
under ASC 605-28 for reporting contract revenue under the Milestone Method.
In order to account for this contract, we identify the deliverables
included within the contract and evaluate which deliverables represent separate units of accounting based on if certain criteria
are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated
among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved. A vendor’s assessment that it expects to achieve a milestone does not necessarily
mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part
on either: (a) the vendor’s performance; or (b) a specific outcome resulting from the vendor’s performance.
(3) If achieved, the event would result in additional payments
being due to the vendor.
A milestone does not include events for which the occurrence
is either: (a) contingent solely upon the passage of time; or (b) the result of a counterparty’s performance.
The policy for recognizing deliverable consideration contingent
upon achievement of a milestone must be applied consistently to similar deliverables.
The assessment of whether a milestone is substantive is performed
at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following
for the milestone to be considered substantive:
(1) The consideration is commensurate with either: (a) the vendor’s
performance to achieve the milestone; or (b) the enhancement of the value of the delivered item or items as a result of a specific
outcome resulting from the vendor’s performance to achieve the milestone;
(2) The consideration relates solely to past performance; and
(3) The consideration is reasonable relative to all of the deliverables
and payment terms (including other potential milestone consideration) within the arrangement.
A milestone is not considered substantive if any portion of
the associated milestone consideration relates to the remaining deliverables in the unit of accounting (i.e., it does not relate
solely to past performance). To recognize the milestone consideration in its entirety as revenue in the period in which the milestone
is achieved, the milestone must be substantive in its entirety. Milestone consideration cannot be bifurcated into substantive and
non-substantive components. In addition, if a portion of the consideration earned from achieving a milestone may be refunded or
adjusted based on future performance, the related milestone is not considered substantive.
See Note 12 for the additional disclosure information required
under ASC 605-28.
Battelle Memorial Institute Subcontract -- We entered into a
subcontract agreement with Battelle Memorial Institute Memorial Institute (“Battelle Memorial Institute”) in March
2013. Battelle Memorial Institute was chosen by DARPA to be the prime contractor on the systems integration portion of the original
DARPA contract and we are one of several subcontractors on that systems integration project. The Battelle Memorial Institute subcontract
is cost-reimbursable under a time and materials basis. We began generating revenues under the subcontract during the nine months
ended December 31, 2013.
Our revenue under this contract is a function of cost reimbursement
plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees).
Battelle Memorial Institute engages us as needed. Each payment requires approval by the program manager at Battelle Memorial Institute.
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock
participation plans are accounted for under the fair value method. Accordingly, share-based compensation is measured when all granting
activities have been completed, generally the grant date, based on the fair value of the award. The exercise price of options is
generally equal to the market price of the Company's common stock (defined as the closing price as quoted on the OTCBB on the date
of grant). Compensation cost recognized by the Company includes (a) compensation cost for all equity incentive awards granted prior
to April 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the original provisions of
the then current accounting standards, and (b) compensation cost for all equity incentive awards granted subsequent to April 1,
2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent accounting standards. We use
a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 10).
The following table summarizes share-based compensation expenses
relating to shares and options granted and the effect on loss per common share during the nine month periods ended December 31,
2014 and 2013:
| |
Nine Months Ended December 31, 2014 | | |
Nine Months Ended December 31, 2013 | |
Vesting of stock options | |
$ | 338,580 | | |
$ | 156,993 | |
Incremental fair value of option modifications | |
| – | | |
| 1,914 | |
Vesting expense associated with CEO restricted stock grant | |
| – | | |
| 64,444 | |
Total stock-based compensation expense | |
$ | 338,580 | | |
$ | 223,351 | |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and diluted | |
| 5,254,459 | | |
| 3,750,111 | |
| |
| | | |
| | |
Basic and diluted loss per common share associated with stock-based compensation expense | |
$ | (0.06 | ) | |
$ | (0.06 | ) |
We account for transactions involving services provided by third
parties where we issue equity instruments as part of the total consideration using the fair value of the consideration received
(i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable.
In transactions, when the value of the goods and/or services are not readily determinable and (1) the fair value of the equity
instruments is more reliably measurable and (2) the counterparty receives equity instruments in full or partial settlement of the
transactions, we use the following methodology:
a) For transactions where goods have already been delivered
or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date
of issuance).
b) For transactions where the instruments are issued on a fully
vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.
c) For any transactions not meeting the criteria in (a) or (b)
above, we re-measure the consideration at each reporting date based on its then current stock value.
We review share-based compensation on a quarterly basis for
changes to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture
rate for all expense amortization after March 31, 2006 is recognized in the period the forfeiture estimate is changed. The effect
of forfeiture adjustments for the nine months ended December 31, 2014 was insignificant.
PATENTS
Patents include both foreign and domestic patents. There were
several patents pending at December 31, 2014. We capitalize the cost of patents and patents pending, some of which were acquired,
and amortize such costs over the shorter of the remaining legal life or their estimated economic life, upon issuance of the patent.
The unamortized costs of patents and patents pending are subject to our review for impairment under our long-lived asset policy
above.
STOCK PURCHASE WARRANTS
We grant warrants in connection with the issuance of convertible
notes payable and the issuance of common stock for cash. When such warrants are classified as equity and issued in connection with
debt, we measure the relative estimated fair value of such warrants and record it as a discount from the face amount of the convertible
notes payable. Such discounts are amortized to interest expense over the term of the notes using the effective interest method.
Warrants issued in connection with common stock for cash, if classified as equity, are considered issued in connection with equity
transactions and the warrant fair value is recorded to additional paid-in-capital. Lastly, warrants not meeting equity classification
are recorded as derivative instruments.
DERIVATIVE INSTRUMENTS
We evaluate free-standing derivative instruments (or embedded
derivatives) to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to
settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed
at each reporting date. If the classification changes as a result of events during a reporting period, the instrument is reclassified
as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
Instruments classified as derivative liabilities are remeasured
each reporting period (or upon reclassification) and the change in fair value is recorded on our consolidated statement of operations
in other (income) expense.
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"). We measure the estimated fair value of the BCF in circumstances in which the conversion feature is not required
to be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements
as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.
REGISTRATION PAYMENT ARRANGEMENTS
We account for contingent obligations to make future payments
or otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction
agreements, and any such contingent obligations are recognized only when it is determined that it is probable we will become obligated
for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses during the three
and nine month periods ended December 31, 2014 and 2013, which are included in various operating expense line items in the accompanying
condensed consolidated statements of operations. Our research and development expenses in those periods were as follows:
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December 31, |
|
|
December 31, |
|
|
|
2014 |
|
|
2013 |
|
|
|
|
|
|
|
|
Three months ended |
|
$ |
214,165 |
|
|
$ |
542,383 |
|
Nine months ended |
|
$ |
747,657 |
|
|
$ |
1,178,488 |
|
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our consolidated financial statements.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
Management is evaluating significant recent accounting pronouncements
that are not yet effective for the Company, including the new accounting standard on revenue recognition, Accounting Standards
Update (“ASU”) 2014-09 (Topic 606), and has not yet concluded whether any such pronouncements will have a significant
effect on the Company’s future consolidated financial statements.
NOTE 4. NOTES PAYABLE
Notes payable consist of the following:
|
|
December 31, 2014 |
|
|
March 31, 2014 |
|
|
|
Principal Balance |
|
|
Accrued Interest |
|
|
Principal Balance |
|
|
Accrued Interest |
|
12% Notes payable |
|
$ |
22,500 |
|
|
$ |
45,562 |
|
|
$ |
185,000 |
|
|
$ |
353,813 |
|
10% Note payable |
|
|
– |
|
|
|
– |
|
|
|
5,000 |
|
|
|
6,375 |
|
Directors’ Note(s) |
|
|
– |
|
|
|
– |
|
|
|
200,000 |
|
|
|
14,516 |
|
Total |
|
$ |
22,500 |
|
|
$ |
45,562 |
|
|
$ |
390,000 |
|
|
$ |
374,704 |
|
During the nine months ended December 31, 2014, we recorded
interest expense of $27,021 related to the contractual interest rates of our notes payable, which is included in interest and other
debt expenses on our condensed consolidated statements of operations. Accrued interest is included in other current liabilities
on our condensed consolidated balance sheets (see Note 8).
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings (the "12% Notes"). In December 2014,
we paid off in full six of the remaining eight 12% Notes with payments of $453,750, representing $150,000 in principal and $303,750
of accrued interest.
In December 2014, at the request of another note holder, we
paid one-half of the $25,000 principal on his note and one-half of the $50,625 in accrued interest on his note for a total payment
in December 2014 of $37,813. As part of that arrangement, the holder agreed that his note was no longer in default. In January
2015, we paid off the remaining one-half of that note in the amount of $37,813 (see Note 15).
In January 2015, we paid off the last remaining 12% Note with
a payment of $30,250, representing $10,000 in principal and $20,250 of accrued interest (see Note 15).
10% NOTES
In December 2014, we paid off the remaining 10% Note with a
payment of $11,750 representing principal of $5,000 and accrued interest of $6,750.
DIRECTORS’ NOTES
In July 2013, we borrowed $400,000 from two of our directors
under two 90 day notes for $200,000 each bearing 10% interest (the “Notes”). At the discretion of the holders, if not
paid off by October 9, 2013, the noteholders were entitled to (i) convert the principal and accrued interest under the Notes into
shares of common stock at $4.40 per share (the “Conversion Price”) and (ii) receive warrants to purchase common stock
equal to 50% of the principal converted under the Notes, with an exercise price of $6.60 per share. Additionally, there was a provision
for a penalty interest rate of 12%.
That potential conversion price and warrant exercise price were
based on the same pricing mechanism that we have used in prior equity unit financings since March 2012 (see Note 6) which are based
on 80% of the then current market price of our common stock and with the warrant exercise price based on 120% of the same then
current market price. We initially reserved 138,636 shares of common stock to support the conversion of the Notes and accrued interest
in full as well as the exercise of the warrants in full (should such conversion and/or issuance occur).
During the fiscal year ended March 31, 2014, the principal of
$200,000 and accrued interest of $9,367 were paid on one of the Notes, which extinguished all potential common stock and warrant
issuance provisions related to that Note.
During the nine months ended December 31, 2014, the holder of
the second Note converted the principal of $200,000 and accrued interest of $20,349 into 50,079 shares of our common stock per
the conversion formula of the Note (see Note 6).
5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consisted of the following at December
31, 2014:
|
|
Principal |
|
|
Unamortized
Discount |
|
|
Net
Amount |
|
|
Accrued
Interest |
|
Convertible Notes Payable – Non-Current Portion: |
|
|
|
|
|
|
|
|
|
|
|
|
November 2014 10% Convertible Notes |
|
|
527,780 |
|
|
|
(465,687 |
) |
|
|
62,093 |
|
|
|
2,680 |
|
April 2011 12% Convertible Notes |
|
|
202,159 |
|
|
|
– |
|
|
|
202,159 |
|
|
|
8,064 |
|
Total – Convertible Notes Payable – Non-Current Portion |
|
|
729,939 |
|
|
|
(465,687 |
) |
|
|
264,252 |
|
|
|
10,744 |
|
Total Convertible Notes Payable |
|
$ |
729,939 |
|
|
$ |
(465,687 |
) |
|
$ |
264,252 |
|
|
$ |
10,744 |
|
During the nine months ended December 30, 2014, we recorded
interest expense of $123,305 related to the contractual interest rates of our convertible notes, interest expense of $68,982 related
to the amortization of deferred financing costs related to the convertible notes and interest expense of $62,092 related to the
amortization of note discounts for a total interest related to convertible notes of $254,379.
Convertible Notes Payable consisted of the following at March
31, 2014:
|
|
Principal |
|
|
Unamortized
Discount |
|
|
Net
Amount |
|
|
Accrued
Interest |
|
Convertible Notes Payable – Current Portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated Series A 12% Convertible Notes, past due |
|
$ |
885,000 |
|
|
$ |
– |
|
|
$ |
885,000 |
|
|
$ |
575,250 |
|
2008 10% Convertible Notes, past due |
|
|
25,000 |
|
|
|
– |
|
|
|
25,000 |
|
|
|
19,167 |
|
October & November 2009 10% Convertible Notes |
|
|
50,000 |
|
|
|
– |
|
|
|
50,000 |
|
|
|
26,097 |
|
April 2010 10% Convertible Note |
|
|
75,000 |
|
|
|
– |
|
|
|
75,000 |
|
|
|
31,438 |
|
July and August 2011 10% Convertible Notes, past due |
|
|
257,655 |
|
|
|
– |
|
|
|
257,655 |
|
|
|
90,256 |
|
Law Firm Note |
|
|
75,000 |
|
|
|
– |
|
|
|
75,000 |
|
|
|
7,604 |
|
Total – Convertible Notes Payable – Current Portion |
|
|
1,367,655 |
|
|
|
– |
|
|
|
1,367,655 |
|
|
|
749,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable – Non-Current Portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2010 12% Convertible Notes |
|
|
317,072 |
|
|
|
– |
|
|
|
317,072 |
|
|
|
35,034 |
|
April 2011 12% Convertible Notes |
|
|
448,448 |
|
|
|
– |
|
|
|
448,448 |
|
|
|
12,117 |
|
September 2011 12% Convertible Notes |
|
|
10,931 |
|
|
|
– |
|
|
|
10,931 |
|
|
|
– |
|
Total – Convertible Notes Payable – Non-Current Portion |
|
|
776,451 |
|
|
|
– |
|
|
|
776,451 |
|
|
|
47,151 |
|
Total Convertible Notes Payable |
|
$ |
2,144,106 |
|
|
$ |
– |
|
|
$ |
2,144,106 |
|
|
$ |
796,963 |
|
There were no discounts remaining on any of our Convertible
Notes Payable as of March 31, 2014.
NOVEMBER 2014 10% CONVERTIBLE NOTES
In November 2014, we entered into a Subscription Agreement with
two accredited investors providing for the issuance and sale of (i) convertible promissory notes (the “November 2014 10%
Convertible Notes”) in the aggregate principal amount of $527,780 and (ii) five year warrants to purchase up to 2,356,160
shares of Common Stock at a fixed exercise price of $8.40 per share. The November 2014 10% Convertible Notes bear interest at the
annual rate of 10% and mature on April 1, 2016.
The aggregate gross cash proceeds to us were $415,000 after
subtracting legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 due diligence fee and
an original issuance discount. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence fee and
original issuance discount and will amortize those costs over the life of the notes using the effective interest method.
The estimated relative fair value of warrants issued in connection
with the November 2014 10% Convertible Notes is recorded as a debt discount and is amortized as additional interest expense over
the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value of these warrants. In addition,
as the effective conversion price of the debt was less than market price of the underlying common stock on the date of issuance,
we recorded an additional debt discount of $287,647 related to the beneficial conversion feature. As of December 31, 2014, the
$527,780 principal amount outstanding under this agreement is presented net of unamortized debt discount of $465,687.
The November 2014 10% Convertible Notes are convertible at the
option of the holders into shares of our common stock at a fixed price of $5.60 per share, for up to an aggregate of 94,246 shares
of Common Stock. There are no registration requirements with respect to the shares of common stock underlying the notes or the
warrants.
The pricing on both the conversion price and on the warrant
exercise price reflected a negotiation that began in September 2014 and continued through funding in November 2014. During that
period of time the price of our common stock rose significantly, which complicated the pricing negotiations. We ended up with pricing
the notes and warrants at levels consistent with our prior equity unit issuances in October 2014 (see Note 6).
APRIL 2011 12% CONVERTIBLE NOTES
In April 2011, we entered into a Subscription Agreement with
two accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory notes and
corresponding warrants in the aggregate principal amount of $385,000. The closing under the Subscription Agreement resulted in
the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of $385,000, (ii) five-year warrants
to purchase an aggregate of 80,080 shares of our common stock at an exercise price of $6.25 per share, and (iii) five-year
warrants to purchase an aggregate of 80,080 shares of our common stock at an exercise price of $8.75 per share. The convertible
promissory notes bear interest compounded monthly at the annual rate of 10% and mature on April 1, 2016 (see below). The aggregate
gross cash proceeds to us were $350,000, the balance of the principal amount representing a due diligence fee and an original issuance
discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock at a price
per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as reported by
Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days preceding the
proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $10.00 nor
less than $5.00. There are no registration requirements with respect to the shares of common stock underlying the notes or the
warrants.
In addition, we issued (i) five-year warrants to purchase an
aggregate of 16,250 shares of our common stock at an exercise price of $6.25 per share, and (ii) five-year warrants to purchase
an aggregate of 16,250 shares of our common stock at an exercise price of $8.75 per share to the Purchasers. These warrants
were issued as an antidilution adjustment under certain common stock purchase warrants held by the Purchasers that were acquired
from us in September 2010.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the April 2011 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were
in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity
date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the Amendments, we also
agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260 to a total of $776,451.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also set the conversion price of the Notes, as
well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue
of the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015 and September 23,
2016 to January 1, 2017.
The following table shows the conversions into principal of
the April 2011 12% Convertible Notes by fiscal year:
Activity in the April 2011 12% Convertible Notes |
Initial principal balance |
|
$ |
400,400 |
|
Increase in principal balance due to extension fee |
|
|
48,048 |
|
Conversions during the nine months ended December 31, 2014 |
|
|
(246,289 |
) |
Balance as of December 31, 2014 |
|
$ |
202,159 |
|
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated Series A
12% Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of certain promissory notes previously
issued by us, extending the due date to December 31, 2010 on the aggregate principal balance of $900,000. During the fiscal year
ended March 31, 2013, the holders of $15,000 of the Notes converted their principal and related accrued interest into common stock.
The balance remaining at March 31, 2014 was $885,000 and past due.
Weiner Note Conversion
On June 24, 2014, we entered into an agreement
with the Ellen R. Weiner Family Revocable Trust (the “Trust”), a holder of a Series A 12% Convertible Note (the “Note”),
which previously was classified as being in default. As per the agreement, the Trust converted past due principal of $660,000 and
accrued interest balance of $343,200 into restricted common stock.
Additionally, the Trust agreed to waive
anti-dilution price protection underlying warrants previously issued to the Trust. On June 26, 2014, three other parties who held
similar warrants also agreed to waive their anti-dilution price protection.
Under its agreement, the Trust converted the entire $1,003,200
past due principal and interest balance on the Note, which previously was in default, into an aggregate of 466,365 restricted shares
of our common stock and five-year warrants to acquire up to 136,190 shares of our common stock at an exercise price of $2.10 per
share (which exercise price was the result of certain contractual price adjustments previously made during 2011) and up to 7,944
shares of our common stock at an exercise price of $5.40 per share (collectively, the “Conversion Securities”). Based
on the fair value of the warrants and shares issued to the Trust for the accrued interest, we recorded a loss on settlement of
notes of $1,791,421.
In exchange for the Trust’s conversion in full of the
Note and accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants, in addition
to the Conversion Securities, we issued to the Trust 1,500 restricted shares of common stock as a service fee, changed the exercise
price of all of the previously issued warrants to $2.10 per share and extended the expiration date of all of the previously issued
warrants to July 1, 2018. We valued the 1,500 share service fee at $12,000 based on our closing price on the date of the agreement
and recorded that value as interest expense during the June 2014 period.
Bird Estate Extension
On July 8, 2014, we executed a written restructuring agreement
(the “Agreement”) with the Estate of Allan Bird (the “Estate”), a holder of a Series A 12% Convertible
Note (the “Note”), which previously was classified as being in default. Since the negotiations for the Agreement were
completed in the month of June, we recorded the impact of the Agreement as of June 30, 2014. In the Agreement, the Estate agreed
to extend the expiration date of the Note to April 1, 2016, to convert approximately $116,970 of accrued interest to equity, and
to waive anti-dilution price protection underlying the Note and warrants previously issued to the Estate.
Under the Agreement, the Estate converted the entire $116,970
past due interest balance on the Note, which previously was in default, into an aggregate of 51,837 restricted shares of our common
stock. The Estate received five-year warrants to acquire up to 46,429 shares of our common stock at an exercise price of $2.10
per share (which exercise price was the result of certain contractual price adjustments previously made during 2011). Based on
our common stock prices during a period of negotiation with the Estate including during calendar year 2013, the Estate also received
five-year warrants to acquire up to 2,708 shares of our common stock at an exercise price of $5.40 (collectively known as the “Conversion
Securities”). Based on the fair value of the warrants and shares issued to the Estate for the accrued interest, we recorded
a loss on settlement of notes of $663,209.
In exchange for the Estate’s extension of the Note, conversion
of accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants, in addition to the
Conversion Securities, we also issued to the Estate 500 restricted shares of common stock as an extension fee and extended the
expiration date of all of the previously issued warrants to July 1, 2018. We valued the 500 share extension fee at $4,500 based
on our closing price and recorded that value as a deferred financing cost, which we will amortize over the extended two year life
of the note.
Bird Estate Conversion
In November 18, 2014, we issued an aggregate of 112,500 shares
of common stock to the Estate upon the conversion of an aggregate of $236,250 representing all $225,000 of unpaid principal and
$11,250 of unpaid accrued interest due under the Note. The conversion price per share was $2.10.
2008 10% CONVERTIBLE NOTES
In September 2014, we issued to the holder of the remaining
2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit warrants to acquire
up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share (see Note 6). The units were issued
to the Note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due under the Note,
which represented the entire amount outstanding under the Note and the Note was retired. We recorded a loss on debt conversion
of $65,493 on this transaction.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale
to accredited investors of 10% convertible notes ("October & November 2009 10% Convertible Notes"). The October &
November 2009 10% Convertible Notes matured at various dates between April 2011 and May 2011 and are convertible into our common
stock at a fixed conversion price of $12.50 per share. The investors also received matching three year warrants to purchase
unregistered shares of our common stock at an exercise price of $12.50 per share. We measured the fair value of the warrants and
the beneficial conversion feature of the Notes and recorded a 100% discount against the principal of the notes. Such discount was
fully amortized at March 31, 2014.
In July 2012, we issued 9,228 shares of common stock and 4,614
warrants to purchase common stock to the holder of a $25,000 note in this grouping in exchange for the conversion of such note
and related accrued interest of $8,000 (for a total of $33,000). The warrants expired in 2012 and are exercisable at $5.35 per
share (see Note 6). We recorded a loss on conversion of $45,796.
The following table shows the conversions into principal of
the October and November 2009 10% Convertible Notes by fiscal year:
Activity in October & November 2009 10% Convertible Notes |
Initial principal balance |
|
$ |
450,250 |
|
Conversions during the fiscal year ended March 31, 2010 |
|
|
(70,000 |
) |
Conversions during the fiscal year ended March 31, 2011 |
|
|
(175,000 |
) |
Conversions during the fiscal year ended March 31, 2012 |
|
|
(130,250 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(25,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
– |
|
Conversions into equity unit structure during the nine months ended December 31, 2014 |
|
|
(50,000 |
) |
Balance as of December 31, 2014 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the September
2011 Convertible Notes converted into equity during the nine months ended December 31, 2014.
On March 31, 2012, we agreed to extend the expiration date and
to change the exercise price of certain warrants of one of the note holders by two years in exchange for the extension of $50,000
of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same
two year period. We recorded a charge of $77,265 relating to this modification.
In September 2013, we agreed to extend the expiration date of
certain warrants of one of the note holders by two years in exchange for the extension of $50,000 of the October & November
2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same two year period. Management
assessed the change in the value of the notes and related warrants before and after that extension and determined that the change
in value related to the change in terms was not significant.
In October 2014, we issued to the holder of the remaining October
& November 2009 10% Convertible Note and the April 2010 10% Convertible Note units consisting of an aggregate of 36,716 shares
of common stock and unit warrants to acquire up to an aggregate of 36,756 shares of common stock at an exercise price of $5.15
per share. The units were issued to the note holder upon the conversion of an aggregate of $189,087 of unpaid principal and accrued
interest due under two promissory notes (the remaining October & November 2009 10% Convertible Note and the April 2010 10%
Convertible Note). The amounts converted represented the entire principal and interest outstanding under the notes and the notes
held by that holder were retired.
APRIL 2010 10% CONVERTIBLE NOTE
In April 2010, we raised $75,000 from the sale to an accredited
investor of a 10% convertible note. The convertible note was originally scheduled to mature in October 2011 and is convertible
into our common stock at a fixed conversion price of $12.50 per share prior to maturity. The investor also received three year
warrants to purchase 6,000 unregistered shares of our common stock at a price of $12.50 per share.
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a 100% discount against the principal of the notes. We amortized this discount using
the effective interest method over the term of the note.
On March 31, 2012, we agreed to extend the expiration date and
to change the exercise price of certain warrants of the note holder by two years in exchange for his extension of $50,000 of the
October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note by that same two year period.
In September 2013, we agreed to extend the expiration date of
certain warrants of one of the note holders by two years in exchange for the extension of $50,000 of the October & November
2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same two year period. Management
assessed the change in the value of the notes and related warrants before and after that extension and determined that the change
in value related to the change in terms was not significant.
In October 2014, we issued to the holder of the remaining October
& November 2009 10% Convertible Note and the April 2010 10% Convertible Note units consisting of an aggregate of 36,716 shares
of common stock and unit warrants to acquire up to an aggregate of 36,756 shares of common stock at an exercise price of $5.15
per share. The units were issued to the note holder upon the conversion of an aggregate of $189,087 of unpaid principal and accrued
interest due under two promissory notes (the remaining October & November 2009 10% Convertible Note and the April 2010 10%
Convertible Note). The amounts converted represented the entire principal and interest outstanding under the notes and the notes
held by that holder were retired.
SEPTEMBER 2010 12% CONVERTIBLE NOTES
On September 3, 2010, we entered into a Subscription Agreement
with three accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory
notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial closing under the Subscription Agreement
resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $743,600, (ii) five-year
warrants to purchase an aggregate of 74,360 shares of our common stock at an exercise price of $15.56 per share, and (iii) five-year
warrants to purchase an aggregate of 74,360 shares of our common stock at an exercise price of $21.79 per share. The convertible
promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and mature on April 1, 2016 (see below).
The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due diligence fee and an original
issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock
at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as
reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days
preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than
$15.00 nor less than $10.00. There are no registration requirements with respect to the shares of common stock underlying the notes
or the warrants.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the September 2010 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were
in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity
date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of fifteen percent at which interest had been accruing. By entering into the Amendments,
we also agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260 to a total of
$776,451.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also set the conversion price of the Notes, as
well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue
of the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015 and September 23,
2016 to January 1, 2017.
The following table shows the activity in the September 2010
12% Convertible Notes by fiscal year:
Activity in the September 2010 12% Convertible Notes |
Initial principal balance |
|
$ |
743,600 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(405,500 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(30,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(25,000 |
) |
Increase in principal balance due to 12% extension fee |
|
|
33,972 |
|
Conversions during the nine months ended December 31, 2014 |
|
|
(317,072 |
) |
Balance as of December 31, 2014 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the September
2011 Convertible Notes converted into equity during the nine months ended December 31, 2014.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised
$357,656 in five separate 10% convertible notes. Those notes had a fixed conversion price of $4.50 per share and carried an interest
rate of 10%. The convertible notes matured in July and August 2012. We also issued those investors five year warrants to purchase
79,479 shares of common stock at $6.25 per share.
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a $257,926 discount against the principal of the notes. We amortized this discount
using the effective interest method over the term of the note.
Effective March 31, 2014, the holders of three of the five notes
totaling $100,000 converted all of their principal and accrued interest into 28,774 shares of our common stock at the contractual
conversion price of $4.50 per share.
In September 2014, we entered into a forbearance agreement with
the holder of the remaining two notes in which we agreed to repay his notes by October 31, 2014 and in which we also agreed to
extend his warrants by two years. We recorded a charge of $143,363 in the September 2014 period related to this warrant extension
due to the change in the fair value of the warrants.
In October 2014, we paid off in full the remaining outstanding
principal balance and interest balances on the two remaining notes with cash payments of $382,748.
SEPTEMBER 2011 CONVERTIBLE NOTES
In September 2011, we issued $253,760 of convertible notes,
convertible at $3.50 per share. Such notes originally matured in September 2012.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the September 2011 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were
in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity
date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the Amendments, we also
agreed to increase the currently outstanding principal amount of the Notes by 12%, which in the case of the September 2011 Notes,
they increased from $9,760 to $10,931
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also set the conversion price of the Notes, as
well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue
of the Amendments, the expiration dates of the Warrants also were extended to January 1, 2017.
The following table shows the conversions into principal of
the September 2011 Convertible Notes by fiscal year:
Activity in the September 2011 Convertible Notes |
Initial principal balance |
|
$ |
253,760 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(15,000 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(60,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(169,000 |
) |
Increase in principal balance due to extension fee |
|
|
1,171 |
|
Conversions during the nine months ended December 31, 2014 |
|
|
(10,931 |
) |
Balance as of December 31, 2014 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the September
2011 Convertible Notes converted into equity during the nine months ended December 31, 2014.
LAW FIRM NOTE
On March 22, 2012, we entered into a Promissory Note with our
corporate law firm for the amount of $75,000, which represented the majority of the amount we owed to that firm at that time. The
Promissory Note originally had a maturity date of December 31, 2012 and bore interest at 5% per annum. The note was convertible
at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date
prior to conversion with a floor price on such conversions of $4.00 per share. The holder subsequently agreed to extend the Maturity
Date of the Note first to October 1, 2013, then to September 30, 2013, and then the expiration date of this note was again extended
to October 1, 2014.
In November 2014, we paid off in full the Law Firm Note with
a cash payment of $50,000 and an issuance of 3,400 common shares.
6. EQUITY TRANSACTIONS
COMMON STOCK AND WARRANTS
The following are Aethlon Medical, Inc.’s Equity Transactions
in the Nine Months Ended December 31, 2014.
June 2014 Quarter Issuances of Common Stock and Warrants
Equity Unit Investments
In the three months ended June 30, 2014, we completed unit subscription
agreements with seven accredited investors pursuant to which we issued 43,849 shares of our common stock and 21,924 warrants to
purchase our common stock for net cash proceeds of $320,800. Such warrants have exercise prices ranging from $9.65 to $11.80 per
share.
Note Conversions
As discussed above in Note 5, during the three months ended
June 30, 2014, we issued 314,286 shares of restricted common stock to the holder of one of the Series A 12% Convertible Notes in
exchange for the conversion in full of the $660,000 principal balance of that note, 152,079 shares of restricted common stock in
exchange for conversion of $343,200 of accrued interest and 1,500 shares of restricted common stock as a restructuring fee. During
that period, we also issued the other holder of the Series A 12% Convertible Notes 51,837 shares of restricted common stock in
exchange for conversion of $116,970 of accrued interest and 500 shares of restricted common stock as a restructuring fee.
Common Stock Issuances
During the three months ended June 30, 2014, we issued 4,383
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $8.73
per share in payment for legal services, internal controls consulting services and regulatory consulting services collectively
valued at $38,268 based on the value of the services provided.
September 2014 Quarter Issuances of Common Stock and Warrants
Common Stock Issuances
During the three months ended September 30, 2014, we issued
7,199 shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price
of $6.82 per share in payment for legal and scientific consulting services valued at $49,090 based on the value of the services
provided.
During the three months ended September 30, 2014, we issued
7,806 shares of restricted common stock at an average price of $9.61 per share in payment for investor relations consulting services
valued at $75,000 based on the value of the services provided.
Note Conversions
During the three months ended September 30, 2014, we issued
38,750 shares of restricted common stock to the holders of three convertible notes in exchange for the partial or full conversion
of principal and interest in the aggregate amount of $81,375 at a conversion price of $2.10 per share.
On July 24, 2014, we issued an aggregate of 50,079 shares of
restricted common stock and a seven-year warrant to issue up to 25,040 shares of common stock at an exercise price of $6.60 per
share to Dr. Chetan Shah, a director. The common stock and warrant were issued to Dr. Shah upon the conversion of an aggregate
of $220,349 of unpaid principal and accrued interest due under a 10% Convertible Note previously issued to Dr. Shah by us on July
9, 2013.
On September 17, 2014, we issued to the holder of the remaining
2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit warrants to acquire
up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share (see Note 5). The units were issued
to the note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due under the promissory
note, which represented the entire amount outstanding under the note. We recorded a loss on debt conversion of $65,493 on this
transaction.
Warrant Exercises and Issuance of New Warrants upon Exercise
During the three months ended September 30, 2014, we issued
to four investors 53,465 shares of restricted common stock through the cash exercise of eight warrants for $259,474 of cash at
an average exercise price of approximately $0.10 per share. As an inducement to those investors, we issued them replacement warrants
to acquire up to an aggregate of 53,564 shares of common stock on the same terms as the warrants they exercised.
Equity Unit Investments
During the three months ended September 30, 2014, we issued
and sold to three accredited investors units consisting of (a) two thousand (2,000) restricted shares of our common stock, par
value $.001 per share, at prices per share ranging from $4.55 to $4.70 and (b) a five-year warrant to purchase one thousand (1,000)
shares of common stock at exercise prices ranging from $6.80 to $7.15 per share. In total, the investors purchased for cash an
aggregate of $90,000 of units. The investors acquired an aggregate of 19,500 shares of common stock and warrants to acquire up
to an aggregate of 9,750 shares of Common Stock.
December 2014 Quarter Issuances of Common Stock and Warrants
Debt Reduction
During the three months ended December 31, 2014, we paid off
in full the outstanding principal balance and interest balance on the Law Firm Note with a cash payment of $50,000 and an issuance
of 3,400 common shares (see Note 4).
Note Conversions
During the three months ended December 31, 2014, we issued an
aggregate of 284,745 shares of common stock to two accredited investors upon the conversion of an aggregate of $597,965 of unpaid
principal and accrued interest due under promissory notes we previously issued to the investors. The conversion price per share
was $2.10 (see note 5).
During the three months ended December 31, 2014, we issued an
aggregate of 112,500 shares of common stock to convert in full the outstanding principal balance of $225,000 and interest balance
of $11,250 on the remaining note from 2010. The conversion price per share was $2.10 (see Note 5).
During the three months ended December 31, 2014, we issued to
an accredited investor units consisting of an aggregate of 36,716 shares of common stock and warrants to acquire up to an aggregate
of 18,358 shares of common stock at an exercise price of $7.70 per share. The units were issued to the investor upon the conversion
of an aggregate of $189,087 of unpaid principal and accrued interest due under two promissory notes we previously issued to the
investor. The amounts converted represented the entire principal and interest outstanding under the notes and the notes held by
that holder were retired (see Note 5).
Issuance of Convertible Notes
During the three months ended December 31, 2014, we sold to
two accredited investors (i) convertible promissory notes in the aggregate principal amount of $527,780 and (ii) five year warrants
to purchase up to 47,123 shares of common stock at a fixed exercise price of $8.40 per share. The convertible promissory notes
bear interest at the annual rate of 10% and mature on April 1, 2016. The aggregate gross cash proceeds to us were $415,000 after
subtracting legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 due diligence fee and
an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our
common stock at a fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of common stock (see Note 5).
Common Stock Issuances
During the three months ended December 31, 2014, we issued 7,486
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $7.32
per share in payment for legal and scientific consulting services valued at $54,800 based on the value of the services provided.
During the three months ended December 31, 2014, we issued 780
shares of restricted common stock at an average price of $10.26 per share in payment for investor relations consulting services
valued at $8,000 based on the value of the services provided.
Equity Unit Investments
During the three months ended December 31, 2014, we issued and
sold to eight accredited investors units consisting of (a) 2,000 restricted shares of our common stock at prices per share ranging
from $5.25 to $5.70 and (b) a five-year warrant to purchase 1,000 shares of common stock at exercise prices ranging from $7.70
to $8.35 per share. In total, the investors purchased for cash an aggregate of $502,700 of units. The investors acquired an aggregate
of 90,125 shares of common stock and warrants to acquire up to an aggregate of 45,063 shares of common stock.
During the three months ended December 31, 2014, we sold $3,300,000
of units at a price of $15.00 per unit (the “December Financing”). Each unit consists of one share of common stock
and a warrant to purchase 1.2 shares of common stock at an exercise price per share of $15.00. We sold a total of 220,000 units
in the financing consisting of 220,000 shares of common stock and warrants to purchase 264,000 shares of common stock at an exercise
price of $15.00 per share.
Roth Capital Partners, LLC served as sole placement agent for
the December Financing and received a cash fee of $231,000, expense reimbursement of $25,000, and a five-year warrant to purchase
11,000 shares of common stock at an exercise price of $15.00 per share for its services in the financing. In addition, we paid
$10,000 in legal expenses to the investors’ counsel. We also paid $32,572 to our counsel related to this financing. The net
proceeds to us after the placement fee and legal fees were $3,001,428.
Warrant Exercises and Issuance of New Warrants upon Exercise
During the three months ended December 31, 2014, we issued an
aggregate of 113,422 shares of common stock and seven-year warrants to issue up to an aggregate of 113,422 shares of common stock
at exercise prices ranging from $4.65 to $5.80 per share to eight accredited investors. One of the investors was Dr. Chetan Shah,
one of our directors. We issued the common stock and warrants to the investors upon the cash exercise of previously issued warrants
held by them. The investors paid an aggregate of $579,251 upon exercise of the previously outstanding warrants at exercise prices
ranging from $4.65 to $5.80 per share.
Warrant Exercises
During the three months ended December 31, 2014, we issued an
aggregate of 430,333 shares of common stock to accredited investors upon the exercise of previously issued warrants. The warrants
were exercised on a cashless or “net” basis. Accordingly, we did not receive any proceeds from such exercises. The
cashless exercise of such warrants resulted in the cancellation of previously issued warrants to purchase an aggregate of 605,304
shares of common stock.
Stock Option Exercises
During the three months ended December 31, 2014, two former
employees exercised stock options to purchase 1,000 common shares through a cash payment of $9,500 with an exercise price of $9.50
per share.
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain of our officers and other related parties have advanced
us funds, agreed to defer compensation and/or paid expenses on our behalf to cover working capital deficiencies. These unsecured
and non-interest-bearing liabilities have been included as due to related parties in the accompanying consolidated balance sheets.
Other related party transactions are disclosed elsewhere in
these notes to consolidated financial statements.
8. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
|
|
December 31, |
|
|
March 31, |
|
|
|
2014 |
|
|
2014 |
|
Accrued interest |
|
$ |
56,306 |
|
|
$ |
1,165,335 |
|
Accrued legal fees |
|
|
– |
|
|
|
179,465 |
|
Accrued liquidated damages |
|
|
362,800 |
|
|
|
362,800 |
|
Other accrued liabilities |
|
|
21,313 |
|
|
|
147,774 |
|
Total other current liabilities |
|
$ |
440,419 |
|
|
$ |
1,855,374 |
|
9. FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, “Fair value measurements and
disclosures” (“ASC 820”) in connection with assets and liabilities measured at fair value on a recurring
basis subsequent to initial recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured
at fair value on a non-recurring basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories: We measure the fair value of applicable financial
and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical
assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs
that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market
data.
The hierarchy noted above requires us to minimize the use of
unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined
based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative
liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
At December 31, 2014, we no longer had any derivative liabilities
as all of the holders of the financial instruments that had price antidilution protection waived such price antidilution protection.
Our fair value measurements at the March 31, 2014 reporting
date are classified based on the valuation technique level noted in the table below:
Description |
|
March 31,
2014 |
|
|
Quoted Prices
in Active
Markets for
(Level 1) |
|
|
Significant
Other
Observable
(Level 2) |
|
|
Significant
Unobservable
(Level 3) |
|
Derivative Liabilities |
|
$ |
10,679,067 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
10,679,067 |
|
Total Assets |
|
$ |
10,679,067 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
10,679,067 |
|
The following outlines
the significant weighted average assumptions used to estimate the fair value information presented, in connection with our warrant
and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
|
|
Nine Months Ended December 31, 2013 |
Risk free interest rate |
|
0.02% - 2.04% |
Average expected life |
|
0.25 – 3 years |
Expected volatility |
|
58.0% - 103.1% |
Expected dividends |
|
None |
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the nine months ended December 31, 2014:
|
|
April 1,
2014 |
|
|
Recorded New
Derivative
Liabilities |
|
|
Change in
estimated
fair value
recognized in
results of
operations |
|
|
Reclassification
of Derivative
Liability to Paid
in capital |
|
|
December 31,
2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
10,679,067 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
(10,679,067 |
) |
|
$ |
– |
|
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the nine months ended December 31, 2013:
|
|
April 1,
2013 |
|
|
Recorded New Derivative
Liabilities |
|
|
Change in
estimated
fair value
recognized in
results of
operations |
|
|
Reclassification
of Derivative
Liability to Paid
in capital |
|
|
December 31,
2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities |
|
$ |
3,588,239 |
|
|
$ |
– |
|
|
$ |
2,304,702 |
|
|
$ |
(316,876 |
) |
|
$ |
5,576,065 |
|
10. STOCK COMPENSATION
The following table breaks out the components of our share-based
compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the
three and nine months ended December 31, 2014 and 2013.
| |
Three Months Ended | | |
Three Months Ended | | |
Nine Months Ended | | |
Nine Months Ended | |
| |
December 31, 2014 | | |
December 31, 2013 | | |
December 31, 2014 | | |
December 31, 2013 | |
Vesting of stock options | |
| 77,900 | | |
| 32,750 | | |
| 338,580 | | |
| 156,993 | |
Incremental fair value of option modifications | |
| – | | |
| – | | |
| – | | |
| 1,914 | |
Vesting expense associated with CEO restricted stock grant | |
| – | | |
| – | | |
| – | | |
| 64,444 | |
Total share-based compensation expense | |
$ | 77,900 | | |
$ | 32,750 | | |
$ | 338,580 | | |
$ | 223,351 | |
| |
| | | |
| | | |
| | | |
| | |
Total share-based compensation expense included in net loss | |
$ | 77,900 | | |
$ | 32,750 | | |
$ | 338,580 | | |
$ | 223,351 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of common shares outstanding – basic and diluted | |
| 6,032,126 | | |
| 3,963,066 | | |
| 5,254,459 | | |
| 3,750,111 | |
| |
| | | |
| | | |
| | | |
| | |
Basic and diluted loss per common share associated with stock-based compensation expense | |
$ | (0.01 | ) | |
$ | (0.01 | ) | |
$ | (0.06 | ) | |
$ | (0.06 | ) |
All of the stock-based compensation expense recorded during
the nine months ended December 31, 2014 and 2013, which totaled $338,580 and $223,351, respectively, is included in payroll and
related expense in the accompanying condensed consolidated statements of operations. Stock-based compensation expense recorded
during the nine months ended December 31, 2014 and 2013 had an impact on basic and diluted loss per common share of $(0.06).
We review share-based compensation on a quarterly basis for
changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting
the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments for the three and nine month periods ended December 31, 2014 was insignificant.
On June 6, 2014, our Board of Directors approved the following
grants of options to certain officers and directors of the Company:
|
o |
To Mr. James A. Joyce, an option to acquire an aggregate of 30,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The fair value of this stock option at the date of grant was $246,000. The option vested as to 10,000 shares on the grant date for a vesting expense of $82,000 and will vest as to an additional 10,000 shares on each of the first two anniversaries of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
|
o |
To Mr. Rodney S. Kenley, an option to acquire an aggregate of 5,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The fair value of this stock option at the date of grant was $41,000. The option vested as to 1,666 shares on the grant date for a vesting expense of $13,667 and will vest as to an additional 1,666 shares on the first anniversary of the grant date and 1,667 shares on the second anniversary of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
|
o |
To Mr. James B. Frakes, an option to acquire an aggregate of 5,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The fair value of this stock option at the date of grant was $41,000. The option vested as to 1,666 shares on the grant date for a vesting expense of $13,667 and will vest as to an additional 1,666 shares on the first anniversary of the grant date and 1,667 shares on the second anniversary of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
|
o |
To Dr. Richard H. Tullis, an option to acquire an aggregate of 1,000 shares of our common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The fair value of this stock option at the date of grant was $8,200. The option vested as to 333 shares on the grant date for a vesting expense of $2,733 and will vest as to an additional 333 shares on the first anniversary of the grant date and 334 shares on the second anniversary of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024. |
In addition to the above grants to our officers, on June 6,
2014, our Board of Directors also approved the grant of options to five employees to acquire an aggregate of 7,400 shares of our
common stock at an exercise price of $9.50 per share, the closing price of our common stock on the date of grant. The aggregate
fair value of those stock options at the date of grant was $60,680. Those options vested as to 2,466 shares on the grant date for
a vesting expense of $20,227 and will vest as to an additional 2,466 shares on the first anniversary of the grant date and 2,467
shares on the second anniversary of the grant date. Unless earlier exercised or terminated, the option will expire June 6, 2024.
In addition to the share-based compensation expense for the
specific stock option grants noted above, our total share-based compensation expense for the three and nine months ended December
31, 2014 includes ongoing vesting expense associated with stock grants from prior periods.
Changes to 2012 Board Compensation Program
In July 2012, the Board approved a Board Compensation Program
(the “2012 Program”), which modified and superseded the 2005 Directors Compensation Program that had been in effect
previously. On June 6, 2014, the Board approved certain changes to the 2012 Program. Under the modified 2012 Program, in which
only non-employee Directors may participate, a new eligible Director will receive an initial grant of $50,000 worth of options
to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices
of our common stock for the five trading days preceding the first day of the fiscal year. These options will have a term of ten
years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant.
At the beginning of each fiscal year, each existing Director
eligible to participate in the 2012 Program also will receive a grant of $35,000 worth of options valued at the exercise price
based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal
year. Such options will vest on the first anniversary of the date of grant. In lieu of per meeting fees, under the 2012 Program
eligible Directors will receive an annual Board retainer fee of $30,000. The modified 2012 Program also provides for the following
annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Audit Committee member - $4,000, Compensation
Committee member - $4,000 and Lead independent director - $15,000.
As a result of the modified 2012 Program on June 6, 2014, we
issued 3,684 stock options to each of our three outside directors. Those grants vest over the fiscal year ending March 31, 2015
and have an exercise price of $9.50 per share.
All of the foregoing actions - the changes in base salaries,
the option grants and the changes to the Directors Compensation Program discussed herein - were approved and recommended by the
Company’s Compensation Committee prior to approval by the Board.
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, with respect to stock option grants utilizing the Binomial Lattice option
pricing models at, and during the nine months ended December 31, 2014:
Risk free interest rate |
2.6% |
Average expected life |
10 years |
Expected volatility |
90.23% |
Expected dividends |
None |
The expected volatility was based on the historic volatility.
The expected life of options granted was based on the "simplified method" as described in the Securities and Exchange
Commission's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical
grants.
In May 2013, we granted to a scientific advisory board member
and a scientific consultant a three year option to purchase 2,500 shares of our common stock at a price of $5.50 per share.
In July 2013, our compensation
committee and Board of Directors approved the issuance of four stock option grants to four of our executives. The options carried
an exercise price of $5.00 per share, have a ten year life and vest over the following schedule: 25% on July 1, 2014, 25% on July
1, 2015, 25% on July 1, 2016 and 25% on July 1, 2017. The numbers of shares underlying each of the stock option grants were as
follows: 40,000 shares to our chief executive officer and 10,000 shares each to our president, chief science officer and chief
financial officer (see Note 10).
The following outlines the significant weighted average assumptions
used to estimate the fair value information, which is based on historical data, with respect to stock option grants utilizing the
Binomial Lattice option pricing models at, and during the nine months ended December 31, 2013:
Risk free interest rate |
0.38% - 2.50% |
Average expected life |
3 years - 10 years |
Expected volatility |
94.6% - 102.7% |
Expected dividends |
None |
The expected volatility was based on the historic volatility.
The expected life of options granted was based on the "simplified method" as described in the Securities and Exchange
Commission's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical
grants.
Options outstanding that have vested and are expected to vest
as of December 31, 2014 are as follows:
|
|
Number of Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term in Years |
|
|
|
|
|
|
|
|
|
|
|
Vested |
|
|
485,301 |
|
|
$ |
13.00 |
|
|
|
4.24 |
|
Expected to vest |
|
|
93,819 |
|
|
$ |
7.00 |
|
|
|
8.90 |
|
Total |
|
|
579,121 |
|
|
|
|
|
|
|
|
|
A summary of stock option activity during the nine months ended
December 31, 2014 is presented below:
|
|
Number of Options |
|
|
Range of
Exercise Price |
|
|
Weighted Average
Exercise Price |
|
Stock options outstanding at March 31, 2014 |
|
|
522,668 |
|
|
|
$3.80 - $20.50 |
|
|
$ |
12.50 |
|
Exercised |
|
|
(1,000 |
) |
|
|
9.50 |
|
|
$ |
9.50 |
|
Granted |
|
|
59,453 |
|
|
|
9.50 |
|
|
$ |
9.50 |
|
Cancelled/Expired |
|
|
(2,000 |
) |
|
|
9.50 |
|
|
$ |
9.50 |
|
Stock options outstanding at December 31, 2014 |
|
|
579,121 |
|
|
|
$3.80 - $20.50 |
|
|
$ |
12.00 |
|
Stock options exercisable at December 31, 2014 |
|
|
485,301 |
|
|
|
$3.80 - $20.50 |
|
|
$ |
13.00 |
|
At December 31, 2014, there was approximately $419,883 of unrecognized
compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 1.35 years.
The aggregate intrinsic value of the stock options outstanding
as of December 31, 2014 was $868,681, which represents the value of our closing stock price on the last trading day of the period,
which was $13.50, in excess of the weighted-average exercise price of $12.00, multiplied by the number of options outstanding.
11. WARRANTS
A summary of warrant activity during the nine months ended December
31, 2014 is presented below:
|
|
Amount |
|
|
Range of
Exercise Price |
|
|
Weighted Average
Exercise Price |
|
Warrants outstanding at March 31, 2014 |
|
|
1,414,190 |
|
|
|
$2.10 - $12.50 |
|
|
$ |
6.50 |
|
Exercised |
|
|
(587,084 |
) |
|
|
$2.10 – $11.00 |
|
|
$ |
4.50 |
|
Issued |
|
|
806,478 |
|
|
|
$2.10 - $15.00 |
|
|
$ |
8.50 |
|
Cancelled/Expired |
|
|
(197,692 |
) |
|
|
$2.10 - $11.00 |
|
|
$ |
7.00 |
|
Warrants outstanding at December 31, 2014 |
|
|
1,435,892 |
|
|
|
$2.10 - $15.00 |
|
|
$ |
7.00 |
|
Warrants exercisable at December 31, 2014 |
|
|
1,435,892 |
|
|
|
$2.10 - $15.00 |
|
|
$ |
7.00 |
|
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models
at, and during, the nine months ended December 31, 2014:
Risk free interest rate |
0.79% - 2.29% |
Average expected life |
5 years – 7 years |
Expected volatility |
87.8% - 107.4% |
Expected dividends |
None |
12. DEFENSE ADVANCED RESEARCH PROJECTS AGENCY CONTRACT AND RELATED
REVENUE RECOGNITION
As discussed in Note 1, we entered into a contract with the
Defense Advanced Research Projects Agency (DARPA) on September 30, 2011. Under the DARPA award, we have been engaged to develop
a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured
soldiers. The award from DARPA was a fixed-price contract with potential total payments to us of $6,794,389 over the course of
five years. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during
each year of the contract. Under the terms of the contract, we will perform certain incremental work towards the achievement of
specific milestones against which we will invoice the government for fixed payment amounts.
Originally, only the base year (year one of the contract) was
effective for the parties, however, DARPA subsequently exercised the option on the second, third and fourth years of the contract.
DARPA has the option to enter into the contract for year five. The milestones are comprised of planning, engineering and clinical
targets, the achievement of which in some cases will require the participation and contribution of third party participants under
the contract. There can be no assurance that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the contract term. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of our contract in
years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and blood processing
instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years three through
five. We recently completed a re-budgeting of the expected costs on the remaining years of the DARPA contract based on the reduced
milestones and have concluded that the reductions in our costs due to the scaled back level of work will almost entirely offset
the anticipated revenue levels based on current assumptions.
During the nine months ended December 31, 2014, we invoiced
DARPA for three milestones totaling $444,723. The details of those milestones were as follows:
Milestone 2.4.2.2 – Determine capacity requirements
of affinity resin to multiple simultaneous targets. The milestone payment was $197,362. Management considers this milestone
to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we were able to determine the capacity requirements of affinity resin to multiple simultaneous
targets. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone 2.4.2.4 – Finish construction and delivery of
25 experimental cartridges for testing by the system integrator. The milestone payment was $50,000. Management considers this milestone
to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we delivered the 25 cartridges to the systems integrator as part of our submission for approval. The
report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone M9 – Target capture > 90% in 24 hours for
at least 3 targets ex vivo in blood or blood components using the optimized cartridge. The milestone payment was $197,361. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We demonstrated that we were able to capture approximately 90% in 24 hours for at least 3f targets ex vivo in blood or
blood components using the optimized cartridge. The report was accepted by the contracting officer's representative and the invoice
was submitted thereafter.
In the nine months ended December 31, 2013, we invoiced DARPA
for four milestones totaling $808,739. The details of those milestones were as follows:
Milestone 2.3.2.2 – Formulate initial design work based
on work from the previous phase. Begin to build and test selected instrument design and tubing sets. The milestone payment was
$195,581. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based
solely on another party's efforts. We demonstrated that we were able to formulate the initial design work and to build and test
selected instrument design and tubing sets as part of our submission for approval. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter.
Milestone 2.3.2.2 – Write and test software and
conduct ergonomic research. Begin discussions with the systems integrator. The milestone payment was $195,581. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another
party's efforts. We obtained wrote and tested software and conducted ergonomic research and began discussions with the
systems integrator. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone 2.3.3.2 – Cartridge construction with optimized
affinity matrix design for each potential target. Complete the capture agent screening. The milestone payment was $208,781. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We completed the cartridge construction with optimized affinity matrix design for each potential target and
completed the capture agent screening. The report was accepted by the contracting officer's representative and the invoice was
submitted thereafter.
Milestone M5 – Target capture > 90% in 24 hours for
at least three targets in blood or blood components. The milestone payment was $208,781. Management considers this milestone to
be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we were able to capture approximately 90% in 24 hours for at least three of the agreed targets in blood or blood
components. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
13. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
We rented approximately 2,300 square feet of executive office
space at 8910 University Center Lane, Suite 660, San Diego, CA 92122 at the rate of $6,475 per month on a four year lease that
expired in September 2014. We continued leasing that space for the month of October and, effective November 1, 2014, moved into
a new facility of approximately 2,576 square feet located at 9635 Granite Ridge Drive, San Diego, CA 92123 under a 39 month
lease with an initial rental rate of $6,054 per month. We believe this new leased facility will be satisfactory for our office
needs over the term of the lease.
We also rent approximately 1,700 square feet of laboratory space
at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $3,917 per month on a one year lease that
previously was scheduled to expire in October 2014 and was recently extended to in October 2015. We believe this new leased facility
will be satisfactory for our laboratory needs over the term of the lease
Our Exosome Sciences, Inc. subsidiary rents approximately 2,055
square feet of office and laboratory space at 11 Deer Park Drive, South Brunswick, NJ at the rate of $3,596 per month on a one
year lease that previously was scheduled to expire in October 2014 and was recently extended to in October 2015. We believe this
new leased facility will be satisfactory for Exosome Sciences, Inc.’s operational needs over the term of the lease.
Rent expense approximated $127,000 and $99,000 for the nine
month periods ended December 31, 2014 and 2013, respectively.
LEGAL MATTERS
From time to time, claims are made against us in the ordinary
course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or
more products or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period
could have a material adverse effect on our results of operations for that period or future periods. We are not presently a party
to any pending or threatened legal proceedings.
14. SEGMENTS
We operate our businesses principally through two reportable
segments: Aethlon, which represents our therapeutic business activities, and Exosome Sciences, Inc., which represents our diagnostic
business activities. Our reportable segments have been determined based on the nature of the potential products being developed.
Aethlon’s revenue is generated primarily from government
contracts to date and Exosome Sciences, Inc. does not yet have any revenues. We have not included any allocation of corporate overhead
to the Exosome Sciences, Inc. segment.
The following tables set forth certain information regarding
our segments and other operations that conforms to the consolidated balance sheet and statement of operations presented in this
Report:
| |
Nine Months Ended December 31, | |
| |
2014 | | |
2013 | |
Revenues: | |
| | | |
| | |
Aethlon | |
$ | 563,805 | | |
$ | 916,796 | |
Exosome Sciences, Inc. | |
| – | | |
| – | |
Total Revenues | |
$ | 563,805 | | |
$ | 916,796 | |
| |
| | | |
| | |
Operating Losses: | |
| | | |
| | |
Aethlon | |
$ | (2,156,769 | ) | |
$ | (2,065,212 | ) |
Exosome Sciences, Inc. | |
| (703,411 | ) | |
| (180,722 | ) |
Total Operating Loss | |
$ | (2,860,180 | ) | |
$ | (2,245,934 | ) |
| |
| | | |
| | |
Net Losses: | |
| | | |
| | |
Aethlon | |
$ | (5,347,716 | ) | |
$ | (5,735,474 | ) |
Exosome Sciences, Inc. | |
| (703,411 | ) | |
| (185,305 | ) |
Net Loss Before Non-Controlling Interests | |
$ | (6,051,127 | ) | |
$ | (5,920,779 | ) |
| |
| | | |
| | |
Cash: | |
| | | |
| | |
Aethlon | |
$ | 2,446,820 | | |
$ | 588,066 | |
Exosome Sciences, Inc. | |
| 328,915 | | |
| 1,266,875 | |
Total Cash | |
$ | 2,775,735 | | |
$ | 1,854,941 | |
| |
| | | |
| | |
Total Assets: | |
| | | |
| | |
Aethlon | |
$ | 2,735,913 | | |
$ | 777,004 | |
Exosome Sciences, Inc. | |
| 420,582 | | |
| 1,328,004 | |
Total Assets | |
$ | 3,156,495 | | |
$ | 2,105,008 | |
| |
| | | |
| | |
Capital Expenditures: | |
| | | |
| | |
Aethlon | |
$ | – | | |
$ | 2,750 | |
Exosome Sciences, Inc. | |
| – | | |
| 58,743 | |
Capital Expenditures | |
$ | – | | |
$ | 61,493 | |
| |
| | | |
| | |
Depreciation and Amortization: | |
| | | |
| | |
Aethlon | |
$ | 13,328 | | |
$ | 7,195 | |
Exosome Sciences, Inc. | |
| 14,686 | | |
| 6,964 | |
Total Depreciation and Amortization | |
$ | 28,014 | | |
$ | 14,159 | |
| |
| | | |
| | |
Interest Expense: | |
| | | |
| | |
Aethlon | |
$ | 285,229 | | |
$ | 325,364 | |
Exosome Sciences, Inc. | |
| – | | |
| 4,583 | |
Total Interest Expense | |
$ | 285,229 | | |
$ | 329,947 | |
15. SUBSEQUENT EVENTS
Management has evaluated events subsequent to December 31, 2014
through the date that the accompanying condensed consolidated financial statements were filed with the Securities and Exchange
Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
Government Contracts
Subsequent to December 31, 2014, we billed $8,207 and we collected
$12,290 under the Battelle Memorial Institute subcontract.
Debt Reduction
Subsequent to December 31, 2014, we paid off the remaining principal
and interest balances on the two remaining 12% Notes with cash payments totaling $68,063 (see Note 5).
Note Conversions
Subsequent to December 31, 2014, we issued
an aggregate of 98,688 shares of Common Stock to two accredited investors upon the conversion of an aggregate of $207,245 of unpaid
principal and accrued interest due under convertible promissory notes previously issued to the investors. The conversion price
per share was $2.10 (see Note 6).
Warrant Exercises
Subsequent to December 31, 2014, we issued 3,574 shares of common
stock to an accredited investor upon the exercise of a previously issued warrant. The warrant was exercised on a cashless or “net”
basis. Accordingly, we did not receive any proceeds from such exercise. The cashless exercise of the warrant resulted in the cancellation
of the previously issued warrant to purchase an aggregate of 5,176 shares of common stock.
Aethlon Medical, Inc.
Up to ● Shares of
Common Stock
Warrants to Purchase up
to ● Shares of Common Stock
Prospectus
Roth Capital Partners
,
2015
PART
II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses
to be incurred in connection with the registration of the securities being registered by this registration statement, all of which
will be borne by us. All amounts shown are estimates except the Securities and Exchange Commission registration fee.
Securities and Exchange Commission registration fee |
|
$ |
1,668 |
|
FINRA filing fee |
|
|
|
|
NASDAQ listing application fee |
|
|
5,000 |
|
Transfer agent’s fees and expenses |
|
|
|
|
Printing and engraving expenses |
|
|
|
|
Legal fees and expenses |
|
|
|
|
Accounting fees and expenses |
|
|
|
|
Miscellaneous |
|
|
|
|
|
|
|
|
|
Total expenses |
|
$ |
|
|
Item 14. Indemnification of Directors and Officers.
Nevada Law
We are incorporated in Nevada. Subsection 1
of Section 78.7502 of the Nevada Revised Statutes empowers a corporation to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee
or agent of another corporation or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he is not liable
pursuant to Section 78.138 of the Nevada Revised Statutes or if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable
cause to believe his conduct was unlawful. Subsection 7 of Section 78.138 provides that, with certain exceptions, a director or
officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or
failure to act in his capacity as a director or officer unless it is proven that (i) his act or failure to act constituted a breach
of his fiduciary duties as a director or officer, and (ii) his breach of those duties involved intentional misconduct, fraud or
a knowing violation of the law.
Subsection 2 of Section 78.7502 empowers a corporation
to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person acted in
any of the capacities set forth above against expenses, including amounts paid in settlement and attorneys’ fees actually
and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted under similar standards,
except that no indemnification may be made in respect of any claim, issue or matter as to which such person shall have been adjudged
by a court of competent jurisdiction to be liable to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction determines
that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses
as the court deems proper.
Section 78.7502 further provides that to the
extent a director or officer of a corporation has been successful in the defense of any action, suit or proceeding referred to
in subsections (1) and (2) thereof, or in the defense of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys’ fees) actually and reasonably incurred by him in connection therewith. Subsection 3 of Section 78.751
of the Nevada Revised Statutes provides that the indemnification provided for by Section 78.7502 shall not be deemed exclusive
or exclude any other rights to which the indemnified party may be entitled (except that indemnification will generally not be available
to a person if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing
violation of the law and were material to the cause of action) and that the indemnification shall continue as to directors, officers,
employees or agents who have ceased to hold such positions, and to their heirs, executors and administrators. Section 78.752 empowers
the corporation to purchase and maintain insurance on behalf of a director, officer, employee or agent of the corporation against
any liability asserted against him or incurred by him in any such capacity or arising out of his status as such whether or not
the corporation would have the power to indemnify him against such liabilities under Section 78.7502.
By-Laws
Our by-laws provide for the elimination of the
personal liability of our officers, directors, corporate employees and agents to the fullest extent permitted by the provisions
of the Nevada Law. Under such provisions, we shall indemnify a director or officer (and may indemnify a corporate employee or agent)
who in his capacity as such is made, or threatened to be made, party to any suit or proceeding, if it is determined that such person
acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of our company and, with
respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
Liability Insurance
We maintain directors’ and officers’
liability insurance covering our directors and officers against expenses and liabilities arising from certain actions to which
they may become subject by reason of having served in such role, including insurance for claims against these persons brought under
securities laws. Such insurance is subject to the coverage amounts, exceptions, deductibles and other conditions set forth in the
policy as in effect at the time of a claim, if any. There is no assurance that we will maintain liability insurance for our directors
and officers.
Public Policy Limitations
Insofar as indemnification for liabilities arising
under the Securities Act of 1933, or Securities Act, may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by one of our directors,
officers or controlling persons in the successful defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, we will, unless in the opinion of our counsel the matter
has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification
by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities.
We have sold or issued the following securities
not registered under the Securities Act in reliance upon the exemption from registration pursuant to Section 4(a)(2) of the Securities
Act or Regulation D of the Securities Act during the three years preceding the filing of this registration statement. Except as
stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions.
Equity Transactions from March 31, 2014 to Present
On May 20, 2014, May 23, 2014, June 6, 2014,
June 11, 2014 and June 26, 2014, we sold seven accredited investors 43,849 shares of restricted common stock for an aggregate purchase
price of $320,800 and an average price of $7.50 per share. The common stock purchase price was calculated as 80% of the average
closing price of our common stock for the five-day period immediately preceding the date of each subscription agreement.
On June 24, 2014, we issued the holder of a
convertible note 466,365 shares of restricted common stock and five-year warrants to acquire up to 136,190 shares of common stock
at an exercise price of $2.10 per share and up to 7,944 shares of common stock at an exercise price of $5.40 per share. We issued
the stock and warrants upon the conversion of a combined principal and interest balance of $1,003,200 due under the note. We also
issued the holder 1,500 shares of common stock as a service fee for converting the note in full and for agreeing to waive anti-dilution
price protection in certain warrants previously issued by the holder to us.
On July 8, 2014, we issued the holder of a convertible
note 51,837 shares of restricted common stock and five-year warrants to acquire up to 46,429 shares of common stock at an exercise
price of $2.10 per share and up to 2,708 shares of common stock at an exercise price of $5.40 per share. We issued the stock and
warrants upon the conversion of the interest balance of $116,970 due under the note and for the holder’s agreement to extend
the expiration date of the note. We also issued the holder 500 shares of common stock as a service fee for extending the note,
for converting the interest due under the note and for agreeing to waive anti-dilution price protection in certain warrants previously
issued by the holder to us.
On August 6, 2014, we issued 7,806 shares of
restricted common stock at an average price of $12.00 per share in payment for investor relations consulting services valued at
$75,000 based on the value of the services provided.
On July 15, 2014, we issued 38,750 shares of
restricted common stock to the holders of three convertible notes in exchange for the partial or full conversion of principal and
interest in the aggregate amount of $81,375 at a conversion price of $2.10 per share.
On July 24, 2014, we issued an aggregate of
50,079 shares of restricted common stock and a seven-year warrant to issue up to 25,040 shares of common stock at an exercise price
of $6.60 per share to Dr. Chetan Shah, one of our directors. We issued the common stock and warrant to Dr. Shah upon the conversion
of an aggregate of $220,349 of unpaid principal and accrued interest due under a 10% Convertible Note previously issued to Dr.
Shah by us on July 9, 2013.
On September 17, 2014, we issued to the holder
of the remaining 2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit
warrants to acquire up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share. The units were
issued to the note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due under the
promissory note, which represented the entire amount outstanding under the note.
On July 29, 2014, August 4, 2014 and August
6, 2014, we issued to four investors 53,465 shares of restricted common stock through the cash exercise of eight warrants for $259,474
of cash at an average exercise price of approximately $5.00 per share. As an inducement to those investors, we issued them replacement
warrants to acquire up to an aggregate of 53,465 shares of common stock on the same terms as the warrants they exercised.
On August 29, 2014, September 2, 2014 and September
22, 2014, we issued and sold to three accredited investors units consisting of (a) 2,000 restricted shares of our common stock
at prices per share ranging from $4.55 to $4.70 and (b) a five-year warrant to purchase 1,000 shares of common stock at exercise
prices ranging from $6.80 to $7.15 per share. In total, the investors purchased for cash an aggregate of $90,000 of units. The
investors acquired an aggregate of 19,500 shares of common stock and warrants to acquire up to an aggregate of 9,750 shares of
common stock.
On November 7, 2014, we issued 3,400 shares
of restricted common stock at price of $10.25 per share, along with a cash payment of $50,000, in full repayment of the outstanding
principal balance and interest balance on the Law Firm Note.
On October 10, 2014, October 14, 2014 and October
15, 2014, we issued and sold to eight accredited investors units consisting of (a) 2,000 restricted shares of common stock at prices
per share ranging from $5.25 to $5.70 and (b) a five-year warrant to purchase 1,000 shares of common stock at exercise prices ranging
from $7.70 to $8.35 per share. In total, the investors purchased for cash an aggregate of $502,700 of units. The investors acquired
an aggregate of 90,125 shares of common stock and warrants to acquire up to an aggregate of 45,063 shares of common stock.
On October 9, 2014, we issued to an accredited
investor units consisting of an aggregate of 36,716 shares of restricted common stock and warrants to acquire up to an aggregate
of 18,358 shares of common stock at an exercise price of $7.70 per share. We issued the units to the investor upon the conversion
of an aggregate of $189,087 of unpaid principal and accrued interest due under two promissory notes (the remaining October and
November 2009 10% Convertible Note and the April 2010 10% Convertible Note) previously issued to the investor by us. The amounts
converted represented the entire principal and interest outstanding under the notes and the notes held by that holder were retired.
On October 17, 2014 and October 20, 2014, we
issued an aggregate of 113,422 shares of restricted common stock and seven-year warrants to issue up to an aggregate of 113,422
shares of common stock at exercise prices ranging from $4.30 to $6.25 per share to eight accredited investors. One of the investors
is Dr. Shah. The common stock and warrants were issued to the investors upon the cash exercise of previously issued warrants held
by them. The investors paid an aggregate of $579,251 upon exercise of the previously outstanding warrants at exercise prices ranging
from $4.30 to $6.25 per share.
On October 15, 2014, we issued an aggregate
of 70,460 shares of restricted common stock to two accredited investors upon the conversion of an aggregate of $147,965 of unpaid
principal and accrued interest due under promissory notes previously issued to the investors by us. The conversion price per share
was $2.10.
On November 6, 2014, we sold two accredited
investors (i) convertible promissory notes in the aggregate principal amount of $527,780 and (ii) five year warrants to purchase
up to 47,123 shares of common stock at a fixed exercise price of $8.40 per share. The convertible promissory notes bear interest
at the annual rate of 10% and mature on April 1, 2016. The aggregate gross cash proceeds to us were $415,000 after subtracting
legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 due diligence fee and an original
issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock
at a fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of common stock.
On October 21, 2014, we issued an aggregate
of 328,463 shares of restricted common stock to three accredited investors upon the cashless exercise of warrants previously issued
to the investors by us with an exercise price of $2.10 per share.
On November 12, 2014, we issued 780 shares of
restricted common stock to a consultant in payment for investor relations services valued at $8,000 based on the value of the services
provided.
On November 18, 2014, we issued an aggregate
of 112,500 shares of restricted common stock to two investors upon the conversion of an aggregate of $236,250 of unpaid principal
and accrued interest under a promissory note previously issued by us. The conversion price was $2.10 per share.
On November 19, 2014 we issued 285 shares of
restricted common stock to an investor upon the cashless exercise of warrants previously issued by us with an exercise price of
$5.50 per share.
On November 25, 2014, we issued an aggregate
of 214,286 shares of restricted common stock to two accredited investors upon the conversion of an aggregate of $450,000 of unpaid
principal and accrued interest due under promissory notes previously issued by us with a conversion price of $2.10 per share.
On November 26, 2014, we authorized the issuance
of an aggregate of 88,165 shares of restricted common stock to 38 accredited investors upon the cashless exercise of warrants previously
issued to the investors by us with an exercise price of $11.00 per share.
On November 26, 2014, we authorized the issuance
of 9,921 shares of restricted common stock to an accredited investor upon the cashless exercise of warrants previously issued by
us with an exercise price of $5.50 per share.
On December 2, 2014, we sold $3,300,000 of units,
comprised of common stock and warrants, to three affiliated institutional investors at a price of $15.00 per unit. Each unit consisted
of one share of common stock and five-year warrants to purchase 1.2 shares of common stock at an exercise price of $15.00 per share.
Accordingly, we issued a total of 220,000 shares of restricted common stock and warrants to purchase 264,000 shares of common stock.
For its services as sole placement agent for the financing, we paid Roth Capital Partners, LLC a cash fee of $231,000 and expense
reimbursement of $25,000 and we issued it a five-year warrant to purchase 11,000 shares of common stock at an exercise price of
$15.00 per share.
On December 5, 2014, we issued an aggregate
of 3,500 shares of restricted common stock to two affiliated accredited investors upon the cashless exercise of warrants previously
issued by us with an exercise price of $2.10 per share.
On January 2, 2015, we issued 47,619 shares
of common stock to an accredited investor upon the conversion of $100,000 of unpaid principal due under a promissory note we previously
issued to the investor. The conversion price per share was $2.10.
On January 14, 2015, we authorized the issuance
of 3,574 shares of common stock to an accredited investor upon the cashless exercise of warrants previously issued by us with an
exercise price of $5.50 per share.
On March 16, 2015, we issued 37,265 shares of
common stock to an accredited investor upon the conversion of an aggregate of $78,257 of unpaid principal and accrued interest
due under a promissory note we previously issued to the investor. The conversion price per share was $2.10.
On March 30, 2015, we issued 13,803 shares of
common stock to an accredited investor upon the conversion of an aggregate of $28,988 of unpaid principal and accrued interest
due under a promissory note we previously issued to the investor. The conversion price per share was $2.10.
Equity Transactions in the Fiscal Year Ended March 31, 2014
Common Stock Issuances in the Fiscal Year Ended March 31, 2014
On June 14, 2013, we completed a unit subscription
agreement with three accredited investors pursuant to which we issued 31,605 shares of our common stock and 15,802 warrants to
purchase our common stock for net cash proceeds of $128,000. Such warrants have an exercise price of $6.05 per share.
On June 20, 2013, we issued to our CEO the remaining
68,000 shares under his restricted share grant, all of which were vested.
On April 3, 2013, April 15, 2013, April 23,
2013, May 3, 2013, May 9, 2013, June 6, 2013 and June 25, 2013, we issued 73,506 shares of restricted common stock to the holders
of three notes issued by us in exchange for the partial conversion of principal and interest in an aggregate amount of $246,500
at an average conversion price of $3.50 per share.
On August 5, 2013 and August 6, 2013, we completed
a unit subscription agreement with four accredited investors pursuant to which we issued 18,018 shares of restricted common stock
and 9,009 warrants to purchase our common stock in exchange for net cash proceeds of $100,000. Such warrants have an exercise price
of $8.35 per share.
On September 10, 2013, we issued 23,367 shares
of restricted common stock at an average price of $5.00 per share in payment for investor relations and public relations services
valued at $115,000 based on the value of the services provided.
On July 16, 2013, July 24, 2013, August 5, 2013
and August 6, 2013, we issued 55,907 shares of restricted common stock to the holders of four notes issued by us in exchange for
the partial or full conversion of principal and interest in an aggregate amount of $173,960 at an average conversion price of $3.00
per share.
On October 30, 1013, November 12, 2013, December
10, 2013 and December 30, 2013, we issued to 32 accredited investors 287,344 shares of restricted common stock and warrants to
purchase our common stock for gross cash proceeds of $1,795,900. The warrants have an exercise price of $11.00 per share. We paid
the broker that was engaged as placement agent in the transaction an aggregate cash fee in the amount of $270,508 and issued the
placement agent’s designees warrants to purchase an aggregate of 43,102 shares of our common stock. We also paid $78,360
in other costs and fees, including legal fees, blue sky fees and escrow costs. The net proceeds that we received totaled $1,447,032.
On October 24, 2013 and December 23, 2013, we
issued 29,304 shares of restricted common stock to the holder of two notes issued by us in exchange for the partial or full conversion
of accrued interest in an aggregate amount of $80,000 at an average conversion price of $2.50 per share.
On February 24, 2014 and March 31, 2014, we
issued 52,764 shares of restricted common stock to the holders of five notes issued by us in exchange for the partial or full conversion
of accrued interest in an aggregate amount of $226,316 at an average conversion price of $4.50 per share.
On February 21, 2014, we issued 7,996 shares
of restricted common stock at an average price of $8.00 per share in payment for investor relations and public relations services
valued at $62,500 based on the value of the services provided.
On March 31, 2014, we entered into extension
agreements with three noteholders. In conjunction with the extension agreements, we agreed to issue to the noteholders an aggregate
90,142 shares of restricted common stock as a result of the noteholders invoking the anti-dilution protection on their notes.
Warrant-Related Issuances in the Fiscal Year Ended March 31, 2014
On August 7, 2013 and September 18, 2013, 18
warrant holders exercised 131,625 warrants to receive 68,149 restricted shares of common stock in cashless exercise transactions.
On October 23, 2013, a warrant holder exercised
56,100 warrants in exchange for 31,555 shares in a cashless exercise transaction.
On October 30, 1013, November 12, 2013, December
10, 2013 and December 30, 2013, we issued an aggregate 186,774 five year warrants to the investors and placement agent as part
of our financing in that period (see above). The exercise price for the warrants was $11.00 per share.
On January 29, 2014 and March 14, 2014, we issued
4,163 shares of restricted common stock to three warrant holders in cashless exercise transactions.
On February 24, 2014, we issued 150,457 shares
of restricted common stock upon the cashless exercise of three warrants in connection with the Gemini litigation settlement.
Stock Option-Related Issuances in the Fiscal Year Ended March 31,
2014
In May 2013, we issued to a scientific advisory
board member and a scientific consultant a three year option to purchase 2,500 shares of our common stock at a price of $5.50 per
share.
On July 1, 2013, our compensation committee
and Board of Directors approved the issuance of four stock option grants to four of our executives. The options carried an exercise
price of $5.00 per share, have a ten-year life and vest over the following schedule: 25% on July 1, 2014, 25% on July 1, 2015,
25% on July 1, 2016 and 25% on July 1, 2017. The numbers of shares underlying each of the stock option grants were as follows:
40,000 shares to our chief executive officer and 10,000 shares each to our president, chief science officer and chief financial
officer.
On March 26, 2014, a former director exercised
3,659 in vested stock options through the contribution of $2,000 in cash and $13,000 in accrued expenses owed to him based on the
exercise price of $4.10 per share.
Equity Transactions in the Fiscal Year Ended March 31, 2013
Common Stock Issuances in the Fiscal Year Ended March 31, 2013
During the fiscal year ended March 31, 2013,
we issued 456,595 shares of restricted common stock to holders of notes issued by the Company in exchange for the partial or full
conversion of principal and interest of several notes payable in an aggregate amount of $1,707,052 at an average conversion price
of $3.50 per share based upon the conversion formulae in the respective notes.
During the fiscal year ended March 31, 2013,
we issued 2,320 shares of restricted common stock to a holder of a note payable to settle past due accrued interest that we recorded
as non-cash interest expense of $11,846.
During the fiscal year ended March 31, 2013,
we issued 38,656 restricted shares of common stock to service providers for investor relations, corporate communications and business
development services valued at $170,849 based upon the fair value of the shares issued. The average issuance price on the restricted
share issuances was approximately $4.50 per share.
On April 5, 2012, we completed a unit subscription
agreement with one accredited investor pursuant to which the investor purchased $200,000 of units, with each unit consisting of
(i) one share of common stock at a price per share of $4.00 and (ii) a warrant to purchase such number of shares of common stock
as shall equal (a) fifty percent of the subscription amount divided by (b) $4.00 at an exercise price of $6.25 per warrant
share. Based on the foregoing, units consisting of 50,000 shares of common stock and warrants to purchase 25,000 shares of common
stock were issued on April 5, 2012.
The warrants are exercisable for a period of
seven years from the date of issuance at an exercise price of $6.25, subject to adjustments for stock splits, stock dividends,
recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying
the warrant are not then registered pursuant to an effective registration statement.
On June 19, 2012, we completed a unit subscription
agreement with seven accredited investors pursuant to which the investors purchased $592,000 of units, with each unit consisting
of (i) one share of common stock at a price per share of $3.60 and (ii) a warrant to purchase such number of shares of common stock
as shall equal (a) fifty percent of the subscription amount divided by (b) $3.60 at an exercise price of $5.40 per warrant
share. Based on the foregoing, units consisting of 164,444 shares of common stock and warrants to purchase 82,222 shares of common
stock were issued on June 19, 2012.
On June 26, 2012, we completed a unit subscription
agreement with one accredited investor pursuant to which the investor purchased $10,000 of units, with each unit consisting of
(i) one share of common stock at a price per share of $3.60 and (ii) a warrant to purchase such number of shares of common stock
as shall equal (a) fifty percent of the subscription amount divided by (b) $3.60 at an exercise price of $5.35 per warrant share.
Based on the foregoing, units consisting of 2,796 shares of common stock and warrants to purchase 1,398 shares of common stock
were issued on June 26, 2012.
On July 3, 2012, we issued 9,228 shares of common
stock to the holder of a $25,000 October and November 2009 10% Convertible Note in exchange for the value of the principal and
related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and
one-half of a stock purchase warrant on June 29, 2012. As part of that structure, the noteholder also received seven year warrants
to purchase 4,614 shares of common stock at a price of $5.35 per share.
On August 29, 2012, we
completed a unit subscription agreement with seven accredited investors pursuant to which the investors purchased an aggregate
of $271,000 of restricted common stock at a price of $4.00 per share. The common stock purchase price under the subscription agreement
was determined to be 80% of the average closing price of the our common stock for the five-day period immediately preceding the
date of the subscription agreement, resulting in the issuance of 67,750 shares of common stock. Each investor also received one
common stock purchase warrant for each two shares of common stock purchased under the subscription agreement. The warrant exercise
price was calculated to be $6.00 per share based upon 120% of the average of the closing prices of our common stock for the five-day
period immediately preceding the parties entering into the subscription agreement.
The warrants are exercisable for a period of
seven years from the date of issuance at an exercise price of $6.00, subject to adjustments for stock splits, stock dividends,
recapitalizations and the like. The investors may exercise the warrants on a cashless basis if the shares of common stock underlying
the warrants are not then registered pursuant to an effective registration statement.
In October 2012, we completed a unit subscription
agreement with four accredited investors pursuant to which the investors purchased an aggregate of $135,000 of restricted common
stock at an average price of $3.50 per share. The common stock purchase price under the subscription agreement was determined to
be 80% of the average closing price of our common stock for the five-day period immediately preceding the date of the subscription
agreement, resulting in the issuance of 36,468 shares of common stock. Each investor also received one common stock purchase warrant
for each two shares of common stock purchased under the subscription agreement. The warrant exercise price was calculated based
upon 120% of the average of the closing prices of our common stock for the five-day period immediately preceding the parties entering
into the subscription agreement.
In November 2012, we completed a unit subscription
agreement with four accredited investors pursuant to which the investors purchased an aggregate of $213,000 of restricted common
stock at an average price of $3.00 per share. The common stock purchase price under the subscription agreement was determined to
be 80% of the average closing price of our common stock for the five-day period immediately preceding the date of the subscription
agreement, resulting in the issuance of 68,710 shares of common stock. Each investor also received one common stock purchase warrant
for each two shares of common stock purchased under the subscription agreement. The warrant exercise price was calculated based
upon 120% of the average of the closing prices of our common stock for the five-day period immediately preceding the parties entering
into the subscription agreement.
In December 2012, we completed a unit subscription
agreement with four accredited investors pursuant to which the investors purchased an aggregate of $150,000 of restricted common
stock at an average price of $3.00 per share. The common stock purchase price under the subscription agreement was determined to
be 80% of the average closing price of our common stock for the five-day period immediately preceding the date of the subscription
agreement, resulting in the issuance of 52,394 shares of common stock. Each investor also received one common stock purchase warrant
for each two shares of common stock purchased under the subscription agreement. The warrant exercise price was calculated based
upon 120% of the average of the closing prices of our common stock for the five-day period immediately preceding the parties entering
into the subscription agreement.
On January 4, 2013, we issued 4,929 shares of
restricted common stock to the owner of a patent as a patent license payment valued at $17,250.
On February 7, 2013, we issued an aggregate
of 70,313 shares of restricted common stock to six accredited investors and one institutional investor for aggregate proceeds of
$225,000 or an average price of $3.00 per share. The common stock purchase price was determined to be 80% of the average closing
price of our common stock for the five-day period immediately preceding the purchase date. Each investor also received one common
stock purchase warrant for each two shares of common stock purchased. The warrant exercise price was calculated based upon 120%
of the average of the closing prices of our common stock for the five-day period immediately preceding the purchase date.
On March 4, 2013, March 14, 2013, March 15,
2013 and March 18, 2013, we issued an aggregate of 81,616 shares of restricted common stock to ten accredited investors and one
institutional investor for aggregate proceeds of $313,834 or an average price of $4.00 per share. The common stock purchase price
was determined to be 80% of the average closing price of our common stock for the five-day period immediately preceding the date
of each purchase. We also issued each investor one common stock purchase warrant for each two shares of common stock purchased.
The warrant exercise price was calculated based upon 120% of the average of the closing prices of our common stock for the five-day
period immediately preceding the applicable purchase date.
Warrant Issuances in the Fiscal Year Ended March 31, 2013
In April 2012, we issued warrants to purchase
32,349 shares of common stock to the placement firm that arranged $1 million in bridge financing in the fiscal year ended March
31, 2012. Those warrants were on the same terms as those received by the investors in the bridge financing with a term of five
years and an exercise price of $5.50.
On April 5, 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 25,000 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an exercise price of $6.25, subject to adjustments for stock splits, stock dividends,
recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying
the warrant are not then registered pursuant to an effective registration statement.
On June 19, 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 82,222 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an exercise price of $5.40, subject to adjustments for stock splits, stock dividends,
recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying
the warrant are not then registered pursuant to an effective registration statement.
On June 26, 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 1,398 shares of common stock. The warrants are exercisable for a period of
seven years from the date of issuance at an exercise price of $5.35, subject to adjustments for stock splits, stock dividends,
recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common stock underlying
the warrant are not then registered pursuant to an effective registration statement.
In July 2012, we issued 9,228 shares of common
stock to the holder of a $25,000 October and November 2009 10% Convertible Note in exchange for the value of the principal and
related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and
one-half of a stock purchase warrant on June 29, 2012. As part of that structure, the noteholder also received seven year warrants
to purchase 4,614 shares of common stock at a price of $5.35 per share.
On August 29, 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 33,875 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an exercise price of $6.00 per share, subject to adjustments for stock splits, stock
dividends, recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common stock
underlying the warrant are not then registered pursuant to an effective registration statement.
In October 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 18,234 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an average exercise price of $5.55 per share, subject to adjustments for stock splits,
stock dividends, recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common
stock underlying the warrant are not then registered pursuant to an effective registration statement.
In November 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 34,355 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an average exercise price of $4.65 per share, subject to adjustments for stock splits,
stock dividends, recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common
stock underlying the warrant are not then registered pursuant to an effective registration statement.
In December 2012, under the unit subscription
agreement noted above, we issued warrants to purchase 26,197 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an average exercise price of $4.30 per share, subject to adjustments for stock splits,
stock dividends, recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common
stock underlying the warrant are not then registered pursuant to an effective registration statement.
On February 7, 2013, we issued warrants to purchase
35,156 shares of common stock. The warrants are exercisable for a period of seven years from the date of issuance at an average
exercise price of $4.80 per share, subject to adjustments for stock splits, stock dividends, recapitalizations and the like. The
investor may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered
pursuant to an effective registration statement.
On March 4, 2013, March 14, 2013, March 15,
2013 and March 18, 2013, we issued warrants to purchase 40,808 shares of common stock. The warrants are exercisable for a period
of seven years from the date of issuance at an average exercise price of $5.90 per share, subject to adjustments for stock splits,
stock dividends, recapitalizations and the like. The investor may exercise the warrant on a cashless basis if the shares of common
stock underlying the warrant are not then registered pursuant to an effective registration statement.
Option Issuances in the Fiscal Year Ended March 31, 2013
In the fiscal year ended March 31, 2013, our
Board of Directors granted, to our four outside directors, ten-year options to acquire an aggregate of 33,342 shares of our common
stock, all with an exercise price of $3.80 per share.
Equity Transactions in the Fiscal Year Ended March 31, 2012
Common Stock Issuances in the Fiscal Year Ended March 31, 2012
During the fiscal year ended March 31, 2012,
we issued 577,191 shares of restricted common stock to noteholders in exchange for the conversion of principal and interest of
several notes payable and convertible notes payable in an aggregate amount of $2,058,290 at an average conversion price of $3.50
per share based upon the conversion formulae in the respective notes.
In the fiscal year ended March 31, 2012 we issued
69,031 shares of stock to consultants as compensation under stock-based compensation expense for services valued at $341,547
based upon the fair value of the shares issued. Of that aggregate amount, 59,480 shares of common stock were issued pursuant
to our S-8 registration statements covering our Amended and Restated 2003 Consultant Stock Plan or 2010 Stock Incentive Plan for
regulatory affairs, primarily managing our Hepatitis C trial in India, scientific consulting and corporate communications valued
at $279,747 based upon the fair value of the shares issued. The average issuance price on the S-8 issuances was approximately
$4.50 per share. Additionally, we issued 9,551 restricted shares of common stock to certain consultants for investor relations
services valued at $61,800 based upon the fair value of the shares issued. The average issuance price on the restricted share issuances
was approximately $6.50 per share.
During the fiscal year ended March 31, 2012,
we issued to a warrant holder 73,998 shares of restricted common stock related to net warrant cashless exercises.
During the fiscal year ended March 31, 2012,
we issued 2,093 shares of restricted common stock as monthly interest payments to the holder on a note payable valued at $5,507
based upon the interest due for those respective months, for an average issuance price of $2.50 per share based on the interest
payment formula in the note.
In January 2012, we issued 5,750 shares of restricted
common stock to the owner of a patent as a patent license payment valued at $17,250.
On March 29, 2012, we entered into a unit subscription
agreement with one accredited investor pursuant to which the investor purchased an aggregate of $300,000 of units, with each unit
consisting of (i) one share of common stock at a price per share of $4.00 and (ii) a warrant to purchase such number of shares
of common stock of the Company as shall equal (a) fifty percent of the subscription amount divided by (b) $4.00 at an exercise
price of $6.25 per warrant share. Based on the foregoing, units consisting of 75,000 shares of common stock and warrants to purchase
37,500 shares of common stock were issued.
Warrant Issuances in the Fiscal Year Ended March 31, 2012
In April 2011, we entered into a Subscription
Agreement with two accredited investors providing for the issuance and sale of convertible promissory notes and corresponding warrants
in the aggregate principal amount of $385,000. The closing under the subscription agreement resulted in the issuance and sale by
us of (i) convertible promissory notes in the aggregate principal amount of $385,000, (ii) five-year warrants to purchase an aggregate
of 80,080 shares of our common stock at an exercise price of $6.25 per share, and (iii) five-year warrants to purchase an
aggregate of 80,080 shares of our common stock at an exercise price of $8.75 per share.
In addition, we issued (i) five-year warrants
to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $6.25 per share, and (iii) five-year warrants
to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $8.75 per share to the investors. These
warrants were issued as an anti-dilution adjustment under certain common stock purchase warrants held by investors that were acquired
from us in September 2010.
In May 2011, we agreed to modify three warrants
held by an institutional investor as the result of anti-dilution protection.
In July and August 2011, we raised $357,656
in 10% convertible notes. Those notes had a fixed conversion price of $4.50 per share and carried an interest rate of 10%. The
convertible notes mature in July and August 2012. We also issued those investors five year warrants to purchase 79,479 shares of
common stock at $6.25 per share.
On September 23, 2011, we entered into a Subscription
Agreement with two accredited investors providing for the issuance and sale of convertible promissory notes and corresponding warrants
in the aggregate principal amount of $253,760. The warrants carried a five-year term to purchase an aggregate of 72,503
shares of our common stock at an exercise price of $5.00 per share.
In November 2011, we raised $525,000 in 5% Original
Issue Discount Unsecured Convertible Debentures from five accredited investors pursuant to which the investors purchased an aggregate
principal amount of $525,000 for an aggregate purchase price of $500,000. The debentures bear interest at 20% per annum and mature
on April 20, 2012. The debentures will be convertible at the option of the holders at any time into shares of our common stock,
at a conversion price equal to $3.895, subject to adjustment. In connection with the debentures, the purchasers received warrants
to purchase 67,394 shares of our common stock. The warrants are exercisable for a period of five years from the date of issuance
at an exercise price of $5.50, subject to adjustment.
In February 2012, we raised $525,000 in 5% Original
Issue Discount Unsecured Convertible Debentures from five accredited investors pursuant to which the investors purchased an aggregate
principal amount of $525,000 for an aggregate purchase price of $500,000. The debentures bear interest at 20% per annum and mature
on April 20, 2012. These subscriptions represent the completion of the $1,000,000 securities offering that was initiated and priced
in November 2011. In connection with the subscription agreement, the investors received warrants to purchase 67,394 shares of our
common stock. The warrants are exercisable for a period of five years from the date of issuance at an exercise price of $5.50 per
share, subject to adjustment.
On March 29, 2012, we entered into a unit subscription
agreement with one accredited investor pursuant to which the investor purchased an aggregate of $300,000 of units, with each unit
consisting of (i) one share of common stock at a price per share of $4.00 and (ii) a warrant to purchase such number of shares
of common stock of the Company as shall equal (a) fifty percent of the subscription amount divided by (b) $4.00 at an exercise
price of $6.25 per warrant share. Based on the foregoing, units consisting of 75,000 shares of common stock and warrants to purchase
37,500 shares of common stock were issued. The warrants are exercisable for a period of seven years from the date of issuance at
an exercise price of $6.25, subject to adjustments for stock splits, stock dividends, recapitalizations and the like. The investor
may exercise the warrant on a cashless basis if the shares of common stock underlying the warrant are not then registered pursuant
to an effective registration statement.
On March 31, 2012, we agreed to extend by two
years the expiration date of seven warrants for a total of 49,600 shares held by a note holder and to reduce the exercise price
on those warrants from $12.50 per share on six of the warrants and $9.50 on the seventh warrant to $6.25 per share in exchange
for his extension of $50,000 of the October and November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible
Note by that same two-year period.
Item 16. Exhibits and Financial Statement Schedules.
Reference is made to the Exhibit Index filed
as part of this registration statement. All exhibits have been filed previously unless otherwise noted.
Item 17. Undertakings.
(a) The
undersigned registrant hereby undertakes:
(1) To file, during any period in which offers
or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required
by section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus
any facts or events arising after the effective date of this registration statement (or the most recent post-effective amendment
hereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in this registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation
of Registration Fee” table in the effective registration statement; and
(iii) To include any material information
with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such
information in this registration statement.
(2) That, for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof;
(3) To remove from registration by means of
a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; and
(4) That, for the purpose of determining liability
of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities, in a primary
offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method
used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following
communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
(i) Any preliminary prospectus or
prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating
to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free
writing prospectus relating to the offering containing material information about the undersigned registrant or its securities
provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that
is an offer in the offering made by the undersigned registrant to the purchaser.
(5) That, for purposes of determining any liability
under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) That, for the purpose of determining any
liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(b) Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of San Diego, State of California, on April 17, 2015.
AETHLON MEDICAL, INC.,
a Nevada corporation
/s/ James A. Joyce
By: James A. Joyce
Its: Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints James A. Joyce and James B. Frakes, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to file and sign any and all amendments, including post-effective amendments and any registration statement
for the same offering that is to be effective under Rule 462(b) of the Securities Act of 1933, to this registration statement,
with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in connection therewith as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or their substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities
Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated:
Signature |
Title |
Date |
|
|
|
/s/ James A. Joyce
James A. Joyce |
Chairman, Chief Executive Officer, Principal Executive Officer |
April 17, 2015 |
|
|
|
/s/ James B. Frakes
James B. Frakes |
Chief Financial Officer, Principal Accounting Officer |
April 17, 2015 |
|
|
|
/s/ Franklyn S. Barry, Jr.
Franklyn S. Barry, Jr. |
Director |
April 17, 2015 |
|
|
|
s/ Edward G. Broenniman
Edward G. Broenniman |
Director |
April 17, 2015 |
|
|
|
/s/ Richard H. Tullis
Richard H. Tullis |
Director |
April 17, 2015 |
|
|
|
/s/ Rodney S. Kenley
Rodney S. Kenley |
Director |
April 17, 2015 |
|
|
|
/s/ Chetan S. Shah
Chetan S. Shah, MD |
Director |
April 17, 2015 |
INDEX TO EXHIBITS
No. |
Description |
|
|
1.1 |
Form of Placement Agent Agreement ** |
|
|
2.1 |
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. (formerly, Bishop Equities, Inc.) and Aethlon, Inc. dated March 10, 1999 (1) |
|
|
2.2 |
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. (formerly, Bishop Equities, Inc.) and Hemex, Inc. dated March 10, 1999 (1) |
|
|
3.1 |
Articles of Incorporation of Aethlon Medical, Inc., as amended * |
|
|
3.2 |
Bylaws of Aethlon Medical, Inc., as amended (2) |
|
|
4.1 |
Form of Common Stock Certificate (3) |
|
|
4.2 |
Form of Amended and Restated Convertible Note dated June 14, 2010 (12) |
|
|
4.3 |
Form of Amended and Restated Warrant dated June 14, 2010 (12) |
|
|
4.4 |
Form of Amended and Restated Warrant dated June 14, 2010 (QB) (12) |
|
|
4.5 |
Form of Common Stock Purchase Warrant dated March 29, 2012 and April 15, 2012
(14) |
|
|
4.6 |
Form of Common Stock Purchase Warrant dated June 19, 2012 (15) |
|
|
4.7 |
Form of Common Stock Purchase Warrant dated August 29, 2012 (16) |
|
|
4.8 |
Form of Common Stock Purchase Warrant dated October, November and December 2012 (17) |
|
|
4.9 |
Form of Common Stock Purchase Warrant dated June 14, 2013 (18) |
|
|
4.10 |
Form of Convertible Promissory Note dated July 9, 2013 (2) |
|
|
4.11 |
Form of Common Stock Purchase Warrant October 30, 2013 (19) |
|
|
4.12 |
Form of Exosome Sciences 10% Promissory Note dated October 2013 (19) |
|
|
4.13 |
Form of Common Stock Purchase Warrant November 12, 2013 (20) |
|
|
4.14 |
Form of Common Stock Purchase Warrant December 10, 2013 (22) |
|
|
4.15 |
Form of Common Stock Purchase Warrant December 30, 2013 (24) |
|
|
4.16 |
Form of Amendment to Notes and Warrants dated March 31, 2014 (26) |
|
|
4.17 |
Form of Common Stock Purchase Warrant dated June 24, 2014 (27) |
|
|
4.18 |
Form of Common Stock Purchase Warrant dated July 8, 2014 (28) |
|
|
4.19 |
Form of Common Stock Purchase Warrant dated July 24, 2014 (29) |
|
|
4.20 |
Form of Common Stock Purchase Warrant issued August and September 2014 (30) |
4.21 |
Form of Class A Common Stock Purchase Warrant dated November 6, 2014 (30) |
|
|
4.22 |
Form of Convertible Promissory Note dated November 6, 2014 (30) |
|
|
4.23 |
Form of Common Stock Purchase Warrant issued December 2, 2014 (32) |
|
|
4.24 |
Form of Purchase Agent Warrant dated December 2, 2014 (33) |
|
|
4.25 |
Form of Warrant ** |
|
|
4.26 |
Form of Placement Agent Warrant ** |
|
|
5.1 |
Opinion of Raines Feldman LLP ** |
|
|
10.1 |
2000 Stock Option Plan *++ |
|
|
10.2 |
Amended 2010 Stock Incentive Plan (4) |
|
|
10.3 |
2005 Directors Compensation Program *++ |
|
|
10.4 |
2012 Directors Compensation Program, as amended on June 6, 2014 *++ |
|
|
10.5 |
Employment Agreement between Aethlon Medical, Inc. and James A. Joyce dated April 1, 1999 (5)++ |
|
|
10.6 |
Patent License Agreement by and amongst Aethlon Medical, Inc., Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra (6) |
|
|
10.7 |
Employment Agreement by and between Aethlon Medical, Inc. and Dr. Richard H. Tullis dated January 10, 2000 (6)++ |
|
|
10.8 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A Joyce dated February 23, 2005 (7)++ |
|
|
10.9 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated February 23, 2005 (7)++ |
|
|
10.10 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry, Jr. dated February 23, 2005 (7)++ |
|
|
10.11 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Ed Broenniman dated February 23, 2005 (7)++ |
|
|
10.12 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated
September 9, 2005 (8)++ |
|
|
10.13 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated June 13, 2007 (9)++ |
|
|
10.14 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated
December 15, 2008 (10)++ |
|
|
10.15 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry dated
December 15, 2008 (10)++ |
|
|
10.16 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Edward G. Broenniman dated
December 15, 2008 (10)++ |
|
|
10.17 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard H. Tullis dated
December 15, 2008 (10)++ |
|
|
10.18 |
Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc. dated September 28, 2009 (11) |
|
|
10.19 |
Form of Amended and Restated Registration Rights Agreement dated February 2, 2009 (12) |
|
|
10.20 |
Offer of Employment by and between Aethlon Medical, Inc. and Rodney S. Kenley dated October 27, 2010 (13)++ |
|
|
10.21 |
Stock Option Agreement of Rodney S. Kenley dated October 27, 2010 (13)++ |
|
|
10.22 |
Unit Subscription Agreement dated March 29, 2012 and April 5, 2012 (14) |
|
|
10.23 |
Unit Subscription Agreement dated June 19, 2012 (15) |
|
|
10.24 |
Unit Subscription Agreement dated August 29, 2012 (16) |
|
|
10.25 |
Unit Subscription Agreement dated October, November and December 2012 (17) |
|
|
10.26 |
Unit Subscription Agreement dated June 14, 2013 (18) |
|
|
10.27 |
Form of Unit Purchase Agreement dated October 30, 2013 (19) |
|
|
10.28 |
Form of Subscription Agreement October 30, 2013 (19) |
|
|
10.29 |
Form of Unit Purchase Agreement dated November 12, 2013 (20) |
|
|
10.30 |
Form of Subscription Agreement November 12, 2013 (20) |
|
|
10.31 |
Form of Exosome Sciences Stock Purchase Agreement dated November 21, 2013 (21) |
|
|
10.32 |
Form of Unit Purchase Agreement dated December 10, 2013 (22) |
|
|
10.33 |
Form of Subscription Agreement December 10, 2013 (22) |
|
|
10.34 |
Form of Exosome Sciences Stock Purchase Agreement dated December 13, 2013 (23) |
|
|
10.35 |
Form of Unit Purchase Agreement dated December 30, 2013 (24) |
|
|
10.36 |
Form of Subscription Agreement December 30, 2013 (24) |
|
|
10.37 |
Settlement Agreement and General Release with Gemini Master Fund, Ltd. dated February 24, 2014 (25) |
|
|
10.38 |
Escrow Agreement dated February 24, 2014 (25) |
|
|
10.39 |
Form of Stipulation of Dismissal (25) |
10.40 |
Form of Restructuring Agreement dated June 24, 2014 (27) |
|
|
10.41 |
Form of Restructuring Agreement dated June 24, 2014 (27) |
|
|
10.42 |
Form of Restructuring Agreement dated July 8, 2014 (28) |
|
|
10.43 |
Second Amendment to Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc. dated October 10, 2014 (3) |
|
|
10.44 |
Form of Subscription Agreement dated November 6, 2014 (30) |
|
|
10.45 |
Office Lease between T-C Stonecrest LLC and Aethlon Medical, Inc. dated November 13, 2014 (31) |
|
|
10.46 |
Securities Purchase Agreement dated November 26, 2014 (32) |
|
|
10.47 |
Registration Rights Agreement dated November 26, 2014 (32) |
10.48 |
DARPA Contract dated September 30, 2011 (3) (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) |
|
|
10.49 |
DARPA Contract Extension dated August 8, 2012 (3) |
|
|
10.50 |
DARPA Contract Extension dated September 15, 2013 (3) |
|
|
10.51 |
DARPA Contract Extension dated September 29, 2014 (3) |
|
|
10.52 |
DARPA Contract Modification dated March 12, 2015 * (Portions of this exhibit have been omitted pursuant to a request for confidential treatment.) |
|
|
10.53 |
DaVita Master Services Agreement dated February 14, 2014 ** |
|
|
10.54 |
First Amendment dated May 16, 2014 to DaVita Master Services Agreement ** |
|
|
10.55 |
Work Order #01 dated May 16, 2014 under DaVita Master Services Agreement ** |
|
|
10.56 |
UCI Clinical Trial Agreement signed April 9, 2015 (34) |
|
|
10.57 |
Protocol for UCI Clinical Trial (34) |
|
|
10.58 |
Budget for UCI Clinical Trial (34) |
|
|
10.59 |
Form of Subscription Agreement ** |
|
|
21.1 |
List of subsidiaries (3) |
|
|
23.1 |
Consent of Independent Registered Public Accounting Firm (Squar, Milner, Peterson, Miranda & Williamson, LLP) * |
|
|
23.2 |
Consent of Raines Feldman LLP (included in Exhibit 5.1) ** |
|
|
24.1 |
Power of Attorney (included on signature page hereto) * |
|
|
101 |
Interactive Data Files * |
|
|
101.INS |
XBRL Instance Document * |
|
|
101.SCH |
XBRL Schema Document * |
|
|
101.CAL |
XBRL Calculation Linkbase Document * |
|
|
101.DEF |
XBRL Definition Linkbase Document * |
|
|
101.LAB |
XBRL Label Linkbase Document * |
|
|
101.PRE |
XBRL Presentation Linkbase Document * |
* Filed herewith
** To be filed by amendment
++ Indicates a management contract or compensatory plan or arrangement
(1) Filed with the Company's Current Report on
Form 8-K/A dated March 26, 1999 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form
10-K filed on July 15, 2013 for the year ended March 31, 2013 and incorporated by reference.
(3) Filed with the Company’s Registration Statement on Form
S-1 (File No. 333-201334) filed on December 31, 2014 and incorporated by reference.
(4) Filed with the Company’s Registration
Statement on Form S-8 (File No. 333-182902) filed on July 27, 2012 and incorporated by reference.
(5) Filed with the Company's Annual
Report on Form 10-KSB filed on July 15, 1999 for the year ended March 31, 1999 and incorporated by reference.
(6) Filed with the Company's Annual Report on
Form 10-KSB/A filed on September 10, 2004 for the year ended March 31, 2004 and incorporated by reference.
(7) Filed with the Company's Annual Report on Form 10-KSB
filed on July 14, 2005 for the year ended March 31, 2005 and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K
filed on September 12, 2005 and incorporated by reference.
(9) Filed with the Company’s Registration Statement
on Form S-8 (File No. 333-168483) filed on August 2, 2010 and incorporated by reference.
(10) Filed with the Company's Current Report on Form
8-K dated December 19, 2008 and incorporated by reference.
(11) Filed with the Company’s Quarterly Report
on Form 10-Q filed on November 16, 2009 for the period ended September 30, 2009 and incorporated by reference.
(12) Filed with the Company’s Annual Report on
Form 10-K filed on July 2, 2010 for the year ended March 31, 2010 and incorporated by reference.
(13) Filed with the Company’s Current Report on
Form 8-K dated November 1, 2010 and incorporated by reference.
(14) Filed with the Company’s Current Report on
Form 8-K dated April 6, 2012 and incorporated by reference.
(15) Filed with the Company’s Current Report on
Form 8-K dated June 27, 2012 and incorporated by reference.
(16) Filed with the Company’s Current Report on
Form 8-K dated September 6, 2012 and incorporated by reference.
(17) Filed with the Company’s Quarterly Report
on Form 10-Q filed on February 12, 2013 for the period ended December 31, 2012 and incorporated by reference.
(18) Filed with the Company’s Quarterly Report
on Form 10-Q filed on August 13, 2013 for the period ended June 30, 2013 and incorporated by reference.
(19) Filed with the Company’s Current Report on
Form 8-K dated November 6, 2013 and incorporated by reference.
(20) Filed with the Company’s Current Report on
Form 8-K dated November 20, 2013 and incorporated by reference.
(21) Filed with the Company’s Current Report on
Form 8-K dated November 21, 2013 and incorporated by reference.
(22) Filed with the Company’s Current Report on
Form 8-K dated December 16, 2013 and incorporated by reference.
(23) Filed with the Company’s Current Report on
Form 8-K/A dated December 19, 2013 and incorporated by reference.
(24) Filed with the Company’s Current Report on
Form 8-K dated January 7, 2014 and incorporated by reference.
(25) Filed with the Company’s Current Report on
Form 8-K dated February 27, 2014 and incorporated by reference.
(26) Filed with the Company’s Current Report on
Form 8-K dated April 4, 2014 and incorporated by reference.
(27) Filed with the Company’s Current Report on
Form 8-K dated June 30, 2014 and incorporated by reference.
(28) Filed with the Company’s Current Report on
Form 8-K dated July 10, 2014 and incorporated by reference.
(29) Filed with the Company’s Current Report on Form 8-K dated
July 28, 2014 and incorporated by reference.
(30) Filed with the Company’s Quarterly Report on Form 10-Q
filed on November 10, 2014 for the period ended September 30, 2014 and incorporated by reference.
(31) Filed with the Company’s Current Report on Form 8-K/A
dated November 19, 2014 and incorporated by reference.
(32) Filed with the Company’s Current Report on Form 8-K dated
November 28, 2014 and incorporated by reference.
(33) Filed with the Company’s Current Report on Form 8-K dated
December 3, 2014 and incorporated by reference.
(34) Filed with the Company’s Current Report on Form
8-K dated April 15, 2015 and incorporated by reference.
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
BISHOP EQUITIES, INC.
Article I - The Corporation
The name of the corporation is Bishop Equities,
Inc. (the "Corporation") and it is hereby incorporated pursuant to the laws of the State of Nevada.
Article II - Duration of Existence
The Corporation shall have perpetual existence.
Article IV - Purposes and Powers of Corporation
The Corporation shall have unlimited power to
engage in and do any lawful act concerning any or all lawful business for which corporations may be organized under the corporation
statutes and codes of the State of Nevada.
Article V - Common Stock and Voting
The Corporation shall have the authority to
issue an aggregate of twenty-five million (25,000,000) shares, with a par value of $.001 per share. All shares will be of the same
class, designated "common" shares, with the same rights. Shares may only be issued as fully-paid and non-assessable,
and may be issued at such times, upon such terms and conditions and for such consideration as the Board of Directors shall determine.
Each common share shall be entitled to one vote concerning all matters as to which the Corporation's shareholders shall be entitled
to vote. The Corporation's common stock shall not be subject to assessment to pay any debts of the Corporation.
Article VI - Capitalization
The Corporation will commence its official business
upon its receipt of consideration of at least $1,000 for the issuance of shares.
Article VII - No Preemptive Rights
The Corporation's shareholders shall have no
preemptive rights to acquire, purchase or subscribe for any unissued shares of the Corporation's securities.
Article VIII - Registered Agent
The name of the Corporation's initial registered
agent in the State of Nevada is Laughlin Associates, and the address of its initial registered office is c/o Laughlin Associates,
1000 East William, Carson City, Nevada 89701.
Article IX - Board of Directors
The Corporation's initial Board of Directors
shall be composed of two members, who need not be shareholders of the Corporation nor residents of the State of Nevada.
Directors shall be elected by a vote of such
majority of a quorum of the Corporation's shareholders present at any meeting held for the election of directors. Cumulative voting
is not authorized and shall not be allowed.
The names and addresses of the persons who are
to serve as the Corporation's directors until the first annual meeting of its shareholders and until their successors shall be
elected and shall qualify, are as follows:
Deborah A. Salerno, 355 South End Ave., New
York NY 10280
Maureen Abato, 19 Union Square West, New York
NY 10003.
Article X - Powers of Board of Directors
The Corporation's Board of Directors shall have
and may exercise all of the powers now or hereafter conferred upon the Board by its Articles of Incorporation and By-Laws, and
by Nevada law, and the following powers:
To make distributions to the Corporation's stockholders
of assets or cash belonging to the Corporation, in partial liquidation of its assets, and to make distributions in cash or kind,
out of the Corporation's capital surplus; to cause the Corporation to purchase, take, receive or otherwise acquire its own shares
out of its capital surplus, subject to limitations contained in the Nevada corporate codes; and to sell or acquire the stock or
assets of the Corporation without the approval of the stockholders.
Article XI - Common Directors; Corporate Transactions
No contract or other transaction between the
Corporation and any one or more of its directors or any other entity in which one or more of its directors or officers may be financially
interested, shall be either void or voidable because of such relationship or interest, or because such director(s) may be present
at a meeting of the Board of Directors which authorizes, approves or ratifies such contract or transaction, or because the vote
of such director(s) was counted for such purpose, so long as:
(a) the fact of such relationship or interest
is disclosed or known to the Board of Directors which authorizes, approves or ratifies the contract or transaction by vote or consent
sufficient for the purpose, without including the votes or consents of such interested director(s); OR
(b) the fact of such relationship or interest
is disclosed or known to the stockholders entitled to vote on the transaction, and the stockholders grant their authorization.
approval or ratification, by oral or written consent; OR
(c) the contract or transaction is deemed to
be fair and reasonable to the Corporation.
Common or interested directors may be counted
in determining the presence of a quorum at any meeting of the Board of Directors or committee thereof, which authorizes, approves
or ratifies such contract or transaction.
Article XII - Indemnification
Without limiting the powers or authority now
or hereafter conferred upon the Corporation by its Articles of Incorporation or By-Laws, or by Nevada law, the Corporation shall
possess and may exercise all powers of indemnification of its officers, directors, employees, agents and other persons, and all
powers and authority incidental thereto (including, without limitation, to advance expenses and to purchase and maintain insurance
in that connection), without regard to whether or not such powers and authority are specifically provided for by Nevada corporation
law. The Corporation's Board of Directors is hereby authorized and empowered on behalf of the Corporation and without shareholder
action, to exercise all of the Corporation's powers of indemnification.
Article XIII - Change, Amendment
The Corporation reserves the right to amend,
alter, change or repeal any provisions hereof, or to add any provision hereto, at any time and in any manner as may be now or hereafter
prescribed or permitted by Nevada corporation codes. All of the rights and powers conferred upon the Corporation's directors and
shareholders hereby are so granted subject to the reservation contained in this Article.
Article XIV - By-Laws
The Corporation's initial By-Laws shall be adopted
by its Board of Directors. The Board may amend, alter or repeal the By-Laws, or replace them by the adoption of new By-Laws.
Article XV - Incorporator
The Corporation's incorporator is:
Maureen Abato, 19 Union Square West, New York
NY 10003
IN WITNESS WHEREOF, the undersigned, a natural
person over the age of twenty-one years and the incorporator designated in Article XIV of the annexed and foregoing Articles of
Incorporation of Avalon Enterprises, Inc., has executed said Articles of Incorporation as of April 10, 1991.
/s/ Maureen Abato
Maureen Abato
(As incorporator)
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On April 10, 1991, before me, the undersigned,
a Notary Public in and for the above County and State, personally appeared Maureen Abato, known to me to be the person whose name
is subscribed above, and who duly acknowledged that she executed the foregoing Articles of Incorporation.
/s/ Margery Heitbrink
Notary Public
Indicate date commission expires:
[notary stamp here]
STATE OF NEVADA
SECRETARY OF STATE
CERTIFICATE OF ACCEPTANCE OF APPOINTMENT
BY RESIDENT AGENT
IN THE MATTER OF BISHOP EQUITIES, INC.,
(Name of Corporation)
I, LAUGHLIN ASSOCIATES, INC., with address at Suite 100,
Name of Resident Agent
Street 1000 E. WILLIAM STREET
Town of CARSON CITY, County of CARSON CITY, State of Nevada, hereby
accept the appointment as Resident Agent of the above-entitled corporation in accordance with NRS 78.090.
FURTHERMORE, that the principal office in this
state is located at Suite 100, Street 1000 E. WILLIAM STREET, Town of CARSON CITY, County of CARSON CITY, State of Nevada.
IN WITNESS WHEREOF, I have hereunto set my hand
this 11th day of April, 1991.
/s/ Irma D. Butler
Sales/Service Advisor
CERTIFICATE OF AMENDMENT
OF
ARTICLES OF INCORPORATION
FRANKLYN S. BARRY, JR., and JAMES A. JOYCE certify that
1. They are President and Secretary, respectively,
of BISHOP EQUITIES, INC., a Nevada corporation.
2. Article FIRST of the Articles of Incorporation
of this corporation is amended to read as follows:
"FIRST: The name of this corporation is:
AETHLON MEDICAL, INC."
3. The foregoing Amendment of Articles of Incorporation
has been duly approved by the Board of Directors.
4. The foregoing Amendment of Articles of Incorporation
has been duly approved by the required vote of shareholders in accordance with the Corporations Code. The total number of outstanding
shares of the corporation is 2,660,000. The number of shares voting in favor of the Amendment equaled or exceeded the vote required.
The percentage vote required was more than 50%.
We further declare under penalty of perjury
under the laws of the State of Nevada that the matters set forth in this certificate are true and correct of our own knowledge.
Date: March 28, 2000.
/s/ Franklyn S. Barry
FRANKLYN S. BARRY, JR., President
/s/ James A. Joyce
JAMES A. JOYCE, Secretary
-------------------------------
Document Number
20050234786-67
-------------------------------
Filing Date and Time
06/15/2005 8:56 AM
-------------------------------
Entity Number
C3159-1991
-------------------------------
-------------------------------------------------------------------
Certificate of Amendment
(PURSUANT TO NRS 78.385 and 78.390)
-------------------------------------------------------------------
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78.390 - After Issuance
of Stock)
1. Name of corporation:
Aethlon Medical, Inc.
2. The articles have been amended as follows (provide article numbers,
if
available):
Article V. Common Stock and Voting
The Corporation shall have the authority to issue an aggregate of
fifty million (50,000,000) shares, with a par value of $.001 per share. All shares will be of the same class, designated 'common'
shares, with the same rights. Shares may only be issued as fully-paid and non-assessable, and may be issued at such times, upon
such terms and conditions and for such consideration as the Board of Directors shall determine. Each common share shall be entitled
to one vote concerning all matters as to which the Corporation's shareholders shall be entitled to vote. The Corporation's common
stock shall not be subject to assessment to pay any debts of the Corporation."
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required
in the case of a vote by classes or series, or as may be required by the provisions of the * articles of incorporation have voted
in favor of the amendment is: 10,238,794
4. Effective date of filing (optional):
5. Officer Signature (required): /s/ James A. Joyce
* If any proposed amendment would alter or change any preference
or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote,
in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of
each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof.
IMPORTANT: Failure to include any of the above information and submit
the proper fees may cause this filing to be rejected.
-------------------------------
Document Number
20070165791-08
-------------------------------
Filing Date and Time
03/07/2007 8:04 AM
-------------------------------
Entity Number
C3159-1991
-------------------------------
-------------------------------------------------------------------
Certificate of Amendment
(PURSUANT TO NRS 78.385 and 78.390)
-------------------------------------------------------------------
Certificate of Amendment to Articles of incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78.390 - After issuance
of Stock)
1. Name of corporation:
Aethlon Medical, Inc.
2. The articles have been amended as follows (provide article numbers,
if available):
Article V. Common Stock and Voting. The Corporation shall have the
authority to issue an aggregate of one hundred million (100,000,000) shares, with a par value of $.001 per share. All shares will
be of the same class, designated 'common' shares, with the same rights. Shares may only be issued as fully-paid and non-assessable,
and may be issued at such times, upon such terms and conditions and for such consideration as the Board of Directors shall determine.
Each common share shall be entitled to one vote concerning all matters as to which the Corporation's shareholders shall be entitled
to vote. The Corporation's common stock shall not be subject to assessment to pay any debts of the Corporation."
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required
in the case of a vote by classes or series, or as may be required by the provisions of the * articles of incorporation have voted
in favor of the amendment is: 8,628,045
4. Effective date of filing (optional):
5. Officer Signature (required): /s/ [signature]
* If any proposed amendment would alter or change any preference
or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote,
in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of
each class or series affected by the amendment regardless of limitations or restrictions on the voting power thereof.
IMPORTANT: Failure to include any of the above information and submit
the proper fees may cause this filing to be rejected.
-------------------------------
Document Number
20090692683-05
-------------------------------
Filing Date and Time
09/21/2009 4:45 PM
-------------------------------
Entity Number
C3159-1991
-------------------------------
-------------------------------------------------------------------
Certificate of Amendment
(PURSUANT TO NRS 78.385 and 78.390)
-------------------------------------------------------------------
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78.385 and 78.390 - After Issuance
of Stock)
1. Name of corporation:
Aethlon Medical, Inc.
2. The articles have been amended as follows: (provide article numbers,
if
available)
"Article V. Common Stock and Voting.
The Corporation shall have the authority to issue an aggregate of
two hundred fifty million (250,000,000) shares, with a par value of $.001 per share. All shares will be of the same class, designated
'common' shares, with the same rights. Shares may only be issued as fully paid and non-assessable, and may be issued at such times,
upon such terms and conditions and for such consideration as the Board of Directors shall determine. Each common share shall be
entitled to one vote concerning all matters as to which the Corporation's stockholders shall be entitled to vote. The Corporation's
common stock shall not be subject to assessment to pay any debts of the Corporation."
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise at least a majority of the voting power, or such greater proportion of the voting power as may be required
in the case of a vote by classes or series, or as may be required by the provisions of the articles of incorporation* have voted
in favor of the amendment is: 41,840,130
4. Effective date of filing: (optional)
5. Signature: (required) /s/ James A. Joyce
* If any proposed amendment would alter or change any preference
or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote,
in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of
each class or series affected by the amendment regardless to limitations or restrictions on the voting power thereof.
IMPORTANT: Failure to include any of the above information and submit
the proper fees may cause this filing to be rejected.
ROSS MILLER
Secretary of State
204 North Carson Street, Suite 1
Carson City, Nevada 89701-4520
(775) 984-5708
website: www.nvsos.gov
-------------------------------
Document Number
20120397920-95
-------------------------------
Filing Date and Time
06/04/2012 3:30 PM
-------------------------------
Entity Number
C3159-1991
-------------------------------
Certificate of Amendment
Certificate of Amendment to Articles of Incorporation
For Nevada Profit Corporations
(Pursuant to NRS 78,385 and 78.390 - After Issuance
of Stock)
1. Name of corporation:
Aethlon Medical, Inc.
2. The articles have been amended as follows: (provide article numbers,
if available)
"Article V. Common Stock and Voting.
The Corporation shall have the authority to
issue an aggregate of five hundred million (500,000,000) shares, with a par value of $.001 per share. All shares will be of the
same class, designated "common" shares, with the same rights. Shares may only be issued as fully paid and non-assessable,
and may be issued at such times, upon such terms and conditions and for such consideration as the Board of Directors shall determine.
Each common share shall be entitled to one vote concerning all matters as to which the Corporation's stockholders shall be entitled
to vote. The Corporation's common stock shall not be subject to assessment to pay any debts of the Corporation."
3. The vote by which the stockholders holding shares in the corporation
entitling them to exercise a least a majority of the voting power, or such greater proportion of the voting power as may be required
in the case of a vote by classes of series, or as may be required by the provisions of the articles of incorporation* have voted
in favor of the amendment is:
89,118,817 shares voted in favor
4. Effective date and time of filing: (optional)
5. Signature: (required)
/s/ James A. Joyce
Signature of Officer
*if any proposed amendment would alter or change any preference
or any relative or other right given to any class or series of outstanding shares, then the amendment must be approved by the vote,
in addition to the affirmative vote otherwise required, of the holders of shares representing a majority of the voting power of
each class or series affected by the amendment regardless to limitations or restrictions on the voting power thereof.
IMPORTANT: Failure to include any of the above information and submit
with the proper fees may cause this filing to be rejected.
Certificate of Change filed Pursuant to NRS 78.209
For Nevada Profit Corporations
1. Name of corporation:
Aethlon Medical, Inc.
2. The board of directors have adopted a resolution pursuant to NRS 78.209 and have obtained any
required approval of the stockholders.
3. The current number of authorized shares and the par value, if any, of each class or series, if any,
of shares before the change:
500,000,000 shares of common stock, par value $0.001.
4. The number of authorized shares and the par value, if any, of each class or series, if any, of shares
after the change:
10,000,000 shares of common stock, par value $0.001.
5. The number of shares of each affected class or series, if any, to be issued after the change in
exchange for each issued share of the same class or series:
6,570,574 shares of common stock, par value $0.001.
6. The provisions, if any, for the issuance of fractional shares, or for the payment of money or
the issuance of scrip to stockholders otherwise entitled to a fraction of a share and the percentage of outstanding shares
affected thereby:
No fractional shares will be issued. If the reverse stock split would result in the issuance of any fractional
shares, the corporation will issue one whole share in lieu of the fractional share on a holder-by-holder basis.
7. Effective date and time
of filing: Date:
04/08/2015 Time: _____________
8. Signature
/s/ James A. Joyce Chief
Executive Officer
Signature of Officer Title
Certificate of Correction
1. The name of the entity for which correction is being made:
Aethlon Medical, Inc.
2. Description of the original document for which correction is being made:
Certificate of Change Pursuant to NRS 78.209 filed for a reverse stock split of corporation’s
outstanding and issued common stock.
3. Filing date of the original document for which correction is being made: 04/01/2015
4. Description of the inaccuracy or defect:
Article 5 of the Certificate of Change filed April 1, 2015 incorrectly stated the shares to be issued
after the reverse stock split as an aggregate number of shares rather than on a per share basis.
Additionally, the effective date for the Certificate of Change filed April 1, 2015 was April 8, 2015 and
the corporation wants the effective date to be April 10, 2015.
5. Correction of the inaccuracy or defect:
Section 5 to the Certificate of Change filed on April 1, 2015 is hereby changed to “After
the change 1/50th share of the company’s common stock, par value $0.001, will be issued for each issued share of common stock.”
Section 7 (Effective Date) to the Certificate of Change filed April 1, 2015 is hereby changed to: April
10, 2015.
6. Signature:
/s/ James B. Frakes Chief
Financial
Officer 4-7-15
Authorized Signature Title Date
Exhibit 10.1
AETHLON MEDICAL, INC.
2000 STOCK OPTION PLAN
I. PURPOSE
The Plan
is intended to provide incentive to key employees and directors of, and key consultants, vendors, customers, and others expected
to provide significant services to, the Corporation, to encourage proprietary interest in the Corporation, to encourage such key
employees to remain in the employ of the Corporation and its Subsidiaries, to attract new employees with outstanding qualifications,
and to afford additional incentive to consultants, vendors, customers, and others to increase their efforts in providing significant
services to the Corporation.
IL DEFINITIONS.
2.1 "Award"
shall mean an Option, which may be designated an Incentive Stock Option or a Nonstatutory Stock Option, in each case as granted
pursuant to the Plan.
2.2 "Award Agreement"
shall mean a Stock Option Agreement.
2.3 "Beneficiary"
shall mean the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits
specified under the Plan in the event of a Participant's death.
2.4 "Board"
shall mean the Board of Directors of the Corporation.
2.5 "Code"
shall mean the Internal Revenue Code of 1986, as amended.
2.6 "Committee"
shall mean the committee, if any, appointed by the Board in accordance with Section 4 of the Plan.
2.7 "Common Stock"
shall mean the Common Stock, par value $.001, of the Corporation.
2.8 "Corporation"
shall mean AETHLON MEDICAL, INC., a Nevada corporation, and its Subsidiaries.
2.9 "Disability"
shall mean the condition of a Participant who is unable to perform his or her substantial and material job duties due to injury
or sickness or such other condition as the Board or Committee may determine in its sole discretion/engage in any substantial gainful
activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or which
has lasted or can be expected to last for a continuous period of not less than twelve (12) months.
2.10 "Eligible
Employee" shall mean an individual who is employed (within the meaning of Code Section 3401 and the regulations thereunder)
by the Corporation.
2.11 "Event"
shall mean any of the following:
(a) Any person or entity
(or group of affiliated persons or entities) acquires in one or more transactions, whether before or after the effective date
of the Plan, ownership of more than 50 percent of the outstanding shares of stock entitled to vote in the election of directors
of the Corporation; or
(b) The dissolution or
liquidation of the Corporation or a reorganization, merger or consolidation of the Corporation with one or more entities, as a
result of which the Corporation is not the surviving entity, or a sale of all or substantially all of the assets of the Corporation
as an entirety to another entity.
For purposes of this definition,
ownership does not include ownership (i) by a person owning such shares merely of record (such as a member of a securities exchange,
a nominee or a securities depository system), (ii) by a person as a bona fide pledgee of shares prior to a default and determination
to exercise powers as an owner of the shares, (iii) by a person who is not required to file statements on Schedule 13D by virtue
of Rule 13d-1(b) of the Securities and Exchange Commission under the Exchange Act, or (iv) by a person who owns or holds shares
as an underwriter acquired in connection with an underwritten offering pending and for purposes of resale.
2.12 "Exchange
Act" shall mean the Securities Exchange Act of 1934, as amended from time to time.
2.13 "Exercise
Price" shall mean the price per Share of Common Stock, determined by the Board or the Committee, at which an Award may be
exercised.
2.14 "Fair Market Value" shall mean the value of one (1) Share of Common Stock, determined as follows:
(i) If
the Shares are traded on an exchange, the price at which Shares traded at the close of business on the date of valuation;
or
(ii) If
the Shares are traded over-the-counter on the NASDAQ System, the closing price if one is available, or the mean between the
bid and asked prices on said System at the close of business on the date of valuation; or
(iii) If
neither (i) nor (ii) above applies, the fair market value as determined by the Board or the Committee in good faith. Such
determination shall be conclusive and binding on all persons.
2.15 "Incentive Stock Option" shall
mean an option described in Section 422A(b) of the Code.
2.16 "Nonstatutory
Stock Option" shall mean an option not described in Section 422(b), 422A(b), 423(b) or 424(b) of the Code.
2.17 "Option"
shall mean either an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan.
2.18 "Participant"
shall mean an Eligible Employee or other person eligible under Section 5.1 herein who has received an Award under the
Plan.
2.19 "Plan" shall mean the AETHLON MEDICAL, INC. 2000 Omnibus Stock Option and Incentive Plan, as it may be amended from
time to time.
2.20 "Purchase
Price" shall mean the Exercise Price times the number of Shares with respect to which an Award is exercised.
2.21 "Qualified
Retirement" shall mean the voluntary termination of employment by an Eligible Employee upon the attainment of age
fifty-five (55) and the completion of not less than five (5) years of service with the Corporation or a Subsidiary, or such
shorter period as the Committee may prescribe.
2.22 "Share"
shall mean one (1) share of Common Stock, adjusted in accordance with Section 9.4 of the Plan (if applicable).
2.23 "Securities Act" shall mean the
Securities Act of 1933, as amended from time to time.
2.24 "Subsidiary"
shall mean any corporation at least fifty percent (50%) of the total combined voting power of which is owned by the
Corporation or by another Subsidiary.
2.25 "Tax Date" shall have the meaning
set forth in Section 9.3 hereof.
III. EFFECTIVE DATE
The Plan was
adopted by the Board on August 21, 2000, subject to the approval by the Corporation's shareholders. The Plan is being submitted
to the shareholders of the Corporation for their approval at the Annual Meeting thereof scheduled for September 25, 2000. The
effective date of the Plan shall be August 21, 2000 (the "Effective Date"), provided that the Plan is approved by the
shareholders of the Corporation at the Annual Meeting.
IV. ADMINISTRATION
The Plan shall
be administered by the Board in compliance with Rule 16b-3 of the Securities Exchange Act of 1934 ("Rule 16b-3"), or
by a Committee appointed by the Board, which Committee shall be constituted to permit the Plan to comply with Rule 16b-3, and
which shall consist of not less than three (3) members. The Board shall appoint one of the members of the Committee, if there
be one, as Chairman of the Committee. If a Committee has been appointed, the Committee shall hold meetings at such times and places
as it may determine. Acts of a majority of the Committee at which a quorum is present, or acts reduced to or approved in writing
by a majority of the members of the Committee, shall be the valid acts of the Committee. The Board, or the Committee if there
be one, shall from time to time at its discretion select the Eligible Employees and consultants who are to be granted Awards,
determine the number of Shares to be applicable to such Award, and designate any Options as Incentive Stock Options or Nonstatutory
Stock Options, except that no Incentive Stock Option may be granted to a non-employee director or a non-employee consultant. A
member of the Board or a Committee member shall in no event participate in any determination relating to Awards held by or to
be granted to such Board or Committee member; however, a member of the Board or a Committee member shall be entitled to receive
Awards approved by the shareholders in accordance with the provisions of Rule 16b-3. The interpretation and construction by the
Board, or by the Committee if there be one, of any provision of the Plan or of any Award granted thereunder shall be final. No
member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the
Plan or any Award granted thereunder. In addition to any right of indemnification provided by the Articles of Incorporation or
Bylaws of the Corporation, such person shall be indemnified and held harmless by the Corporation from any loss, cost, liability
or expense that may be imposed upon or reasonably incurred by him in connection with any claim, suit, action or proceeding to
which he may be a party by reason of any action or omission under the Plan.
V. PARTICIPATION
5.1 Eligibility.
Subject to the terms and conditions of Section 52 below, the Participants shall be such persons as the shareholders may
approve or as the Committee may select from among the following classes of persons: (i) Eligible Employees of the Corporation
or of a Subsidiary (who may be officers, whether or not they are directors); and (ii) Directors, consultants, vendors,
customers, and others expected to provide significant services to the Corporation or a Subsidiary.
No Incentive Stock Option
may be granted to a non-employee director or non-employee consultant, vendor, customer, or other provider of significant services
to the Corporation or a Subsidiary, and except that no Nonstatutory Stock Option may be granted to a non-employee director or
non-employee consultant, vendor, customer, or other provider of significant services to the Corporation or a Subsidiary other
than upon a vote of a majority of disinterested directors finding that the value of the services rendered or to be rendered
to the Corporation or a Subsidiary by such non-employee director or non-employee consultant, vendor, customer, or other provider
of services is at least equal to the value of the Awards granted.
5.2 Ten-Percent
Shareholders. An Eligible Employee who owns more than ten percent (10%) of the total combined voting power of all classes of
outstanding stock of the Corporation, its parent or any of its Subsidiaries shall not be eligible to receive an Award for an
Incentive Stock Option unless (i) the Exercise Price of the Shares subject to such Award is at least one hundred ten percent
(110%) of the Fair Market Value of such Shares on the date of grant; and (ii) such Award by its terms is not exercisable
after the expiration of five (5) years from the date of grant.
5.3 Stock
Ownership. For purposes of Section 5.2 above, in determining stock ownership an Eligible Employee shall be considered as
owning the stock owned, directly or indirectly, by of for his brothers, sisters, spouses, ancestors and lineal descendants.
Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned
proportionately by or for its shareholders, partners or beneficiaries. Stock with respect to which such Eligible Employee
holds an Award shall not be counted.
5.4 Outstanding
Stock. For purposes of Section 5.2 above, "outstanding stock" shall include all stock actually issued and
outstanding immediately after the grant of the Award to the Participant. "Outstanding stock" shall not include
shares authorized for issue under outstanding Options held by the Participant or by any other person.
VI. STOCK SUBJECT TO THE PLAN
The stock subject to Awards granted
under the Plan shall be Shares of the Corporation's authorized but unissued or reacquired Common Stock. The aggregate number of
Shares which may be issued as Awards or upon exercise of Awards under the Plan shall not exceed Five Hundred Thousand (500,000)
shares. The number of Shares subject to unexercised Options (plus the number of Shares previously issued under the Plan) shall
not at any time exceed the number of Shares available for issuance under the Plan. In the event that any unexercised Option, or
any portion thereof, for any reason expires or is terminated, the unexercised or unvested Shares allocable to such Option may
again be made subject to any Award. Any Shares withheld by the Corporation pursuant to Section 9.3 shall not be deemed to be issued.
The number of withheld Shares shall be deducted from the applicable Award and shall not entitle the Participant to receive additional
Shares. The limitations established by this Article VI shall be subject to adjustment in the manner provided in Section 8.5 hereof
upon the occurrence of an event specified therein.
VII. OPTIONS
7.1 Stock Option
Agreements. Options shall be evidenced by written stock option agreements in such form as the Committee shall from time to
time determine. Such agreements shall comply with and be subject to the terms and conditions set forth below.
7.2 Number of Shares.
Each Option shall state the number of Shares to which it pertains and shall provide for the adjustment thereof in accordance with
the provisions of Section 8.5 hereof.
7.3 Exercise
Price. Each Option shall state the Exercise Price thereof. The Exercise Price in the
case of any Incentive Stock Option shall not be less than the
Fair Market Value on the date of grant and, in the case of any Option granted to an Optionee described in Section 5.2 hereof,
shall not be less than one hundred ten percent (110%) of the Fair Market Value on the date of grant. The Exercise Price in the
case of any Nonstatutory Stock Option shall not be less than seventy-five percent (75%) of the Fair Market Value on the date of
grant.
7.4 Medium and
Time of Payment. The Purchase Price shall be payable in full in United States dollars upon the exercise of the Option;
provided, however, that if the applicable Stock Option Agreement so provides the Purchase Price may be paid (i) by the
surrender of Shares in good form for transfer, owned by the Participant and having a Fair Market Value on the date of
exercise equal to the Purchase Price, or in any combination of cash and Shares, as long as the sum of the cash so paid and
the Fair Market Value of the Shares so surrendered equal the Purchase Price, (ii) by cancellation of indebtedness owed by the
Corporation to the Participant, or (iii) any combination of the foregoing.
7.5 Term and
Nontransferability of Options. Each Option shall state the time or times which all or part thereof becomes exercisable. No
Option shall be exercisable after the expiration of ten (10) years from the date it was granted, and no Option granted to a
Participant described in Section 5.2 hereof shall be exercisable after the expiration of five (5) years from the date it was
granted. During the lifetime of the Participant, the Option shall be exercisable only by the Participant and shall not be
assignable or transferable. In the event of the Participant's death, the Option shall not be transferable by the Participant
other than by will or the laws of descent and distribution.
7.6 Modification,
Extension and Renewal of Option. Within the limitations of the Plan, the Committee may modify, extend or renew outstanding
Options or accept the cancellation of outstanding Options (to the extent not previously exercised) for the granting of new
Options in substitution therefor. The foregoing notwithstanding, no modification of an Option shall, without the consent of
the Participant, alter or impair any rights or obligations under any Option previously granted.
7.7 Limitation on
Grant of Incentive Stock Options. In the case of Incentive Stock Options granted hereunder, the aggregate Fair Market Value
(determined as of the date of the grant thereof) of the Shares with respect to which Incentive Stock Options become
exercisable by any Participant for the first time during any calendar year (under this Plan and all other plans maintained by
the Corporation, its parent or its Subsidiaries) shall not exceed One Hundred Thousand Dollars ($100,000). The Board or
Committee may, however, with the Participant's consent authorize an amendment to the Incentive Stock Option which renders it
a Nonstatutory Stock Option.
7.8 Other
Provisions. The Stock Option Agreements authorized under the Plan may contain such other provisions not inconsistent with the
terms of the Plan (including, without limitation, restrictions upon the exercise of the Option) as the Committee shall deem
advisable.
7.9 Specific
Awards Approved by the Shareholders. Subject to the approval by the vote of the shareholders at the Annual Meeting of the
Shareholders on September 25, 2000, the individuals whose names are set forth in Exhibit "A," a copy of which is
attached hereto and incorporated herein by this reference, shall be deemed granted Nonstatutory Stock Options as of the
Effective Date, in the amounts and for the amount indicated opposite their respective names, and in accordance with the
vesting schedule set forth therein, all in accordance with the provisions set forth in this Article VII of the Plan. The
provisions of this Section 7.9 shall not be amended more than once every six (6) months, other than to comport with changes
in the Internal Revenue Code, the Employee Retirement Income Security Act, or the rules thereunder, and are intended to be
construed in accordance with the provisions pertaining to "formula awards" under Paragraph (c)(2)(ii) of Rule
16b-3.
VIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS AND BENEFICIARIES
8.1 Eligible
Employee Status. Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under the
Plan to an Eligible Employee or to Eligible Employees generally.
8.2 No
Employment Contract. Nothing contained in the Plan (or in the Award Agreements or in any other documents related to the Plan
or to Awards) shall confer upon any Eligible Employee or any Participant any right to continue in the employee of the
Corporation or constitute any contract or agreement of employment, or interfere in any way with the right of the Corporation
to reduce such person's compensation or to terminate the employment of such Eligible Employee or Participant, with or without
cause, but nothing contained in the plan or any document related thereto shall affect any other contractual right of any
Eligible Employee or Participant. Nothing contained in the plan (or in the Award Agreements or in any other documents related
to the Plan or the Awards) shall confer upon any director of the Corporation any right to continue as a director of the
Corporation.
8.3 No
Transferability. Awards may be exercised only by, and amounts payable or shares issuable pursuant to an Award shall be paid
only to or registered only in the name of, the Participant or, in the event of the Participant's death, to the Participant's
Beneficiary or, in the event of the Participant's Disability, to the Participant's Personal Representative or, if there is
none, to the Participant. Other than by will or the laws of descent and distribution, no right or benefit under the Plan or
any Award, including, without limitation, any Option that has not vested, shall be subject in any manner to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge and any such attempted action shall be void and no such
right or benefit shall be, in any manner, liable for, or subject to, debts, contract, liabilities, engagements or torts of
any Eligible Employee, Participant or Beneficiary, in any case except as may otherwise be expressly required by applicable
law. The Board or the Committee shall disregard any attempt at transfer, assignment or other alienation prohibited by the
preceding sentence and shall deliver such shares of Common Stock in accordance with the provisions of the Plan.
Notwithstanding the foregoing, the Board or the Committee may authorize exercise by or transfers or payments to a third party
in a specific case or more generally; provided, however, with respect to any option such discretion may only be exercised to
the extent that applicable rules under Section 16 of the Exchange Act would so permit without disqualifying the Plan from
certain benefits thereunder.
8.4 Plan Not
Funded. No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific
asset (including shares of Common Stock) of the Corporation by reason of any Award granted hereunder. There shall be no
funding of any benefits which may become payable hereunder. Neither the provisions of the Plan (or of any documents related
hereto), nor the creation or adoption of the plan, nor any action taken pursuant to the provisions of the Plan shall create,
or be construed to create, a trust of any kind or a fiduciary relationship between the Corporation and any Participant,
Beneficiary. To the extent that a Participant, a Beneficiary or other person acquires a right to receive an Award hereunder,
such right shall be no greater than the right of any unsecured general creditor of the Corporation.
8.5 Adjustment
Upon Recapitalizations and Corporate Changes. If the outstanding shares of Common Stock are changed into or exchanged for
cash or a different number or kind of shares or securities of the Corporation, or if the outstanding shares of the Common
Stock are increased, decreased, exchanged for, or otherwise changed, or if additional shares or new or different shares or
securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger in
which the Corporation is the surviving entity or through a combination, consolidation, recapitalization, reclassification,
stock split, stock dividend, reverse stock split, stock consolidation or other capital change or adjustment, an appropriate
adjustment shall be made in the number and kind of shares of other consideration that is subject to or may be delivered under
the Plan and pursuant to outstanding Awards. In addition, the Board or the Committee may grant such additional rights in the
foregoing circumstances as the Board or the Committee deems to be in the best interest of any Participant and the Corporation
in order to preserve for the Participant the benefits of an Award.
8.6 Termination
of Employment, Except by Death, Disability or Qualified Retirement. If a Participant ceases to be an Eligible Employee for
any reason other than his or her death, Disability or Qualified Retirement, such Participant shall have the right, subject to
the restrictions of Section 8.3 above, to exercise any Award at any time within three (3) months after termination of
employment, but only to the extent that, at the date of termination of employment, the Participant's right to exercise such
Award had accrued pursuant to the terms of the applicable agreement and had not previously been exercised; provided, however,
that if the Participant was terminated for cause (as defined in the applicable agreement) any Award not exercised in full
prior to such termination shall be canceled. For this purpose, the employment relationship shall be treated as continuing
intact while the Participant is on military leave, sick leave or other bona fide leave of absence (to be determined in the
sole discretion of the Board or the Committee). The foregoing notwithstanding, in the case of an Incentive Stock Option,
employment shall not be deemed to continue beyond the ninetieth (90th) day after the Participant's reemployment rights are
guaranteed by statute or by contract.
8.7 Death of
Participant. If a Participant dies while an Eligible Employee, or after ceasing to be an Eligible Employee but during the
period while he or she could have exercised the Award under this Section 8.7, and has not fully exercised the Award, then the
Award may be exercised in full at any time within twelve (12) months after the Participant's death (but not later than the
date of termination fixed in the applicable agreement), by the executors or administrators of his or her estate or by any
person or persons who have acquired the Award directly from the Participant by bequest or inheritance, but only to the extent
that, at the date of death, the Participant's right to exercise such Award had accrued and had not been forfeited pursuant to
the terms of the applicable agreement and had not previously been exercised.
8.8 Disability
of Participant. If a Participant ceases to be an Eligible Employee by reason of Disability, such Participant shall have the
right to exercise the Award at any time within twelve (12) months after termination of employment (but not later than the
termination date fixed in the applicable agreement), but only to the extent that, at the date of termination of employment,
the Participant's right to exercise such Award had accrued pursuant to the terms of the applicable agreement and had not
previously been exercised.
8.9 Qualified
Retirement of Participant. If a Participant ceases to be an Eligible Employee by reason of Qualified Retirement, Awards will
continue to become exercisable and remain exercisable for a period of five (5) years after termination of employment (but not
later than the termination date fixed in the applicable agreement), but only to the extent that, at the date of termination
of employment, the Participant's right to such Award had not previously been exercised.
8.10 Rights as a
Stockholder. An Participant, or a transferee of an Participant, shall have no rights as a stockholder with respect to any
Shares covered by his or her Award until the date of the issuance of a stock certificate for such Shares. No adjustment shall
be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other
rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 8.5
hereof.
8.11 Acceleration
of Awards. Immediately prior to the occurrence of an Event, (i) each Option under the Plan shall become exercisable in full,
unless, prior to the Event, the Board or the Committee otherwise determines that there shall be no such acceleration or
vesting of an Award or otherwise determines those Awards which shall be accelerated or vested and to the extent to which they
shall be accelerated or vested, or that an Award shall terminate, or unless in connection with such Event the Board provides
(A) for the assumption of such Awards theretofore granted; or (B) for the substitution for such Awards of new awards covering
securities or obligations (or any combination thereof) of a successor corporation, or a parent or subsidiary thereof, with
appropriate adjustments as to number and kind of shares and prices; or (C) for the payment of the fair market value of the
then outstanding Awards. In addition, the Board or the Committee may grant such additional rights in the foregoing
circumstances as the Board or the Committee deems to be in the best interest of the Participant and the Corporation in order
to preserve for the Participant the benefits of an Award. For purposes of this Section 8.11 only, Board shall mean the Board
of Directors of the Corporation as constituted immediately prior to the Event. In addition, the Board may in its sole
discretion accelerate the exercisability or vesting of any or all Awards outstanding under the Plan in circumstances under
which the Board or the Committee determines such acceleration appropriate.
IX. MISCELLANEOUS
9.1 Termination,
Suspension and Amendment. The Board or the Committee may, at any time, suspend, amend, modify of terminate the Plan (or any
part thereof) and may, with the consent of a Participant, authorize such modifications of the terms and conditions of such
Participant's Award as it shall deem advisable; provided that, except as permitted under the provisions of Section 8.5
hereof, no amendment or modification of the plan may be adopted without approval by a majority of the shares of the Common
Stock represented (in person or by proxy) at a meeting of stockholders at which a quorum is present and entitled to vote
thereat, if such amendment or modification would:
(i) materially
increase the benefits accruing to Participants under the plan within the meaning of Rule 16b-3 under the Exchange Act or any
successor provision;
(ii) materially
increase the aggregate number of shares which may be delivered pursuant to Awards granted under the Plan; or
(iii) materially
modify the requirements of eligibility for participation in the Plan.
Neither adoption of the plan
nor the provisions hereof shall limit the authority of the Board to adopt other plans or to authorize other payments of compensation
and benefits under applicable law. No Awards under the plan may be granted or amended during any suspension of the Plan or after
its termination. The amendment, suspension or termination of the Plan shall not, without the consent of the Participant, alter
or impair any rights or obligations pertaining to any Awards granted under the plan prior to such amendment, suspension or termination.
9.2 No Fractional
Shares. No Award or installment thereof shall be exercisable except in respect of whole shares, and fractional share
interests shall be disregarded.
9.3 Tax
Withholding and Tax Bonuses. As required by law, federal, state or local taxes that are subject to the withholding of tax at
the source shall be withheld by the Corporation as necessary to satisfy such requirements. The Corporation is entitled to
require deduction from other compensation payable to each Participant or, in the alternative: (i) the Corporation may require
the Participant to advance such sums; or (ii) if a Participant elects, the Corporation may withhold (or require the return
of) Shares having the Fair Market Value equal to the sums required to be withheld. If the Participant elects to advance such
sums directly, written notice of that election shall be delivered prior to such exercise and, whether pursuant to such
election or pursuant to a requirement imposed by the Corporation, payment in cash or by check of such sums for taxes shall be
delivered within ten (10) days after the exercise date. If the Participant elects to have the Corporation withhold Shares (or
be entitled to the return of Shares) having a Fair Market Value equal to the sums required to be withheld, the value of the
Shares to be withheld (or returned) will be equal to the Fair Market Value on the date the amount of tax to be withheld (or
subject to return) is to be determined (the "Tax Date").
9.4 Restrictions
on Elections Made by Participants. Elections by Participants to have Shares withheld (or subject to return) for this purpose
will be subject to the following restrictions: (i) the election must be made prior to the Tax Date; (ii) the election must be
irrevocable; (iii) the election will be subject to the Board's disapproval; and (iv) if the Participant is an
"officer" within the meaning of Section 16 of the Exchange Act, the election shall be subject to such additional
restrictions as the Board or the Committee may impose in an effort to secure the benefits of any regulations thereunder.
9.5 Limitations on
the Corporation's Obligations. The Corporation shall not be obligated to issue shares to the Participant upon any Award
exercise until such payment has been received or Shares have been withheld, unless withholding (or offset against a cash
payment) as of or prior to the exercise date is sufficient to cover all such sums due or which may be due with respect to
such exercise.
9.6 Compliance
with Laws. The Plan, the granting of Awards under the Plan, the Stock Option Agreements and the delivery of Options, Shares
and Awards pursuant thereto are subject to such additional requirements as the Board or the Committee may impose to assure or
facilitate compliance with all applicable federal and state laws, rules and regulations (including, without limitation,
securities laws and margin requirements) and to such approvals by any regulatory or governmental agency which may be
necessary or advisable in connection therewith. In connection with the administration of the Plan or the grant of any Award,
the Board or the Committee may impose such further limitations or conditions as in its opinion may be required or advisable
to satisfy, or secure the benefits of, applicable regulatory requirements (including those rules promulgated under Section 16
of the Exchange Act or those rules that facilitate exemption from or compliance with the Securities Act or the Exchange Act),
the requirements of any stock exchange upon which such shares or shares of the same class are then listed, and any blue sky
or other securities laws applicable to such shares.
9.7 Governing
Laws. The Plan and all Awards granted under the Plan and the documents evidencing Awards shall be governed by, and construed
in accordance with, the laws of the State of California, except as to those matters governed by the laws of the State of
Nevada as the state of incorporation of the Corporation.
9.8 Securities Law Requirements.
(a) Legality of
Issuance. The issuance of any Shares upon the exercise of any Option and the grant of any Option shall be contingent upon the
following:
(i) the
Corporation and the Participant shall have taken all actions required to register the Shares under the Securities Act of
1933, as amended (the "Securities Act"), and to qualify the Option and the Shares under any and all applicable
state securities or "blue sky" laws or regulations, or to perfect an exemption from the respective registration and
qualification requirements thereof;
(ii) any
applicable listing requirement of any stock exchange on which the Common Stock is listed shall have been
satisfied; and any other applicable provision of state of Federal law shall have been satisfied.
(b) Restrictions on
Transfer. Regardless of whether the offering and sale of Shares under the plan has been registered under the Securities Act
or has been registered or qualified under the securities laws of any state, the Corporation may impose restrictions on the
sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates) if, in
the judgment of the Corporation and its counsel, such restrictions are necessary or desirable in order to achieve compliance
with the provisions of the Securities Act, the securities laws of any state or any other law. In the event that the sale of
Shares under the Plan is not registered under the Securities Act but an exemption is available which required an investment
representation or other representation, each Participant shall be required to represent that such Shares are being acquired
for investment, and not with a view to the sale or distribution thereof, and to make such other representations as are deemed
necessary or appropriate by the Corporation and its counsel. Any determination by the Corporation and its counsel in
connection with any of the matters set forth in this Section 9.6(b) shall be conclusive and binding on all persons. Stock
certificates evidencing Shares acquired under the Plan pursuant to an unregistered transaction shall bear the following
restrictive legend and such other restrictive legends as are required or deemed advisable under the provisions of any
applicable law:
"THE SALE OF THE
SECURITIES REPRESENTED HEREBY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"). ANY TRANSFER
OF SUCH SECURITIES WILL BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE SECURITIES ACT IS IN EFFECT AS TO SUCH TRANSFER OR
IN THE OPINION OF COUNSEL FOR THE ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER FOR SUCH TRANSFER TO COMPLY WITH THE SECURITIES
ACT."
(c) Registration
or Qualification of Securities. The Corporation may, but shall not be obligated to register or qualify the issuance of Awards
and/or the sale of Shares under the Securities Act or any other applicable law. The Corporation shall not be obligated to
take any affirmative action in order to cause the issuance of Awards or the sale of Shares under the plan to comply with any
law.
(d) Exchange
of Certificates. If, in the opinion of the Corporation and its counsel, any legend placed on a stock certificate representing
shares issued under the Plan is no longer required, the holder of such certificate shall be entitled to exchange such
certificate for a certificate representing the same number of Shares but lacking such legend.
9.9 Execution. To
record the adoption of the Plan in the form set forth above by the Board effective as of August 21, 2000, the Corporation has
caused this Plan to be executed in the name and on behalf of the Corporation where provided below by an officer of the
Corporation thereunto duly authorized.
AETHLON MEDICAL, INC
By: /s/ Franklyn
S. Barry, Tr.
Franklyn
S. Barry, Jr., President
ATTEST:
/s/ Tames A. Joyce
James A. Joyce, Secretary
Exhibit 10.3
Aethlon Medical, Inc.
2005 Directors Compensation
Program
as adopted in February 2005
In February 2005, the Board of Directors (the
“Board”) of Aethlon Medical, Inc. (the “Company”) adopted the Company’s 2005 Directors
Compensation Program, in which only non-employee directors of the Company may participate, as follows:
| A. | Newly Elected Directors: A newly elected director will receive a one-time grant of options to acquire shares of common
stock equal to 1.5% of the common stock outstanding at the time of election, with an exercise price based on the average of the
closing bid prices of the common stock for the last ten trading days prior to the date of grant. These options will have a term
of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. |
| B. | Existing Eligible Directors: At the beginning of each fiscal year, each existing eligible director will receive a grant
of $25,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based on the
average of the closing bid prices of the common stock for the last ten trading days prior to the date of grant. These options will
have a term of ten years and will vest as follow: $15,000 will vest immediately upon the date of grant and $10,000 will vest on
the first anniversary of the date of grant contingent upon each eligible director attending not less than 75% of the Board meetings
conducted during the ensuing fiscal year. |
Exhibit 10.4
Aethlon Medical, Inc.
2012 Directors Compensation Program
as Modified on June 6, 2014
On June 6, 2014, the Compensation Committee
of the Board of Directors (the “Board”) of Aethlon Medical, Inc. (the “Company”) recommended to the Board
that the Company’s 2012 Directors Compensation Program, in which only non-employee directors of the Company may participate,
be modified in its entirety as follows:
| 1. | New Eligible Directors: A new eligible director will receive an initial grant of $50,000 worth of options to acquire
shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. These options will have a term of ten years
and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. |
| 2. | Existing Eligible Directors: At the beginning of each fiscal year, each existing eligible director will receive a grant
of $35,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based on the
average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year These
options will have a term of ten years and will vest on the first anniversary of the date of grant. |
| 1. | Eligible Director Annual Retainer: Eligible directors will receive an annual board retainer fee of $30,000. |
| 2. | Audit Committee Annual Retainer: Each member of the Audit Committee will receive an annual retainer fee of $4,000, except
for the Chair of the Audit Committee, who will receive an annual retainer of $5,000. |
| 3. | Compensation Committee Annual Retainer: Each member of the Compensation Committee will receive an annual retainer fee
of $4,000, except for the Chair of the Compensation Committee, who will receive an annual retainer of $5,000. |
| 4. | Lead Independent Director: The Lead Independent Director will receive an annual retainer of $15,000. |
The Board unanimously approved the Compensation
Committee’s recommendation with the eligible directors abstaining.
Aethlon Medical, Inc.
2012 Directors Compensation Program
as Adopted on July 24, 2012
On July 24, 2012, the Board of Directors
(the “Board”) of Aethlon Medical, Inc. (the “Company”) adopted the Company’s 2012 Directors Compensation
Program, in which only non-employee directors of the Company may participate. The Company’s 2012 Directors Compensation Program
modified in its entirety the Company’s 2005 Directors Compensation Program, as follows:
| 1. | Existing Eligible Directors: At the beginning of each fiscal year, each existing eligible director will receive a grant
of $35,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based on the
average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. These
options will have a term of ten years and will vest as follow: $10,000 will vest immediately upon the date of grant and $20,000
will vest on the first anniversary of the date of grant contingent upon each eligible director attending not less than 80% of the
Board meetings conducted during the ensuing fiscal year. |
| 1. | Board Meetings: Eligible directors will receive $1,000 for each Board meeting attended. |
| 2. | Committee Meetings: Eligible directors will receive $500 for each Committee meeting attended. |
Exhibit 10.52
SECTION
SF 30 BLOCK 14 CONTINUATION PAGE
SUMMARY OF CHANGES
SECTION C - DESCRIPTIONS AND SPECIFICATIONS
The following have been modified:
STATEMENT OF WORK (SOW)
Aethlon Medical, Inc.
DATE: 11 December 2013, Revised:
12 March 2015
TITLE: Broad Spectrum Countermeasures for Viral and Bacterial
Sepsis using Dialysis-Like Devices
1.0 Scope
The scope of this effort is to use Aethlon’s
Hemopurifier as the core technology within an extracorporeal blood purification device that would simultaneously remove: viruses,
virally-derived immunosuppressive glycoproteins, and multiple classes of exosomes; complement activation, activation of virus growth
(e.g. cytomegalovirus) and TLR activation, all of which have implications to the promotion of the well-being and recovery of wounded
warfighters and the prevention of sepsis.
1.1 Introduction
This effort will create an adaptable dialysis-like
platform (ADAPT) technology that allows for the selective removal of harmful agents from the entire circulatory system. This revolutionary
advance overcomes the limitation of devices that indiscriminately adsorb or solely capture particles by molecule size. The platform
will provide an expansive therapeutic filtration mechanism to immobilize multiple affinity agents directed toward precursors to
sepsis, bacterial toxins, viral pathogens, and disease enhancing particles transported by exosomes. To insure benefit to wounded
warfighters, this effort will advance an innovative strategy that will allow therapy administration without systemic anticoagulation.
The ADAPT platform has been shown previously
to create a broad-spectrum antiviral device that immobilized one lectin affinity agent, resulting in the effective capture of all
tested Category A pathogens, as well as exosomes underlying tuberculosis and cancer. In human studies, this same device, known
as the Hemopurifier, consistently provided greater than 50% average viral load reductions during four-hour treatment periods in
both hepatitis-C and HIV infected individuals without antiviral drug therapy.
The resulting device would save thousands
of military and civilian lives each year. Each of these technology advancements will be integrated into a single cartridge that
will provide decision-free and life-saving medical care for the wounded warfighter.
1.2 Background
The goal of the DLT program is to develop
a portable device that removes “dirty” blood from the body, separates harmful agents, and returns “clean”
blood to the body in a manner similar to dialysis treatment of kidney failure. While the device could have an impact across multiple
areas of medicine, the target application for this device is sepsis. The envisioned device will persistently interrogate the entire
blood volume, providing early identification of the presence of a pathogen. Once the presence of pathogens has been confirmed,
the DLT device will provide continuous "label-free" removal of pathogens, toxins and activated patient cells without
pathogen identification or use of pathogen-specific binding chemistries. As a final step in the treatment process, the DLT device
will enable closed-loop therapy based on continuous, reduced dimensionality modeling of patient health. Predictive modeling in
this fashion will allow us to identify sepsis early, learn what we need to remove, and direct the most effective intervention to
improve patient health. This cycle of sensing, adjustment, estimation, computation, and manipulation will
modulate key health parameters faster than the underlying disease process and drive the patient towards a stable, healthy state.
2.0 Technical Requirements
2.1 Human and Animal use
Human use is anticipated in
this effort, specifically related to the use of human blood. The grantee shall obtain all necessary Institutional Review Board
(IRB) approvals, show proper assurance documentation, and obtain proper approval from the Government officials prior to human use
testing. Funds associated with human subjected testing shall not be released until IRB documentation has been provided to SSC's
1-IRPO and approval to release funds has been obtained.
Animal use is anticipated
in this effort. The contractor shall obtain all necessary Institutional Animal Care and Utilization Committee (IACUC) approval
and demonstrate this approval to the Government (both ACURO and SSC-Pacific) prior to beginning experimentation with animals.
If animal use is no longer anticipated, or changes significantly from the approved IACUC then the Principal Investigator (PI) must
submit a letter stating the discontinuation of animal use for this effort and/or receive appropriate authorization for IACUC changes
of previously specified protocols. Unless prior approval by DARPA is given IACUC documentation must be provided prior to contract
award.
2.2 Base Effort (Year 1)
2.2.1 Subtask la: Anticoagulant-free Hemopurification
Device
2.2.1.1
Write requirements definition for the extracorporeal blood purification system and acquire necessary equipment.
2.2.1.2
Fabricate breadboard prototypes for anticoagulation-free anti-sepsis extracorporeal system (ASEPSYS) device. Fabricate prototype
blood tubing sets. Acquire anti-thrombogenic surface-modified hollow fiber plasma separators.
2.2.1.3
Assemble and test breadboard ASEPSYS devices ex vivo with bovine blood. The test will most likely be conducted using a
porcine model where the elapsed time to reach a pre-defined degree of clotting in the blood treatment device will be compared
between the new device and two control groups; one using standard anticoagulant therapy and one using none. Determine contribution
of the following techniques and a..roaches to eliminating anticoagulants:
[***]
2.2.1.4
IRB Documentation Generation: The contractor shall obtain all necessary IRB documentation and obtain both institutional and Government
(SSC-Pacific) approval in accordance with IRB documentation submission guidance prior to conducting human subject testing.
Milestones
Ml: | Demonstrate the effectiveness of the prototype device in preventing platelet
activation or clotting in at least
a 2 hour blood pumping experiment at 100 mL/hr blood flow. |
2.2.2
Subtask 2: Removal of Sepsis Precursors
2.2.2.1
Begin to develop a device based on Aethlon's ADAPT system to efficiently capture sepsis precursors identified as potentially important
in killing patients undergoing sepsis. The strategy is takes advantage of the flexibility and rapidity of modification of our ADAPT
platform system to test any sepsis precursor candidates that circulate in the blood. The sepsis precursors that will be targeted
are shown in Table I, in order of importance. No test for the removal of bacterial toxins. No testing for removal of cytokines,
since the evidence to date does not support a role for them in death due to sepsis. Additional factors may become known during
the grant period and those will also be tested as time and budget permit.
[***]
This material has been omitted pursuant to a request for confidential treatment and filed separately with the Securities and
Exchange Commission.
2.2.2.2
Screening Capture Agents: Perform initial screening of the different proposed capture agents by measuring binding affinity
and kinetics using surface plasmon resonance (SPR) or biolayer surface interferometry (BLI).
2.2.2.3
Perform quantitative real time PCR will also be used to measure viral load, and specific DNA or RNA targets.
Milestones
M2: Target capture > 50% in 24 hours for at least 1 target
in blood or blood components
Table I Potential Target Sepsis Precursors
and Broad Spectrum Binding Agents
Septic Exosomes |
Removal Agent |
INOS exosomes |
GNA |
Viruses Associated with Sepsis |
|
Dengue Fever virus |
GNA |
H1N1 Flu virus |
GNA |
Cytomegalovirus ** |
GNA |
Herpes viruses – e.g. HSV 1 |
GNA |
Poxviruses - e.g. Vaccina (model for small pox) |
GNA |
Activation of Innate Immunity |
|
LPS endotoxins |
GNA |
LTA endotoxins |
GNA |
2.3 Option 1 (Year 2)
2.3.2 Subtask 1a: Anticoagulant-free Hemopurification
Device
2.3.2.1
Demonstrate the effectiveness of the prototype device in vivo in animals preventing platelet activation or clotting in at least
a 2 hour blood pumping experiment at 75 mL/min blood flow.
2.3.2.2
Formulate initial design based on work from previous phase. Begin to build and test selected instrument design and tubing sets.
2.3.2.3 Write and test software. Conduct ergonomic research.
Begin discussions with System Integrator.
2.3.2.4 Complete fabrication and testing of prototype instrument.
2.3.2.5
Research literature and patent database for technical options for an on-line/in-line sensor with the ability to quantify the
clearance of citrate and/or calcium in effluent dialysate.
2.3.2.6 Collect feasibility data on at least one sensor option.
2.3.2.7
Conduct a series of 21 experiments aimed at characterizing the contribution of several alternate fluidic designs and methods of
perfusing plasma filters and affinity columns in the performance of affinity plasmapheresis.
2,3.3 Subtask 2. Removal of Sepsis Precursors
2.3.3.1 Build the ADAPT capture
cartridges with the identified affinity agents. Measure the rate of capture of the specific targets from in ex vivo recirculation
experiments from cell culture and blood.
2.3.3.2 Cartridge construction
with optimized affinity matrix design for each potential target. Complete all capture agents screening. Initiate ex vivo capture
studies from blood using the optimized cartridges.
Milestones
M4: Target capture > 50% in 24 hours for at least 5 targets
in blood or blood components.
M5: Milestone 5: Target capture > 90% in 24 hours for
at least 3 targets in blood or blood components.
NOTE: TASK 2.3.2 SHALL NOT BE EXERCISED AND TASKING FUNDS RELEASED
UNTIL IRB DOCUMENTATION AND PROPER IRB APPROVAL HAS BEEN OBTAINED.
2.4 Option 2 (Year 3)
2.4.1
Subtask 1a: Anticoagulant-free Hemopurification Device
2.4.1.1
Design and fabricate optimized configuration(s) of hemopurification device(s) that contain(s) a combination of hemofilters, plasma
filters, and affinity columns.
Milestones
| M6: | Define Aethlon’s GMP manufacturing
process and revise and upgrade Aethlon’s quality procedures and policies to the
current state of the art. Demonstrate the safety of at least one prototype device
within an optimized fluidic circuit architecture preventing clotting in a 24 hour experiment
in vivo at a blood flow rate of 200 ml/min using either pigs or dogs. |
2.4.2 Subtask 4: Target Capture in Combined Agent Cartridge
2.4.2.1 Evaluate contribution of manufacturing process variables
to binding capacity of affinity resin.
2.4.2.2 Determine capacity requirements of affinity resin to
multiple simultaneous targets.
2.4.2.3
Perform basic biocompatibility tests for the combination ADAPT device to confirm the combination cartridge does not present additional
risk.
2.4.2.4 Finish construction and delivery of 25 experimental
cartridges for testing by the system integrator.
Milestones
M7: Target capture > 90% in 24 hours (12 months) for at least 3 targets ex vivo in blood or blood components using the optimized cartridge.
M8: Pass biocompatibility tests for the combination ADAPT device.
M9: Construct and deliver of 25 prototype cartridges for testing by the system integrator.
2.5 Option 3 (Year 4)
2.5.1 Subtask 1a: Anticoagulant-free Hemopurification
Device
2.5.1.1
Complete Aethlon’s GMP procedure and establish and maintain all GMP documentation for the company.
Revise and upgrade Aethlon’s quality procedures and policies to the current state of the art and establish and maintain
all GMP documentation for the company.Develop additional optimized configuration(s) of hemopurification device(s) that contain(s)
a combination of hemofilters, plasma filters, and affinity columns.
Milestones
M11:
Develop a strategic plan for developing an alternate method of producing GNA by cloning the gene into
an alternate vector and identify potential partners for such production. Demonstrate the safety of an additional prototype
device within an optimized fluidic circuit architecture preventing clotting in a 24 hour experiment in vivo at a blood
flow rate of 200 ml/min using either pigs or dogs.
2.5.2 Subtask 4: Target Capture in
Combined Agent Cartridge
2.5.2.2
Finish construction and delivery of 50 prototype cartridges for testing by the system integrator. The cartridges will need to be
made available (packaged, labeled, sterilized and qualified) to the system integrator.
Milestones
M13: Construct and deliver of 50 prototype cartridges for testing
by the system integrator.
2.6 Option 4 (Year 5)
2.6.1 Subtask 5: Testing of final product
by System Integrator
2.6.1.1 System integrator acceptance of the hemofilter device.
2.6.1.3 Prepare and submit IDE proposal
for sepsis treatment.
2.6.1.4 Prepare and present Final report for DARPA.
Milestones
M12: System Integrator approval of a sepsis
precursor ADAPT treatment cartridge
3.0 Program Management and Reviews
3.1 Program Management Plan
The contractor shall develop a Program
Management Plan. A graphical representation of this plan (Gantt chart is one example) identifying major tasks and their task leaders,
milestones of the major task and their completion dates shall be generated. In addition, a graphical representation of budget shall
be generated.
3.2 Kick-off Meeting
The contractor shall participate in a kick-off
meeting within 60 days of contract award. The purpose of this meeting is to introduce key program personnel, discuss the proposed
tasking, present the program schedule and milestones and the initial Program Management Plan.
3.3 Quarterly Reviews
The contractor shall hold quarterly reviews
for the duration of this effort. The purpose of these reviews is to present a summary of work completed and milestones met, discuss
any problems encountered, update the program schedule, present the program financial status, and discuss remaining work.
3.4 Final Contract Review
A final contract review held in place of
the last quarterly review shall be hosted by the principal contractor. The purpose of this review is to present a summary of all
work completed and milestones accomplished and to discuss any relevant future efforts similar to the contract that may be pursued.
4.0 Deliverables
The reports and presentation materials
are to be delivered in accordance with the attached Data Delivery Matrix.
(End of SOW).
SECTION G - CONTRACT ADMINISTRATION DATA
The following have been modified:
SCHEDULE
OF PAYMENT MILESTONES
12 month duration
base period (Year 1)
Milestone |
Month |
Payable Milestone |
GOVT
CONTRIBUTION |
Subtask 1a |
|
Anticoagulant-free Hemopurification Device |
($908,384) |
2.2.1.1 |
1 |
Write requirements definition for the extracorporeal blood purification system and acquire necessary equipment. |
($358,284) |
2.2.1.2 |
3 |
Fabricate breadboard prototypes for anticoagulation-free anti-sepsis extracorporeal system (ASEPSYS) device. Fabricate prototype blood tubing sets. Acquire anti- thrombogenic surface-modified hollow fiber plasma separators. |
($183,367) |
2.2.1.3 |
6 |
Assemble and test breadboard ASEPSYS devices. Evaluate the use of different techniques and approaches to eliminating anticoagulants. |
($183,367) |
2.2.1.4 |
12 |
Obtain all necessary IRB documentation and obtain both institutional and Government (SSC-Pacific) approval in accordance with IRB documentation submission guidance prior to conducting human or animal testing. |
($183,367) |
Subtask 2
& 4 |
|
Removal of Sepsis Precursors |
($1,066,663) |
2.2.2.1 |
2 |
Begin to develop the Aethlon’s ADAPT device to efficiently capture sepsis precursors and acquire important equipment and supplies |
($416,424) |
2.2.2.2 |
5 |
Perform initial screening of the different proposed capture agents by measuring binding affinity and kinetics using surface plasmon resonance (SPR) or biolayer surface interferometry (BLI). |
($216,747) |
2.2.2.3 |
8 |
Perform preliminary quantitative real time PCR to measure viral load, and specific DNA or RNA targets. |
($216,747) |
M2 |
12 |
Target capture > 50% in 24 hours for at least 1 target in blood or blood components |
($216,747) |
|
|
Total |
($1,975,047) |
12
month duration option #1 period (Year2)
Milestone |
Month |
Payable Milestone |
GOVT
CONTRIBUTION |
Subtask 1a |
|
Anticoagulant-free Hemopurification Device |
($782,322) |
2.3.2.1 |
15 |
Demonstrate the effectiveness of the prototype device in vivo in animals preventing platelet activation or clotting in at least a 2 hour blood pumping experiment at 75 mL/min blood flow. |
($195,581) |
2.3.2.2 |
18 |
Formulate initial design based on work from previous phase. Begin to build and test selected instrument design and tubing sets. |
($195,581) |
2.3.2.3 |
21 |
Write and test software. Conduct ergonomic research. Begin discussions with System Integrator. |
($195,581) |
M3 |
24 |
Complete fabrication and testing of prototype
instrument.
Research literature and patent
database for technical. |
($195,581) |
Subtask 2 |
|
Removal of Sepsis Precursors |
($835,124) |
2.3.3.1 |
15 |
Build the ADAPT capture cartridges with the identified affinity agents. Measure the rate of capture of the specific targets from in ex vivo recirculation experiments from cell culture and blood. |
($208,781) |
M4 |
18 |
Target capture > 50% in 24 hours for at least 5 targets in blood or blood components. |
($208,781) |
2.3.3.2 |
21 |
Cartridge construction with optimized affinity matrix design for each potential target. Complete the capture agent screening. |
($208,781) |
M5 |
24 |
Target capture > 90% in 24 hours for at least 3 targets in blood or blood components. |
($208,781) |
|
|
Total |
($1,617,446) |
12 month duration
option #2 period (Year 3)
Milestone |
Month |
Payable Milestone |
GOVT
CONTRIBUTION |
Subtask 1a |
|
Anticoagulant-free Hemopurification Device |
($372,328) |
2.4.1.1 |
27 |
Design and fabricate optimized configuration(s) of hemopurification device(s) that contain(s) a combination of hemofilters, plasma filters, and affinity columns. |
($186,164) |
M6 |
36 |
Define Aethlon’s GMP manufacturing process and revise and upgrade Aethlon’s quality procedures and policies to the current state of the art. |
($186,164) |
Subtask
2+4 |
|
Target Capture in Combined Agent Cartridge |
($720,726) |
2.4.2.1 |
27 |
Evaluate contribution of manufacturing process variables to binding capacity of affinity resin. |
($197,362) |
2.4.2.2 |
33 |
Determine capacity requirements of affinity resin to multiple simultaneous targets. |
($197,362) |
2.4.2.3 |
30 |
Perform biocompatibility tests for the combination ADAPT device to confirm the combination cartridge does not present additional risk. |
($78,641) |
2.4.2.4 |
36 |
Finish construction and delivery of 25 experimental cartridges for testing by the system integrator. |
($50,000) |
M9 |
36 |
Target capture > 90% in 24 hours (12 months) for at least 3 targets ex vivo in blood or blood components using the optimized cartridge. |
($197,361) |
|
|
Total |
($1,093,054) |
12
month duration option #3 period (Year 4)
Milestone |
Month |
Payable Milestone |
GOVT
CONTRIBUTION |
Subtask 1a |
|
Anticoagulant-free Hemopurification Device |
($276,172) |
2.5.1.1 |
45 |
Complete Aethlon’s GMP procedure and establish and maintain all GMP documentation for the company. |
($90,008) |
M11 |
48 |
Develop a strategic plan for developing an alternate method of producing GNA by cloning the gene into an alternate vector and identify potential partners for such production. |
($186,164) |
Subtask
2+4 |
|
Target Capture in Combined Agent Cartridge |
($296,964) |
2.5.2.2 |
48 |
Finish construction and begin delivery of 50 prototype cartridges for testing by the system integrator. |
($296,964) |
|
|
Total |
($573,136) |
12
month duration option #4 period (Year 5)
Milestone |
Month |
Payable Milestone |
GOVT
CONTRIBUTION |
Subtask 5 |
|
Testing of final product by System Integrator |
($581,157) |
2.6.1.1 |
51 |
System integrator acceptance of the hemofilter device. |
($193,719) |
2.6.1.3 |
57 |
Prepare and submit IDE proposal for sepsis treatment. |
($193,719) |
2.6.1.4 |
60 |
Prepare and present Final Report for DARPA. |
($193,719) |
|
|
Total |
($581,157) |
(End of Milestone Schedule)
(End of Summary of Changes)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
We hereby consent to the use in this Registration
Statement on Form S-1 (expected to be filed with the Securities and Exchange Commission on or about April 17, 2015) of Aethlon
Medical, Inc. (the “Company”) of our report dated April 17, 2015 relating to the Company’s consolidated financial
statements as of March 31, 2014 and 2013 and for each of the years in the two-year period then ended, appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to our firm
under the caption “Experts” in such Prospectus.
Squar,
Milner, Peterson, Miranda & Williamson, LLP
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
Newport Beach, California
April 17, 2015
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