SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2009
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ________ to __________
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
(Name of Small Business issuer in its charter)
NEVADA 13-3632859
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 Bunker Hill Street, Suite 4000,
San Diego, California 92109
(Address of principal executive office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (858) 459-7800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK--$.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [_] No [X]
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.[x]
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 [_] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company. Yes [_] No [X]
The registrant had no revenue for the fiscal year ended March 31, 2009. The
aggregate market value of the Common Stock held by non-affiliates was
approximately $13,968,059 based upon the closing price of the Common Stock of
$0.27, as reported by the NASDAQ Over-the-Counter Bulletin Board ("OTCBB") on
June 26, 2009.
The number of shares of the Common Stock of the registrant outstanding as of
June 26, 2009 was 53,790,567.
TABLE OF CONTENTS
PAGE
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PART I.
Item 1. Description of Business.......................................... 1
Item 1A. Risk Factors .................................................... 9
Item 2. Properties.......................................................20
Item 3. Legal Proceedings................................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities...............21
Item 6. Selected Financial Data..........................................27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................27
Item 8. Financial Statements.............................................34
Item 9. Changes in and Disagreements with Accountants on Accounting
and Results of Operations......................................34
Item 9A(T). Controls and Procedures..........................................34
Item 9B. Other Information................................................35
PART III.
Item 10. Directors, Executive Officers, Promoters and Control Persons
and Corporate Governance; Compliance with Section 16(a) of
the Exchange Act.............................................. 35
Item 11. Executive Compensation.......................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................... 44
Item 13. Certain Relationships and Related Transactions
and Director Independence..................................... 46
Item 14. Principal Accountant Fees and Services.......................... 46
Item 15. Exhibits, Financial Statements.................................. 47
Signatures................................................................... 51
Certifications
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
We are a developmental stage medical device company focused on
expanding the applications of our Hemopurifier(R) platform technology which is
designed to selectively reduce the presence of infectious viruses from human
blood. As such, the Hemopurifier(R) is a candidate therapeutic device to assist
in the treatment of a broad range of viral pathogens. Viral treatment targets
include bioterror agents, pandemic threats, HIV/AIDS, and Hepatitis-C virus
("HCV"). On June 10, 2009, we disclosed the primary treatment focus of our
Hemopurifier(R) would be HCV.
The Hemopurifier(R) combines the established scientific technologies of
hemodialysis and affinity chromatography as a means to mimic the immune system's
response of clearing viruses from the blood before the occurrence of cell and
organ infection. The device is also proven to capture immunosuppressive proteins
that shed from the surface of viruses to kill-off immune cells required for the
body to combat infection.
On March 10, 1999, Aethlon, Inc., a California corporation ("Aethlon"),
Hemex, Inc., a Delaware corporation ("Hemex"), the accounting predecessor to the
Company and Bishop, Inc. ("Bishop"), a publicly traded "shell" company completed
an Agreement and Plan of Reorganization (the "Plan") structured to result in
Bishop's acquisition of all of the outstanding common shares of Aethlon and
Hemex (the "Reorganization"). The Reorganization was intended to qualify as a
tax-free transaction under Section 368(a)(1)(B) of the 1986 Internal Revenue
Code, as amended. Under the Plan's terms Bishop issued 733,500 and 1,350,000
shares of its common stock to the common stock shareholders of Aethlon and
Hemex, respectively, such that Bishop then owned 100% of each company. Upon
completion of the transaction, Bishop was renamed Aethlon Medical, Inc.
On January 10, 2000, we acquired all of the outstanding common stock of
Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of our common
stock in order to establish research facilities in San Diego, California, as
well as to employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a
recognized research scientist in the area of DNA synthesis and antisense. Syngen
has no significant assets, liabilities or operations and primarily served as the
entity through which Dr. Tullis performed research consulting services. As such,
the acquisition was accounted for as an acquisition of assets in the form of an
employment contract with Dr. Tullis and not as a business combination. Dr.
Tullis is presently the chief scientific officer of Aethlon Medical, Inc.
On April 6, 2000, we completed the acquisition of Cell Activation, Inc.
("Cell"). In accordance with the Purchase Agreement, we issued 99,152 shares of
restricted common stock and 50,148 options to purchase common stock in exchange
for all of the outstanding common shares and options to purchase common stock of
Cell. After the transaction, Cell became a wholly-owned subsidiary of the
Company. The acquisition was accounted for as a purchase. At March 31, 2001, we
determined that goodwill recorded during the acquisition of Cell was impaired
due to the permanent suspension of operations by Cell and, accordingly, treated
the related goodwill as fully impaired.
1
THE HEMOPURIFIER
The Hemopurifier(R) is a broad spectrum platform technology that
combines the established scientific methods of hemodialysis (artificial kidneys)
and affinity chromatography (a method that allows the selective capture of
viruses and related toxins) as a means to augment the natural immune response of
clearing infectious viruses from the blood before the occurrence of cell and
organ infection. The device is also proven to capture immunosuppressive proteins
that shed from the surface of viruses to kill-off immune cells required for the
body to combat infection. The therapeutic goal of the Hemopurifier(R) is to
improve patient survival rates by reducing viral load and preserving the immune
function. We believe that the Hemopurifier(R) will enhance and prolong the
benefit of infectious disease drug therapies and fill the treatment gap for
patients who inevitably become resistant to such therapies. The Hemopurifier(R)
is also a broad-spectrum candidate to treat viral pathogens not treatable with
drug or vaccine therapy.
Traditionally, hemodialysis (kidney dialysis) has been used to remove
urea and other small metabolic toxins that accumulate in the blood of people
with acute or chronic kidney failure (also called renal failure). Acute renal
failure is generally treated in hospital intensive care units using a continuous
filtration therapy. Chronic renal failure is treated through intermittent,
thrice-weekly kidney dialysis in a specialized clinic setting. A catheter is
most often the method used to gain access to the blood which is then pumped
through thousands of hollow micro-fibers running the length of the kidney
dialysis cartridge. Within the cartridge, toxins, urea and excess water pass
through small pores in the walls of the micro-fibers and are removed by a
separately circulating dialysis fluid outside of the fibers. Blood cells and
molecules that are too large to pass through the pores are retained and the
cleansed blood is returned to circulation.
The Hemopurifier(R) modifies this process in several ways to provide an
efficient method to selectively remove targeted viruses and toxins. First, the
pores of the nano-fibers within the Hemopurifier(R) are large enough to allow
circulating infectious viruses and toxins to separate from the blood and diffuse
through the walls of the fibers. Second, within the cartridge but outside of the
fibers the Hemopurifier(R) contains a unique material (the "affinity agent")
which selectively binds to the viruses or toxins. Finally, because of the
affinity agent's ability to bind to viruses and toxins, there is no need for a
separate circulation of a dialysis solution with the Hemopurifier(R). This
provides the flexibility to use the Hemopurifier(R) either on kidney dialysis
machines (global infrastructure), or other blood pumping devices.
INFECTIOUS DISEASE
The current treatment for viral illnesses include vaccines and
antiviral drugs. Vaccines have been the most successful in curing viral diseases
(e.g., polio and smallpox). Unfortunately, newly emerging pathogens (e.g.,
SARS), highly mutable RNA viruses (e.g., HIV and Hepatitis C) and exotic viruses
that might be used in terrorist attacks often do not have vaccine treatments.
Similarly, antiviral drugs are often useful in controlling viral infections.
However, there do not seem to be any general, broad-spectrum antiviral agents
similar to penicillin for bacteria capable of addressing drug resistant
mutations that evolve in viral pathogens. In addition, it generally takes years
and hundreds of millions of dollars to develop vaccine and drug candidates that
may or may not be approved by the FDA.
The Hemopurifier(R) represents a new approach to treating
viral pathogens. The application is designed to work with current treatments to
remove infectious virus, toxic viral proteins and injurious immunological
mediators directly from the blood of the patient. By removing circulating virus
and toxins the Hemopurifier(R) cartridge prevents virus and toxins from
infecting tissues and cells. The device augments the immune response of clearing
viruses and toxins from the blood before infection can occur. Scientifically,
this action is known as "Fusion Inhibition" since the ability of the virus to
enter or fuse with host cells or organs is inhibited. To Date, we have conducted
Hemopurifier(R) animal studies, in vitro studies, and human studies. In vitro
studies have demonstrated the ability of our Hemopurifier(R) to capture HIV,
HCV, Ebola Virus, Dengue Virus, Lassa Virus, West Nile Virus, Monkeypox Virus,
H5N1 Avian Influenza Virus, and reconstructed H1N1 Spanish Flu of 1918 virus. In
human studies, we have demonstrated initial safety of the Hemopurifier(R) and
the ability to reduce viral load in both HIV and HCV infected individuals. While
our initial treatment focus is directed towards Hepatitis-C virus (HCV), the
Hemopurifier(R) is a candidate to treat a broad spectrum of infectious disease
conditions and may have additional applications in cancer care.
2
HEPATITIS-C VIRUS (HCV)
In HCV care, we believe the Hemopurifier(R) can inhibit viral
replication through selective adsorption of circulating HCV and augment the
immune response by removing toxic proteins shed from HCV to kill-off immune
cells. HCV represents our initial treatment focus based on our human treatment
outcomes in India, the magnitude of the HCV market opportunity, and previous
clinical validations that HCV viral filtration can increase cure rates. Our
treatment goal in HCV is to increase patient cure rates by implementing our
Hemopurifier(R) as an adjunct treatment to enhance the benefit of the standard
of care drug therapy administered to HCV infected patients.
BIOLOGICAL WEAPONS AND PANDEMIC THREATS
The Hemopurifier(R) is also a broad-spectrum treatment candidate
against drug and vaccine resistant bioterror and pandemic threats. These threats
include viral pathogens known as "Category A" agents, which are considered by
the Centers for Disease Control ("CDC") to pose a threat through natural
emergence or if weaponized as an agent of bioterrorism. Pre-clinical in vitro
studies have demonstrated the ability of our Hemopurifier(R) to capture Ebola
Virus, Dengue Virus, Lassa Virus, West Nile Virus, Monkeypox Virus, H5N1 Avian
Influenza Virus, and reconstructed H1N1 Spanish Flu of 1918 virus. In March
2007, we submitted an Investigational Device Exemption ("IDE") with the FDA
related to a proposed human safety study of the Hemopurifier(R) in the United
States with a focus on the use of the Hemopurifier(R) as a countermeasure
against biological weapons and pandemic threats. At present, we are preparing to
update our IDE with human clinical data collected from human safety and efficacy
studies performed in India. These studies demonstrated efficacy in reducing
viral load in both HIV and HCV patients. Once we have updated our IDE, we plan
to request permission from the FDA to conduct human safety studies in the United
States.
CANCER TREATMENT
We have licensed an invention and related 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" for which a
provisional patent application was filed in the United States. The agreement
provides that the Company will pay certain patent application and filing costs
as well as a 2% royalty on any future net sales.
In addition to our efforts to treat infectious disease, we are
developing treatments to remove the immunosuppressive activity normally found in
the fluid of cancer patients. Studies in 2007, led by Dr. Douglas Taylor at the
University of Louisville, have demonstrated that the capture of tumor secreted
exosomes by the Hemopurifier(R) does result in reversing immunosuppressive
activity. Dr. Taylor is a recognized authority on the causative effects of
immune suppression in cancer patients. He is credited with the initial
characterization of exosomes and is a leading peer-reviewed author on the
subject.
In the studies, the Aethlon Hemopurifier(R) removed the
immunosuppressive activity normally found in the ascites fluid of ovarian cancer
patients. Immunosuppressive activity in ovarian cancer patients is known to
correlate with disease progression and long-term survival. The studies measured
the expression of two biological markers required for T-cell activation. The
markers, Jak-3 kinase and CD3-zeta chain expression are respectively required
for interleukin (cytokine) activation of cell proliferation and T-cell receptor
mediated activation. Both markers are highly expressed in T-cell lines. When
cells were subjected to ovarian cancer ascites fluid, both markers were
consistently absent. However, the circulation of the same ascites fluid through
the Aethlon Hemopurifier(R) allowed the expression of both biological markers
necessary to activate the immune response.
Previously, Dr. Taylor documented that 60% of circulating exosomes were
removed from the blood of ovarian cancer patients during first pass
(approximately 10 minutes) through a small scale Hemopurifier(R). The capture
data was consistent over the course of five different studies. Exosomes, are
released by solid tumors, lymphomas, and leukemia. They induce T-cell apoptosis
(programmed cell death), and block T-cell signaling, proliferation, and cytokine
production. High concentrations of circulating exosomes correlate with reduced
T-cell production and tumor progression in cancer patients. The ability to
reduce the presence of circulating exosomes would reverse immune suppression and
increase patient responsiveness to both immunotherapy and chemotherapy. As such,
Aethlon believes the Hemopurifier(R) can address a significant unmet medical
need in cancer care.
3
We have also exercised an option to exclusively license a pending
patent entitled, "Method to Inhibit Proliferation and Growth of Metastases" from
The Trustees of Boston University. The license provides a rapid development
strategy for new cancer therapies by uniting drug agents that inhibit the spread
of cancer-related metastases, with filtration techniques already proven in the
Aethlon Hemopurifier(R). The resulting devices would inhibit tumor growth by
reducing the presence of circulating growth factors without interfering with
surgical wound healing or the recovery of tissue injured by radiation therapy.
While the market for anti-growth factor drug agents exceeds $5 billion, there
remains a significant unmet clinical need, as these drug agents may not be
indicated for use in conjunction with surgical procedures or radiation treatment
as they inhibit wound healing and tissue recovery. Depending on the
applications, if we commercialize a product based upon this license, we will
pay royalties up to a maximum of 3.5 percent of net sales.
MANUFACTURING AND METHODS OF DISTRIBUTION
We plan to manufacture a small number of cartridges sufficient to
complete clinical trials in our current facilities. At present, we plan to
outsource cartridge manufacturing to GMP/ISO9001 compliant contract
manufacturers. If approved for sale in the marketplace, Hemopurifiers(R) to
treat bioterror and pandemic threats will be sold directly to the U.S. military
and the federal government. Hemopurifiers(R) to treat chronic viral conditions
such as HCV and HIV will be provided directly to Hemopurifier(R) treatment
centers or shipped to distribution channels established by other organizations.
RESEARCH AND DEVELOPMENT
In fiscal year 2001, we realigned our research and development
activities from developing Hemopurifiers(R) to treat harmful metals to
developing Hemopurifiers(R) for the treatment of chronic viral conditions. As a
result of this strategic realignment, we initiated the consolidation of all
scientific and administrative functions into our San Diego facilities during the
fourth quarter of fiscal year 2001. This consolidation was completed during the
first quarter of fiscal year 2002 and our facilities in Buffalo, New York were
closed. In 2004, we focused our research effort to develop a broad-spectrum
antiviral Hemopurifier(R). Since then, we have conducted animal studies, in
vitro studies, and human studies. In vitro studies have demonstrated the ability
of our Hemopurifier(R) to capture HIV, HCV, Ebola Virus, Dengue Virus, Lassa
Virus, West Nile Virus, Monkeypox Virus, H5N1 Avian Influenza Virus, and
reconstructed H1N1 Spanish Flu of 1918 virus. In human studies, we have
demonstrated initial safety of the Hemopurifier(R) and the ability to reduce
viral load in both HIV and HCV infected individuals. The cost of research and
development, all of which has been charged to operations, amounted to
approximately $1,470,000 over the last two fiscal years.
PATENTS
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.
In certain countries, medical devices are not patentable or only
recently have become patentable, and enforcement of intellectual property rights
in some countries has been limited or non-existent. Future enforcement of
patents and proprietary rights in many countries can be expected to be
problematic or unpredictable. We cannot guarantee that any patents issued or
licensed to us will provide us with competitive advantages or will not be
challenged by others. 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.
4
INDUSTRY
The industry for treating infectious disease is extremely competitive,
and companies developing new treatment procedures are faced with severe
regulatory challenges. In Hepatitis-C (HCV) alone, it is believed there are more
than 50 new candidate drugs in the clinical pipeline. However, only a small
percentage of candidate drug therapies obtain approval from the FDA to market
their treatments in the United States. Currently, the market for treating
chronic and acute viral diseases is comprised of drugs designed to reduce viral
load by inhibiting viral replication or by inhibiting viruses from infecting
healthy cells. These drugs can be toxic, are expensive to develop, and viral
strains often emerge that are resistant to drug therapy. As a result, patients
are left with limited treatment options.
COMPETITION
We are advancing our Hemopurifier(R) as a treatment strategy to
enhance and prolong current drug therapies by removing the viral strains that
cause drug resistance. The Hemopurifier(R) 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(R) augments the benefit of drug therapies and should not be
considered a competitor to such treatments. However, if the industry considered
the Hemopurifier(R) to be a potential replacement for drug therapy, then the
marketplace for the Hemopurifier(R) would be extremely competitive. We believe
our Hemopurifier(R) is the sole therapeutic device able to selectively remove
viruses and immunosuppressive proteins from circulation. However, we are aware
that Asahi Kasei Kurary Medical (Asahi) based in Japan has created a double
filtration plasmapheresis that indiscriminately removes particles from blood in
a certain molecule range that includes HCV. Asahi is now marketing this device
in Japan as an adjunct therapy for HCV. We may also face competition from
producers of antiviral drugs and vaccines.
5
LICENSING 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 HIV and other viruses from the blood using the Hemopurifier(R) were
assigned to us by the inventors in exchange for a royalty to be paid on future
sales of the patented product or process and shares of our common stock. On
March 4, 2003, the related patent was issued and we issued 196,078 shares of
restricted common stock.
On February 9, 2006, we entered into an option agreement with the
Trustees of Boston University which provides for the right to negotiate an
exclusive license for a Boston University patent BU05-41, "Method to Prevent
Proliferation and Growth of Metastases." On February 8, 2007 we entered into an
amendment to this agreement to extend its term until August 9, 2007. On April
22, 2008, we entered into the actual license agreement for this patent and as
the initial payment under this license we issued shares of our common stock
equivalent to 115% of $5,000.
This license agreement with the Trustees of Boston University calls for
annual license fees in the amount of $5,000 (or 115% of $5,000 if paid in our
common stock) until products utilizing the license are commercialized. In
January 2009, we issued 23,566 shares of our common stock to Boston University,
which was equivalent to 115% of the $5,000 annual license fee, for the second
year of the license.
On November 7, 2006 we entered into an assignment agreement with the
London Health Science Center Research, Inc. and Thomas Ichim under which an
invention and related patent rights for a method to treat cancer were assigned
to the Company. The invention provides for the "Depression of anticancer
immunity through extracorporeal removal of microvesicular particles" for which a
provisional patent application was filed in the United States. The agreement
provides that the Company will pay certain patent application and filing costs
as well as a 2% royalty on any future net sales.
GOVERNMENT REGULATION
The Hemopurifier(R) is a medical device subject to extensive and
rigorous regulation by FDA, as well as other federal and state regulatory bodies
in the United States and comparable authorities in other countries. Therefore,
we cannot assure that our technology will successfully complete any regulatory
clinical trial for any of our proposed applications.
One of the problems facing the FDA is the need to ensure public safety
while at the same time preventing unsafe treatments from reaching the public.
The balance between these competing pressures has resulted in a long and
deliberate process for approving new treatments which is not responsive to the
urgent need for new treatments presented in the era of bioterrorism. For most
drugs, the principal research and development phases take several years prior to
a drug being submitted to the FDA for testing. A clinical research program takes
two to ten years, depending on the agent and clinical indication, after which
the marketing application review period requires an average of one year. Once a
product is approved for market, long-term post-marketing surveillance,
inspections, and product testing must be performed to ensure the quality,
safety, and efficacy of the product, as well as appropriate product labeling.
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS.
Each medical device we wish to commercialize in the United States will
require the filing of a Premarket Approval ("PMA") from the FDA. Medical devices
are classified into one of three classes--Class I, Class II, or Class
III--depending on the degree or risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness. Devices deemed to
pose lower risks are placed in either Class I or II, which requires the
manufacturer to submit to the FDA a premarket notification requesting permission
to commercially distribute the device. Our Hemopurifier(R) has been categorized
as a Class III device, requiring premarket approval.
6
CLINICAL TRIALS.
Clinical trials are almost always required to support an FDA premarket
application. In the United States, these trials generally require submission of
an application for an Investigational Device Exemption, or IDE, to the FDA. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results, 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 unless the product is
deemed a non-significant risk device eligible for more abbreviated IDE
requirements. Clinical trials for significant risk devices may not begin until
the IDE application is approved by the FDA and the appropriate institutional
review boards, or IRBs, at the clinical trial sites. Our clinical trials must be
conducted under the oversight of an IRB at the relevant clinical trial sites and
in accordance with FDA regulations, including but not limited to those relating
to good clinical practices. 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 IRB 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 not be equivocal or may otherwise not be
sufficient to obtain approval of the product. Similarly, in Europe the clinical
study must be approved by a local ethics committee and in some cases, including
studies with high-risk devices, by the Ministry of Health in the applicable
country.
In March 2007 we submitted an IDE with the FDA to obtain approval to
studies in the United States. Upon successful completion of the clinical studies
proposed in the IDE, we would anticipate submitting a PMA (see below).
PREMARKET APPROVAL PATHWAY.
A PMA application must be supported by extensive data, including but
not limited to technical, preclinical, clinical trials, manufacturing and
labeling to demonstrate to the FDA's satisfaction the safety and effectiveness
of the device.
After a PMA application is submitted and FDA determines that the
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for review. FDA has 180 days to review an "accepted"
PMA application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, the FDA may 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. In
addition, the FDA will conduct a pre-approval inspection of the manufacturing
facility to ensure compliance with quality system regulations. New PMA
applications or PMA application supplements are required for significant
modification to the manufacturing process, labeling and design of a device that
is approved through the premarket approval process. Premarket approval
supplements often require submission of the same type of information as a
premarket approval application, except that the supplement is limited to
information needed to support any changes from the device covered by the
original premarket approval application and may not require as extensive
clinical data or the convening of an advisory panel.
PERVASIVE AND CONTINUING REGULATION.
After a device is placed on the market, numerous regulatory
requirements continue to apply. These include:
o FDA's Quality System Regulation, or QSR, 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;
o labeling regulations and FDA prohibitions against the
promotion of products for uncleared, unapproved or off-label
uses;
o clearance or approval of product modifications that could
significantly affect safety or efficacy or that would
constitute a major change in intended use;
7
o medical device reporting, or MDR, 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;
and
o post-market surveillance regulations, which apply when
necessary to protect the public health or to provide
additional safety and effectiveness data for the device.
After a device receives a PMA, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, will require a new clearance or approval. The
FDA requires each manufacturer to make this determination initially, but FDA can
review any such decision and can disagree with a manufacturer's determination.
The regulations also require that we report to 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.
FRAUD AND ABUSE.
We may also directly or indirectly be subject to various federal and
state laws pertaining to healthcare fraud and abuse, including anti-kickback
laws. In particular, the federal healthcare program Anti-Kickback Statute
prohibits persons from knowingly and willfully soliciting, offering, receiving
or providing remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual, or the furnishing, arranging for or
recommending a good or service, for which payment may be made in whole or part
under federal healthcare programs, such as the Medicare and Medicaid programs.
Penalties for violations include criminal penalties and civil sanctions such as
fines, imprisonment and possible exclusion from Medicare, Medicaid and other
federal healthcare programs. The Anti-Kickback Statute is broad and prohibits
many arrangements and practices that are lawful in businesses outside of the
healthcare industry. In implementing the statute, the Office of Inspector
General ("OIG") has issued a series of regulations, known as the "safe harbors."
These safe harbors set forth provisions that, if met, will assure healthcare
providers and other parties that they will not be prosecuted under the
Anti-Kickback Statute. The failure of a transaction or arrangement to fit
precisely within one or more safe harbors does not necessarily mean that it is
illegal or that prosecution will be pursued. However, conduct and business
arrangements that do not fully satisfy each applicable element of a safe harbor
may result in increased scrutiny by government enforcement authorities, such as
the OIG.
INTERNATIONAL
International sales of medical devices are subject to foreign
governmental regulations, which vary substantially from country to country. The
time required to obtain clearance or approval by a foreign country may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may be different.
The primary regulatory environment in Europe is that of the European
Union, which has adopted numerous directives and has promulgated voluntary
standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential requirements of
the applicable directives and, accordingly, can be commercially distributed
throughout the member states of the European Union, and other countries that
comply with or mirror these directives. The method of assessing conformity
varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a notified body, an independent and neutral institution appointed by a
country to conduct the conformity assessment. This third-party assessment may
consist of an audit of the manufacturer's quality system and specific testing of
the manufacturer's device. Such an assessment is required in order for a
manufacturer to commercially distribute the product throughout these countries.
ISO 9001 and ISO 13845 certifications are voluntary harmonized standards.
Compliance establishes the presumption of conformity with the essential
requirements for a CE Marking.
We have conducted Hemopurifier(R) animal studies, in vitro studies, and
human studies. In vitro studies have demonstrated the ability of our
Hemopurifier(R) to capture HIV, HCV, Ebola Virus, Dengue Virus, Lassa Virus,
West Nile Virus, Monkeypox Virus, H5N1 Avian Influenza Virus, and reconstructed
H1N1 Spanish Flu of 1918 virus. In human studies, conducted in India, we have
demonstrated initial safety of the Hemopurifier(R) and the ability to reduce
viral load in both HIV and HCV infected individuals.
8
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. There can be no assurance 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.
SUBSIDIARIES
We have four dormant wholly-owned subsidiaries, Aethlon, Inc., Cell
Activation, Inc., Syngen Research, Inc., and Hemex, Inc.
EMPLOYEES
At June 29, 2009, we had three full-time employees, comprised of our
Chief Executive Officer, our Chief Science Officer and a research scientist. We
utilize, whenever appropriate, contract and part-time professionals in order to
conserve cash and resources. We currently employ a Senior Vice President of
Finance on a part-time basis and a Director of Business Development on a
contract basis. We believe our employee relations are good. None of our
employees are represented by a collective bargaining unit.
ITEM 1A. RISK FACTORS
An investment in our common shares involves a high degree of risk and
is subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. In such an
event, the trading price for our common shares could decline substantially, and
you could lose all or part of your investment. In order to attain an
appreciation for these risks and uncertainties, you should read this annual
report in its entirety and consider all of the information and advisements
contained in this annual report, including the following risk factors and
uncertainties.
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR
THE FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. We have
not had any significant revenues from our principal operations. We have incurred
annual operating losses of $2,923,254 and $2,892,588, for the
fiscal years ended March 31, 2009 and 2008, respectively. At March 31,
2009 and 2008, we had an accumulated deficit of $(38,311,414) and $(32,227,256),
respectively. We have incurred net losses of $6,084,158 and $4,140,264 for the
fiscal years ended March 31, 2009 and 2008. We have not had revenues to date. We
expect that our revenues, if any, will not be sufficient to sustain our
operations for the foreseeable future. Our profitability will require the
successful commercialization of our Hemopurifier(R) technology. No assurances
can be given when or if this will occur or that we will ever generate revenues
or be profitable.
WE HAVE RECEIVED AN EXPLANATORY PARAGRAPH FROM OUR AUDITORS REGARDING
OUR ABILITY TO CONTINUE AS A GOING CONCERN
Our independent registered public accounting firm noted in their report
accompanying our financial statements for our fiscal year ended March 31, 2009
that we had a significant deficit accumulated during the development stage, had
a working capital deficit and that a significant amount of additional capital
will be necessary to advance the development of our products to the point at
which we may become commercially viable and stated that those conditions raised
substantial doubt about our ability to continue as a going concern. Note 1 to
our financial statements for the year ended March 31, 2009 describes
management's plans to address these matters. We cannot assure you that our
business plans will be successful in addressing these issues. This explanatory
paragraph about our ability to continue as a going concern could affect our
ability to obtain additional financing at favorable terms, if at all, as it may
cause investors to lose faith in our long-term prospects. If we cannot
successfully continue as a going concern, our shareholders may lose their entire
investment in our common shares.
9
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.
Should the financing we require to sustain our working capital needs
be unavailable to us on reasonable terms when we require it, the consequences
could be a material adverse effect on our business, operating results, financial
condition and prospects. If we cannot raise operating capital, we may be forced
to cease operations.
A LARGE NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
OUTSTANDING COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY
NOTES AND WE HAVE A LIMITED NUMBER OF AUTHORIZED SHARES TO ISSUE IN CONNECTION
WITH NEW EQUITY FINANCING TRANSACTIONS. IF WE ARE UNABLE TO INCREASE OUR
AUTHORIZED CAPITAL, WE MAY BE UNABLE TO RAISE SUFFICIENT WORKING CAPITAL.
We have reserved for issuance 45,827,651 shares of common stock for
existing options, warrants and convertible notes. We have issued and
outstanding, as of March 31, 2009, 49,454,131 shares of common stock. As a
result, as of March 31, 2009 we have only 4,718,218 common shares available for
issuance to new investors. In light of our limited available authorized common
shares, we may be unable to attract investors or issue common stock in equity
financing transactions in order to raise working capital. Our failure to raise
working capital through the issuance and sale of common stock could be
detrimental to our continued operations and could force us to cease operations.
WE MAY FAIL TO OBTAIN GOVERNMENT CONTRACTS TO DEVELOP OUR
HEMOPURIFIER(R) TECHNOLOGY FOR BIODEFENSE APPLICATIONS.
The U.S. Government has undertaken commitments to help secure improved
countermeasures against bioterrorism. To date, we have been unsuccessful in
obtaining grant income. As a result, future attempts to obtain grant income from
the Federal Government will be sought through direct communication to government
health and military agencies, and may include unsolicited proposals to provide
the Hemopurifier(R) as a treatment countermeasure.
At present, the Hemopurifier(R) has not been approved for use by any
U.S. Government agency, nor have we received any contracts to purchase the
Hemopurifier(R). Since inception, we have not generated revenues from the sale
of any product based on our Hemopurifier(R) technology platform. 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 U.S. Government grants or contracts utilizing our Hemopurifier(R)
platform technology.
IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(R) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.
We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(R)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.
U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.
Our business plan to provide biodefense product candidates may involve
contracts with the U.S. Government. U.S. Government 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:
o 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;
o audit and object to our contract-related costs and fees,
including allocated indirect costs;
o control and potentially prohibit the export of our products;
and
o change certain terms and conditions in our contracts.
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If we were to become a U.S. Government contractor, we would be 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
adjustments arising from government audits and reviews have not seriously harmed
our business in the past, 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.
WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.
Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(R) 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:
o are more effective;
o have fewer or less severe adverse side effects;
o are better tolerated;
o are more adaptable to various modes of dosing;
o are easier to administer; or
o are less expensive than the products or product candidates we
are developing.
Even if we are successful in developing effective Hemopurifier(R)
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.
The Congress' passage of the Project BioShield Bill, a comprehensive
effort to develop and make available modern, effective drugs and vaccines to
protect against attack by biological and chemical weapons or other dangerous
pathogens, may encourage competitors to develop their own product candidates. We
cannot predict the decisions that will be made in the future by the various
government agencies as a result of such legislation.
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.
The market for medical devices is intensely competitive. Many of our
potential competitors have longer operating histories, greater name recognition,
more employees, and significantly greater financial, technical, marketing,
public relations, and distribution resources than we have. This intense
competitive environment may require us to make changes in our products, pricing,
licensing, services or marketing to develop, maintain and extend our current
technology. Price concessions or the emergence of other pricing or distribution
strategies of competitors may diminish our revenues (if any), adversely impact
our margins or lead to a reduction in our market share (if any), any of which
may harm our business.
11
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
To achieve the levels of production necessary to commercialize our
Hemopurifier(R) products, we will need to secure 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 manufacturing products for testing purposes
and no experience manufacturing products for large scale commercial purposes. We
will likely outsource the manufacture of our Hemopurifier(R) products to third
parties operating FDA-certified facilities. To date, we have manufactured
devices on a small scale for testing purposes. There can be no assurance 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. Any failure to address such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.
OUR HEMOPURIFIER(R) TECHNOLOGY MAY BECOME OBSOLETE.
Our Hemopurifier(R) 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 Hemopurifier(R) products.
The Homeland Security industry is growing rapidly with many competitors 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.
OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO
COMPLY WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.
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(R) cartridges and the infected
plasma samples used in preclinical testing of the Hemopurifier(R). 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
these damages. In addition, we may be required to incur significant costs to
comply with regulatory requirements in the future.
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EXECUTIVE OFFICERS. OUR
INABILITY TO RETAIN THOSE OFFICERS WOULD IMPEDE OUR BUSINESS PLAN AND GROWTH
STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.
Our success depends to a critical extent on the continued services of
our Chief Executive Officer, James A. Joyce and our Chief Science Officer,
Richard H. Tullis. Were we to lose one or both of these key executive officers,
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 loss of Dr.
Tullis would harm the clinical development of our products due to his unique
experience with the Hemopurifier(R) technology. The loss of Dr. Tullis and/or
Mr. Joyce would be detrimental to our growth as they possess unique knowledge of
our business model and infectious disease which would be difficult to replace
within the biotechnology field. We can give you no assurance that we can find
satisfactory replacements for these key executive officers at all, or on terms
that are not unduly expensive or burdensome to our company. Although Mr. Joyce
and Mr. Tullis have signed employment agreements providing for their continued
service to our company, these agreements will not preclude them from leaving our
company. 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.
12
OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE
OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR
BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR
BUSINESS AND COULD ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.
We currently have an extremely small staff comprised of three full time
employees consisting of our Chief Executive Officer, our Chief Science Officer
and a research scientist. We also employ a Senior Vice President - Finance on a
part-time, contract basis. 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. 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 personal. Competition for these
individuals, especially in San Diego 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.
WE PLAN TO GROW RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT
TEAM AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED
MANAGERIAL, OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO
TRAIN AND MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR
INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND
PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES,
WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
INVESTMENT.
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.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND
OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR
CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND
SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD
COMPANY.
The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder 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. We currently do carry limited directors and officers liability
insurance. Directors and officers liability 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 as well as increased exposure to such risks. As a company with a
limited operating history and limited resources, we will have a more difficult
time attracting and retaining management and outside independent directors than
a more established company due to these enhanced duties, obligations and
liabilities.
13
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, INCLUDING
OUR U.S. AND INTERNATIONAL PATENTS COULD NEGATIVELY IMPACT OUR PROJECTED GROWTH
AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT
ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.
In the case of patents, we cannot give you any assurance that our
existing patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. We believe that certain patent applications filed
and/or other patents issued more recently will help to protect the proprietary
nature of the Hemopurifier(R) treatment technology.
The Hemopurifier(R) and related treatment approaches are protected by
three issued U.S. patents and seven issued international patents. We have also
applied for seven additional U.S. patents and a number of additional
international patents.
We also rely on proprietary designs, technologies, processes and
know-how not eligible for patent protection. We cannot give you any assurance
that our competitors will not independently develop the same or superior
designs, technologies, processes and know-how.
While we have and will continue to enter into proprietary rights
agreements with our employees and third parties giving us proprietary rights to
certain technology developed by those employees or parties while engaged by our
company, we can give you no assurance that courts of competent jurisdiction will
enforce those agreements.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS OF DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE
PREVENTED OR DELAYED.
Our pathogen filtration devices, or Hemopurifier(R) 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 to be commercially marketed and sold. The process of obtaining and
complying with FDA and other governmental regulatory approvals and regulations
is costly, time consuming, uncertain and subject to unanticipated delays. Such
regulatory approval (if any) and product development requires 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.
o The FDA may refuse to approve an application if they believe
that applicable regulatory criteria are not satisfied.
o The FDA may require additional testing for safety and
effectiveness.
o The FDA may interpret data from pre-clinical testing and
clinical trials in different ways than we interpret them.
o If regulatory approval of a product is granted, the approval
may be limited to specific indications or limited with respect
to its distribution.
o The FDA may change their approval policies and/or adopt new
regulations.
14
Failure to comply with these or other regulatory requirements of the
FDA may subject us to administrative or judicially imposed sanctions, including:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention;
o product recalls; and
o total or partial suspension of productions.
DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(R) PRODUCT
CANDIDATES ON A TIMELY BASIS.
Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(R) 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:
o serious adverse events related to our medical device
candidates;
o unsatisfactory results of any clinical trial;
o the failure of our principal third-party investigators to
perform our clinical trials on our anticipated schedules;
and/or
o 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 Hemopurifier(R) 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.
THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.
THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.
We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.
15
OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE
TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR
MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.
Our previously planned products have not become marketable products due
in part to our transition in 2001 from a focus on utilizing our Hemopurifier(R)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and to take
advantage of the greater sense of urgency surrounding acute and chronic
infectious diseases. Prior to initiating the development of infectious disease
Hemopurifiers(R), we successfully completed an FDA approved Phase I human safety
trial of a Hemopurifier(R) to treat aluminum and iron intoxication. Since
changing the focus to infectious disease research, we have not initiated an FDA
approved human clinical trial as the development of the technology is still
continuing and will require both significant capital and scientific resources.
Our pending products face similar challenges of obtaining successful clinical
trials in route to gaining FDA approval prior to commercialization.
Additionally, our limited financial resources hinder the speed of our product
development due to personnel constraints.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including the:
o lack of adequate quality or sufficient prevention benefit, or
unacceptable safety during pre-clinical studies or clinical
trials;
o failure to receive necessary regulatory approvals;
o existence of proprietary rights of third parties; and/or
o inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.
THE PATENTS WE OWN COMPRISE A MAJORITY OF OUR ASSETS WHICH COULD LIMIT
OUR FINANCIAL VIABILITY.
The Hemopurifier(R) is protected by three issued U.S. patents and seven
issued international patents. One of the U.S. patents is covered via an
exclusive license. Our exclusive license expires March 2020 and is subject to
termination if the inventors have not received a minimum of $15,000 in any year
during the term beginning in the second year after the FDA approves the
Hemopurifier(R). These patents comprise a majority of our assets. At March 31,
2009, our intellectual property assets comprise 90% of our non-current assets,
and 70% of total assets. If our existing patents are invalidated or if they fail
to provide significant commercial benefits, it will severely hurt our financial
condition as a majority of our assets would lose their value. Further, since the
financial value of our patents is written down for accounting purposes over the
course of their term until they expire, our assets comprised of patents will
continually be written down until they lose value altogether.
LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE
LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.
There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may potentially be new accounting pronouncements or additional
regulatory rulings which will have an impact on our future financial position
and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes
as well as proposed legislative initiatives following the Enron bankruptcy have
increased our general and administrative costs as we have incurred increased
legal and accounting fees to comply with such rule changes. Further, proposed
initiatives are expected to result in changes in certain accounting rules,
including legislative and other proposals to account for financial instruments
at fair value. These and other potential changes could materially increase the
expenses we report under accounting principles generally accepted in the United
States of America, and adversely affect our operating results.
16
OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
Our Hemopurifier(R) 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 do not have
general clinical trial liability insurance coverage. There can be no assurance
that future 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 affect 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.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR IMPAIR OUR ABILITY TO MARKET
OUR PRODUCTS.
Products developed to treat diseases caused by or to combat the threat
of bioterrorism will be subject to changing political and social environments.
The political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business. Bioterrorism has become the focus of political debates both
in terms of how to approach bioterrorism and the amount of funding the
government should provide for any programs involving homeland protection.
Government funding for products on bioterrorism could be reduced which would
hinder our ability to obtain governmental grants.
RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL
BE PAID IN THE FORESEEABLE FUTURE.
We do not anticipate paying cash dividends on our common shares in the
foreseeable future, and we cannot assure an investor that funds will be legally
available to pay dividends, or that even if the funds are legally available,
that the dividends will be paid.
THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL
THOSE SHARES.
As long as the trading price of our common shares is below $5 per
share, the open-market trading of our common shares will be subject to the
"penny stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
17
OUR COMMON SHARES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
Our common shares have historically been sporadically or
"thinly-traded" on the OTCBB, 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 or non-existent, 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 SHARES IS PARTICULARLY VOLATILE GIVEN
OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC
FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUE WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE
PRICE, WHICH MAY RESULT IN SUBSTANTIAL 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, 2009, the high and
low closing sale prices of a share of our common stock were $0.61 and $0.12,
respectively. The volatility in our share price is attributable to a number of
factors. First, as noted above, our common shares are sporadically and/or thinly
traded. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders 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 or "risky" investment due to
our limited operating history and lack of revenue or 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.
Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
18
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.
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 the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY
21.5% OF OUR OUTSTANDING COMMON SHARES AS OF MARCH 31, 2009, WHICH MAY LIMIT
YOUR ABILITY OR THAT OF OTHER SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR
COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN YOU
RECEIVING A PREMIUM OVER THE MARKET PRICE FOR YOUR COMMON SHARES.
As of March 31, 2009, our officers and directors beneficially own or
control approximately 21.5% of our outstanding common shares (assuming the
exercise of all outstanding options and warrants held by our officers and
directors). In addition, our Board has approved the grant of 4,000,000 shares of
restricted stock to our Chief Executive Officer, and upon such issuance, the
beneficial ownership of our officers and directors will increase to 26%. These
persons will have the ability to substantially influence all matters submitted
to our shareholders 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 COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
OUTSTANDING COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY
NOTES. THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE
SUBSTANTIAL DILUTION OF YOUR INVESTMENT IN TERMS OF YOUR PERCENTAGE OWNERSHIP IN
THE COMPANY AS WELL AS THE BOOK VALUE OF YOUR COMMON SHARES. THE SALE OF A LARGE
AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON
THE PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME
TAXES, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY
DEPRESS THE PREVAILING MARKET PRICES FOR OUR SHARES.
As of March 31, 2009, there are outstanding purchase options and
warrants entitling the holders to purchase 33,683,026 common shares at a
weighted average exercise price of $0.33 per share. That figure includes
1,924,465 warrants that are conditional upon the exercise of other warrants or
conversion of certain convertible debt instruments. There are 10,318,851 shares
underlying promissory notes convertible into common stock at a weighted average
exercise price of $0.17. The exercise price for all of the aforesaid warrants
may be less than your cost to acquire our common shares. In the event of the
exercise of these securities, you could suffer substantial dilution of your
investment in terms of your percentage ownership in the company as well as the
book value of your common shares. In addition, the holders of the common share
purchase options or warrants may sell common shares in tandem with their
exercise of those options or warrants to finance that exercise, 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.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.
We are entitled under our certificate of incorporation to issue up to
100,000,000 shares of common stock. After taking into consideration our
outstanding common stock at March 31, 2009, our convertible notes, outstanding
options, outstanding warrants and conditional warrants we will be entitled to
issue up to 4,718,218 additional common shares. Our board may generally issue
shares of common stock, or options or warrants to purchase those shares, without
further approval by our shareholders 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.
19
OUR ISSUANCE OF ADDITIONAL COMMON SHARES IN EXCHANGE FOR SERVICES OR TO
REPAY DEBT, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS AND
COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
Our board may generally issue shares of common stock to pay for debt or
services, without further approval by our shareholders based upon such factors
that our board of directors may deem relevant at that time. For the past four
years, we issued a total of 4,589,735 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 35.7% and
59.3% for the years ended March 31, 2009 and 2008, respectively.
For the past four fiscal years we issued a total of 6,461,919 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 4.3%
and 12.8% for the years ended March 31, 2009 and 2008, 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 under circumstances we may deem appropriate at
the time.
THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS
AND EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.
Our certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to our company and
shareholders. Our bylaws 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 shareholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our company and shareholders.
ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.
Certain provisions of the Nevada General Corporation Law have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in
acquiring us to negotiate with, and to obtain the approval of, our Board of
Directors in connection with such a transaction. However, certain of these
provisions may discourage a future acquisition of us, including an acquisition
in which the shareholders might otherwise receive a premium for their shares. As
a result, shareholders who might desire to participate in such a transaction may
not have the opportunity to do so.
ITEM 2. PROPERTIES
We currently rent approximately 3,200 square feet of executive office
space and laboratory space at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109 at the rate of $7,744 per month on a lease that expired on July
12, 2007. The Company is presently leasing its space on a month to month basis,
at the same terms.
ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various claims, lawsuits,
disputes with third parties or breach of contract actions incidental to the
normal course of business operations. We are currently not involved in any such
litigation or any pending legal proceedings that we believe could have a
material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our Common Stock is quoted on the Over-The-Counter Bulletin Board
(OTCBB). Our trading symbol is "AEMD."
Our Common Stock has had a limited and sporadic trading history.
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 OTCBB.
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
- -----------------------------------------------------------------------------
2009:
First Quarter $ 0.27 $ 0.12
2008:
Fourth Quarter 0.45 0.18
Third Quarter 0.50 0.25
Second Quarter 0.61 0.38
First Quarter 0.75 0.45
2007:
Fourth Quarter 0.76 0.49
Third Quarter 0.88 0.57
Second Quarter 0.79 0.55
First Quarter 0.84 0.25
There were approximately 153 record holders of our common stock at June
29, 2009. The number of registered shareholders includes any beneficial owners
of common shares held in street name.
We have not declared any cash dividends on our common stock since
inception and do not anticipate any in the future. Our current business plan is
to retain any future earnings to finance the expansion and development of our
business. Any future determination to pay cash dividends will be at the
discretion of our board of directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors our
board may deem relevant at that time.
The transfer agent and registrar for our common stock is Computershare
Investor Services, located at 350 Indiana Street, Suite 800, Golden Colorado
80401; 303-262-0600.
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(2) of the Securities Act or Regulation D of the Securities Act during
the fiscal year ended March 31, 2009 Except as stated below, no underwriting
discounts or commissions were payable with respect to any of the following
transactions.
CONVERSION AND RESTRUCTURING OF 8% NOTES AND 2008 9% NOTES INTO DECEMBER 2008
10% CONVERTIBLE NOTES
On December 30, 2008, we entered into an agreement with the holders of the 8%
Notes and the 2008 9% Notes to extend the maturity dates of those notes. As part
of this arrangement, we also agreed to (a) extend the expiration dates of the
warrants originally issued with those notes to July 1, 2012, (b) modify the
interest rate to 10%, (c) issue notes in the amount of $265,911 representing
loan extension fees, (d) issue new notes representing accrued interest and
penalties incurred through September 30, 2008, (e) book the anticipated interest
through maturity on the original principal amounts, the loan fees and the
accrued interest and damages into another new note. All of these new notes and
the modified original notes are convertible into our common stock at 80% of the
market price on the date of conversion with a floor on the conversion price of
$0.15 per share and a ceiling on the conversion price of $0.25 per share.
21
The following table summarizes the number of shares of our Common Stock issuable
upon the conversion of the restructured December 2008 10% convertible notes
("Restructured December 2008 10% Convertible Notes" or "December 2008 10%
Convertible Notes") using upon the floor conversion price of $0.15 per common
share:
Modified Original Notes 4,766,667
New Notes 3,821,407
---------
Total 8,588,074
=========
For accounting purposes, the restructuring and amendment of the 8% and 9% Notes
into December 2008 10% Convertible Notes was treated as an extinguishment
pursuant to EITF Issue No. 06-6. The changes in the note agreements, conversion
feature and warrants were considered substantive as prescribed in that
consensus. We initially recorded an estimated loss on extinguishment of
$1,063,344. We subsequently retained a third party to assess the fair value of
the December 2008 10% Convertible Notes and related warrants. Based on that
third party valuation, we reduced the loss on extinguishment to $977,452 as
follows:
Reacquisition Price (fair value of notes
and warrants as amended) $1,909,877
Less amounts relieved at date of extinguishment
Accrued interest and accrued damages (217,425)
Principal balance of original notes (715,000)
----------
Loss on extinguishment $ 977,452
==========
During the three months ended March 31, 2009, holders of the Restructured
December 2008 10% Convertible Notes and related convertible notes converted
$171,808 of their principal balance and $1,808 of accrued interest to common
stock per the terms of the Restructured December 2008 10% Convertible Notes and
Related Convertible Notes.
2008 10% Convertible Notes in the aggregate amount of $45,000 remain outstanding
at March 31, 2009. At March 31, 2009, interest payable on those notes totaled
$2,978.
COMMON STOCK AND WARRANTS
In April 2008, the Company issued 10,170 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $6,000 based on the value of the services
provided.
In April 2008, the Company entered into a license agreement with the Trustees of
Boston University which provides for an exclusive license for a Boston
University patent BU05-41, "Method to Prevent Proliferation and Growth of
Metastases." The agreed initial payment under this license was an issuance of
10,849 restricted shares of common stock equivalent to 115% of $5,000.
In April 2008, the Company issued 6,667 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In May 2008, the Company issued 1,000,000 shares of restricted common stock to
an institutional investor for $500,000 of cash.
In May 2008, we issued 232,033 shares of common stock to a 10% convertible
noteholder in order to convert the $33,000 principal balance and $6,325 of
accrued interest of the convertible note to equity.
In June 2008, the Company issued 25,610 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.41 per share in payment for regulatory affairs consulting
services to the Company valued at $10,500 based on the value of the services
provided.
In June 2008, we issued grants of restricted common stock to two employees of
5,000 shares each as additional compensation. Those grants were valued at $2,400
apiece based our closing stock price of $0.48 on the date of issuance.
22
In July 2008, our Chief Executive Officer converted $35,000 of accrued debt to
100,000 shares of unregistered common stock based upon the closing stock price
of $0.35 per share on that day.
In July 2008, a board member and his spouse, both former executives at Hemex, a
company we acquired in 1999, converted $147,279 of accrued debt to 446,300
shares of unregistered common stock based upon the closing stock price of $0.33
per share on that day.
In July 2008, our Chief Science Officer converted $150,000 of accrued debt to
468,750 shares of unregistered common stock based upon the closing stock price
of $0.32 per share on that day.
In September 2008, we issued 966,750 shares of restricted common stock and
966,750 warrants with a strike price of $0.20 in payment of accrued interest of
$89,500 and accrued damages of $103,850 per the payment formula in the Loan
Agreement.
In September 2008, we issued 110,138 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.45 per
share in payment for legal services valued at $49,562 based on the value of the
services.
In September 2008, we issued 38,150 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.40 per
share in payment for regulatory affairs consulting services valued at $15,260
based on the value of the services.
In October 2008, we issued 770,000 shares, of which 385,000 were through the
exercise of registered warrants and 385,000 were issuances of restricted common
stock, for gross proceeds of $192,500.
In October 2008, we issued 51,398 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.31 per
share in payment for financial consulting services and research services valued
at $16,080 based on the value of the services.
In November 2008, we issued 200,000 shares, of which 100,000 were through the
exercise of registered warrants and 100,000 were issuances of restricted common
stock, for gross proceeds of $50,000.
In November 2008, we issued 95,550 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for financial consulting services valued at $23,888 based on
the value of the services.
In November 2008, we issued 98,684 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for legal services valued at $18,750 based on the value of the
services.
In December 2008, we issued 59,950 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for legal services valued at $16,606 based on the value of the
services.
In December 2008, we issued 700,000 shares of restricted common stock and
700,000 warrants with a strike price of $0.25 to an accredited investor for
gross proceeds of $175,000.
In December 2008, we issued 338,099 shares of restricted common stock pursuant
at $0.25 per share in payment for legal services valued at $84,288 based on the
value of the services.
In December 2008, we issued 23,636 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for regulatory affairs consulting services valued at $6,000
based on the value of the services.
In December 2008, we issued 77,192 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for regulatory affairs consulting services valued at $20,070
based on the value of the services.
In December 2008, we issued 35,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $8,400
based on the value of the services.
23
In December 2008, we issued 15,337 shares of restricted common stock pursuant at
$0.33 per share in payment for public relations services valued at $5,000 based
on the value of the services.
In January 2009, we issued 23,566 shares of restricted common stock as a patent
license payment valued at $5,750.
In January 2009, we issued 1,452,926 shares of common stock as a result of
conversions of $419,473 of convertible notes payable, other notes payable and
related accrued interest. The shares were issued to accredited investors.
In January 2009, we issued 105,869 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at an average
price of $0.19 per share in payment for regulatory affairs consulting services
valued at $19,550 based on the value of the services.
In January 2009, we issued 353,000 shares of restricted common stock and
warrants to purchase 353,000 shares of common stock in exchange for $55,850. The
shares were issued to an accredited investor.
In February 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In February 2009, we issued 582,000 shares of restricted common stock and
warrants to purchase 582,000 shares of common stock in exchange for $88,870. The
shares were issued to an accredited investor.
In February 2009, we issued 78,743 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at a price of
$0.18 per share in payment for regulatory affairs consulting services valued at
$13,780 based on the value of the services.
In February 2009, we issued 53,706 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for regulatory affairs consulting services valued at $9,130
based on the value of the services.
In February 2009, we issued 168,750 shares of restricted common stock and
168,750 warrants with a strike price of $0.20 in payment of accrued interest of
$89,500 and accrued damages of $53,105 per the payment formula in the Loan
Agreement.
In February 2009, we issued 213,666 shares of common stock as a result of
conversions of $83,500 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In March 2009, we issued 903,135 shares of common stock as a result of
conversions of $179,808 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In March 2009, we issued 385,000 shares of restricted common stock and warrants
to purchase 385,000 shares of common stock in exchange for $57,750. The shares
were issued to an accredited investor.
In March 2009, we issued 50,000 shares of restricted common stock pursuant at
$0.17 per share in payment for investor relations services valued at $8,500
based on the value of the shares issued for the services.
In March 2009, we issued 33,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In March 2009, we issued 47,760 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.18 per
share in payment for financial consulting services valued at $8,597 based on the
value of the services.
In March 2009, we issued 25,674 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $5,263 based on the value of the
services.
In March 2009, we issued 37,695 shares of restricted common stock pursuant at
$0.19 per share in payment for legal services valued at $7,275 based on the
value of the services.
In March 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
24
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth March 31, 2009 information on our equity
compensation plans (including the potential effect of debt instruments
convertible into common stock) in effect as of that date:
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available
of outstanding options, outstanding options, for future issuance
warrants and rights (1)(2) warrants and rights under equity
compensation plans
(excluding securities
reflected in column
(a))
Equity compensation
plans approved by
security holders 32,500 $2.65 457,500
Equity compensation
plans not approved by
security holders (1) 14,456,560 $0.37 N/A
------------- ------ --------
Totals 14,489,060 $0.38 457,500
(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.
2000 STOCK OPTION PLAN
Number of
securities to be Weighted average
issued upon exercise price Number of
exercise of of outstanding securities
outstanding options, remaining
options, warrants warrants and available for
Plan Category and rights rights future issuance
- --------------------- ------------------- ------------------ ----------------
(a) (b) (c)
- --------------------- ------------------- ------------------ ---------------
Equity compensation
plans approved by
security holders 32,500 $ 2.65 457,500
- --------------------- ------------------- ------------------ ----------------
Equity compensation
plans not approved
by security holders -- -- --
- --------------------- ------------------- ------------------ ----------------
Total 32,500 $ 2.65 457,500
- --------------------- ------------------- ------------------ ----------------
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 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 NSO, 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 Plan is 500,000 options.
25
During the fiscal year ended March 31, 2009, we issued 10,000
restricted shares under the plan to two employees. At March 31, 2009, we had
granted 32,500 options and 10,000 restricted shares under the 2000 Stock Option
Plan, with 457,500 available for future issuance.
2003 CONSULTANT STOCK PLAN
- -------------------- ------------------- ------------------ -----------------
Plan Category Number of shares
of common stock Weighted average Number of common
available for price of shares shares remaining
issuance under issued under the available for
the plan plan future issuance
- -------------------- ------------------- ------------------ -----------------
(a) (b) (c)
- -------------------- ------------------- ------------------ -----------------
Equity compensation
plans approved by
security holders -- -- --
- -------------------- ------------------- ------------------ -----------------
Equity compensation
plans not approved
by security holders 5,000,000 $ 0.31 706,011
- -------------------- ------------------- ------------------ -----------------
Total 5,000,000 $ 0.31 706,011
- -------------------- ------------------- ------------------ -----------------
Our 2003 Consultant Stock Plan (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 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 Stock Plan provides for the grants of
common stock. No awards may be issued after the ten-year anniversary of the date
we adopted the Stock Plan, the termination date for the plan.
On March 29, 2004, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 1,000,000 common shares issuable under
the Stock Plan under the Securities Act of 1933.
On August 29, 2005, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 2,000,000 common shares issuable under
The Stock Plan under the Securities Act of 1933.
On August 9, 2007, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 2,000,000 common shares issuable under
The Stock Plan under the Securities Act of 1933.
At March 31, 2009, 706,011 shares of common stock remain to be issued
under the 2003 Consultant Stock Plan.
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or
providing those persons with incentives or inducements affording them an
opportunity to become owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will
receive a one-time grant of a non-qualified stock option of 1.5% of the common
stock outstanding at the time of election. The options will vest one-third at
the time of election to the Board and the remaining two-thirds will vest equally
at year end over three years. Additionally, each director will also receive an
annual $25,000 non-qualified stock option retainer, $15,000 of which is to be
paid at the first of the year to all directors who are on the Board prior to the
first meeting of the year and a $10,000 retainer will be paid if a director
attends 75% of the meetings either in person, via conference call or other
electronic means. The exercise price for the options under the Directors
Compensation Program will equal the average closing of the last ten (10) trading
days prior to the date earned. At March 31, 2009 under the 2005 Directors
Compensation Program we had issued 1,337,825 options to outside directors,
3,965,450 options to employee-directors, 308,725 outside directors options had
been forfeited, 250,000 outside directors options had been exercised and
4,744,550 options remained outstanding.
26
STAND-ALONE GRANTS
From time to time our Board of Directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.
To date we have issued 12,393,158 options (of which 3,912,025 have been
exercised or cancelled) outside of both the 2005 Directors Compensation Plan,
2000 Stock Option Plan and the 2003 Consultant Stock Plan.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to furnish information under
this Item 6.
ITEM 7. 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 report.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this document we make a number of statements, referred to as
"FORWARD-LOOKING STATEMENTS" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), that are intended to
convey our expectations or predictions regarding the occurrence of possible
future events or the existence of trends and factors that may impact our future
plans and operating results. The safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995 does not apply
to us. We note, however, that these forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they
do develop, the pace at which they develop;
o our ability to attract and retain the qualified personnel to
implement our growth strategies;
o our ability to obtain approval from the Food and Drug
Administration for our products;
o our ability to protect the patents on our proprietary
technology;
o our ability to fund our short-term and long-term financing
needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in
the sections of this prospectus, including those captioned
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.
27
Overview
We are a development stage medical device company focused primarily on
the advancement of our proprietary Hemopurifier(R) platform treatment
technology, which is designed to rapidly reduce the presence of infectious
viruses and toxins in human blood. Our focus is to prepare our Hemopurifier(R)
to treat chronic viral conditions, acute viral conditions and viral-based
bioterror threats in human clinical trials. Our Hemopurifier(R)is not yet
approved for use in humans, and to date we have not generated any revenues from
product sales.
Results of Operations
Operating Expenses
Consolidated operating expenses were $2,923,254 for the fiscal year
ended March 31, 2009, versus $2,892,588 for the comparable period one year ago.
The net increase of $30,666 was due to an increase in payroll expense of
$262,629, which was partially offset by decreases in professional fees of
$156,652 and in general and administrative expense of $75,311.
Payroll and related expenses increased by $262,629 as compared to the
prior fiscal year. The increase was principally driven by an increase in stock
compensation expense of $206,228 due to the recognition of expense related to
the amortization of stock options vesting during the fiscal year ended March 31,
2009. Additionally, general and administrative payroll increased by $174,147 due
to the hiring of a finance professional for the 2009 fiscal year and an investor
relations employee for part of the 2009 fiscal year. This increase in general
and administrative payroll was partially offset by a reduction in research and
development payroll of $105,526. The reduction in research and development
payroll was largely due to a workforce reduction. Finally, due to the change in
the mix of payroll expenses, payroll taxes decreased by $9,991.
Professional fees decreased by $156,652. This decrease was driven by a
$146,686 decrease in legal fees, a $121,291 decrease in investor relations fees
and a $15,890 decrease in scientific consulting fees. Those decreases were
partially offset by a $53,176 increase in business development fees, a $40,714
increase in accounting and finance professional fees and a $5,301 increase in
website-related professional fees.
General and administrative expenses decreased by $75,311. This
decrease was the result of decreases in insurance costs of $24,991, lab supplies
of $17,536, utility expenses of $16,603, travel expenses of $11,770, lab fees of
$9,992, office equipment expenses of $4,316 and telephone expenses of $3,460,
which were partially offset by a number of general and administrative expenses
that increased.
Other Expenses
In the fiscal year ended March 31, 2009, we recognized $1,604,715 in
non-cash losses on extinguishment of debt. $1,380,772 of that loss arose out of
the restructuring of $715,000 in notes and the remainder related to the value of
warrants issued as part of interest payments. In the fiscal year ended March 31,
2008, we recognized $547,119 in non-cash losses, which related to the
restructuring of $1,000,000 in convertible notes.
In addition, we recognized $213,903 in non-cash income related to
warrant liability revaluation to reflect the change in fair value of the
warrants that were classified as derivative liabilities under EITF Issue No.
00-19. In the fiscal year ended March 31, 2008, we recognized $637,179 in
non-cash income related to warrant liability revaluation.
28
The combination of interest expenses and other expenses increased by
$443,375 primarily due to the high level of amortization of discounts associated
with several short-term notes. The following table breaks out the various
components of our interest expense over the fiscal years ended March 31, 2009
and 2008:
Components of Interest Expense in
Fiscal Year Ended
March 31, March 31,
2009 2008 Change
----------- ----------- -----------
ACTUAL INTEREST EXPENSE 302,679 256,291 46,388
AMORTIZATION OF DEFERRED OFFERING COSTS 110,851 73,311 37,540
AMORTIZATION OF NOTE DISCOUNTS 1,376,465 595,172 781,293
FINANCE CHARGES FROM VENDORS 21,518 17,702 3,816
DERIVATIVE EXPENSE -- 38,224 (38,224)
LIQUIDATED DAMAGES (38,651) 338,787 (377,438)
----------- ----------- -----------
TOTAL INTEREST EXPENSE $1,772,862 $1,319,487 $ 453,375
$453,374
=========== =========== ===========
As a result of the above factors, our net loss increased from $(4,140,264) for
the fiscal year ended March 31, 2008 to $(6,084,158) for the fiscal year ended
March 31, 2009.
Liquidity and Capital Resources
At March 31, 2009, we had a cash balance of $6,157 and a working
capital deficit of $4,103,520. This compares to a cash balance of $254,691 and a
working capital deficit of $3,480,939 at March 31, 2008. Between April 1, 2009
and June 26, 2009, we raised aggregate proceeds OF $385,200 through the exercise
of previously outstanding warrants and through private equity and debt financing
transactions. Our cash at March 31, 2009 plus additional funds raised subsequent
to March 31, 2009 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 the Company to
continue to operate as a going concern.
We do not expect to generate revenue from operations for the
foreseeable future, and 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, March 31,
2009 2008
------- -------
Cash (used in) provided by:
Operating activities $(1,777) $(2,104)
Investing activities (12) (12)
Financing activities 1,541 1,930
------- -------
Net (decrease) increase in cash $ (248) $ (186)
======= =======
29
NET CASH FROM OPERATING ACTIVITIES. We use cash in our operating
activities due to our losses from operations. Net cash used in operating
activities was $1,777,000 in fiscal 2009 compared to net cash used in operating
activities of $2,104,000 in fiscal 2008.
NET CASH FROM INVESTING ACTIVITIES. For the fiscal years ended March 31,
2009 and 2008, we used approximately $12,000 in cash for our investing
activities. The primary investing activity in both years was in patents and
patents pending.
NET CASH FROM FINANCING ACTIVITIES. Net cash used in financing activities
decreased $389,000 to $1,541,000 in fiscal 2009 compared to $1,930,000 in fiscal
2008. Included in net cash provided by financing activities in fiscal 2009 were
$1,111,000 in net proceeds from the issuance of common stock and $430,000 from
the issuance of convertible notes payable. In fiscal 2008, we raised $1,290,000
in net proceeds from the issuance of common stock and $640,000 from the issuance
of notes payable.
CONVERTIBLE NOTES PAYABLE AND WARRANTS
On December 30, 2008, we entered into an agreement with the holders of
the 8% Notes and the 2008 9% Notes to extend the maturity dates of
those notes. As part of this arrangement, we also agreed to (a) extend the
expiration dates of the warrants originally issued with those notes to July 1,
2012, (b) modify the interest rate to 10%, (c) issue notes in the amount of
$265,911 representing loan extension fees, (d) issue new notes representing
accrued interest and penalties incurred through September 30, 2008, (e) book the
anticipated interest through maturity on the original principal amounts, the
loan fees and the accrued interest and damages into another new note. All of
these new notes and the modified original notes are convertible into our common
stock at 80% of the market price on the date of conversion with a floor on the
conversion price of $0.15 per share and a ceiling on the conversion price of
$0.25 per share.
The following table summarizes the number of shares of our Common Stock issuable
upon the conversion of the restructured December 2008 10% convertible notes
using upon the floor conversion price of $0.15 per common share:
Modified Original Notes 4,766,667
New Notes 3,821,407
---------
Total 8,588,074
=========
For accounting purposes, the restructuring and amendment of the 8% and 9% Notes
into December 2008 10% Convertible Notes was treated as an extinguishment
pursuant to EITF Issue No. 06-6. The changes in the note agreements, conversion
feature and warrants were considered substantive as prescribed in that
consensus. We initially recorded an estimated loss on extinguishment of
$1,063,344. We subsequently retained a third party to assess the fair value of
the December 2008 10% Convertible Notes and related warrants. Based on that
third party valuation, we decreased the loss on extinguishment to $977,452 as
follows:
Reacquisition Price (fair value of notes
and warrants as amended) $1,909,877
Less amounts relieved at date of extinguishment
Accrued interest and accrued damages (217,425)
Principal balance of original notes (715,000)
----------
Loss on extinguishment $ 977,452
==========
During the three months ended March 31, 2009, holders of the Restructured
December 2008 10% Convertible Notes and Related Convertible Notes converted
$171,808 of their principal balance and $1,808 of accrued interest to common
stock per the terms of the Restructured December 2008 10% Convertible Notes and
Related Convertible Notes.
30
2008 10% CONVERTIBLE NOTES
During the year ended March 31, 2009, we raised an aggregate amount of $430,000
from the sale to accredited investors of 10% convertible notes and warrants
("2008 10% Convertible Notes"). The notes are convertible into our common stock
at a fixed conversion price of $0.50 per share prior to maturity and the
warrants are exercisable at $0.50 per share for a period of three years ending
between July and September 2011. In connection with this financing, we agreed to
pay to the investment banking firm that arranged this sale a cash commission of
seven percent of the proceeds and warrants equal to seven percent of the gross
capital raised which we accounted for as deferred financing costs and amortize
over the terms of convertible notes.
The warrants issued as part of the 2008 10% Convertible Notes can be settled in
unregistered shares of our common stock. The warrants have been valued using a
Binomial Lattice option pricing model and an associated discount of $150,095,
the relative fair value measured at the commitment date, was recorded and
presented net against the face amount of the 2008 10% Convertible Notes. The
discount associated with the warrants is amortized over the term of the notes.
The convertible feature of the 2008 10% Convertible Notes does not have a
beneficial conversion pursuant to EITF 98-5.
During the three months ended March 31, 2009, a holder of $385,000 of the 2008
10% Convertible Notes converted his principal and $19,250 of accrued interest to
common stock at $0.50 per share per the terms of the 2008 10% Convertible Notes.
2008 10% Convertible Notes in the aggregate amount of $45,000 remain outstanding
at March 31, 2009. At March 31, 2009, interest payable on those notes totaled
$2,978.
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 year ended March 31,
2009 we issued 1,476,255 common shares for services of which 441,131 were
unregistered. We also issued 2,801,760 for the retirement or conversion of notes
payable and convertible notes payable, 65,337 for investor relations services
and 34,415 for licensing rights. Included in the 1,476,255 common shares issued
for services are 1,035,124 shares, registered under a Form S-8 registration
statement, which were issued as follows: 401,037 for regulatory consulting,
194,708 for financial and scientific consulting, 144,933 for business
development consulting and 294,446 for legal expenses 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 4.3%.
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, 2009 we
issued 2,801,760 restricted common shares for repayment in full of notes,
including accrued interest in the aggregate amount of $109,723. The price
discount of the common stock issued for debt was approximately 35.7%. We
recorded a loss on extinguishment of debt totaling $1,604,715 in the fiscal year
ended March 31, 2009.
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.
GOING CONCERN
Our independent registered public accounting firm has stated in their
audit report on our March 31, 2009 consolidated financial statements that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.
31
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
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, the Company evaluates estimates and assumptions based upon
historical experience and various other factors and circumstances. Management
believes the Company's estimates and assumptions are reasonable in the
circumstances; however, actual results may differ from these estimates under
different future conditions. The Company believes that the estimates and
assumptions that are most important to the portrayal of the Company's financial
condition and results of operations, in that they require the most difficult,
subjective or complex judgments, form the basis for the accounting policies
deemed to be most critical to us. These critical accounting policies relate to
stock purchase warrants issued with notes payable, beneficial conversion feature
of convertible notes payable, impairment of intangible assets and long lived
assets, stock compensation, contingencies and litigation. We believe estimates
and assumptions related to these critical accounting policies are appropriate
under the circumstances; however, should future events or occurrences result in
unanticipated consequences, there could be a material impact on the Company's
future financial conditions or results of operations.
Fair Value Measurements
In December 2006, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 157, "FAIR VALUE
MEASUREMENTS," which defines fair value, establishes a framework for measuring
fair value in accordance with GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 simplifies and codifies related guidance within GAAP,
but does not require any new fair value measurements. The guidance in SFAS No.
157 applies to derivatives and other financial instruments measured at estimated
fair value under SFAS No. 133 and related pronouncements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We adopted
SFAS No. 157 as of April 1, 2008. SFAS No. 157 applies to certain assets and
liabilities that are being measured and reported on a fair value basis. SFAS No.
157 defines fair value, establishes a framework for measuring fair value in
accordance with generally accepted accounting principles, and expands disclosure
about fair value measurements. This Statement enables the reader of the
financial statements to assess the inputs used to develop those measurements by
establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The Statement requires that assets
and liabilities carried at fair value will be classified and disclosed in one of
the following three categories:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of warrants classified as derivative liabilities is
determined based on unobservable inputs that are corroborated by market data,
which is a Level 3 classification. We record variations in our warrant liability
account on our balance sheet at fair value with changes in fair value recorded
in our consolidated statements of operations.
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, with respect to warrants
utilizing the Binomial Lattice option pricing model:
Fiscal Year Ended March 31, 2009
-----------------------------------
Risk free interest rate 1.81% - 3.01%
Average expected life 3 - 5 years
Expected volatility 83.6% - 103.0%
Expected dividends None
We did not make any changes to our valuation techniques compared to the
prior fiscal year.
We also obtained a third party valuation, which is a Level 3
classification as it was based on unobservable inputs that are not corroborated
by market data, in connection with our December 2008 note restructuring.
32
Long-Lived Assets
SFAS No.144, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
SFAS 144 also requires companies to separately report discontinued operations
and extends that reporting requirement to a component of an entity that either
has been disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to sell.
Management noted no indicators requiring review for impairment during the fiscal
year ended March 31, 2009.
Stock Purchase Warrants Issued with Notes Payable
The Company granted warrants in connection with the issuance of certain
notes payable. Under Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable. Such discounts are amortized to interest expense over the
term of the notes.
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" ("BCF"). Pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities With Beneficial Conversion Features or
Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of
EITF Issue No. 98-5 to Certain Convertible Instruments," the estimated fair
value of the BCF is recorded 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.
Accounting for Transactions involving Stock Compensation
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based
Payment," which requires that the compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No.
123-R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No.123-R replaces
SFAS No. 123 and supersedes APB 25. As originally issued, SFAS No. 123
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of APB 25,
provided that the financial statements disclosed the pro forma net income or
loss based on the preferable fair-value method.
We adopted SFAS No. 123-R in the first fiscal quarter of 2007. Thus,
our consolidated financial statements reflect an expense for (a) all share-based
compensation arrangements granted on or after January 1, 2006 and for any such
arrangements that are modified, cancelled, or repurchased on or after that date,
and (b) the portion of previous share-based awards for which the requisite
service has not been rendered as of that date, based on the grant-date estimated
fair value. For the fiscal year ended March 31, 2009, we recognized $733,289 of
share-based compensation.
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 and would be
considered material to investors.
33
ITEM 8. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO"), who is also our acting Chief
Financial Officer ("CFO"), we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the "Evaluation Date")
within 90 days prior to filing the Company's March 31, 2009 Form 10-K.
Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of such period, our disclosure
controls and procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Exchange Act and are effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
(a) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the registrant's annual or interim
financial statements will not be prevented or detected on a timely basis.
The Company's management, with the participation of its Chief Executive
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of March 31, 2009. In making this assessment, the Company
used the criteria set forth by the Committee of Sponsoring Organizations of The
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
that assessment under such criteria, management concluded that the Company's
internal control over financial reporting was not effective as of March 31, 2009
due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for fiscal
2009 identified a lack of sufficient segregation of duties, particularly in cash
disbursements. Specifically, this material weakness is such that the design of
controls over the area of cash disbursements relies primarily on detective
controls and could be strengthened by adding preventative controls to properly
safeguard company assets.
Management has identified a lack of sufficient personnel in the
accounting function due to the limited resources of the Company with appropriate
skills, training and experience to perform the review processes to ensure the
complete and proper application of generally accepted accounting principles,
particularly as it relates to taxes. Specifically, this material weakness led to
segregation of duties issues and resulted in audit adjustments to the annual
consolidated financial statements and revisions to related disclosures,
including tax reporting.
The Company is in the process of developing and implementing
remediation plans to address its material weaknesses.
34
Management has identified specific remedial actions to address the
material weaknesses described above:
o Improve the effectiveness of the accounting group by
continuing to augment existing Company resources with
additional consultants or employees to improve segregation
procedures and to assist in the analysis and recording of
complex accounting transactions and preparation of tax
disclosures. The Company plans to mitigate the segregation of
duties issues by hiring additional personnel in the accounting
department once the Company has achieved commercialization of
its products and is generating revenue, or has raised
significant additional working capital.
o Improve segregation procedures by strengthening cross approval
of various functions including cash disbursements and
quarterly internal audit procedures where appropriate.
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the
Company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for certain
public companies.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes made in our internal controls over
financial reporting during the quarter ended March 31, 2009 that have materially
affected or are reasonably likely to materially affect these controls.
ITEM 9B. OTHER INFORMATION
During the period December 31, 2008 through March 31, 2009, the Company
issued restricted securities totaling 4,169,738 shares or 9.29% of the Company's
issued and outstanding Common Stock, based on the number of shares of Common
Stock outstanding and reported on the Company's Form 10-Q for the quarter ended
December 31, 2008. Such securities included shares of restricted Common Stock
issued upon the conversion of outstanding debt securities and shares issued for
cash investment, services, interest payable and professional services.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors, and persons who own more than 10% of a registered class of
our equity securities to file reports of ownership and changes in ownership with
the SEC and Nasdaq. Officers, directors, and greater than 10% beneficial owners
are required by SEC regulation to furnish the Company with copies of all Section
16 (a) forms they file. Based solely on our review of copies of the Section
16(a) reports filed for the fiscal year ended March 31, 2009, we believe that
all filing requirements applicable to its officers, directors, and greater than
10% beneficial owners were complied with.
35
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of our directors and executive officers
as of June 29, 2009 are listed below:
NAMES TITLE OR POSITION AGE
----------------------------------------------------------------------------
James A. Joyce (1) Chairman, Chief Executive 46
Officer, Principal Accounting Officer
and Secretary
Richard H. Tullis, PhD (2) Vice President, Chief Science Officer 63
and Director
Franklyn S. Barry, Jr. Director 69
Edward G. Broenniman Director 73
(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.
(2) Effective June 1, 2001, Dr. Tullis was appointed as our Chief
Science 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.
Resumes of Management:
James A. Joyce, Chairman, CEO, President, Principal Accounting Officer
and Secretary.
Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman
of the Board and Secretary since March 1999. On June 1, 2001, our Board of
Directors appointed Mr. Joyce with the additional role of CEO. During the
quarter ended December 31, 2007, our chief financial officer resigned and Mr.
Joyce assumed the role of principal accounting officer. In 1992, Mr. Joyce
founded and was the sole shareholder 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.
Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
Dr. Tullis has been Vice President and a director of the 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, 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.
Franklyn S. Barry, Jr.
Mr. Barry has over 30 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and our President and CEO from March 10, 1999 to May 31,
2001. He became a director of Aethlon Medical 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.
36
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon Medical on March 10, 1999.
Mr. Broenniman has 30 years of management and executive experience with
high-tech, privately-held growth companies where he has served as a CEO, COO, or
corporate advisor, using his expertise to focus management on increasing
profitability and stockholder value. He is the Managing Director of The Piedmont
Group, LLC, a venture advisory firm. Mr. Broenniman recently served on the Board
of Directors of publicly-traded QuesTech (acquired by CACI International), and
currently serves on the Boards of four privately-held firms. His nonprofit
Boards are the Dingman Center for Entrepreneurship's Board of Advisors at the
University of Maryland, the National Association of Corporate Directors,
National Capital Chapter and the Board of the Association for Corporate Growth,
National Capital Chapter.
Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry and
Broenniman serve. Mr. Barry is Chairman of the Audit Committee, and Mr.
Broenniman is Chairman of the Compensation Committee.
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors 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. Under the
Directors Compensation Program, a newly elected director will receive a one time
grant of a non-qualified stock option of 1.5% of the common stock outstanding at
the time of election. The options will vest one-third at the time of election to
the board and the remaining two-thirds will vest equally at year end over three
years. Additionally, each director will also receive an annual $25,000
non-qualified stock option retainer, $15,000 of which is to be paid at the first
of the year to all directors who are on the Board prior to the first meeting of
the year and a $10,000 retainer will be paid if a director attends 75% of the
meetings either in person, via conference call or other electronic means. The
exercise price for the options under the Directors Compensation Program will
equal the average closing of the last ten (10) trading days prior to the date
earned. At March 31, 2009 under the 2005 Directors Compensation Program, we had
issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors for a total of 5,303,275 options, of these 4,744,550 remain
outstanding.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors,
executive officers or persons nominated or charged 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. There is no arrangement or understanding
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 shareholders will exercise their voting rights to continue to
elect the current Board of Directors. There are also no arrangements, agreements
or understanding between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
SCIENCE ADVISORY BOARD
Each person listed below is a current member of our Science Advisory
Board. The role of the Science Advisory Board is to provide scientific guidance
related to the development of our Hemopurifier(R) technology. Unlike the members
of our Board of Directors, the Science Advisory Board members are not involved
in the management or operations of our company. Members of the Science Advisory
Board are paid $500 per day for services rendered either on-site or at a
mutually agreeable location.
37
Ken Alibek, M.D., Ph.D., D.Sc.
------------------------------
Dr. Alibek is the Executive Director of Education at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor at GMU as well. Dr. Alibek specializes in medical and scientific
research dedicated to developing new forms of protection against biological
weapons and other infectious diseases.
Formerly, Dr. Alibek was a Soviet Army Colonel, and served as First
Deputy Chief of the civilian branch of the Soviet Union's biological weapons
program until he defected to the United States in 1992 and subsequently served
as a consultant to numerous U.S. government agencies in the areas of medical
microbiology, biological weapons defense, and biological weapons
nonproliferation. Dr. Alibek has worked with the National Institutes of Health,
testified extensively before the U.S. Congress on nonproliferation of biological
weapons and is the author of Biohazard: The Chilling True Story of the Largest
Covert Biological Weapons Program in the World--Told from Inside by the Man Who
Ran It, published by Random House Books. He holds numerous patents, is widely
published in science journals, and has provided over 300 lectures and
presentations to military and civilian universities, as well as foreign
governments. The December 2003 issue of the Acumen Journal of Life Sciences
named Dr. Alibek as one of the top five biological warfare experts in the
nation.
Charles Bailey, Ph.D.
---------------------
Dr. Bailey is the former commander of the U.S. Army Medical Research
Institute of Infectious Diseases (USAMRIID). Dr. Bailey has 25 years U.S. Army
experience in R&D and management in infectious diseases and biological warfare
defense. As an officer of the Defense Intelligence Agency, Dr. Bailey wrote
extensively on foreign biological warfare capabilities. Dr. Bailey is currently
the Executive Director for Research & International Relations at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor of Biology at GMU as well. The Acumen Journal of Life Sciences named
Dr. Bailey as one of the top five biological warfare experts in the nation.
Larry Cowgill, D.V.M., Ph.D.
----------------------------
Dr. Cowgill is a Professor in the Department of Medicine and
Epidemiology at the School of Veterinary Medicine, University of California at
Davis and has nearly 30 years of experience as a clinical instructor in small
animal internal medicine, nephrology and hemodialysis. He currently Heads the
Companion Animal Hemodialysis Units at the Veterinary Medical Teaching Hospital
at UC Davis and the UC Veterinary Medical Center at San Diego. Dr. Cowgill is
also Associate Dean for Southern California Clinical Programs and is Co-Director
of the University of California Veterinary Medical Center at San Diego. Prior to
his appointment at the University of California, he was a National Institutes of
Health (NIH) Special Research Fellow at the University of Pennsylvania School of
Veterinary Medicine and at the Renal Electrolyte Section at the University of
Pennsylvania School of Medicine, where he conducted research in basic renal
physiology and clinical nephrology. Dr. Cowgill received his D.V.M. from the
University of California at Davis School of Veterinary Medicine and his Ph.D. in
Comparative Medical Sciences from the University of Pennsylvania, where he also
completed his internship and Residency training in Small Animal Internal
Medicine. He became a Diplomate of the American College of Veterinary Internal
Medicine in 1977. Dr. Cowgill has published extensively in the area of
veterinary nephrology and has established a Clinical Fellowship in Renal
Medicine and Hemodialysis, which is the first of its kind in veterinary
Medicine.
Pedro Cuatrecasas, M.D.
-----------------------
Dr. Cuatrecasas was President of the Pharmaceutical Research Division
of Parke-Davis Co., and Corporate Vice President for Warner Lambert Company from
1989 until his retirement in 1997. From 1986 to 1989, he served as SVP and
Director of Glaxo Inc. For the prior ten years, he was VP/R&D and Director, of
the Burroughs Wellcome Company. During his career in pharmaceutical research, he
was involved in the discovery, development and marketing registration of more
than 40 novel medicines. Dr. Cuatrecasas is widely recognized for the invention
and development of affinity chromatography which is a method for the selective
capture of proteins, sugars, fats and inorganic compounds. He is a member of the
National Academy of Sciences, The Institute of Medicine, and the American
Academy of Arts & Sciences, and he has authored more than 400 original
publications.
38
Nathan W. Levin, M.D.
---------------------
Dr. Levin is recognized as a leading authority within the hemodialysis
industry. He is the Medical and Research Director of the Renal Research
Institute, LLC, a joint venture between Fresenius Medical Care - North America
and Beth Israel Medical Center, New York. Dr. Levin also serves as Professor of
Clinical Medicine at the Albert Einstein College of Medicine.
Raveendran (Ravi) Pottathil, Ph.D.
----------------------------------
Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV
and HCV) and tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in India.
Currently, Dr. Pottathil is the President of AccuDx, Inc. a pharmaceutical
diagnostics company he founded in 1996.
Claudio Ronco, M.D.
-------------------
Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.
Members of the Scientific Advisory Board do not receive any monetary
compensation for service on the Board, however, on occasion, the members may be
awarded stock options.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
CODE OF ETHICS.
On February 23, 2005, the Board of Directors approved a "Code of
Business Conduct and Ethics." Our Code of Business Conduct and Ethics is
available on our company website at www.aethlonmedical.com.
39
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors formed an audit committee in May of 1999 (the
"Audit Committee"). Mr. Franklin S. Barry, Jr. (the Chairman of the Committee)
and Mr. Edward Broenniman serve as members of the Committee. We believe that
each of Mr. Broenniman and Mr. Barry is an "audit committee financial expert" as
that term is defined by Item 407 of Regulation S-K.
The Audit Committee assists the Board of Directors in its oversight of
the quality and integrity of our accounting, auditing, and reporting practices.
The Audit Committee's role includes overseeing the work of our internal
accounting and financial reporting and auditing processes and discussing with
management our processes to manage business and financial risk, and for
compliance with significant applicable legal, ethical, and regulatory
requirements. The Audit Committee is responsible for the appointment,
compensation, retention, and oversight of the independent auditor engaged to
prepare or issue audit reports on our financial statements and internal control
over financial reporting. The Audit Committee relies on the expertise and
knowledge of management and the independent auditor in carrying out its
oversight responsibilities. The Committee's specific responsibilities are
delineated in its charter.
COMPENSATION COMMITTEE
Our Board of Directors formed a Compensation Committee in May of 1999
(the "Compensation Committee"). Mr. Franklin S. Barry, Jr. and Mr. Edward
Broenniman (the Chairman of the Committee) serve as members of the Committee.
Our Board of Directors has delegated to the Compensation Committee strategic and
administrative responsibility on a broad range of issues. The Compensation
Committee's basic responsibility is to assure that the Chief Executive Officer,
other officers, and key management are compensated effectively in a manner
consistent with our compensation strategy and competitive practice. In addition,
the Compensation Committee is responsible for establishing general compensation
guidelines for non-management employees.
The Compensation Committee will be responsible for overseeing and, as
appropriate, making recommendations to the Board regarding the annual salaries
and other compensation of our executive officers, our general employee
compensation and other policies and providing assistance and recommendations
with respect to our compensation policies and practices. The Compensation
Committee is authorized to carry out these activities and other actions
reasonably related to the Compensation Committee's purposes or assigned by the
Board from time to time. The Committee's specific responsibilities are
delineated in its charter.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following executive compensation disclosure reflects all
compensation awarded to, earned by or paid to the executive officers below for
the fiscal year ended March 31, 2009 and March 31, 2008. The following table
summarizes all compensation for fiscal year 2009 and 2008 received by our Chief
Executive Officer, and the Company's two most highly compensated executive
officers who earned more than $100,000 in fiscal year 2009.
SUMMARY COMPENSATION TABLE
NON-EQUITY NONQUALIFIED
INCENTIVE DEFERRED ALL
STOCK OPTION PLAN COMPENSATION OTHER
NAMED EXECUTIVE OFFICER AWARDS AWARDS COMPENSATION EARNINGS COMP. TOTAL
AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) ($) ($) ($) ($) ($)
James A. Joyce (1) 2009 $290,000 $- $- $424,528 $ -- $ -- $ -- $714,528
CHIEF EXECUTIVE OFFICER 2008 256,010 -- -- -- -- -- -- 256,010
AND PRINCIPAL ACCOUNTING 2007 240,000 -- -- -- -- -- -- 240,000
OFFICER
Richard H. Tullis, Ph.D (2) 2009 $175,000 $- $- $154,025 $ -- $ -- $ -- $329,025
VICE PRESIDENT AND CHIEF 2008 $172,500 -- -- -- -- -- -- 172,500
SCIENCE OFFICER 2007 180,000 -- -- -- -- -- -- 180,000
(1) The aggregate number of stock awards and stock option awards issued to
Mr. Joyce and outstanding as of March 31, 2009 is zero and 9,588,243.
(2) The aggregate number of stock awards and stock option awards issued to
Dr. Tullis and outstanding as of March 31, 2009 is zero and 2,764,350.
40
Subsequent to the Company's year end, On June 29, 2009, Mr. Joyce, our
Chief Executive Officer, entered into an Option Suspension Agreement, whereby
Mr. Joyce has agreed to not exercise his stock options pending the filing of
amended articles of incorporation of the Company increasing the Company's
authorized capital. Accordingly of Mr. Joyce's total options, 2,857,143 cannot
be exercised until the amended articles of incorporation are filed, and
6,731,090 cannot be exercised until the later of June 9, 2010 or the filing of
the amended articles of incorporation. The Agreement also provides Mr. Joyce
certain protections in the event the Company shall undergo a Change of Control
Transaction while his options are suspended. Such protections include the right
to receive, in the form of cash payments, the positive value of his options
(which remain subject to suspension) at the time of such transaction. A copy of
the Option Suspension Agreement is filed as an Exhibit to this Report.
In addition, Mr. Joyce has been granted 4,000,000 shares of restricted
common stock, at a price per share of $0.24, which shall vest in equal
installments over a thirty six month period commencing June 9, 2010; however
such shares will not be issued until the filing of the amended articles of
incorporation.
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.
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 of the Company. 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
250,000 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 FDA and the filing of a patent
application. Effective April 1, 2006, Dr. Tullis salary was increased to
$180,000 per year.
Both Mr. Joyce's and Dr. Tullis' agreements provide for medical
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.
41
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information concerning stock
option Awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
- -----------------------------------------------------------------------------------------------
OPTIONS AWARDS
-------------------------------------------------------------------
EQUITY
INCENTIVE
PLAN AWARDS;
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE OPTIONS PRICE DATE
- ------------------- ------------ ------------- ----------- ---------- ------------
(#) (#) (#) ($)
James A. Joyce 1,115,550(1) -- -- $ 0.38 02/23/10
557,775(1) -- -- $ 0.38 12/31/10
557,775(1) -- -- $ 0.38 12/31/11
2,857,143(1) -- -- $ 0.21 09/09/15
1,500,000(2) 1,000,000 -- $ 0.36 06/13/17
1,000,000(3) 1,000,000 -- $ 0.25 11/13/18
Richard H. Tullis 30,000(1) -- -- $ 2.56 12/31/10
250,000(1) -- -- $ 1.90 03/12/12
867,175(1) -- -- $ 0.38 02/23/10
433,588(1) -- -- $ 0.38 12/31/10
433,587(1) -- -- $ 0.38 12/31/11
--(4) 750,000 -- $ 0.41 6/14/18
(1) This option was fully vested as of March 31, 2009.
(2) The option vested 1,000,000 shares at grant, with 500,000 shares
vesting each annual anniversary date through June 13, 2010.
(3) The option vested 1,000,000 at grant, with 500,000 shares vesting on
December 31, 2009 and December 31, 2010.
(4) The option vests 250,000 annually over at June 4, 2009, June 4 2010 and
June 4, 2011
Subsequent to the Company's year end, On June 29, 2009, Mr. Joyce, our
Chief Executive Officer, entered into an Option Suspension Agreement, whereby
Mr. Joyce has agreed to not exercise his stock options pending the filing of
amended articles of incorporation of the Company increasing the Company's
authorized capital. Accordingly of Mr. Joyce's total options, 2,857,143 cannot
be exercised until the amended articles of incorporation are filed, and
6,731,090 cannot be exercised until the later of June 9, 2010 or the filing of
the amended articles of incorporation. A copy of the Option Suspension Agreement
is filed as an Exhibit to this Report.
STOCK AWARDS
- ------------------------------------------------------------------------------------------------------
EQUITY
EQUITY INCENTIVE PLAN
INCENTIVE PLAN AWARDS: MARKET
AWARDS: NUMBER OR PAYOUT VALUE
NUMBER OF OF UNEARNED OF UNEARNED
SHARES OR MARKET VALUE OF SHARES, UNITS SHARES, UNITS
UNITS OF STOCK SHARES OR UNITS OR OTHER OR OTHER RIGHTS
THAT HAVE NOT THAT HAVE NOT RIGHTS THAT THAT HAVE NOT
NAME VESTED VESTED HAVE NOT VESTED VESTED
- ------------------------ --------------- ----------------- ------------------ ----------------
(#) ($) (#) ($)
James A. Joyce -- $ -- -- $ --
Richard H. Tullis, Ph.D -- $ -- -- $ --
42
OPTION GRANTS TO EXECUTIVE OFFICERS IN 2009
On December 15, 2008, Mr. Joyce was granted a stock option award to
purchase 2,000,000 shares of common stock at an exercise price of $0.25 per
share. Also on December 15, 2008, Dr. Tullis was granted a stock option award to
purchase 750,000 shares of common stock at an exercise price of $0.41 per share.
No other options were granted to our executive officers in fiscal year 2009.
DIRECTOR COMPENSATION
The following director compensation disclosure reflects all
compensation awarded to, earned by or paid to the directors below for the fiscal
years ended March 31, 2009 and 2008.
Change in
Pension
Fees Value
Earned and
or Non-Equity Nonqualified
Paid Incentive Deferred All
in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
- ------------------------- ------ ------- ------ ------------ ------------- ------------ -------
James A. Joyce (1) -- -- 424,528 -- -- -- 424,528
Richard H. Tullis (2) -- -- 154,025 -- -- -- 154,025
Edward G. Broenniman (3) -- -- 102,683 -- -- -- 102,683
Franklyn S. Barry, Jr. (3) -- -- 102,683 -- -- -- 102,683
(1) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2009 are 0 and 9,588,243.
(2) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2009 are 0 and 2,764,350.
(3) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2009 are 0 and 1,020,050.
(4) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2009 are 0 and 766,417.
Directors Compensation Program
Under the Directors Compensation Program, adopted by us in February
2005, a newly elected director will receive a one-time grant of a non-qualified
stock option of 1.5% of the common stock outstanding at the time of election.
The options will vest one-third at the time of election to the board and the
remaining two-thirds will vest equally at year end over three years.
Additionally, each director will also receive an annual $25,000 non-qualified
stock option retainer, $15,000 of which is to be paid at the first of the year
to all directors who are on the Board prior to the first meeting of the year and
a $10,000 retainer will be paid if a Director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned. At March 31,
2009 under the 2005 Directors Compensation Program we had issued 1,337,825
options to outside directors and 3,965,450 options to employee-directors for a
total of 5,303,275 options, of which 4,744,550 remained outstanding. A portion
of the employee-director options was awarded in recognition of prior employment
efforts. Since inception of the Program, the Company has not paid any
non-qualified stock option retainers.
43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of June 29, 2009, 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 the Company. 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:
AMOUNT AND NATURE PERCENT OF
OF TITLE OF CLASS NAME BENEFICIAL OWNERSHIP(1)(2) CLASS
- -------------- ------------------------ -------------------------- -------
Common Stock James A. Joyce, Chief Executive Officer
and Director 8,788,243 shares(3) 20%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Richard H. Tullis, Chief Scientific Officer
and Director 2,783,100 shares(4) 5%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Edward G. Broenniman, Director
3030 Bunker Hill Street, Suite 4000, 1,599,724 shares(5) 3%
San Diego, CA 92109
Common Stock Franklyn S. Barry, Jr., Director
3030 Bunker Hill Street, Suite 4000, 1,022,510 shares(6) 2%
San Diego, CA 92109
Common Stock Ellen R. Weiner Family Revocable Trust(7)(8) 2,973,109 20%
10645 N. Tatum Blvd. Suite 200-166
Phoenix, Arizona 85028
Common Stock Estate of Allan S. Bird(7)(8) 762,295 7%
PO Box 371179
Las Vegas, Nevada 89137
Common Stock Phillip A. Ward (7)(9) 6,503,145 16%
P.O. Box 3322
Rancho Santa Fe, CA 92067
All Current
Directors and
Executive Officers
as a Group (5 14,193,577 shares 22%
members)
* Less than 1%.
1. Based on 53,790,567 shares of Common Stock outstanding on the transfer
records as of June 26, 2009.
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 which are
subject to options, warrants, rights or conversion privileges
exercisable 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. The Company believes 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, except where otherwise
noted.
44
3. Includes 2,231,100 stock options exercisable at $0.38 per-share,
2,857,143 stock options exercisable at $0.21 per share, 2,000,000 stock
options exercisable at $0.36 per share and 1,000,000 stock options
exercisable at $0.25 per share. All of the foregoing options are
currently subject to an Option Suspension Agreement, whereby Mr. Joyce
has agreed to not exercise such options pending the filing of amended
articles of incorporation of the Company increasing the Company's
authorized capital. Of Mr. Joyce's total option holdings (including
options not yet vested and not reflected in this Table or the first
sentence of this footnote No. 3) 2,857,143 cannot be exercised until
the amended articles of incorporation are filed, and 6,731,090 cannot
be exercised until the later of June 9, 2010 or the filing of the
amended articles of incorporation. The options are included in this
table, however, as such agreement could be amended or terminated (or
the amended articles of incorporation filed) during the sixty day
period commencing June 30, 2009. In addition, Mr. Joyce has been
granted 4,000,000 shares of restricted common stock, which shall vest
over a 36 month period commencing June 9, 2010 however such shares will
not be issued until the filing of the amended articles of
incorporation. However, such event may not occur until after the sixty
day period commencing June 30, 2009 and therefore such shares are not
included in the percentages and ownership information in this table.
4. Includes 250,000 stock options exercisable at $1.90 per share, 30,000
stock options exercisable at $3.00 per share, 1,734,350 stock options
exercisable at $0.38 per share and 250,000 stock options exercisable at
$0.41 per share.
5. Includes 2,500 stock options exercisable at $3.75 per share, 3,000
stock options exercisable at $1.78 per share, 514,550 stock options
exercisable at $0.38 per share and 500,000 stock options exercisable at
$0.41 per share.
6. Includes 1,867 stock options exercisable at $1.84 per share and 264,550
stock options exercisable at $0.38 per share and 500,000 stock options
exercisable at $0.41 per share.
7. More-than-5% shareholder.
8. Does not include shares issuable upon conversion of convertible notes
and exercise of warrants held by the Ellen R. Weiner Family Revocable
Trust (the "Trust") and the Estate of Allan S. Bird (the "Estate").
Beneficial ownership is limited to the extent that such conversion or
exercise would cause the aggregate number of shares of common stock
beneficially owned by either to exceed 9.9%. Accordingly, beneficial
ownership for the Trust and for the Estate does not reflect 9,973,109
shares and 3,012,295 shares, respectively, underlying convertible notes
and warrants that would cause the number of shares beneficially owned
by the Trust and the Estate to exceed 9.9%. However, the Trust owns a
convertible promissory note in the principal amount of $660,000
convertible at $0.20 per share, a Class A Interest Warrant for
1,128,788 shares exercisable at $0.20 per share, a Class A-1 Damages
Warrant for 511,621 shares exercisable at $0.40 per share, a Class A
Principal Warrant for 3,800,000 shares exercisable at $0.20 per share
and a conditional warrant for accrued interest for 564,394 shares
exercisable at $0.60 per share and a conditional warrant for damages
for 255,811 shares exercisable at $0.40 per share. The Estate owns a
convertible promissory note in the principal amount of $225,000
convertible at $0.20 per share, a Class A Interest Warrant for 326,799
shares exercisable at $0.20 per share, a Class A-1 Damages Warrant for
151,621 shares exercisable at $0.40 per share, a Class A Principal
Warrant for 1,125,000 shares exercisable at $0.20 per Share and a
Warrant for accrued interest for 163,400 shares exercisable at $0.60
per share and a conditional warrant for damages for 75,811 shares
exercisable at $0.40 per share. Mr. Bird was Ms. Weiner's
father-in-law. The Ellen R. Weiner Family Trust disclaims any
beneficial ownership of Mr. Bird's notes, associated warrants and
underlying common stock. The Estate of Mr. Bird disclaims any
beneficial ownership of such Trust's notes and associated warrants
9. Includes warrants to purchase 100,000 shares of common stock at an
exercise price of $0.50; warrants to purchase
100,000 shares of common stock at an exercise price of $0.17; warrants
to purchase 555,556 shares of common stock at an exercise price of
$0.18; warrants to purchase 555,556 shares of common stock at an
exercise price of $0.18; warrants to purchase 194,118 shares of common
stock at an exercise price of $0.17; and warrants to purchase 194,118
shares of common stock at an exercise price of $0.17.
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The following describes all transactions since April 1, 2008, and all
proposed transactions, in which the Company was or is to be a participant and
the amount involved exceeds the lesser of $120,000 or one percent of the average
of the Company's 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.
On June 29, 2009, Mr. Joyce, our Chief Executive Officer entered into
an Option Suspension Agreement, whereby Mr. Joyce has agreed to not exercise his
stock options pending the filing of amended articles of incorporation of the
Company increasing the Company's authorized capital. Accordingly of Mr. Joyce's
total options, 2,857,143 cannot be exercised until the amended articles of
incorporation are filed, and 6,731,090 cannot be exercised until the later of
June 9, 2010 or the filing of the amended articles of incorporation. The
Agreement also provides Mr. Joyce certain protections in the event the Company
shall undergo a Change of Control Transaction while his options are suspended.
Such protections include the right to receive, in the form of cash payments, the
positive value of his options (which remain subject to suspension) at the time
of such transaction. A copy of the Option Suspension Agreement is filed as an
Exhibit to this Report.
In addition, Mr. Joyce has been granted 4,000,000 shares of restricted
common stock, at a price per share of $0.24, which shall vest in equal
installments over a thirty six month period commencing June 9, 2010; however
such shares will not be issued until the filing of the amended articles of
incorporation.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services billed by
Squar, Milner, Peterson, Miranda & Williamson LLP ("Squar Milner") for the
fiscal years ended March 31, 2009 and 2008:
Fiscal Year Ended March 31,
2009 2008
-------- --------
Audit Fees $ 98,200 $ 85,000
Audit Related Fees 32,400 20,000
Tax Fees 43,600 30,000
All Other Fees -- --
-------- --------
$174,200 $135,000
======== ========
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
Our audit committee of the Board of Directors is responsible for
pre-approving all audit and permitted non-audit services to be performed for us
by our independent auditor.
46
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS
The following documents are filed as part of this report on Form 10-K:
1. Consolidated Financial Statements for the periods ended March 31, 2009 and
2008:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Deficit
Notes to Consolidated Financial Statements
2. Exhibits
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated
March 28, 2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated
June 13, 2005(3)
3.5 Certificate of Amendment of Articles of Incorporation dated
March 6, 2007 (23)
10.1 Employment Agreement between Aethlon Medical, Inc. and James
A. Joyce dated April 1, 1999 (4)
10.2 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Aethlon, Inc. dated March 10, 1999 (5)
10.3 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Hemex, Inc. dated March 10, 1999 (5)
10.4 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Syngen Research, Inc. (6)
10.5 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Cell Activation, Inc. (7)
10.6 Common Stock Purchase Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.7 Registration Rights Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.8 Form of Securities Purchase Agreement for Private Placement
closing on June 7, 2004 (8)
10.9 Form of Common Stock Purchase Warrant for Private Placement
closing on June 7, 2004 (8)
10.10 Form of Registration Rights Agreement for Private Placement
closing on June 7, 2004 (8)
10.11 Note Purchase Agreement by and between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.12 Convertible Promissory Note by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.13 Form of Common Stock Cashless Purchase Warrant for benefit of
Fusion Capital Fund II, LLC, dated May 16, 2005. (9)
10.14 2003 Consultant Stock Plan (10)
10.15 Lease by and between Aethlon Medical, Inc. and San Diego
Science Center (11)
10.16 Consulting Agreement by and between Aethlon Medical, Inc. and
Jean-Claude Chermann, PhD (11)
10.17 Consulting Agreement by and between Aethlon Medical, Inc. and
Franklyn S. Barry, Jr. (11)
10.18 Patent License Agreement by and amongst Aethlon Medical, Inc.,
Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra
(11)
47
10.19 Employment Agreement by and between Aethlon Medical, Inc. and
Dr. Richard H. Tullis (11)
10.20 Employment Agreement by and between Aethlon Medical, Inc. and
Edward C. Hall (11)
10.21 Cooperative Agreement by and between Aethlon Medical, Inc. and
George Mason University (12)
10.22 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Charles Bailey (13)
10.23 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Ken Alibek (13)
10.24 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A Joyce (14)
10.25 Stock Option Agreement by and between Aethlon Medical, Inc.
and Richard Tullis (14)
10.26 Stock Option Agreement by and between Aethlon Medical, Inc.
and Franklyn S. Barry, Jr. (14)
10.27 Stock Option Agreement by and between Aethlon Medical, Inc.
and Ed Broenniman (14)
10.28 Stock Option Agreement by and between Aethlon Medical, Inc.
and Calvin Leung (14)
10.29 Warrant for the benefit of Richardson and Patel, LLP (14)
10.30 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A. Joyce(15)
10.31 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Allan S. Bird(16)
10.32 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Ellen R. Weiner Family Revocable Trust(16)
10.33 Form of Warrant for Series A Convertible Noteholders(16)
10.34 Form of Registration Rights Agreement for Series A Convertible
Noteholders(16)
10.35 Employment Agreement by and between Aethlon Medical, Inc. and
James Dorst(17)
10.36 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Christian Hoffmann(18)
10.37 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Claypoole Capital, LLC(18)
10.38 Form of Warrant for additional Series A Convertible
Noteholders(18)
10.39 Form of Registration Rights Agreement for additional Series A
Convertible Noteholders(18)
10.40 Option Agreement by and between Aethlon Medical, Inc. and
Trustees of Boston University(19)
10.41 Warrant for the benefit of Fusion Capital Fund II, LLC(20)
10.42 Common Stock Purchase Agreement by and between Aethlon
Medical, Inc. and Fusion Capital Fund II, LLC dated March 21,
2007 (24)
10.43 Registration Rights Agreement by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC dated March 21, 2007(24)
10.44 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Christian
Hoffman III(24)
10.45 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Joel S.
Aronson, Patricia Green, Christina J. Bird, Co-Executor of the
Estate of Allan S. Bird(24)
48
10.46 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Claypoole
Capital, LLC(24)
10.47 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Ellen R.
Weiner Family Revocable Trust(24)
10.48 Private Placement Agreement with Fusion Capital Fund II, LLC
(25)
10.49 Option Suspension Agreement dated June 29, 2009*
10.50 Letter Agreement between the Company and Mr. James A. Joyce
(27)
10.51 Letter Agreement the Company and Mr. Richard H. Tullis (28)
10.52 Form of Class C Common Stock Purchase Warrant (29)
10.53 Form of 10% Convertible Note (30)
10.54 Stock Option Agreement of James A. Joyce (31)
10.55 Stock Option Agreement of Franklyn S. Barry (32)
10.56 Stock Option Agreement of Edward G. Broenniman (33)
10.57 Stock Option Agreement of Richard H. Tullis (34)
10.58 Modification and Amendment Agreement dated
December 30, 2008 (35)
10.59 Form of Interest Note dated December 30, 2008 (36)
10.60 Form of Liquidated Damages Note dated December 30, 2008 (37)
10.61 Form of Common Stock Purchase Warrant (38)
10.62 Form of Unit Subscription Agreement (39)
14 Code of Ethics (24)
21 List of subsidiaries (22)
23.1 Consent of Independent Registered Public Accounting Firm
(Squar, Milner, Peterson, Miranda & Williamson, LLP) *
31 Certification of our Chief Executive Officer and Chief
Accounting Officer, pursuant to Securities Exchange Act rules
13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.*
32 Statement of our Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)*
99.1 Resignation Letter dated June 28, 2006 from Calvin Leung (26)
* Filed herewith
(1) December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 14,
2005 and incorporated by reference.
(4) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999 and incorporated by reference.
(5) Filed with the Company's Current Report on Form 8-K dated March 26,
1999 and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated January 24,
2000 an incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated April 25,
2000 and incorporated by reference.
49
(8) Filed with the Company's Current Report on Form 8-K dated June 9, 2004
and incorporated by reference.
(9) Filed with the Company's Current Report on Form 8-K dated May 23, 2005
and incorporated by reference.
(10) Filed with the Company Registration Statement on Form S-8 (File No.
333-114017) filed on August 29, 2005 and incorporated by reference.
(11) Filed with the Company's Annual Report on Form 10-KSB/A for the year
ended March 31, 2004 and incorporated by reference.
(12) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 filed on October 28, 2004 and incorporated by reference.
(13) Filed with the Company's Amendment No. 3 to Registration Statement on
Form SB-2 (File No. 333-117203) filed on November 24, 2004 and
incorporated by reference.
(14) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2005 and incorporated by reference.
(15) Filed with the Company's Current Report on Form 8-K filed on September
12, 2005 and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K filed on November
7, 2005 and incorporated by reference.
(17) Filed with the Company's Post-Effective Amendment to Registration
Statement on Form SB-2 filed on December 8, 2005 and incorporated by
reference.
(18) Filed with the Company's Registration Statement on Form SB-2 (File No.
333-130915) filed on January 9, 2006 and incorporated by reference.
(19) Filed with the Company's Current Report on Form 8-K filed on February
23, 2006 and incorporated by reference.
(20) Filed with the Company's Current Report on Form 8-K filed on April 4,
2006 and incorporated by reference.
(21) Filed with the Company's Current Report on Form 8-K filed on May 1,
2008 and incorporated by reference.
(22) Filed with the Company's Registration Statement on Form SB-2 filed on
July 7, 2004 and incorporated by reference.
(23) Filed with the Company's Current Report on form 8-K dated March 7, 2007
and incorporated herein by reference.
(24) Filed with the Company's Current Report on form 8-K dated March 22,
2007 and incorporated herein by reference.
(25) Filed with the Company's Registration Statement on Form S-1 filed on
February 11, 2008 and incorporated by reference.
(26) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2006 and incorporated by reference.
(27) Filed with the Company's Current Report on Form 8-K dated July 25, 2008
and incorporated by reference.
(28) Filed with the Company's Current Report on Form 8-K dated July 31, 2008
and incorporated by reference.
(29) Filed with the Company's Current Report on Form 8-K dated August 12,
2008 and incorporated by reference.
(30) Filed with the Company's Current Report on Form 8-K dated August 12,
2008 and incorporated by reference.
(31) Filed with the Company's Current Report on Form 8-K dated December 19,
2008 and incorporated by reference.
(32) Filed with the Company's Current Report on Form 8-K dated December 19,
2008 and incorporated by reference.
(33) Filed with the Company's Current Report on Form 8-K dated December 19,
2008 and incorporated by reference.
50
(34) Filed with the Company's Current Report on Form 8-K dated December 19,
2008 and incorporated by reference.
(35) Filed with the Company's Current Report on Form 8-K dated January 2,
2009 and incorporated by reference.
(36) Filed with the Company's Current Report on Form 8-K dated January 2,
2009 and incorporated by reference.
(37) Filed with the Company's Current Report on Form 8-K dated January 2,
2009 and incorporated by reference.
(38) Filed with the Company's Current Report on Form 8-K dated January 20,
2009 and incorporated by reference.
(39) Filed with the Company's Current Report on Form 8-K dated January 2,
2009 and incorporated by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 2nd day of July, 2009.
BY: /S/ JAMES A. JOYCE
---------------------------------
JAMES A. JOYCE
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND ACTING CHIEF FINANCIAL OFFICER
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JAMES A. JOYCE CHAIRMAN OF THE BOARD JULY 2, 2009
- -------------------------
JAMES A. JOYCE
/S/ FRANKLYN S. BARRY, JR. DIRECTOR JULY 2, 2009
- --------------------------
FRANKLYN S. BARRY, JR.
/S/ EDWARD G. BROENNIMAN DIRECTOR JULY 2, 2009
- --------------------------
EDWARD G. BROENNIMAN
/S/ RICHARD H. TULLIS DIRECTOR JULY 2, 2009
- -------------------------
RICHARD H. TULLIS
51
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-19
Notes to Consolidated Financial Statements................................. F-21
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2009 and 2008 and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the years in the two-year
period ended March 31, 2009 and for the period January 31, 1984 (Inception)
through March 31, 2009. 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 audit 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 financial statements referred to above present fairly, in
all material respects, the financial position of Aethlon Medical, Inc. and
Subsidiaries as of March 31, 2009 and 2008 and the consolidated results of their
operations and their cash flows for each of the years in the two-year period
ended and for the period January 31, 1984 (Inception) through March 31, 2009, 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, is in default on certain
debt agreements, has negative working capital of approximately $4,104,000 and a
deficit accumulated during the development stage of approximately $38,311,000 at
March 31, 2009. As discussed in Note 1 to the consolidated financial statements,
a significant amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become
commercially viable. These conditions, 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.
/S/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
NEWPORT BEACH, CALIFORNIA
JULY 1, 2009
F-2
- -----------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2009 and 2008
- -----------------------------------------------------------------------------------------------
ASSETS
March 31, 2009 March 31, 2008
-------------- --------------
CURRENT ASSETS
Cash $ 6,157 $ 254,691
Deferred financing costs -- 71,139
Prepaid expenses 37,011 3,600
------------ -----------
TOTAL CURRENT ASSETS 43,168 329,430
NON-CURRENT ASSETS
Property and equipment, net 2,603 8,313
Patents, net 138,417 137,162
Deposits 13,200 13,200
------------ -----------
TOTAL ASSETS $ 197,388 488,105
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 460,074 $ 351,261
Due to related parties 634,896 949,063
Notes payable, net of discounts 302,500 633,611
Convertible notes payable, net of discounts 2,069,720 152,530
Warrant obligation -- 633,095
Other current liabilities 679,498 1,090,809
------------ -----------
TOTAL CURRENT LIABILITIES 4,146,688 3,810,369
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT
Common stock, par value of $0.001, 100,000,000 shares
authorized; 49,454,131 and 38,991,151 issued and
outstanding at March 31, 2009 and 2008, respectively 49,455 38,992
Additional paid-in capital 34,312,659 28,866,000
Deficit accumulated during the development stage (38,311,414) (32,227,256)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIT (3,949,300) (3,322,264)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 197,388 $ 488,105
============ ===========
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
- -----------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------
JANUARY 31, 1984
(INCEPTION) THROUGH
2009 2008 MARCH 31, 2009
-------------------------------------------------
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
-------------------------------------------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 848,790 1,005,442 7,792,459
Payroll and related 1,626,579 1,363,950 11,125,726
General and administrative 447,885 523,196 5,898,082
Impairment -- -- 1,313,253
-------------------------------------------------
2,923,254 2,892,588 26,129,520
-------------------------------------------------
OPERATING LOSS (2,923,254) (2,892,588) (24,595,952)
OTHER (INCOME) EXPENSE
Loss on extinguishment of debt 1,604,715 547,119 3,368,582
Change in fair value of warrant liability (213,903) (637,179) 1,621,618
Interest expense 1,772,863 1,319,487 8,354,770
Interest income (2,771) -- (20,186)
Other -- 18,249 390,678
-------------------------------------------------
3,160,904 1,247,676 13,715,462
-------------------------------------------------
NET LOSS $ (6,084,158) $ (4,140,264) $(38,311,414)
=================================================
Basic and diluted net loss per share $ (0.14) $ (0.12)
===============================
Weighted average number of common
shares outstanding - basic and diluted 42,948,049 34,395,562
===============================
- -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
- --------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- --------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ---------- -----------
Balance, January 31, 1984 (Inception) -- $ -- $ -- $ -- $ -- $ --
Common stock issued for cash at $1
per share 22,000 22 26,502 -- -- 26,524
Common stock issued for cash at $23
per share 1,100 1 24,999 -- -- 25,000
Common stock issued for cash at $86
per share 700 1 59,999 -- -- 60,000
Common stock issued for cash at $94
per share 160 1 14,999 -- -- 15,000
Common stock issued for cash at $74
per share 540 1 39,999 -- -- 40,000
Common stock issued for cash at $250
per share 4,678 5 1,169,495 -- -- 1,169,500
Capital contributions -- -- 521,439 -- -- 521,439
Common stock issued for compensation
at $103 per share 2,600 3 267,403 -- -- 267,406
Conversion of due to related parties
to common stock at $101 per share 1,120 1 113,574 -- -- 113,575
Conversion of due to related parties
to common stock at $250 per share 1,741 2 435,092 -- -- 435,094
Effect of reorganization 2,560,361 2,558 (2,558) -- -- --
Common stock issued in connection with
employment contract at $8 per share 65,000 65 519,935 -- -- 520,000
Common stock issued in connection with
the acquisition of patents at $8 per
share 12,500 13 99,987 -- -- 100,000
Warrants issued to note holders in
connection with notes payable -- -- 734,826 -- -- 734,826
Warrants issued for services -- -- 5,000 -- -- 5,000
Net loss -- -- -- -- (4,746,416) (4,746,416)
---------- -------- ------------ ---------- ----------- ------------
BALANCE, MARCH 31, 2000 2,672,500 2,673 4,030,691 -- (4,746,416) (713,052)
Common stock and options issued
in connection with acquisition
of Cell Activation, Inc.
at $7.20 per share 99,152 99 1,067,768 -- -- 1,067,867
Warrants issued to note holders in
connection with notes payable -- -- 218,779 -- -- 218,779
Warrants issued to promoter in
connection with notes payable -- -- 298,319 -- -- 298,319
Beneficial conversion feature of
convertible notes payable -- -- 150,000 -- -- 150,000
Warrants issued to promoter in
connection with convertible notes
payable -- -- 299,106 -- -- 299,106
Options issued to directors for
services as board members -- -- 14,163 -- -- 14,163
- --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-5
- --------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- --------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ---------- -----------
Options and warrants issued for
services -- -- 505,400 -- -- 505,400
Common stock issued for services at
$3 per share 5,500 5 16,495 -- -- 16,500
Common stock issued for cash at $1
per share 100,000 100 99,900 -- -- 100,000
Net loss -- -- -- -- (4,423,073) (4,423,073)
--------- -------- ------------ --------- ------------ ------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ -- $(9,169,489) $(2,465,991)
Common stock, warrants and options
issued for accounts payable and
accrued liabilities 21,750 22 243,353 -- -- 243,375
Common stock issued for services at
$2.65 per share 6,038 6 15,994 -- -- 16,000
Common stock issued for cash at $1.00
per share, net of issuance costs of
$41,540 paid to a related party 730,804 731 688,533 -- -- 689,264
Common stock issued for services at
$2.75 per share 10,000 10 27,490 -- -- 27,500
Common stock issued in connection with
license agreement at $3.00 per share 6,000 6 17,994 -- -- 18,000
Common stock issued to holder of
convertible notes payable at $3.00
per share 70,586 71 211,687 -- -- 211,758
Options issued to directors for
services as board members -- -- 7,459 -- -- 7,459
Common stock issued for cash at $1.50
per share, net of issuance costs
of $2,500 16,667 17 22,483 -- -- 22,500
Beneficial conversion feature of
convertible notes payable -- -- 185,000 -- -- 185,000
Common stock issued for conversion of
convertible notes payable and accrued
interest at an average price of
$1.24 per share 134,165 134 166,352 -- -- 166,486
Common stock issued for services at
$2.72 per share 9,651 10 26,240 -- -- 26,250
Options issued to consultant for
services -- -- 562,000 -- -- 562,000
Common stock and warrants for services
at $1.95 per share 62,327 62 161,475 -- -- 161,537
Common stock issued for services at
$1.90 per share 9,198 9 17,491 -- -- 17,500
Stock options exercised for cash 400,000 400 199,600 -- -- 200,000
Warrants issued to note holders for
90-day forebearance -- -- 118,000 -- -- 118,000
Common stock and warrants issued to
note holders and vendors in the
debt-to-equity conversion program at
$1.25 per share 816,359 816 1,623,635 -- -- 1,624,451
- --------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-6
- ---------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- ---------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ---------- -----------
Other warrant transactions -- -- (32,715) -- -- (32,715)
Net loss -- -- -- -- (3,995,910) (3,995,910)
---------- --------- ----------- ---------- ----------- ------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $ -- $(13,165,399) $(2,197,536)
Proceeds from the issuance of common
stock at $0.50 per share in connection
with the exercise of options 200,000 200 99,800 -- -- 100,000
Interest expense related to beneficial
conversion feature -- -- 150,000 -- -- 150,000
Pro-rata value assigned to warrants
issued in connection with conversion of
accounts payable -- -- 71,000 -- -- 71,000
Pro-rata value assigned to warrants
issued in connection with note payable -- -- 30,000 -- -- 30,000
Issuance of common stock at $1.25 per
share in connection with the conversion
of accounts payable 150,124 150 187,505 -- -- 187,655
Issuance of common stock at $1.25 per
share in connection with the conversion
of notes payable 420,000 420 104,580 -- -- 105,000
Estimated fair market value of options
issued for services -- -- 114,000 -- -- 114,000
Issuance of common stock at $0.25 per
share for cash 461,600 462 114,938 -- -- 115,400
Issuance of common stock at $0.26 per
share for cash 19,230 19 4,981 -- -- 5,000
Issuance of common stock at $1.25 per
share for cash 8,000 8 9,992 -- -- 10,000
Issuance of common stock at $0.65 per
share for services 69,231 69 44,931 -- -- 45,000
Issuance of common stock at $0.51 per
share for services 196,078 196 99,804 -- -- 100,000
Adjustment booked -- -- (100,000) -- 100,000 --
Net loss -- -- -- -- (2,461,116) (2,461,116)
----------- -------- ------------ --------- ----------- ------------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,894,223 $ -- $(15,526,515) $(3,625,597)
- ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-7
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------- -----------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,894,223 $ -- $(15,526,515) $(3,625,597)
Proceeds from the issuance of
common stock at $0.25 per share
in connection with the exercise
of warrants 540,000 540 134,460 -- -- 135,000
Issuance of common stock at $0.25
per share in connection with the
conversion of notes payable,
including interest of $15,099 300,397 300 74,799 -- -- 75,099
Issuance of common stock at $0.35
per share in connection with the
conversion of notes payable,
including interest of $59,827 813,790 814 284,013 -- -- 284,827
Issuance of common stock at $0.50
per share in connection with the
conversion of notes payable,
including interest of $509 11,017 11 5,498 -- -- 5,509
Issuance of common stock at $0.42
per share in connection with the
conversion of notes payable,
including interest of $696 13,725 14 5,682 -- -- 5,696
Issuance of common stock at $0.65
per share in connection with the
conversion of notes payable,
including interest of $5,088 27,059 27 17,561 -- -- 17,588
Issuance of common stock at $0.25
per share in connection with the
conversion of notes payable,
including interest of $15,416 461,667 462 114,954 -- -- 115,416
Issuance of common stock at $0.25
per share for cash 1,226,000 1,226 305,274 -- -- 306,500
Issuance of common stock at $0.30
per share for cash 180,000 180 53,820 -- -- 54,000
Issuance of common stock at $0.525
per share for cash 40,000 40 20,960 -- -- 21,000
Issuance of common stock at $1.125
per share for cash 5,000 5 5,620 -- -- 5,625
Issuance of common stock at $0.25
per share for services 10,000 10 2,490 -- -- 2,500
Issuance of common stock at $0.34
per share for services 73,529 73 24,927 -- -- 25,000
Issuance of common stock at $0.40
per share for services 62,000 62 24,763 -- -- 24,825
Issuance of common stock at $0.45
per share for services 185,185 185 83,148 -- -- 83,333
Issuance of common stock at $0.50
per share for services 5,000 5 2,495 -- -- 2,500
Interest expense related to beneficial
conversion feature -- -- 324,800 -- -- 324,800
Net loss -- -- -- -- (1,518,798) (1,518,798)
---------- -------- ------------ --------- ------------- -------------
BALANCE - MARCH 31, 2004 10,649,329 $ 10,649 $ 13,379,487 $ -- $(17,045,313) $ (3,655,177)
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-8
- --------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- --------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING
STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------
- -------------
BALANCE - MARCH 31, 2004 10,649,329 $ 10,649 $ 13,379,487 $ -- $(17,045,313) $ (3,655,177)
Proceeds from the issuance of common
stock at $0.25 per share in connection
with the exercise of warrants 1,126,564 1,127 280,515 -- -- 281,642
Issuance of common stock at $0.44 per
share for cash 1,415,909 1,416 621,584 -- -- 623,000
Issuance of common stock at $0.25 per
share for cash 40,233 40 9,960 -- -- 10,000
Issuance of common stock at $0.28 per
share for cash 35,947 36 9,964 -- -- 10,000
Issuance of common stock at $0.29 per
share for cash 69,431 69 19,931 -- -- 20,000
Issuance of common stock at $0.32 per
share for cash 94,449 94 29,906 -- -- 30,000
Issuance of common stock at $0.33 per
share for cash 60,620 61 19,939 -- -- 20,000
Issuance of common stock at $0.35 per
share for cash 172,824 173 59,826 -- -- 59,999
Issuance of common stock at $0.36 per
share for cash 223,756 224 79,776 -- -- 80,000
Issuance of common stock at $0.37 per
share for cash 108,079 108 39,892 -- -- 40,000
Issuance of common stock at $0.38 per
share for cash 26,549 27 9,973 -- -- 10,000
Issuance of common stock at $0.39 per
share for cash 51,748 52 19,948 -- -- 20,000
Issuance of common stock at $0.40 per
share for cash 25,233 25 9,975 -- -- 10,000
Issuance of common stock at $0.42 per
share for cash 143,885 144 59,857 -- -- 60,001
Issuance of common stock at $0.43 per
share for cash 70,467 70 29,930 -- -- 30,001
Issuance of common stock at $0.45 per
share for cash 22,455 22 9,978 -- -- 10,000
Issuance of common stock at $0.46 per
share for cash 43,944 44 19,956 -- -- 20,000
Issuance of common stock at $0.47 per
share for cash 128,836 129 59,872 -- -- 60,001
Issuance of common stock at $0.52 per
share for cash 95,502 96 49,904 -- -- 49,999
Issuance of common stock with warrants
at $0.36 per unit for cash 55,556 56 19,944 -- -- 20,000
Issuance of common stock at $0.27 per
share for cash 90,000 90 24,210 -- -- 24,300
Issuance of common stock at $0.50 per
share for cash 3,000 3 1,497 -- -- 1,500
Issuance of common stock to Fusion
Capital for "commitment" shares 50,000 50 (50) -- -- --
- --------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-9
- -------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ---------- -----------
Issuance of common stock to Fusion
Capital for fees 418,604 419 (419) -- -- --
Issuance of common stock at $0.34 per share
in connection with the conversion of notes
payable, including interest of $38,371 479,513 480 162,891 -- -- 163,371
Issuance of common stock at $0.44 per
share in connection with the conversion
of notes payable 113,636 114 49,886 -- -- 50,000
Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable 80,000 80 19,920 -- -- 20,000
Issuance of common stock at $0.49 per
share in connection with the conversion
of notes payable 174,606 175 85,382 -- -- 85,557
Issuance of common stock at $1.75 per
share for services 17,143 17 29,983 -- -- 30,000
Issuance of common stock at $0.44 per
share for services 265,273 265 116,455 -- -- 116,720
Issuance of common stock at $0.70 per
share for services 10,715 11 7,489 -- -- 7,500
Issuance of common stock at $0.73 per
share for services 6,850 7 4,993 -- -- 5,000
Issuance of common stock at $0.55 per
share for services 46,364 46 25,454 -- -- 25,500
Issuance of common stock at $0.25 per
share for services 165,492 165 41,208 -- -- 41,373
Issuance of common stock at $0.45 per
share for services 28,377 28 12,741 -- -- 12,769
Issuance of common stock at $0.50 per
share for services for deferred
consulting services 60,000 60 29,940 (30,000) -- --
Issuance of common stock at $0.49 per
share for services 25,087 25 12,318 -- -- 12,343
Issuance of common stock at $0.45 per
share for services for deferred
consulting services 66,666 67 29,933 (30,000) -- --
Issuance of common stock at $0.37 per
share for services 13,369 13 4,987 -- -- 5,000
Issuance of common stock at $0.42 per
share for services 19,231 19 7,981 -- -- 8,000
Issuance of common stock at $0.39 per
share for services 18,042 18 6,982 -- -- 7,000
Issuance of common stock at $0.32 per
share for services 162,678 163 52,382 -- -- 52,545
Issuance of common stock at $0.31 per
share for services 16,234 16 4,984 -- -- 5,000
Issuance of common stock at $0.39 per
share for employee bonus 22,500 22 8,754 -- -- 8,776
- --------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-10
- ----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- ----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------ ------------
Debt discount on debt issued with
detachable warrants -- -- 84,000 -- -- 84,000
Amortization of deferred consulting fees -- -- -- 30,000 -- 30,000
Intrinsic value of options issued to
directors -- -- 424,262 -- -- 424,262
Net loss -- -- -- -- (2,096,951) (2,096,951)
----------- -------- ---------- --------- ---------- -----------
BALANCE - MARCH 31, 2005 17,014,696 $ 17,015 $ 16,088,280 $ (30,000) $(19,142,264) $(3,066,969)
Issuance of common stock at $0.28 per
share for cash 35,947 36 9,964 -- -- 10,000
Issuance of common stock at $0.26 per
share for cash 38,256 38 9,962 -- -- 10,000
Issuance of common stock at $0.26 per
share for cash 38,401 38 9,962 -- -- 10,000
Issuance of common stock at $0.25 per
share for cash 201,165 201 49,799 -- -- 50,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.18 per
share for cash 100,000 100 17,500 -- -- 17,600
Issuance of common stock at $0.25 per
Share for cash 301,744 302 74,698 -- -- 75,000
Issuance of common stock at varied
prices for cash 2,485,249 2,485 767,512 -- -- 769,997
Issuance of common stock at $0.76 per
share for cash 568,181 568 431,249 -- -- 431,818
Issuance of common stock at $0.25 per
share in connection with the
conversion of notes payable,
including interest
of $4,564 140,000 140 34,860 -- -- 35,000
Issuance of common stock at $0.20
per share in connection with the
conversion of convertible notes
payable, including
interest of $4,943 174,716 175 34,768 -- -- 34,943
Issuance of common stock at $0.31 per
share for services 9,740 10 2,990 -- -- 3,000
Issuance of common stock at $0.30 per
share for services 25,134 25 7,475 -- -- 7,500
Issuance of common stock at $0.25 per
share for services 31,424 31 7,869 -- -- 7,900
Issuance of common stock at $0.26 per
share for services 19,084 19 4,981 -- -- 5,000
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-11
- ----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- ----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ---------- -----------
Issuance of common stock at $0.25 per
share for services 33,228 33 8,407 -- -- 8,440
Issuance of common stock at $0.25 per
share for services 24,000 24 5,976 -- -- 6,000
Issuance of common stock at $0.26 per
share for services 11,450 11 2,989 -- -- 3,000
Issuance of common stock at $0.26 per
share for services 19,084 19 4,981 -- -- 5,000
Issuance of common stock at $0.26 per
share for services 34,352 34 8,966 -- -- 9,000
Issuance of common stock at $0.26 per
share for services 11,450 11 2,989 -- -- 3,000
Loss on settlement of accrued legal
liabilities -- -- 142,245 -- -- 142,245
Issuance of common stock at $0.24 per
share for services 12,605 13 2,987 -- -- 3,000
Issuance of common stock at $0.24 per
share for services 21,008 21 4,979 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 21,739 22 4,978 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 21,740 22 4,978 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 2,155 2 498 -- -- 500
Issuance of common stock at $0.23 per
share for services 91,739 92 21,008 -- -- 21,100
Issuance of common stock at $0.21 per
share for services 175,755 176 37,084 -- -- 37,260
Issuance of common stock at $0.23 per
share for services 37,863 38 8,519 -- -- 8,557
Issuance of common stock at $0.23 per
share for services 21,368 21 4,979 -- -- 5,000
Issuance of common stock at $0.21 per
share for services 27,852 28 5,710 -- -- 5,738
Issuance of common stock at $0.24 per
share for services 21,186 21 4,979 -- -- 5,000
Issuance of common stock at $0.22 per
share for services 35,278 35 7,585 -- -- 7,620
Issuance of common stock at $0.38 per
share for services 13,298 13 4,987 -- -- 5,000
Issuance of common stock at $0.38 per
share for services 19,948 20 7,640 -- -- 7,660
Issuance of common stock at $0.37 per
share for services 97,662 98 36,037 -- -- 36,135
Issuance of common stock at $0.25 per
share for services 371,847 372 91,137 -- -- 91,509
Issuance of common stock at $0.25 per
share for services 73,964 74 18,128 -- -- 18,202
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-12
- ----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- ----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ---------- -----------
Issuance of common stock at $0.29 per
share for services 13,333 13 3,827 -- -- 3,840
Issuance of common stock at $0.33 per
share for services 15,060 15 4,985 -- -- 5,000
Issuance of common stock at $0.24 per
share for services 579,813 580 138,575 -- -- 139,155
Issuance of common stock at $0.28 and
$0.33 per share for services 66,017 66 19,934 -- -- 20,000
Issuance of common stock at $0.36 per
share for services 13,889 14 4,986 -- -- 5,000
Issuance of common stock at $0.33 per
share for services 9,091 9 2,989 -- -- 2,999
Issuance of common stock at $0.28 per
share for services 10,563 11 2,991 -- -- 3,001
Issuance of common stock at $0.33 per
share for services 150,000 150 48,850 (49,000) -- --
Issuance of common stock at $0.28 per
share for services 35,714 36 9,964 -- -- 10,000
Issuance of common stock at $0.33 per
share for services 15,152 15 4,985 -- -- 5,000
Issuance of common stock at $0.28 per
per share for services 17,730 18 4,982 -- -- 5,000
Issuance of common stock at $0.20 and
$0.37 per share for services 79,255 79 19,894 -- -- 19,974
Issuance of common stock at $0.33 per
share for services 33,333 33 9,967 -- -- 10,000
Issuance of common stock at $0.39 per
share for services 220,080 220 85,171 -- -- 85,391
Issuance of common stock at $0.49 per
share for services 7,275 7 3,543 -- -- 3,550
Issuance of common stock at $0.34 per
share for services 27,284 27 9,170 -- -- 9,197
Issuance of common stock at $0.33 per
share for services 158,046 158 51,997 -- -- 52,155
Issuance of common stock at $0.20 per
share for services 836,730 837 166,509 -- -- 167,346
Issuance of cashless warrants 389,168 389 (389) -- -- --
Conversion of accrued salaries to
employee stock options -- -- 300,000 -- -- 300,000
Debt discount on debt issued with
detachable warrants -- -- 119,610 -- -- 119,610
Interest expense related to beneficial
conversion feature -- -- 222,375 -- -- 222,375
Professional fees related to registration
statement -- -- (76,732) -- -- (76,732)
Amortization of deferred consulting
fees -- -- -- 34,083 -- 34,083
- ----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-13
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------ ------------
Reclassification of derivative
liabilities upon registration of
shares underlying
warrants -- -- 1,090,000 -- -- 1,090,000
Net loss -- -- -- -- (2,920,183) (2,920,183)
----------- -------- ------------ ---------- ------------- ------------
BALANCE - MARCH 31, 2006 25,383,705 $ 25,380 $ 20,322,498 $ (44,917) $(22,062,447) $(1,759,484)
----------- -------- ------------ ---------- ------------- ------------
Issuance of common stock at varied
prices for cash 2,649,773 2,650 794,097 -- -- 796,747
Issuance of common stock at $0.18 per
share for cash 555,556 556 99,444 -- -- 100,000
Issuance of common stock at $0.30 per
share for cash 1,333,333 1,333 398,667 -- -- 400,000
Issuance of common stock at $0.24
per share in connection with the
conversion of notes payable,
including interest
of $18,750 107,759 108 43,642 -- -- 43,750
Issuance of common stock at $0.24 per
share for services 33,058 33 7,967 -- -- 8,000
Issuance of common stock at $0.25 per
share for services 126,065 127 31,858 -- -- 31,985
Issuance of common stock at $0.26 per
share for services 156,485 156 40,349 -- -- 40,505
Issuance of common stock at $0.27 per
share for services 30,075 30 7,970 -- -- 8,000
Issuance of common stock at $0.28 per
share for services 43,819 44 12,256 -- -- 12,300
Issuance of common stock at $0.29 per
share for services 14,563 15 4,150 -- -- 4,165
Issuance of common stock at $0.30 per
share for services 18,454 19 5,531 -- -- 5,550
Issuance of common stock at $0.31 per
share for services 32,984 33 10,467 -- -- 10,500
Issuance of common stock at $0.32 per
share for services 52,722 53 17,947 -- -- 18,000
Issuance of common stock at $0.34 per
share for services 29,965 30 9,470 -- -- 9,500
Issuance of common stock at $0.37 per
share for services 132,765 133 48,725 -- -- 48,858
Issuance of common stock at $0.40 per
share for services 7,813 8 2,492 -- -- 2,500
Issuance of common stock at $0.45 per
share for services 3,363 3 1,497 -- -- 1,500
Issuance of common stock at $0.47 per
share for services 14,535 15 4,985 -- -- 5,000
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-14
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ----------- -----------
Issuance of common stock at $0.50 per
share for services 35,601 36 17,765 -- -- 17,801
Issuance of common stock at $0.51 per
share for services 21,078 21 10,728 -- -- 10,749
Issuance of common stock at $0.53 per
share for services 20,127 20 8,980 -- -- 9,000
Issuance of common stock at $0.55 per
share for services 4,545 5 2,495 -- -- 2,500
Issuance of common stock at $0.58 per
share for services 17,332 17 9,983 -- -- 10,000
Issuance of common stock at $0.59 per
share for services 8,532 9 4,991 -- -- 5,000
Issuance of common stock at $0.61 per
share for services 4,934 5 2,995 -- -- 3,000
Issuance of common stock at $0.79 per
share for services 10,095 9 7,990 -- -- 8,000
Issuance of common stock at $0.81 per
share for services 3,086 3 2,497 -- -- 2,500
Adjustment for issuance of
cashless warrants (144,099) (140) 140 -- -- --
Issuance of commitment shares 1,050,000 1,050 (1,050) -- -- --
Interest expense related to beneficial
conversion feature -- -- 50,000 -- -- 50,000
Amortization of deferred consulting fees -- -- -- 44,917 -- 44,917
Issuance of common stock for option
to obtain licensing rights
to cancer patent 40,000 40 10,760 -- -- 10,800
Stock compensation expense -- -- 38,132 -- -- 38,132
Issuance of common stock at $0.20 per
Share in settlement of
accrued liabilities 114,130 114 22,997 -- -- 23,111
Reclassification of derivative liabilities
upon registration of shares underlying
warrants -- -- (1,090,000) -- -- (1,090,000)
Net loss -- -- -- -- (6,024,545) (6,024,545)
---------- -------- ------------ --------- ------------- -------------
BALANCE - MARCH 31, 2007 31,912,153 $ 31,914 $ 20,963,419 $ -- $(28,086,992) $ (7,091,660)
============ ======== ============ ========= ============= =============
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-15
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------- ------------
BALANCE - MARCH 31, 2007 31,912,153 $ 31,914 $ 20,963,419 $ -- $(28,086,992) $(7,091,660)
----------- -------- ---------- --------- ------------- ------------
Issuance of common stock at $0.50 per
share for cash 2,560,000 2,560 1,187,840 -- -- 1,190,400
Issuance of common stock at $1.00 per
share for cash 100,000 100 99,900 -- -- 100,000
Issuance of common stock at $0.24 per
share for services 71,045 71 16,980 -- -- 17,051
Issuance of common stock at $0.48 per
share for services 41,999 42 19,958 -- -- 20,000
Issuance of common stock at $0.49 per
share for services 13,017 13 6,399 -- -- 6,413
Issuance of common stock at $0.50 per
share for services 45,380 45 22,645 -- -- 22,690
Issuance of common stock at $0.53 per
share for services 75,000 75 39,675 -- -- 39,750
Issuance of common stock at $0.57 per
share for services 7,895 8 4,492 -- -- 4,500
Issuance of common stock at $0.58 per
share for services 36,487 36 21,164 -- -- 21,200
Issuance of common stock at $0.60 per
share for services 120,033 120 71,490 -- -- 71,610
Issuance of common stock at $0.61 per
share for services 103,106 103 62,791 -- -- 62,894
Issuance of common stock at $0.63 per
share for services 10,174 10 6,440 -- -- 6,450
Issuance of common stock at $0.65 per
share for services 4,601 5 2,995 -- -- 3,000
Issuance of common stock at $0.68 per
share for services 17,127 17 11,583 -- -- 11,600
Issuance of common stock at $0.69 per
share for services 7,246 7 4,993 -- -- 5,000
Issuance of common stock at $0.76 per
share for services 17,061 17 12,983 -- -- 13,000
Issuance of common stock at $0.78 per
share for services 19,179 19 14,981 -- -- 15,000
Exercise of cashless warrants 49,414 49 (49) -- -- --
Issuance of common stock for
option exercises by director 250,000 250 94,750 -- -- 95,000
Common stock units issued under
renegotiation of
convertible notes 2,149,582 2,150 5,390,514 -- -- 5,392,664
Beneficial conversion feature on
convertible debt -- -- 38,197 -- -- 38,197
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-16
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------- ------------
Issuance of common stock in exchange
for licensing rights 15,152 15 4,985 -- -- 5,000
Stock compensation expense -- -- 487,093 -- -- 487,093
Issuance of common stock in connection
with the conversion of notes payable 1,365,500 1,366 279,782 -- -- 281,148
Net loss -- -- -- -- (4,140,264) (4,140,264)
---------- -------- ------------ --------- ------------- -------------
BALANCE - MARCH 31, 2008 38,991,151 $ 38,992 $ 28,866,000 $ -- $(32,227,256) $ (3,322,264)
------------ -------- ------------ --------- ------------- -------------
Issuance of common stock at $0.59 per
share for services 10,170 10 5,990 -- -- 6,000
Issuance of common stock under
licensing agreement 10,849 11 5,739 -- -- 5,750
Issuance of common stock at $0.45 per
share for services 6,667 7 2,993 -- -- 3,000
Issuance of common stock at $0.50 per
share for cash 1,000,000 1,000 499,000 -- -- 500,000
Issuance of common stock in connection
with the conversion of notes payable 232,033 232 39,093 -- -- 39,325
Issuance of common stock at $0.41 per
share for services 25,610 26 10,474 -- -- 10,500
Issuance of common stock in connection
with the conversion of accounts
payable due to related parties 1,015,050 1,015 331,264 -- -- 332,279
Issuance of common stock in connection
with the payment of interest and
damages to convertible noteholders 966,750 967 472,741 -- -- 473,708
Issuance of common stock at $0.45 per
share for legal services 110,138 110 49,452 -- -- 49,562
Issuance of common stock at $0.40 per
share for services 38,150 38 15,222 -- -- 15,260
Issuance of common stock at $0.50 per
Share under warrant exercises 770,000 770 191,730 -- -- 192,500
Issuance of common stock at $0.50 per
share under warrant exercises 200,000 200 49,800 -- -- 50,000
Issuance of common stock at $0.19 per
share for legal services 98,684 99 18,651 -- -- 18,750
Issuance of common stock at $0.28 per
share for legal services 59,950 60 16,546 -- -- 16,606
Issuance of common stock at $0.25 per
share for cash 700,000 700 165,550 -- -- 166,250
Issuance of common stock at $0.25 per
share for legal services 338,099 338 83,950 -- -- 84,288
Record warrant expense on the issuance
of units for accrued interest -- -- 425,680 -- -- 425,680
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-17
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- -----------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------- ------------
Record warrants and discount on
Convertible notes -- -- 163,402 -- -- 163,402
Issuance of common stock at $0.25 per
share for services 23,636 24 5,976 -- -- 6,000
Issuance of common stock at $0.26 per
share for services 77,192 77 19,993 -- -- 20,070
Issuance of common stock at $0.26 per
share for services 35,000 35 8,365 -- -- 8,400
Issuance of common stock at $0.33 per
share for services 15,337 15 4,985 -- -- 5,000
Reclass remainder of derivative
liability to additional paid-in
capital due to registration of warrants -- -- 419,192 -- -- 419,192
Estimated value of equity instruments
granted in debt restructuring -- -- 711,541 -- -- 711,541
Issuance of common stock at $0.15 per
share for cash 1,320,000 1,320 200,610 -- -- 201,930
Issuance of common stock at $0.21 per
share for services 38,810 39 8,111 -- -- 8,150
Issuance of common stock at $0.17 per
share for services 67,059 67 11,333 -- -- 11,400
Issuance of common stock under
licensing agreement 23,566 24 5,726 -- -- 5,750
Issuances of common stock under
conversions of notes payable 2,569,727 2,570 680,212 -- -- 682,782
Issuance of common stock at $0.19 per
share for services 28,947 27 5,471 -- -- 5,498
Issuance of common stock at $0.17 per
share for services 78,743 79 13,701 -- -- 13,780
Issuance of common stock at $0.17 per
share for services 53,706 54 9,076 -- -- 9,130
Issuance of common stock in
connection with the payment of
interest to convertible
noteholders 168,750 169 30,206 -- -- 30,375
Issuance of common stock at $0.17 per
share for services 50,000 50 8,450 -- -- 8,500
Issuance of common stock at $0.17 per
share for services 33,333 33 5,467 -- -- 5,500
Issuance of common stock at $0.20 per
share for legal services 63,369 63 12,412 -- -- 12,475
Issuance of common stock at $0.19 per
share for services 28,947 29 5,471 -- -- 5,500
Stock-based compensation expense 204,708 205 733,084 -- -- 733,289
Net loss -- -- -- -- (6,084,158) (6,084,158)
---------- -------- ------------ --------- ------------- -------------
BALANCE - MARCH 31, 2009 49,454,131 $ 49,455 $ 34,312,659 $ -- $(38,311,414) $ (3,949,300)
------------ -------- ------------ --------- ------------- -------------
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-18
- ---------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009
- ---------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2009 2008 March 31, 2009
-----------------------------------------------
Cash flows from operating activities:
Net loss $ (6,084,158) $ (4,140,264) $(38,311,414)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 16,281 21,550 1,045,224
Amortization of deferred consulting fees -- -- 109,000
Gain on settlement of debt -- -- (131,175)
Loss on on debt extinguishment and on issuance of
units for accrued interest and damages 1,604,715 547,119 3,368,582
Loss on settlement of accrued legal liabilities -- -- 142,245
Gain on sale of property and equipment -- -- (13,065)
Change in estimated fair value of warrant liability (213,903) (637,179) 1,621,618
Fair market value of warrants issued in connection
with accounts payable and debt related costs -- -- 2,715,736
Fair market value of common stock, warrants and
options issued for services and interest 334,870 325,157 4,146,943
Stock based compensation 733,289 487,093 1,682,776
Amortization of debt discount 1,517,132 1,195,863 3,998,782
Impairment of patents and patents pending -- -- 416,026
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (3,452) 970 154,485
Other assets -- -- (13,200)
Accounts payable and accrued liabilities 309,695 140,355 2,499,166
Due to related parties 8,143 (44,936) 1,285,707
------------------------------------------------
Net cash used in operating activities (1,777,388) (2,104,272) (14,168,114)
-------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (1,407) (4,746) (272,850)
Patents and patents pending (10,419) (6,797) (387,343)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
-------------------------------------------------
Net cash used in investing activities (11,826) (11,543) (632,400)
-------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-19
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2009 AND 2008 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2009 (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2009 2008 March 31, 2009
------------------------------------------------
Cash flows from financing activities:
Net proceeds from the issuance of notes payable -- 640,000 2,350,000
Principal repayments of notes payable -- (60,000) (352,500)
Proceeds from the issuance of convertible notes payable 430,000 60,000 2,568,000
Net proceeds from the issuance of common stock 1,110,680 1,290,400 10,317,902
Professional fees related to registration statements -- -- (76,731)
------------ ------------ ------------
Net cash provided by financing activities 1,540,680 1,930,400 14,806,671
------------ ------------ ------------
Net (decrease) increase in cash (248,534) (185,415) 6,157
Cash at beginning of period 254,691 440,106 --
------------ ------------ ------------
Cash at end of period $ 6,157 $ 254,691 $ 6,157
============ ============ ============
Supplemental disclosure of cash flow information
- Cash paid during the period for:
Interest $ -- $ 3,717 $ 266,975
============ ============ ============
Income taxes $ -- $ -- $ 13,346
============ ============ ============
Supplement schedule of noncash investing and
financing activities:
Conversion of debt and accrued interest to common stock $ 722,106 $ 316,375 $ 3,519,192
============ ============ ============
Stock option exercise by director for accrued expenses $ -- $ 95,000 $ 95,000
============ ============ ============
Conversion of amounts due to officers and
directors into common stock $ 332,279 $ -- $ 332,279
============ ============ ============
Debt discount on notes payable associated with
detachable warrants $ 150,095 $ -- $ 1,304,955
============ ============ ============
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related
parties $ -- $ -- $ 1,003,273
============ ============ ============
Reclassification of derivative liability to
additional paid-in capital $ 419,192 $ -- $ 419,192
============ ============ ============
Additional convertible debt issued in connection with
debt restructuring $ 573,211 $ -- $ 573,211
============ ============ ============
Issuance of common stock in connection with license
agreements $ -- $ -- $ 18,000
============ ============ ============
Net assets of entities acquired in exchange for equity
securities $ -- $ -- $ 1,597,867
============ ============ ============
Debt placement fees paid by issuance of warrants $ 13,307 $ -- $ 856,845
============ ============ ============
Patent pending acquired for 12,500 shares of common stock $ -- $ -- $ 100,000
============ ============ ============
Common stock issued for prepaid expenses $ -- $ -- $ 161,537
============ ============ ============
Licensing rights acquired with common stock issuance $ 11,500 $ 5,000 $ 27,300
============ ============ ============
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-20
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") engages in the
research and development of a medical device known as the Hemopurifier(R) that
removes harmful substances from the blood. Aethlon is in the development stage
on the Hemopurifier(R) and significant research and testing are still needed to
reach commercial viability. Any resulting medical device or process will require
approval by the U.S. Food and Drug Administration ("FDA") or the regulatory
agency of any foreign country where it intends to sell its device. Aethlon has
submitted an Investigational Device Exemption ("IDE") to the FDA. Some of our
patents may expire before FDA approval or approval in a foreign country, if any,
is obtained. However, the Company believes that certain patent applications
and/or other patents issued more recently will help protect the proprietary
nature of the Hemopurifier(R) treatment technology.
Aethlon is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its planned principal operations.
Aethlon's common stock is quoted on the Over-the-Counter Bulletin Board
administered by the Financial Industry Regulatory Authority ("OTCBB") under the
symbol "AEMD.OB."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its inactive wholly-owned subsidiaries Aethlon, Inc.,
Hemex, Inc., Syngen Research, Inc. and Cell Activation, Inc.(hereinafter
collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has incurred continuing losses from
operations, is in default on certain debt agreements, has negative working
capital of approximately $4,104,000, recurring losses from operations and a
deficit accumulated during the development stage of approximately $38,311,000 at
March 31, 2009, which among other matters, raises substantial doubt about its
ability to continue as a going concern. A significant amount of additional
capital will be necessary to advance the development of the Company's products
to the point at which they may become commercially viable. The Company intends
to fund operations through debt and/or equity financing arrangements, working
capital and other cash requirements (consisting of accounts payable, accrued
liabilities, amounts due to related parties and amounts due under various notes
payable) for the fiscal year ending March 31, 2010. Therefore, the Company will
be required to seek additional funds to finance its current and long-term
operations.
The Company is currently addressing its liquidity issue by continually seeking
investment capital through private placements of common stock and debt. The
Company believes that its cash on hand and funds expected to be received from
additional private investment will be sufficient to meet its liquidity needs for
fiscal 2010. However, no assurance can be given that the Company will receive
any funds in addition to the funds it has received to date.
F-21
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOING CONCERN (continued)
The successful outcome of future activities cannot be determined at this time
and there is no assurance that, if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results.
The consolidated financial statements do not include any adjustments related to
recoverability and classification of 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
The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.
USE OF ESTIMATES
The Company prepares its consolidated financial statements in conformity with
Generally Accepted Accounting Principles ("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 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's cash, accounts payable and accrued
liabilities approximates their estimated fair values due to the short-term
maturities of those financial instruments. The fair value of certain convertible
notes and related warrants at March 31, 2009 approximates $1,542,373 based upon
a third party valuation report that we commissioned. Warrants classified as
derivative liabilities are reported at their estimated fair value, with changes
in fair value being report in current period results of operations.
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.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at a single financial institution in a checking account and a
related cash management account. In October 2008, the Federal Deposit Insurance
Corporation ("FDIC") increased the maximum level of deposit insurance at
financial institutions from $100,000 to $250,000. Our cash balances were in
excess of such insured amounts that were then in effect by $0 and $155,000 at
March 31, 2009 and 2008, respectively.
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
statements of operations.
F-22
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
INCOME TAXES
Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences 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 carry-forwards. The Company records a valuation allowance for deferred
tax assets when, based on management's best estimate of taxable income in the
foreseeable future, it is more likely than not that some portion of the deferred
income tax assets may not be realized.
In May 2007, the Financial Accounting Standards Board ("FASB") issued Staff
Position FIN 48-1, "Definition of SETTLEMENT in FASB Interpretation No. 48"
("FSP FIN 48-1"), which amends FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109"
("FIN 48," together with FSP FIN 48-1 referred as "FIN 48, as amended"). As of
April 1, 2007, we adopted the provisions of FIN 48, as amended, which clarify
the accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 109, "Accounting for Income Taxes." FIN 48, as amended,
prescribes a recognition threshold and measurement attribute for financial
statement recognition and measurement of a tax position an entity takes or
expects to take in a tax return. To recognize a tax position, the tax position
must be more-likely-than-not sustainable upon examination by the relevant taxing
authority, and the relevant measurement of the position must be the largest
amount of benefit that we would more than 50% likely realize upon settlement. We
would recognize the benefit of a position in the interim reporting period during
which it meets the threshold, unless we effectively settle it earlier through
examination, negotiation, or litigation or the applicable statute of limitations
period expires.
The Company did not recognize any additional liability for unrecognized tax
benefit as a result of the implementation. As of March 31, 2009, the Company did
not increase or decrease liability for unrecognized tax benefit related to tax
positions in prior period nor did the company increase its liability for any tax
positions in the current year. Furthermore, there were no adjustments to the
liability or lapse of statute of limitation or settlements with taxing
authorities.
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, 2009 and 2008.
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 assumed to be
outstanding during the period of computation. Diluted loss per share is computed
similar to basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued, and if the additional common
shares were dilutive. As the Company had net losses for all periods presented,
basic and diluted loss per share are the same, and additional common stock
equivalents have been excluded as their effect would be antidilutive.
The potentially dilutive common shares outstanding for the fiscal years ended
March 31, 2009 and 2008, which include shares underlying outstanding stock
options, warrants and convertible debentures were 45,827,651 and 29,845,343,
respectively.
SEGMENTS
We currently operate in one segment, and accordingly, no additional segment
related disclosures are required.
F-23
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation
plans are accounted for under the fair value method. Accordingly, share-based
compensation is measured when all granting activities have been completed,
generally the grant date, based on the fair value of the award. The exercise
price of options is generally equal to the market price of the Company's common
stock (defined as the closing price as quoted on the Over-the-Counter Bulletin
Board) on the date of grant. Compensation cost recognized by the Company
includes (a) compensation cost for all equity incentive awards granted prior to,
but not yet vested as of April 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS No. 123, and (b)
compensation cost for all equity incentive awards granted subsequent to April 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123-R. We use a Binomial Lattice option pricing model for
estimating fair value of options granted.
F-24
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
The following table summarizes the effect of share-based compensation recorded
during the years ended March 31, 2009 and 2008:
March 31, 2009 March 31, 2008
-------------- --------------
Stock Option Expense $ 679,924 $ 487,093
Direct Stock Grants 53,365 --
-------------- --------------
Total Stock-Based Compensation Expense $ 733,289 $ 487,093
============== ==============
Basic and diluted loss per common share $ (0.02) $ (0.01)
============== ==============
We account for transactions involving services provided by third parties where
we issue equity instruments as part of the total consideration using the fair
value of the consideration received (i.e. the value of the goods or services) or
the fair value of the equity instruments issued, whichever is more reliably
measurable. In transactions, when the value of the goods and/or services are not
readily determinable and (1) the fair value of the equity instruments is more
reliably measurable and (2) the counterparty receives equity instruments in full
or partial settlement of the transactions, we use the following methodology:
a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the performance
is complete (and valued on the date of issuance).
b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the date of
the contract.
c) For any transactions not meeting the criteria in (a) or (b) above, the
Company re-measures the consideration at each reporting date based on its then
current stock value.
We review share-based compensation on a quarterly basis for changes to the
estimate of expected award forfeitures based on actual forfeiture experience.
The effect of adjusting the forfeiture rate for all expense amortization after
March 31, 2006 is recognized in the period the forfeiture estimate is changed.
The effect of forfeiture adjustments for the fiscal year ended March 31, 2009
was insignificant.
F-25
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PATENTS
Patents include both foreign and domestic patents. There were several patents
pending at March 31, 2009. We capitalize the cost of patents and patents
pending, some of which were acquired, and amortizes such costs over the shorter
of the remaining legal life or their estimated economic life, upon issuance of
the patent. The unamortized costs of patents and patents pending is written off
when we determine there is no future benefit to those assets.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
We granted warrants in connection with the issuance of certain notes payable.
The relative estimated fair value of such warrants represents a discount from
the face amount of the notes payable. Accordingly, the relative estimated fair
value of the warrants in those certain transactions where the warrants qualified
for equity classification has been recorded in the consolidated financial
statements as a discount from the face amount of the notes. The discount is
amortized using the effective yield method over the respective term of the
related notes payable.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable (see Note 5) provides for a
rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). The estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are accreted to
interest expense over the term of the notes using the effective yield method.
REGISTRATION PAYMENT ARRANGEMENTS
We account for contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement separately from
any related financing transaction agreements, and any such contingent
obligations are recognized only when it is determined that it is probable that
the Company will become obligated for future payments and the amount, or range
of amounts, of such future payments can be reasonably estimated. On October
2008, the SEC declared effective a registration statement that covered all of
the shares and warrants that had previously been generating liquidated damages
pursuant to registration rights agreements and as a result, we ceased recording
such liquidated damages at that time.
As of March 31, 2009, we did not owe any liquidated damages.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred approximately $649,000 and $797,000 of research and development
expenses for the years ended March 31, 2009 and 2008, 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
consolidate financial statements.
F-26
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In December 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS,"
("SFAS No. 157") which defines fair value, establishes a framework for measuring
fair value in accordance with GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 simplifies and codifies related guidance within GAAP,
but does not require any new fair value measurements. The guidance in SFAS No.
157 applies to derivatives and other financial instruments measured at estimated
fair value under SFAS No. 133 and related pronouncements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. SFAS No. 157
applies to certain assets and liabilities that are being measured and reported
on a fair value basis. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosure about fair value measurements. This Statement
enables the reader of the financial statements to assess the inputs used to
develop those measurements by establishing a hierarchy for ranking the quality
and reliability of the information used to determine fair values.
SFAS No. 157 requires that assets and liabilities carried at fair value will be
classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Our adoption of SFAS 157 for our financial assets and liabilities on April 1,
2008 did not have a material impact on our consolidated financial statements. In
February 2008, the FASB issued Staff Position ("FSP") FAS 157-2 ("FSP FAS
157-2") which defers the effective date of SFAS 157 for all non-financial assets
and liabilities, except those items recognized or disclosed at fair value on an
annual or more frequent recurring basis until years beginning after November 15,
2008. We are currently reviewing the adoption requirements of FSP FAS 157-2
related to our nonfinancial assets and liabilities and has not yet determined
the impact, if any, this will have on its consolidated financial statements.
The fair value of our warrant liabilities is determined based on observable
market based inputs or unobservable inputs that are corroborated by market data,
which is a Level 3 classification.
The following outlines the significant weighted average assumptions we used to
estimate the fair value information presented, with respect to warrants
utilizing the Binomial Lattice option pricing model:
Fiscal Year Ended March 31, 2009
-----------------------------------
Risk free interest rate 0.94% - 3.01%
Average expected life 3 - 5 years
Expected volatility 83.6% - 103.0%
Expected dividends None
We did not make any changes to our valuation techniques compared to the prior
fiscal year.
We also obtained a third party valuation in connection with our December 2008
note restructuring (see Note 5). The third party valuation firm used level 3
inputs in its measurement techniques. As a result of that valuation, we adjusted
our preliminary loss on debt extinguishment of $1,063,344 to $977,452.
The table below sets forth a summary of changes in the fair value of our Level 3
assets and liabilities for the year ended March 31, 2009.
Change in
estimated fair
Transfers value recognized
April 1, into Equity in results March 31,
2008 (See Note 6) of operations 2009
----------- --------- ------------ ---------
Warrant derivative
Liability(1) $ 633,095 ($ 419,192) ($ 213,903) $ --
(1) At March 31, 2008 we had outstanding warrants to purchase common shares of
our stock that are classified as warrant derivative liabilities with a fair
value of $633,095. In October 2008, the derivative liability was reclassified to
equity at its fair value of $419,192 on the reclassification date. The warrants
were valued using Level 3 inputs because there are significant unobservable
inputs associated with them.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
expands the scope of specific types of assets and liabilities that an entity may
carry at fair value on its statement of financial position, and offers an
irrevocable option to record the vast majority of financial assets and
liabilities at fair value, with changes in fair value recorded in earnings. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. We have
not yet elected to use the fair value option, and as such, our adoption SFAS No.
159 as of April 1, 2008 did not have a material impact on our consolidated
financial statements.
F-27
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In May 2008, the FASB issued FSP APB 14-1, "Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)" ("FSB APB 14-1"). FSP APB 14-1 requires recognition of both the
liability and equity components of convertible debt instruments with cash
settlement features. The debt component is required to be recognized at the fair
value of a similar instrument that does not have an associated equity component.
The equity component is recognized as the difference between the proceeds from
the issuance of the note and the fair value of the liability. FSP APB 14-1 also
requires an accretion of the resulting debt discount over the expected life of
the debt. Retrospective application to all periods presented is required and a
cumulative-effect adjustment is recognized as of the beginning of the first
period presented. This standard is effective for us in the first quarter of
fiscal year 2010. We are currently evaluating the impact of FSP APB 14-1 on our
financial position and on our results of operations.
In June 2008, the FASB ratified the Emerging Issues Task Force ("EITF") Issue
No. 07-5, "Determining whether an Instrument (or Embedded Feature) is indexed to
an Entity's own Stock" ("EITF 07-5"). EITF 07-5 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Early application is not permitted.
Paragraph 11(a) of SFAS No. 133 - specifies that a contract that would otherwise
meet the definition of a derivative but is both (a) indexed to our own stock and
(b) classified in stockholders' equity in the statement of financial position
would not be consider a derivative financial instrument. EITF 07-5 provides a
new two-step model to be applied in determining whether a financial instrument
or an embedded feature is indexed to an issuer's own stock and thus able to
qualify for the SFAS No. 133 paragraph 11(a) scope exception. We have
outstanding warrants to purchase common stock that have been preliminarily
evaluated as ineligible for equity classification under EITF 07-5 because of
certain provision that may result in an adjustment to the exercise price of the
warrants. Accordingly, the adjustment feature may cause the warrant to fail to
be indexed solely to our stock. The warrants would therefore be classified as
liabilities and re-measured at fair value with changes in the fair value
recognized in operating results. We have not completed our analysis of these
instruments nor determined the effects of pending adoption, if any, on our
consolidated financial statements
In April 2009, the FASB issued FSP FAS 107-1/APB 28-1 ("FSP 107-1"), which is
entitled "Interim Disclosures about Fair Value of Financial Instruments." This
pronouncement amended SFAS No 107, Disclosures about Fair Value of Financial
Instruments, to require disclosure of the carrying amount and the fair value of
all financial instruments for interim reporting periods and annual financial
statements of publicly traded companies (even if the financial instrument is not
recognized in the balance sheet), including the methods and significant
assumptions used to estimate the fair values and any changes in such methods and
assumptions. FSP 107-1 also amended APB Opinion No. 28, Interim Financial
Reporting, to require disclosures in summarized financial information at interim
reporting periods. FSP 107-1 is effective for interim reporting periods ending
after June 15, 2009, with early adoption permitted for periods ended after March
15, 2009 if a company also elects to early adopt FSP FAS 157-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Indentifying Transactions That Are Not Orderly, and
FSP FAS 115-2/FAS 124-2, Recognition and Presentation of Other-Than-Temporary
Impairments. We have not completed our analysis nor determined its effects on
our financial position or results of operations.
In April 2009, the FASB also issued FSP FAS 157-4, which generally applies to
all assets and liabilities within the scope of any accounting pronouncements
that require or permit fair value measurements. This pronouncement, which does
not change SFAS No. 157's guidance regarding Level 1 inputs, requires the entity
to (i) evaluate certain factors to determine whether there has been a
significant decrease in the volume and level of activity for the asset or
liability when compared with normal market activity, (ii) consider whether the
preceding indicates that transactions or quoted prices are not determinative of
fair value and, if so, whether a significant adjustment thereof is necessary to
estimate fair value in accordance with SFAS No. 157, and (iii) ignore the intent
to hold the asset or liability when estimating fair value. FSP FAS 157-4 also
provides guidance to consider in determining whether a transaction is orderly
(or not orderly) when there has been a significant decrease in the volume and
level of activity for the asset or liability, based on the weight of available
evidence. This pronouncement is effective for interim and annual reporting
periods ending after June 15, 2009, and shall be applied prospectively. Early
adoption of FSP FAS 157-4 also requires early adoption of the pronouncement
described in the following paragraph. However, early adoption for periods ended
before March 15, 2009 is not permitted. We have not completed our analysis nor
determined its effects on our financial position or results of operations.
F-28
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In April 2009, the FASB issued FSP FAS 115-2 and 124-2 (hereinafter referred to
as "FAS 115-2/124-2"), which amends the other-than-temporary impairment ("OTTI")
recognition guidance in certain existing U.S. GAAP (including SFAS No. 115 and
130, FSP FAS 115-1/FAS 124-1, and EITF Issue 99-20) for debt securities
classified as available-for-sale and held-to-maturity. FAS 115-2/124-2 requires
the entity to consider (i) whether the entire amortized cost basis of the
security will be recovered (based on the present value of expected cash flows),
and (ii) its intent to sell the security. Based on the factors described in the
preceding sentence, this pronouncement also explains the process for determining
the OTTI to be recognized in "other comprehensive income" (generally, the
impairment charge for other than a credit loss) and in earnings. FAS 115-2/124-2
does not change existing recognition or measurement guidance related to OTTI of
equity securities. This pronouncement is effective as described in the preceding
paragraph. Certain transition rules apply to debt securities held at the
beginning of the interim period of adoption when an OTTI was previously
recognized. If an entity early adopts either FSP 107-1 or FSP FAS 157-4, the
entity is also required to early adopt this pronouncement. In addition, if an
entity early adopts FAS 115-2/124-2, it is also required to early adopt FSP FAS
157-4. We have not completed our analysis nor determined its effects on our
financial position or results of operations.
In November 2007, the EITF issued a consensus on EITF 07-1, "Accounting for
Collaborative Arrangements" ("EITF 07-1"). The Task Force reached a consensus on
how to determine whether an arrangement constitutes a collaborative arrangement,
how costs incurred and revenue generated on sales to third parties should be
reported by the partners to a collaborative arrangement in each of their
respective income statements, how payments made to or received by a partner
pursuant to a collaborative arrangement should be presented in the income
statement, and what participants should disclose in the notes to the financial
statements about a collaborative arrangement. This issue shall be effective for
annual periods beginning after December 15, 2008. Entities should report the
effects of applying this Issue as a change in accounting principle through
retrospective application to all periods to the extent practicable. Upon
application of this issue, the following should be disclosed: a) a description
of the prior-period information that has been retrospectively adjusted, if any,
and b) the effect of the change on revenue and operating expenses (or other
appropriate captions of changes in the applicable net assets or performance
indicator) and on any other affected financial statement line item. We are
currently evaluating the impact, if any, of the adoption of EITF 07-1 on our
consolidated financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141(R)"). This statement requires an acquirer to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date. SFAS 141(R) replaces the cost-allocation process of SFAS No. 141,
"Business Combinations" ("SFAS 141") which required the cost of an acquisition
to be allocated to the individual assets acquired and liabilities assumed based
on their estimated fair values. This statement applies prospectively and is
effective for annual periods beginning after December 15, 2008. Earlier adoption
is prohibited. We do not believe the adoption of SFAS 141(R) will have a
material effect on our consolidated financial statements.
The Sarbanes-Oxley Act of 2002 ("the Act") introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements of the
Act is for management to annually assess and report on the effectiveness of its
internal control over financial reporting under Section 404(a) and for its
registered public accountant to attest to this report under Section 404(b). The
SEC has modified the effective date and adoption requirements of Section 404(a)
and Section 404(b) implementation for non-accelerated filers multiple times,
such that we are first required to issue our management report on internal
control over financial reporting in this annual report on Form 10-K for the
fiscal year ending March 31, 2009. Based on current SEC requirements, we will
not be required to have our auditor attest to management's assessment until our
fiscal year ending March 31, 2010.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
F-29
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
March 31, 2009 March 31, 2008
--------------- --------------
Furniture and office equipment at cost $ 267,687 $ 266,280
Accumulated depreciation (265,084) (257,967)
--------------- --------------
$ 2,603 $ 8,313
=============== ==============
Depreciation expense for the years ended March 31, 2009 and 2008 approximated
$7,000 and 12,000, respectively.
3. PATENTS
Patents consist of the following:
March 31, 2009 March 31, 2008
--------------- --------------
Patents $ 157,442 $ 157,442
Patents pending and trademarks 34,310 23,891
Accumulated amortization (53,335) (44,171)
--------------- --------------
$ 138,417 $ 137,162
=============== ==============
Amortization of patents for the years ended March 31, 2009 and 2008 approximated
$9,000 and $11,000, respectively. Amortization expense on patents is estimated
to be approximately $9,000 per year for the next five fiscal years.
4. NOTES PAYABLE
Notes payable consist of the following at March 31, 2009:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 297,500 -- $ 297,500
10% Note payable, past due 5,000 -- 5,000
----------- --------- -----------
Total Notes Payable $ 302,500 ($ --) $ 302,500
=========== ========= ===========
Notes payable consist of the following at March 31, 2008:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 347,500 -- $ 347,500
10% Note payable, past due 5,000 -- 5,000
8% Note payable 495,000 (275,000) 220,000
2008 9% Note payable 220,000 (158,889) 61,111
----------- --------- ---------
Total Notes Payable $ 1,067,500 ($ 433,889) $ 633,611
=========== ========= =========
During the fiscal year ended March 31, 2009, we restructured our 8% and 9% Notes
and for accounting purposes, we recorded an extinguishment loss of approximately
$977,000 (See Note 5 for further description). Our plans to satisfy the
remaining outstanding balance on the 12% and 10% Notes include repayment with
available funds or converting the notes to common stock at market value.
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings
(the "12% Notes"). On January 26, 2009, a holder of $50,000 of the 12% Notes
converted his principal balance and $56,723 of accrued interest to common stock
at the then current market price of $0.17 per share. At March 31, 2009, 12%
Notes with a principal balance of $297,500 are outstanding, all which are past
due, in default, and bearing interest at the default rate of 15%. At March 31,
2009, interest payable on the 12% Notes totaled $285,594.
F-30
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
4. NOTES PAYABLE (continued)
10% NOTES
From time to time, we issued notes payable ("10% Notes") to various investors,
bearing interest at 10% per annum, with principal and interest due six months
from the date of issuance. The 10% Notes required no payment of principal or
interest during the term. The total amount of the original notes issued was
$275,000. One 10% Note in the amount of $5,000, which is past due and in
default, remains outstanding at March 31, 2009. At March 31, 2009, interest
payable on this note totaled $3,875.
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.
8% NOTES
In December 2007, we issued notes payable ("8% Notes") to two accredited
investors in the aggregate amount of $495,000 with 8% interest maturing on
September 5, 2008. In conjunction with the issuance of the 8% Notes, we also
issued three year warrants to acquire 1,485,000 shares of Common Stock at $0.50
per share.
Under this transaction, we were obligated to issue registered common shares,
underlying the warrants. This warrant obligation did not meet the scope
exception of paragraph 11(a) of SFAS No. 133. Specifically, at the commitment
date, we did not have any uncommitted registered shares to settle the warrant
obligation and accordingly, such obligation was classified as a liability
(outside of stockholders' deficit) in accordance with EITF Issue No.00-19. The
warrants were valued at $693,050 on the commitment date using a Binomial Lattice
option pricing model. Such amount was recorded as a derivative liability with an
offsetting debt discount recorded against the $495,000 face amount of the 8%
Notes and the remaining $198,050 recorded as interest expense. The debt discount
was amortized to expense over the term of the 8% Notes.
On December 30, 2008, the 8% Notes were restructured into convertible notes on
December 30, 2008. See Note 5 "Restructuring of 8% and 9% Notes"
2008 9% NOTES
In January 2008, we issued notes payable ("2008 9% Notes") to an accredited
investor in the amount of $220,000 with 9% interest maturing on October 19,
2008. In conjunction with the issuance of the 2008 9% Notes, we also issued
three year warrants to acquire 660,000 shares of Common Stock at $0.50 per
share.
Under this transaction, we were obligated to issue registered common shares,
underlying the warrants. This warrant obligation did not meet the scope
exception of paragraph 11(a) of SFAS No. 133. Specifically, at the commitment
date, we did not have any uncommitted registered common shares to settle the
warrant obligation and accordingly, such obligation was classified as a
liability (outside of stockholders' deficit) in accordance with EITF Issue No.
00-19. The warrants were valued at $222,450 on the commitment date using a
Binomial Lattice option pricing model. Such amount was recorded as a derivative
liability with an offsetting debt discount recorded against the $220,000 face
amount of the 2008 9% Notes and the remaining $2,450 recorded as interest
expense. The debt discount is amortized to expense over the term of the 2008 9%
Notes.
On October 8, 2008, our registration statement covering the warrants underlying
the 8% and 9% Notes was declared effective. Consequently, the fair value of the
warrant liability on that date of $419,192 was reclassified into equity in
accordance with EITF 00-19. On December 30, 2008, the 8% Notes were restructured
into convertible notes. See Note 5 "Conversion and Restructuring of 8% and 9%
Notes"
F-31
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following at March 31, 2009:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes 45,000 (8,683) 36,317
December 2006 10% Convertible Notes 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 1,116,403 -- 1,116,403
---------- ----------- ----------
Total - Convertible Notes $2,078,403 $ (8,683) $2,069,720
========== ============ ==========
Convertible Notes Payable consist of the following at March 31, 2008:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $(797,470) $ 102,530
December 10% Convertible Notes 50,000 -- 50,000
--------- --------- ---------
Total - Convertible Notes $ 950,000 $(797,470) $ 152,530
========= ========== =========
DECEMBER 2006 10% CONVERTIBLE NOTES
On December 15, 2006, we issued two 10% Convertible Notes ("December 10% Notes")
totaling $50,000 to accredited investors. The December 10% Notes accrue interest
at a rate of ten percent (10%) per annum and matured on March 15, 2007. Such
notes are convertible into shares of restricted common stock at any time at the
election of the holder at a fixed conversion price of $0.17 per share for any
conversion occurring on or before the maturity date. In addition, upon issuance,
we issued five-year Warrants ("December 10% Note Warrants") to purchase a number
of shares equal to the number of shares into which the December 10% Notes can be
converted at a fixed exercise price of $0.17. Additionally, if the December 10%
Note Warrants were exercised prior to December 15, 2007, the holder would have
received an additional warrant on the same terms as the December 10% Note
Warrants on a one to one basis. The warrants can be settled in unregistered
shares of our common stock. The December 10% Note Warrants have been valued
using a Binomial Lattice option pricing model and an associated discount of
$15,627, the relative fair value measured at the commitment date, was recorded
and presented net against the face amount of the December 10% Notes. The
convertible feature of the December 10% Notes provides for an effective
conversion rate that is below market value. Pursuant to EITF No. 98-5 and EITF
No. 00-27, we estimated the fair value of such beneficial conversion feature to
be $34,373 and recorded such amount as a debt discount. The discounts associated
with the warrants and the beneficial conversion feature were accreted to
interest expense over the term of the December 10% Notes.
On May 1, 2008, a holder of $33,000 of the December 10% Notes converted his
$33,000 principal amount and accrued interest of $6,325 at the agreed conversion
rate of $0.17 per share. As a result, we issued 232,033 shares of common stock
under this conversion.
At March 31, 2009, $17,000 of the December 10% Notes remained outstanding and in
default.
AMENDED SERIES A 10% CONVERTIBLE NOTES
From July 11, 2005 through December 15, 2005 we received cash investments
totaling $1,000,000 from accredited investors based on agreed-upon terms reached
on the cash receipt dates. Such investments were documented in November and
December 2005 in several 10% Series A Convertible Promissory Notes. The 10%
Series A Convertible Notes accrue interest at a rate of ten percent (10%) per
annum and matured on January 2, 2007. The 10% Series A Convertible Notes were
convertible into shares of our common stock at any time at the election of the
holder at a fixed conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date.
F-32
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
On November 2007, we entered into Amended and Restated 10% Series A Convertible
Promissory Notes (the "Amended Notes") with the holders of certain promissory
notes that we previously issued (the "Prior Notes"), and all amendments to the
Prior Notes.
The Amended Notes, in the principal amount of $1,000,000, are convertible into
an aggregate of 5,000,000 shares of our Common Stock and matured on February 15,
2009. The Amended Notes provided for the payment of accrued and default interest
through December 31, 2007 in the aggregate amount of $295,248 paid in units
("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of one share
of our Common Stock and one Class A Common Stock Purchase Warrant (the "Class A
Warrant") to purchase one share of our Common Stock at a fixed exercise price of
$0.20 per share. If the Holders exercise the Class A Warrants on or before
February 15, 2010, we will issue them one Class B Common Stock Purchase Warrant
(the "Class B Warrant") for every two Class A Warrants exercised. The Class B
Warrants will have a fixed exercise price of $0.60 per share.
The Amended Notes also provided for the payment of liquidated damages through
November 29, 2007 in the aggregate amount $269,336 to be paid in units ("Damages
Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit consisting
of one share of our Common Stock and one Class A-1 Common Stock Purchase Warrant
(the "Class A-1 Warrant") to purchase one share of our Common Stock at a fixed
exercise price of $0.40 per share. If the Holders exercise the Class A-1
Warrants on or before February 15, 2010, we will issue them one Class B-1 Common
Stock Purchase Warrant (the "Class B-1 Warrant") for every two Class A-1
Warrants exercised. The Class B-1 Warrants will have a fixed exercise price of
$0.40 per share.
In addition, the Amended Notes provided for the issuance of Class A Principal
Common Stock Purchase Warrants (the "Class A Principal Warrant") to purchase an
aggregate of 5,000,000 shares of our Common Stock on the same terms as the Class
A Warrants.
The following table summarizes the number of shares of the our Common Stock
issuable upon the conversion of the Amended Notes or the exercise of the various
warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
------------
Total 15,373,955
============
For accounting purposes, the amendment of the 10% Series A Convertible Notes was
treated as an extinguishment pursuant to EITF Issue No. 06-6. The changes in the
note agreements, conversion feature and warrants were considered substantive as
prescribed in that consensus. Consequently, at the amendment date we initially
recorded an estimated loss on extinguishment of $489,013 as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized notes (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
------------
Loss on extinguishment $ 489,013
============
Subsequently, we engaged a third party valuation firm to value the various
components of the amendment of the Series A Convertible Notes. As a result of
that valuation, we recorded an additional $58,106 of loss on extinguishment of
debt with the offset being recorded to additional paid-in capital.
The new warrants issued in connection with the Amended Notes were evaluated
pursuant to EITF Issue No. 00-19 and classified as equity instruments. In
connection with the new warrants, we recorded $4,392,664 as an increase to
additional paid in capital, based on the estimated fair value at issuance.
F-33
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
In January 2008, one of the holders of the Amended Series A Convertible Notes
converted $100,000 of their notes into 500,000 shares of common stock at the
agreed conversion rate of $0.20 per share.
On July 30, 2008, the holders of the Amended Series A Convertible Notes notified
us that we were in default on the notes due to our failure to register the
warrants by March 31, 2008 and for failing to make required interest payments.
We subsequently registered their warrants under a registration statement
declared effective in October 2008. We were obligated to register the shares
underlying the Class A Warrants, the Class A-1 Warrants and the Class A
Principal Warrants with the SEC by March 31, 2008, and the shares underlying the
Class B Warrants and to register the Class B-1 Warrants with the SEC by the 30th
day following the issuance date of such warrants. Since we failed to effect a
registration statement by March 31, 2008, we recorded liquidated damages of
$15,000 per month through September 30, 2008, when we stopped recording damages
due to the effectiveness of a registration statement in October 2008.
To satisfy the accrued interest and damages through September 30, 2008, on
September 19, 2008, we issued 966,750 shares of restricted common stock, valued
at the closing price of $0.49, and 966,750 warrants with a strike price of $0.20
in payment of accrued interest of $89,500 and accrued damages of $103,850 per
the payment formula in the Loan Agreement. The difference in value of equity
instruments issued upon settlement and the liabilities settled resulted in a
non-cash loss on settlement of $607,908.
In order to satisfy the accrued interest for the December 2008 quarter, on
February 18, 2009, we issued 168,750 shares of restricted common stock, valued
at the closing price of $0.18, and 168,750 warrants with a strike price of $0.20
in payment of accrued interest of $33,750 per the payment formula in the Loan
Agreement. The difference in value of equity instruments issued upon settlement
and the liabilities settled resulted in a non-cash loss on settlement of
$19,355.
We have not yet paid an agreed amount of legal fees, which total $32,970 and are
accrued in our accounts payable, associated with the amendment to the notes. We
are currently in discussions with the noteholders regarding the terms of a
potential extension to the notes but there can be no assurance such an extension
will be finalized on terms acceptable to us or at all.
2008 10% CONVERTIBLE NOTES
During the year ended March 31, 2009, we raised an aggregate amount of $430,000
from the sale to accredited investors of 10% convertible notes and warrants
("2008 10% Convertible Notes"). The 2008 10% Convertible Notes mature at various
dates between January 2010 through March 2010 and are convertible into our
common stock at a fixed conversion price of $0.50 per share prior to maturity
and the warrants are exercisable at $0.50 per share for a period of three years
ending between July and September 2011. In connection with this financing, we
agreed to pay to the investment banking firm that arranged this sale a cash
commission of seven percent of the proceeds and warrants equal to seven percent
of the gross capital raised which we accounted for as deferred financing costs
and which are being amortized over the terms of convertible notes.
The warrants issued as part of the 2008 10% Convertible Notes can be settled in
unregistered shares of our common stock. The warrants have been valued using a
Binomial Lattice option pricing model and an associated discount of $150,095,
the relative fair value measured at the commitment date, was recorded and
presented net against the face amount of the 2008 10% Convertible Notes. The
discount associated with the warrants is amortized over the term of the notes.
The convertible feature of the 2008 10% Convertible Notes does not have a
beneficial conversion pursuant to EITF 98-5.
During the three months ended March 31, 2009, a holder of $385,000 of the 2008
10% Convertible Notes converted his principal and $19,250 of accrued interest to
common stock at $0.50 per share per the terms of the 2008 10% Convertible Notes.
2008 10% Convertible Notes in the aggregate amount of $45,000 remain outstanding
at March 31, 2009. At March 31, 2009, interest payable on those notes totaled
$2,978.
F-34
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
CONVERSION AND RESTRUCTURING OF 8% NOTES AND 2008 9% NOTES INTO RESTRUCTURED
DECEMBER 2008 10% CONVERTIBLE NOTES
On December 30, 2008, we entered into an agreement with the holders of the 8%
Notes and the 2008 9% Notes (see Note 4) to extend the maturity dates of those
notes. As part of this arrangement, we also agreed to (a) extend the expiration
dates of the warrants originally issued with those notes to July 1, 2012, (b)
modify the interest rate to 10%, (c) issue notes in the amount of $265,911
representing loan extension fees, (d) issue new notes representing accrued
interest and penalties incurred through September 30, 2008, (e) book the
anticipated interest through maturity on the original principal amounts, the
loan fees and the accrued interest and damages into another new note. All of
these new notes and the modified original notes are convertible into our common
stock at 80% of the market price on the date of conversion with a floor on the
conversion price of $0.15 per share and a ceiling on the conversion price of
$0.25 per share (see Note 4).
The following table summarizes the number of shares of our Common Stock issuable
upon the conversion of the restructured December 2008 10% convertible notes
using the floor conversion price of $0.15 per common share:
Modified Original Notes 4,766,667
New Notes 3,821,407
---------
Total 8,588,074
=========
For accounting purposes, the restructuring and amendment of the 8% and 9% Notes
into December 2008 10% Convertible Notes was treated as an extinguishment
pursuant to EITF Issue No. 06-6. The changes in the note agreements, the
granting of a conversion feature and the extension of the warrants were
considered substantive as prescribed in that
consensus. We initially recorded an estimated loss on extinguishment of
$1,063,344. We subsequently retained a third party valuation firm to assess the
fair value of the December 2008 10% Convertible Notes and related warrants.
Based on that third party valuation, we reduced the loss on extinguishment to
$977,452 as follows:
Reacquisition Price (fair value of notes
and warrants as amended) $1,909,877
Less amounts relieved at date of extinguishment
Accrued interest and accrued damages (217,425)
Principal balance of original notes (715,000)
----------
Loss on debt extinguishment $ 977,452
==========
During the three months ended March 31, 2009, holders of the Restructured
December 2008 10% Convertible Notes and Related Convertible Notes converted
$171,808 of their principal balance and $1,808 of accrued interest to common
stock per the terms of the Restructured December 2008 10% Convertible Notes and
Related Convertible Notes.
EXTINGUISHMENT OF DEBT
During the fiscal year ended March 31, 2009, we recorded $1,604,715 in losses
associated with the restructuring of notes recorded as extinguishments for
accounting purposes:
Loss on extinguishment related to the Restructured December
2008 10% Convertible Notes $ 977,452
Loss on issuance of units related to the Amended Series A 10%
Convertible Notes in September 2008 607,908
Loss on issuance of units related to the Amended Series A 10%
Convertible Notes in February 2009 19,355
-----------
Total loss on debt extinguishment $ 1,604,715
===========
6. EQUITY TRANSACTIONS
2003 CONSULTANT STOCK PLAN
In August 2003, the Company adopted the 2003 Consultant Stock Plan (the "Stock
Plan"), which provides for grants of common stock through August 2013, to assist
the Company in obtaining and retaining the services of persons providing
consulting services for the Company. A total of 1,000,000 common shares are
reserved for issuance under the Stock Plan. On March 29, 2004, the Company filed
a registration statement on Form S-8 for the purpose of registering 1,000,000
common shares issuable under the Stock Plan under the Securities Act of 1933. On
August 29, 2005, the Company filed a Form S-8 for the purpose of registering an
additional 2,000,000 shares, for a total of 3,000,000 common shares reserved
under the Plan.
F-35
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
2005 DIRECTORS COMPENSATION PROGRAM
In February 2005, the Company adopted the 2005 Directors Compensation Program
(the "Directors Compensation Program") to assist in obtaining and retaining the
services of outside directors. Under the Directors Compensation Program, a newly
elected director will receive a one time grant of a non-qualified stock option
of 1.5% of the common stock outstanding at the time of election. The options
will vest one-third at the time of election to the board and the remaining
two-thirds will vest equally at year end over three years. Additionally, each
director will also receive an annual $25,000 non-qualified stock option
retainer, $15,000 of which is to be paid at the first of the year to all
directors who are on the Board prior to the first meeting of the year and a
$10,000 retainer will be paid if a director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned.
COMMON STOCK
In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In April 2004, the Company issued 50,000 shares of restricted common stock to
Fusion Capital Fund II, LLC, an accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. The Company recorded no
expense related to the issuance of these shares since they were related to
equity fund raising activities. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.
In May 2004, the Company issued 225,000 shares of common stock at $0.44 per
share and 225,000 warrants to purchase the Company's common stock at a price of
$0.76 per share to legal counsel for legal services in the amount of $99,000,
which was recorded as expense in the accompanying consolidated financial
statements. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares of common stock and 113,636 warrants to purchase the Company's
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In May 2004, the Company issued a total of 1,415,909 shares of restricted stock
at a price of $0.44 per share for cash totaling $623,000 to fourteen accredited
investors. In connection with the issuance of these shares, the Company granted
the stockholders 1,640,908 warrants to purchase the Company's common stock at a
price of $0.76 per share. The warrants vested immediately and expire on the
fifth anniversary from the date when a registration statement covering the
common stock underlying such warrants is declared effective. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In July 2004, the Company issued 10,715 shares of restricted common stock at
$0.70 per share to an accredited individual for employee placement services in
the amount of $7,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In July 2004, the Company issued 6,850 shares of restricted common stock at
$0.73 per share to an accredited individual for consulting services on
opportunities for the Company's Hemopurifier(R) within the biodefense
marketplace in the amount of $5,000. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In September 2004, the Company issued 479,513 shares of restricted common stock
to an accredited investor, in conjunction with the conversion of $125,000 in
principal amount of notes, plus accrued interest, at $0.34 per share, in
accordance with their convertible note agreement. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
F-36
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In November and December 2004, the Company issued 80,000 shares of restricted
common stock to an accredited individual investor in connection with the
exercise of 80,000 warrants at $0.25 per share for consideration of a $20,000
reduction in the principal amount of a 10% one-year promissory note. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In December 2004, the Company issued 461,667 shares of restricted common stock
to two accredited individual investors in connection with the exercise of
461,667 warrants at $0.25 per share for cash totaling $115,417. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In December 2004, the Company repaid two $25,000 12% promissory notes, including
accrued interest of $17,778 each, through the issuance of 87,303 restricted
common shares at $0.49 per share to each of two separate accredited individual
investors. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In December 2004, the Company issued 60,000 shares of restricted common stock at
$0.50 per share under a consulting agreement with an accredited individual
investor, for investor relations consulting services to the Company. The fair
value of the transaction of $30,000 was recorded as deferred compensation and
presented as an offset to additional paid-in capital in the accompanying
consolidated financial statements. Such amount is being amortized to expense
over the six month term of the agreement. At March 31, 2005, $15,000 of such
amount remained unamortized. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The remaining $15,000
balance in deferred consulting fees were amortized during the fiscal year ended
March 31, 2006.
In January 2005, the Company issued 55,556 shares of restricted common stock at
$0.36 per share and a warrant to purchase 55,556 shares of common stock at $0.44
per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In January 2005, the Company issued 66,666 shares of restricted common stock at
$0.45 per share to an accredited individual investor under a consulting
agreement for investor relations services to the Company. The fair value of the
transaction of $30,000 was recorded as deferred compensation and presented as an
offset to additional paid-in capital in the accompanying consolidated financial
statements. Such amount is being amortized to expense over the six month term of
the agreement. At March 31, 2005, $15,000 of such amount remained unamortized.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. The remaining $15,000 balance in deferred consulting
fees were amortized during the fiscal year ended March 31, 2006.
In January 2005, the Company issued 25,834 shares of restricted common stock to
an accredited individual investor in connection with the exercise of a warrant
to purchase 25,834 shares of common stock at $0.25 per share for cash totaling
$6,459. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In February 2005, the Company issued 139,063 shares of restricted common stock
to an accredited individual investor in connection with the exercise of a
warrant to purchase 139,063 shares of common stock at $0.25 per share for cash
totaling $34,766. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In February 2005, the Company issued 90,000 shares of restricted common stock at
$0.27 per share and a three-year warrant to purchase 90,000 shares of common
stock at $0.34 per share for cash in the amount of $24,300 to an accredited
individual investor. This transaction was exempt from registration pursuant to
Section 4(2)of the Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional total of
1,416,958 shares of restricted common stock at prices ranging from $0.25 to
$0.52 for total cash proceeds of approximately $541,000.
During the year ended March 31, 2005, the Company issued an additional 557,647
shares of restricted common stock at prices ranging from $0.25 to $0.55 under
various consulting service agreements for total recorded value of approximately
$196,000. All services on these agreements were completed and expensed during
the year ended March 31, 2005.
F-37
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2005, the Company issued 9,740 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for scientific consulting services to
the Company valued at $3,000.
In April 2005, the Company issued 25,134 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $7,500.
In April 2005, the Company issued 31,424 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $7,900.
During the year ended March 31, 2006, the Company issued 3,990,807 shares of
common stock at prices between $0.25 to and $0.76 per share to Fusion Capital
under its $6,000,000 common stock purchase agreement for cash proceeds totaling
$1,436,815. These shares are registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
During the quarter ended June 30, 2005, the Company issued 95,420 shares of
common stock pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.262 per share in payment for
regulatory affairs consulting services to the Company valued at $25,000.
In May 2005, the Company issued 33,228 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $8,440.
In May 2005, the Company issued 24,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for investor relations consulting
services to the Company valued at $6,000.
In May 2005 the Company issued 100,000 shares of common stock and a warrant to
purchase 400,000 shares of common stock at a purchase price of $0.18 per share
to an accredited investor for $17,600. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In May 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 21,008 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 836,730 shares of restricted common stock and a
three-year warrant to purchase 418,365 shares of the Company's restricted common
stock at an exercise price of $0.25 to legal counsel as an inducement to settle
accrued past due legal services payable in the amount of $167,346 which had been
expensed in the prior fiscal year. At the time of the settlement, the shares of
the Company's restricted common stock were valued at $209,183 and, using a
Black-Scholes option pricing model, the warrant was valued at $100,408. The
non-cash additional consideration of $142,245 has been recorded as professional
fees expense during the fiscal year ended March 31, 2006.
F-38
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In June 2005, the Company issued 12,605 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for scientific consulting services to
the Company valued at $3,000.
During the quarter ended June 30, 2005, the Company expensed $30,000 of deferred
consulting fees, which were included in additional paid-in capital at March 31,
2005, as the related consulting services were completed.
In July 2005, the Company issued 43,479 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000.
In July 2005, the Company issued 2,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $500.
In August 2005, the Company issued 37,863 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $8,557.
In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $21,100.
In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $37,260.
In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $5,738.
In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.22 per share in payment for regulatory affairs consulting
services to the Company valued at $7,620.
In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $7,660.
In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $36,135.
In November 2005, the Company issued 13,298 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
F-39
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2005, the Company issued 371,847 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.25 per share in payment of general
legal fees valued at $91,509.
In December 2005, the Company issued 73,964 shares of restricted common stock at
$0.25 per share in payment of legal fees related to capital raising transactions
valued at $18,202.
In December 2005, the Company issued 13,333 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $3,840.
In December 2005, the Company issued 15,060 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In January 2006, the Company issued 579,813 shares of restricted common stock at
$0.24 per share in payment for patent fees valued at $139,155.
In January 2006, the Company issued 66,017 shares of restricted common stock at
Prices ranging from $0.28 to $0.33 per share in payment for investor relations
valued at $20,000.
In January 2006, the Company issued 9,091 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In January 2006, the Company issued 13,889 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.36 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In February 2006, the Company issued 10,563 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In March 2006, the Company issued 17,730 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In March 2006, the Company issued 79,255 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for Corporate communications consulting
services to the Company valued at $19,974.
In March 2006, the Company issued 110,040 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan and 110,040 shares of restricted stock at
$0.39 per share in payment of general legal fees valued at $85,392.
In March 2006, the Company issued 7,275 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.49 per share in payment for regulatory affairs consulting
services to the Company.
In March 2006, the Company issued 27,284 shares of common stock to legal counsel
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment of general legal fees valued
at $9,197.
In March 2006, the Company issued 158,046 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $52,155.
F-40
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In March 2006, the Company converted a $30,000 10% promissory notes held by an
accredited individual investor, including accrued interest of $4,564, through
the issuance of 140,000 restricted common shares at $0.25 per share.
In March 2006, a $30,000 15% convertible note, including accrued interest of
$4,943, was converted at $0.20 per share for 174,716 shares of common stock.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In March 2006, the Company issued 150,000 shares of restricted common stock
under a one year investor relations consulting agreement which was valued at
$49,000 and being amortized over a one year period. Approximately $4,000 was
amortized during the year ended March 31, 2006. As a result, the remaining
balance of $44,917 represents that entire balance of deferred consulting fees
(contra equity) in accompanying consolidated balance sheet.
In March 2006, the Company issued 35,714 shares of restricted common stock
payment of professional services related to investor relations valued at
$10,000.
In March 2006, the Company issued 15,152 shares of restricted common stock at
$0.33 per share in payment of professional services related to investor
relations valued at $5,000.
In March 2006, the Company issued 33,333 shares of restricted common stock at
$0.30 per share in payment of an option agreement valued at $10,000.
In April 2006, the Company issued 3,782 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In April 2006, the Company issued 25,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for past due rents owed by the Company
valued at $12,801 based on the value of the services.
In April 2006, the Company issued 6,313 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 10,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 14,563 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $4,165 based on the value of the services.
F-41
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations valued at $2,500 based on the
value of the services.
During April 2006, the Company issued 209,679 shares of common stock at prices
between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $140,002. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.41 per share to an accredited individual investor. There was no
gain or loss on the extinguishment.
In May 2006, the Company issued 8,532 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In May 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In May 2006, the Company issued 4,545 shares of restricted common stock at $0.55
per share in payment for investor relations valued at $2,500 based on the value
of the services.
In June 2006, the Company issued 8,681 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In June 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2006, the Company issued 3,363 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.
F-42
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In July 2006, the Company issued 10,684 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.47 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In July 2006, the Company issued 6,250 shares of restricted common stock at
$0.40 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In July 2006, the Company issued 7,813 shares of restricted common stock at
$0.32 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In July 2006, the Company issued 132,765 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $48,858 based on the value of the services.
In July 2006, the Company issued 14,535 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
During August 2006, the Company issued 113,235 shares of common stock at prices
between $0.26 and $0.27 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $30,000. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In August 2006, the Company issued 9,434 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In August 2006, the Company issued 86,779 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for general legal expenses to the
Company valued at $22,085 based on the value of the services.
In August 2006, the Company issued 114,132 shares of restricted common stock at
$0.20 per share in payment for accrued accounting consulting services provided
to the Company by a third party valued at $23,111 based upon the value of the
services.
During September 2006, the Company issued 439,936 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $110,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In September 2006, the Company issued 4,808 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.
In September 2006, the Company issued 15,723 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In September 2006, the Company issued 9,868 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
F-43
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In September 2006, the Company issued 16,447 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In September 2006, the Company issued 9,733 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $2,550 based on the value of the services.
During October 2006, the Company issued 201,165 shares of common stock at $0.25
per share to Fusion Capital under its $6,000,000 common stock purchase agreement
for net cash proceeds totaling $50,000. These shares are registered pursuant to
the Company's Form SB-2 registration statement effective December 7, 2004.
In October 2006, the Company issued 16,994 shares of restricted common stock at
$0.31 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In October 2006, the Company issued 8,929 shares of restricted common stock at
$0.28 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In October 2006, the Company issued 18,797 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In October 2006, the Company issued 11,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In October 2006, the Company issued 7,540 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $1,900 based on the value of the services.
In November 2006, the Company issued 555,556 shares of restricted common stock
at $0.18 per share in exchange for an investment of $100,000. As an inducement
the Company also issued five-year warrants to purchase a number of shares equal
to the number of restricted shares issued converted at a fixed exercise price of
$0.18. Additionally, if the warrants are exercised prior to November 14, 2007,
the holder will receive an additional warrant on the same terms as the warrants.
In November 2006, the Company issued 11,905 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In November 2006, the Company issued 19,841 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
F-44
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2006, the Company issued 12,397 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In December 2006, the Company issued 20,661 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In December 2006, the Company issued 40,000 shares of restricted common stock at
$0.25 per share in exchange for license and development rights related to
certain intellectual property valued at $10,800 based on the fair market value
of the intellectual property license.
During December 2006, the Company issued 118,360 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $30,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In January 2007, the Company issued 15,248 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $4,300 based on the value of the services.
In January 2007, the Company issued 10,714 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In January 2007, the Company issued 125,091 shares of restricted common stock at
between $0.24 and $0.31 per share in payment for investor relations services to
the Company valued at $32,500 based on the value of the services.
In January 2007, the Company issued 17,857 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
During January 2007, the Company issued 782,268 shares of common stock at prices
between $0.25 and $0.273 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $200,001. These shares
were registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In February 2007, the Company issued 31,394 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.255 per share in payment for general legal expenses to the
Company valued at $8,005 based on the value of the services.
In February 2007, the Company issued 9,740 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.308 per share in payment for regulatory affairs consultant
services to the Company valued at $3,000 based on the value of the services.
During February 2007, the Company issued 692,751 shares of common stock at
prices between $0.28 and $0.32 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $199,998. These
shares were registered pursuant to the Company's Form SB-2 registration
statement effective December 7, 2004.
F-45
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In March 2007, the Company issued 15,723 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.318 per share in payment for regulatory affairs consultant
services to the Company valued at $5,000 based on the value of the services.
In March 2007, the Company issued 4,934 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.608 per share in payment for regulatory affairs consultant
services to the Company valued at $3,000 based on the value of the services.
In March 2007, the Company issued 21,078 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.51 per share in payment for regulatory affairs consultant
services to the Company valued at $10,750 based on the value of the services.
In March 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.578 per share in payment for regulatory affairs consultant
services to the Company valued at $5,000 based on the value of the services.
During March 2007, the Company issued 92,379 shares of common stock at prices
between $0.36 and $0.44 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $36,745. These shares
were registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In March 2007, the Company issued 1,333,333 shares of common stock at $0.30 per
share to Fusion Capital for net cash proceeds of $400,000. In addition, the
Company issued 1,050,000 of common shares as a commitment fee under a common
stock purchase agreement.
In April 2007, the Company issued 30,617 shares of restricted common stock as
the result of a cashless exercise of 80,000 warrants held by a former
noteholder.
In April 2007, the Company issued 15,152 shares of restricted common stock at
$0. 33 per share in payment of an option agreement valued at $5,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In April 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2007, the Company issued 3,937 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In May 2007, the Company issued 13,124 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000 based on the value of the services.
In May 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
F-46
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In June 2007, the Company issued 41,999 shares of restricted common stock at
between $0.30 and $0.74 per share in payment for investor relations services to
the Company valued at $20,000 based on the value of the services.
In June 2007, the Company issued 17,526 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $10,200 based on the value of the services.
In June 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2007, the Company issued 10,174 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.63 per share in payment for regulatory affairs consulting
services to the Company valued at $6,450 based on the value of the services.
In August 2007, the Company issued 1,630,000 shares of common stock for cash
proceeds of $815,000 ($757,950 net of commissions). The shares were issued to
accredited investors in the form of Units comprised of two shares of common
stock and one three-year warrant to acquire common stock at an exercise price of
$0.50. The offering price of each Unit was $1.00.
In August 2007, the Company issued 107,153 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at an average price of $0.37 per share in payment of grant writing
and regulatory consulting services to the Company valued at $39,963 based upon
the value of the services.
In August of 2007, the Company issued 103,106 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment of legal fees related to general
corporate legal services to the Company valued at $62,894 based upon the value
of the services provided.
In August 2007, the Company issued 21,020 shares of restricted common stock at
prices between $0.68 and $0.78 per share in payment for investor relations
services to the Company valued at $15,000 based on the value of the services.
In September 2007, the Company issued 14,000 shares of common stock to an
accredited investor at $0.50 per share in payment of commissions related to the
August Private Placement transaction valued at $7,000 based upon the value of
services provided.
In September 2007, the Company issued 5,294 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $3,600 based on the value of the services
provided.
In October 2007, the Company issued 4,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.65 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In December 2007, the Company issued 330,000 shares of common stock for cash
proceeds of $165,000. The shares were issued to accredited investors and were in
the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
F-47
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In January 2008, the Company issued 21,992 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $15,000 based on the value of the services
provided.
In January 2008, the Company issued 200,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to an accredited investor and were
in the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In January 2008, the Company issued 500,000 shares of common stock for a
conversion of $100,000 of Amended Series A 10% Convertible Notes at the agreed
conversion price of $0.20 per share (see Note 6).
In January 2008, the Company issued 18,797 shares of restricted common stock as
the result of a cashless exercise of 55,556 warrants held by a former
noteholder.
In February 2008, the Company issued 400,000 shares of common stock for cash
proceeds of $200,000. The shares were issued to accredited investors and were in
the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In February 2008, the Company issued 100,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to a corporate investor.
In February 2008, the Company issued 25,380 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $12,690 based on the value of the services
provided.
In March 2008, the Company issued 6,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In March 2008, the Company issued 7,895 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.57 per share in payment for regulatory affairs consulting
services to the Company valued at $4,500 based on the value of the services
provided.
In March 2008, the Company issued 50,000 shares of common stock to an accredited
investor at $0.53 per share in payment of commissions related to the August
Private Placement transaction valued at $26,500 based upon the value of services
provided.
In March 2008, the Company issued 25,000 shares of common stock to an accredited
investor at $0.53 per share in payment of commissions related to the August
Private Placement transaction valued at $13,250 based upon the value of services
provided.
In March 2008, the Company issued 92,188 shares of restricted common stock at an
average price of $0.60 in payment for investor relations services to the Company
valued at $55,000 based on the value of the services.
In March 2008, the Company issued 250,000 shares to a Director under a stock
option exercise at a strike price of $0.38 per share through the conversion of
$95,000 in accounts payable owed to such Director.
In March 2008, the Company issued 865,500 shares of common stock for a
conversion of $150,000 of 9% Convertible Notes and $66,375 of accrued interest
at the agreed conversion price of $0.25 per share (see Note 6).
F-48
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2008, the Company issued 10,170 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $6,000 based on the value of the services
provided.
In April 2008, the Company entered into a license agreement with the Trustees of
Boston University which provides for an exclusive license for a Boston
University patent BU05-41, "Method to Prevent Proliferation and Growth of
Metastases." The agreed initial payment under this license was an issuance of
10,849 restricted shares of common stock equivalent to 115% of $5,000.
In April 2008, the Company issued 6,667 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In May 2008, the Company issued 1,000,000 shares of restricted common stock to
an institutional investor for $500,000 of cash.
In May 2008, we issued 232,033 shares of common stock to a 10% convertible
noteholder in order to convert the $33,000 principal balance and $5,325 of
accrued interest of the convertible note to equity.
In June 2008, the Company issued 25,610 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.41 per share in payment for regulatory affairs consulting
services to the Company valued at $10,500 based on the value of the services
provided.
In June 2008, we issued grants of restricted common stock to two employees of
5,000 shares each as additional compensation. Those grants were valued at $2,400
apiece based our closing stock price of $0.48 on the date of issuance.
In July 2008, our Chief Executive Officer converted $35,000 of accrued debt to
100,000 shares of unregistered common stock based upon the closing stock price
of $0.35 per share on that day.
In July 2008, a board member and his spouse, both former executives at Hemex, a
company we acquired in 1999, converted $147,279 of accrued debt to 446,300
shares of unregistered common stock based upon the closing stock price of $0.33
per share on that day.
In July 2008, our Chief Science Officer converted $150,000 of accrued debt to
468,750 shares of unregistered common stock based upon the closing stock price
of $0.32 per share on that day.
In September 2008, we issued 966,750 shares of restricted common stock and
966,750 warrants with a strike price of $0.20 in payment of accrued interest of
$89,500 and accrued damages of $103,850 per the payment formula in the Amended
Series A 10% Convertible Notes(see Note 5).
In September 2008, we issued 110,138 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.45 per
share in payment for legal services valued at $49,562 based on the value of the
services.
In September 2008, we issued 38,150 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.40 per
share in payment for regulatory affairs consulting services valued at $15,260
based on the value of the services.
In October 2008, we issued 770,000 shares, of which 385,000 were through the
exercise of registered warrants and 385,000 were issuances of restricted common
stock, for gross proceeds of $192,500.
In October 2008, we issued 51,398 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.31 per
share in payment for financial consulting services and research services valued
at $16,080 based on the value of the services.
In November 2008, we issued 200,000 shares, of which 100,000 were through the
exercise of registered warrants and 100,000 were issuances of restricted common
stock, for gross proceeds of $50,000.
F-49
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In November 2008, we issued 95,550 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for financial consulting services valued at $23,888 based on
the value of the services.
In November 2008, we issued 98,684 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for legal services valued at $18,750 based on the value of the
services.
In December 2008, we issued 59,950 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for legal services valued at $16,606 based on the value of the
services.
In December 2008, we issued 700,000 shares of restricted common stock and
700,000 warrants with a strike price of $0.25 to an accredited investor for
gross proceeds of $175,000.
In December 2008, we issued 338,099 shares of restricted common stock pursuant
at $0.25 per share in payment for legal services valued at $84,288 based on the
value of the services.
In December 2008, we issued 23,636 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for regulatory affairs consulting services valued at $6,000
based on the value of the services.
In December 2008, we issued 77,192 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for regulatory affairs consulting services valued at $20,070
based on the value of the services.
In December 2008, we issued 35,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $8,400
based on the value of the services.
In December 2008, we issued 15,337 shares of restricted common stock pursuant at
$0.33 per share in payment for public relations services valued at $5,000 based
on the value of the services.
In January 2009, we issued 23,566 shares of restricted common stock as a patent
license payment valued at $5,750.
In January 2009, we issued 1,452,926 shares of common stock as a result of
conversions of $419,473 of convertible notes payable, other notes payable and
related accrued interest. The shares were issued to accredited investors.
In January 2009, we issued 105,869 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at an average
price of $0.19 per share in payment for regulatory affairs consulting services
valued at $19,550 based on the value of the services.
In January 2009, we issued 353,000 shares of restricted common stock and
warrants to purchase 353,000 shares of common stock in exchange for $55,850. The
shares were issued to an accredited investor.
In February 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In February 2009, we issued 582,000 shares of restricted common stock and
warrants to purchase 582,000 shares of common stock in exchange for $88,870. The
shares were issued to an accredited investor.
In February 2009, we issued 78,743 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at a price of
$0.18 per share in payment for regulatory affairs consulting services valued at
$13,780 based on the value of the services.
In February 2009, we issued 53,706 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for regulatory affairs consulting services valued at $9,130
based on the value of the services.
F-50
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In February 2009, we issued 168,750 shares of restricted common stock and
168,750 warrants with a strike price of $0.20 in payment of accrued interest of
$53,105 per the payment formula in the Amended Series A 10% Convertible
Notes(see note 5).
In February 2009, we issued 213,666 shares of common stock as a result of
conversions of $83,500 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In March 2009, we issued 903,135 shares of common stock as a result of
conversions of $179,808 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In March 2009, we issued 385,000 shares of restricted common stock and warrants
to purchase 385,000 shares of common stock in exchange for $57,750. The shares
were issued to an accredited investor.
In March 2009, we issued 50,000 shares of restricted common stock at $0.17 per
share in payment for investor relations services valued at $8,500 based on the
value of the shares issued for the services.
In March 2009, we issued 33,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In March 2009, we issued 47,760 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.18 per
share in payment for financial consulting services valued at $8,597 based on the
value of the services.
In March 2009, we issued 25,674 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $5,263 based on the value of the
services.
In March 2009, we issued 37,695 shares of restricted common stock pursuant at
$0.19 per share in payment for legal services valued at $7,275 based on the
value of the services.
In March 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
WARRANTS
During the year ended March 31, 2005, we granted 568,181 warrants to an investor
in connection with a commitment fee for the purchase of common stock. The
warrants have an exercise price of $0.76 per share, vest immediately and are
exercisable through May 2009. As the warrants were issued in connection with
equity financing, no expense has been recorded in the accompanying consolidated
financial statements.
During the year ended March 31, 2005, we granted 847,727 warrants to investors
in connection with the purchase of common stock. The warrants have an exercise
price of $0.76 per share, vest immediately and are exercisable through May 2009.
As the warrants were issued in connection with equity financing, no expense was
recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2005, we issued 113,636 warrants to purchase
common stock for $0.76 per share, which are exercisable through May 2009 and
vested upon grant. The warrants were issued in connection with the conversion of
notes payable (see Notes 4 and 5). These warrants were valued using the Black
Scholes option pricing model; the relative pro-rata estimated fair value was
insignificant and was charged to interest expense upon grant.
During the year ended March 31, 2005, we issued 225,000 warrants to purchase
common stock for $0.76 per share, which are exercisable through May 2009 and
vested upon grant. The warrants were issued in connection with common stock
issued for legal services expense totaling $99,000 (see "Common Stock" above).
F-51
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
During the year ended March 31, 2005, we issued 260,000 warrants to
purchase common stock for $0.50 per share, which vested upon grant and were
scheduled to expire in October 2007. The warrants were issued in connection with
the issuance of notes payable (see Note 4). These warrants were valued using the
Black Scholes option pricing model; the relative pro-rata estimated fair value
is being amortized to interest expense over the life of the notes.
During the year ended March 31, 2005, we issued 144,443 warrants to purchase
common stock for $0.90 per share, which vested upon grant and expired in October
2007. The warrants were issued in connection with the issuance of notes payable
(see Note 4). These warrants were valued using the Black Scholes option pricing
model; the relative pro-rata estimated fair value was amortized to interest
expense over the life of the notes.
During the year ended March 31, 2005, we granted 55,556 warrants to an investor
in connection with the purchase of common stock. The warrants have an exercise
price of $0.44 per share, vest immediately and were exercisable through January
2008. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2005, we granted 90,000 warrants to investors in
connection with the purchase of common stock. The warrants have an exercise
price of $0.34 per share, vest immediately and were exercisable through February
2008. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.
On May 16, 2005, we granted 100,000 warrants to an accredited investor in
connection with the purchase of 100,000 restricted common shares for $17,600.
the warrants have an exercise price of $0.176 and were exercisable through May
2008.
On May 16, 2005, we granted 300,000 warrants to Fusion Capital Fund II, LLC in
connection with the issuance of a 15% Convertible Note. The warrants have an
exercise price of $0.25 per share and are exercisable through May 2010.
On May 27, 2005, we granted 400,000 warrants to an accredited investor in
connection with the issuance of a $100,000 12% note payable. The warrants had an
exercise price of $0.25 and expired on May 27, 2006.
On June 27, 2005, we granted three-year warrants to purchase 418,365 shares of
the Company's restricted common stock at an exercise price of $0.25 to legal
counsel as an inducement to settle accrued past due legal services payable.
From July 11, 2006 through December 14, 2005, we granted three-year warrants to
purchase 5,000,000 shares of common stock to the holders of an aggregate of
$1,000,000 in 10% Series A Convertible Notes. The warrants have an exercise
price of $0.20 and will be issued upon conversion of the underlying 10% Series A
Convertible Notes.
On March 31, 2006, as an inducement to exercise 568,181 warrants at an exercise
price of $0.76 per share, we issued five-year replacement warrants in like
amount to Fusion Capital Fund II, LLC. The 568,181 replacement warrants have an
exercise price of $0.76. Such warrants were valued using Binomial Option Pricing
model and such incremental value was insignificant.
On November 14, 2006, in conjunction with the purchase of 555,556 shares of our
restricted common stock, we granted five-year warrants to purchase 555,556
shares of restricted common stock at an exercise price of $0.18. If such
warrants are exercised on or before November 14, 2007, the warrant holder will
receive five-year warrants to purchase an additional 555,556 shares of
restricted common stock at an exercise price of $0.18.
On December 15, 2006, as an inducement to enter into a $100,000 10% convertible
note, we granted noteholders five-year warrants to purchase 294,118 shares of
restricted common stock at an exercise price of $0.17. If such warrants are
exercised on or before December 15, 2007, the noteholders will receive five-year
warrants to purchase an additional 294,118 shares of restricted common stock at
an exercise price of $0.17.
In March 2007, an investor exercised 160,000 warrants in two cashless
transactions.
F-52
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
On March 22, 2007 in effecting the Allonges, we amended our 10% Series A
Convertible Notes to extend the maturity date of the Notes from January 2, 2007
until January 3, 2008. We agreed to also pay all accrued interest, through
February 15, 2007 and each calendar quarter thereafter, in the form of units
(the "Units")at the rate of $0.20 per Unit (the "Interest Payment Rate"). The
Notes were convertible into Units at any time prior to the Maturity Date at the
conversion price of $0.20 per Unit (the "Conversion Price"). Each Unit is
composed of one share of the Company's Common Stock and one Class A Common Stock
Purchase Warrant (the "Class A Warrant"). Each Class A Warrant expires on
January 2, 2011 and is exercisable to purchase one share of Common Stock at a
price of $0.20 per share (the "Exercise Price"). If the Holder exercises Class A
Warrants on or before July 3, 2008, we will issue the Holder one Class B Common
Stock Purchase Warrant (the "Class B Warrant" and with the Class A Warrant,
collectively, the "Warrants") for every two Class A Warrants exercised. Each
Class B Warrant has a three-year term and is exercisable to purchase one share
of Common Stock at a price equal to the greater of $0.20 per share or 75% of the
average of the closing bid prices of the Common Stock for the five trading days
immediately preceding the date of the notice of conversion. Class A Warrants to
purchase 685,328 shares of Common Stock and Class B Warrants to purchase 342,665
shares of Common Stock were granted under the Allonges.
At various points over the fiscal year ended March 31, 2007, 669,000 warrants
expired.
In August 2007, as part of the purchase of 815,000 units, we issued three-year
warrants to purchase 815,000 shares of our common stock at $0.50 per share to
accredited investors.
At various points in the three months ended December 31, 2007, 144,443 warrants
expired.
In December 2007, we issued 1,650,000 three-year warrants to purchase our common
stock at $0.50 per share in association with debt and equity financings.
In January 2008, we issued 760,000 three-year warrants to purchase our common
stock at $0.50 per share in association with debt and equity financings.
In February 2008, an investor exercised 55,556 warrants to receive 30,617 shares
in a cashless transaction.
In February 2008, we issued 200,000 three-year warrants to purchase our common
stock at $0.50 per share in connection with equity financings.
In March 2008, 90,000 warrants expired.
In the July through September 2008 period, we issued 860,000 warrants to
accredited investors in connection with the issuance of the 2008 10% Convertible
Notes. We also issued 60,200 warrants as a placement fee to an investment
banking firm that arranged the placement of the 2008 10% Convertible Notes. The
warrants had an exercise price of $0.50 and carry three year terms.
In September 2008, we issued 966,750 warrants with a strike price of $0.20 as
part of a payment of accrued interest of $89,500 and accrued damages of $103,850
per the payment formula in the Amended Series A 10% Convertible Notes(see note
5).
In December 2008, we issued 700,000 warrants with a strike price of $0.25 to an
accredited investor as part of the sale of units in exchange for $175,000. These
warrants carry three year terms.
In the three months ended December 31, 2008, investors exercised 485,000
warrants to purchase our common stock at $0.50 per share.
In January 2009, we issued 353,000 warrants to purchase 353,000 shares of common
stock as part of the sale of units to an accredited investor in exchange for
$55,850. 118,000 of the warrants have a strike price of $0.16 per share and
200,000 of the warrants have a strike price of $0.15 per share. These warrants
carry three year terms.
In February 2009, we issued warrants to purchase 582,000 shares of common stock
as part of the sale of units to an accredited investor in exchange for $88,870.
157,000 of the warrants have a strike price of $0.16 per share and 425,000 of
the warrants have a strike price of $0.15 per share. These warrants carry three
year terms.
F-53
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
In February 2009, we issued 168,750 warrants with a strike price of $0.20 as
part of a payment of accrued interest of $53,105 (see note 5) per the payment
formula in the Amended Series A 10% Convertible Notes(see note 5).
In March 2009, we issued warrants to purchase 385,000 shares of common stock as
part of the sale of units to an accredited investor in exchange for $57,750. The
warrants have a strike price of $0.15 per share and carry a three year term.
In the three months ended March 31, 2009, 418,365 warrants expired.
A summary of the aggregate warrant activity for the years ended March 31, 2009
and 2008 is presented below:
Year Ended March 31,
-----------------------------------------------------
2009 2008
------------------------- -------------------------
Weighted Weighted
Average Exercise Average Exercise
Warrants Price Warrants Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 16,021,630 $ 0.36 12,886,629 $ 0.31
Granted 4,075,701 $ 0.26 3,425,000 $ 0.50
Exercised (485,000) $ 0.50 (55,556) $ 0.44
Cancelled/Forfeited (418,365) $ 0.25 (234,443) $ 0.69
----------- -------- ---------- --------
Outstanding, end of year 19,193,966 $ 0.29 16,021,630 $ 0.36
=========== ======== ========== ========
Exercisable, end of year 19,193,966 $ 0.29 16,021,630 $ 0.36
=========== ========= ========== ========
Weighted average estimated fair
value of warrants granted $ 0.19 $ 0.48
========= ========
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:
Years Ended March 31,
2009 2008
----------- -----------
Risk free interest rate 0.94%-3.01% 1.79%-4.03%
Average expected life 3 to 5 years 3 years
Expected volatility 83.6% - 103.0% 84.0% - 88.6%
Expected dividends None None
The detail of the warrants outstanding and exercisable as of March 31, 2009 is
as follows:
Warrants Outstanding Warrants Exercisable
--------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Outstanding Price
- --------------------------- -------------- ------------- ---------- --------------- ----------
$0.15 - $0.18 3,119,348 3.12 $ 0.17 3,119,348 $ 0.17
$0.20 - $0.40 9,621,753 3.70 $ 0.23 9,621,753 $ 0.23
$0.50 - $0.76 6,452,865 2.37 $ 0.58 6,452,865 $ 0.58
----------- ------------
19,193,966 19,193,966
=========== ============
F-54
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
OPTIONS
At March 31, 2009 we had issued 1,337,825 options to outside directors and
3,965,450 options to employee-directors under the 2005 Directors Compensation
Program. Of the options issued to outside directors, 308,725
options had been forfeited, 250,000 options had been exercised and 4,744,550
options remain outstanding.
From time to time, our Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone basis
outside of any of our formal stock plans. The terms of these grants are
individually negotiated.
In August 2000, we adopted the 2000 Stock Option Plan ("Stock Option Plan"),
which was approved by its stockholders in September 2000. The Stock Option Plan
provides for the issuance of up to 500,000 options to purchase shares of common
stock. Such options can be incentive options or nonstatutory options, and may be
granted to employees, directors and consultants. The Stock Option Plan has
limits as to the eligibility of those stockholders who own more than 10% of our
stock, as defined. The options granted pursuant to the Stock Option Plan may
have exercise prices of no less than 100% of fair market value of our common
stock at the date of grant (incentive options), or no less than 75% of fair
market value of such stock at the date of grant (nonstatutory). At March 31,
2009, we had granted 47,500 options under the 2000 Stock Option Plan of which
15,000 had been forfeited granted 10,000 shares to employees under the plan,
with 457,500 available for future issuance.
In March 2002, the Board of Directors granted our Chief Executive Officer
("CEO") and Chief Scientific Officer ("CSO") non-qualified stock options to
purchase up to 250,000 shares of common stock each, at an exercise price of
$1.90 per share (the estimated fair value of the underlying common stock at
grant date) and expire March 2012. Awards are earned upon achievement of certain
financial and/or research and development milestones. On July 1, 2005, the
Company's CEO forfeited all of his aforementioned 250,000 options.
In February 2005, our Board of Directors granted our CEO and CSO non-qualified
stock options to purchase up to 2,231,100 and 1,734,350 shares of common stock,
respectively, at an exercise price of $0.38 per share and vest fifty percent
immediately, twenty-five percent in December 2005 and twenty-five percent in
December 2006. In addition Mr. Calvin Leung, a board member, was granted
non-qualified stock options to purchase up to 308,725 shares at $0.38 that vest
fifty percent immediately, twenty-five percent in December 2005 and twenty-five
percent in December 2006. Messrs. Franklyn S Barry, Jr. and Edward G Broenniman,
board members, were each granted non-qualified stock options to purchase up to
514,550 shares at $0.38 that vest fifty percent immediately, twenty-five percent
in December 2005 and twenty-five percent in December 2006. All of these options
granted expire in 2010 and 2011 and were granted at a price that was $0.08 below
the estimated fair value of the underlying common stock on the date of grant.
Accordingly, we recorded approximately $424,000 of compensation expense in the
accompanying consolidated statement of operations for the year ended March 31,
2005.
On September 9, 2005, our Board of Directors granted our CEO non-qualified stock
options to purchase up to 2,857,143 shares of common stock, at an exercise price
of $0.21 per share, in exchange for the extinguishment of $300,000 of accrued
related-party liabilities. The fair value of such options approximated the value
of the accrued related-party liability.
On October 2, 2006, our Board of Directors granted our President non-qualified
stock options to purchase up to 500,000 shares of common stock, at an exercise
price of $0.27 per share. 166,667 of the options vested on July 18, 2007 with
the remaining shares of the grant vesting at a rate of 13,889 shares per month.
Due to our President ceasing his employment with us in November 2008, the option
grant was subsequently forfeited.
F-55
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
OPTIONS (continued)
On June 13, 2007, our Board of Directors granted our CEO non-qualified stock
options to purchase up to 2,500,000 shares of common stock, at an exercise price
of $0.36 per share. 1,000,000 options vested immediately, 500,000 options vested
in June 2008 and 500,000 options are scheduled to vest in June 2009. Unless
terminated earlier in accordance with the agreement, the option, to the extent
unexercised, will expire on June 13, 2017.
On December 15, 2008, our Board of Directors granted our CEO non-qualified stock
options to purchase up to 2,000,000 shares of common stock, at an exercise price
of $0.25 per share. The exercise price was set based on the closing price of our
common stock on November 13, 2008, the date on which our Board of Directors
approved the grant of the option. The option vested on December 15, 2008, the
date of grant, with respect to 1,000,000 shares, will vest as to 500,000 shares
on December 31, 2009 and will vest as to the remaining 500,000 shares on
December 31, 2010. Unless terminated earlier in accordance with the agreement,
the option, to the extent unexercised, will expire on November 13, 2018.
Also on December 15, 2008, we entered into separate agreements with Franklyn S.
Barry, Jr. and Edward G. Broenniman, two of our non-employee directors, pursuant
to which we granted to each such director a non-statutory stock option to
acquire an aggregate of 500,000 shares of the Company's common stock at an
exercise price of $0.41 per share. The exercise price was set based on the
closing price of our common stock on June 4, 2008, the date on which our Board
of Directors approved the grant of each option. In the case of each grant, the
option vested on December 15, 2008, the date of grant, with respect to 333,333
shares and will vest as to the remaining 166,667 shares on June 4, 2009. Unless
terminated earlier in accordance with its respective agreement, each option, to
the extent unexercised, will expire on June 4, 2018.
Additionally, on December 15, 2008, our Board of Directors granted our CSO and
another employee non-statutory stock options at an exercise price of $0.41 per
share to acquire an aggregate of 750,000 shares and 300,000 shares of our common
stock, respectively. The exercise price was set based on the closing price of
our common stock on June 4, 2008, the date on which our Board of Directors
approved the option grants. The one-third of the options will vest on June 4,
2009, one-third on June 4, 2010 and the final one-third will vest on June 4,
2011. Unless terminated earlier in accordance with the agreements, the options,
to the extent unexercised, will expire on June 4, 2018.
The following is a summary of the stock options outstanding at March 31, 2009
and 2008 and the changes during the two years then ended:
Year Ended March 31,
-----------------------------------------------------
2009 2008
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 10,954,060 $ 0.38 9,204,060 $ 0.38
Granted 4,050,000 $ 0.33 2,500,000 $ 0.36
Exercised -- $ -- (250,000) $ 0.38
Cancelled/Forfeited (515,000) $ 0.32 (500,000) $ 0.23
----------- ---------- ----------- ----------
Outstanding, end of year 14,489,060 $ 0.38 10,954,060 $ 0.38
=========== ========== =========== ==========
Exercisable, end of year 11,105,726 $ 0.37 9,231,839 $ 0.38
=========== ========== =========== ==========
Weighted average estimated fair
value of options granted $ 0.21 $ 0.37
========== ==========
F-56
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
OPTIONS (continued)
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented, with respect to stock options
utilizing the Binomial Lattice option pricing model for the years ended March
31, 2009 and March 31, 2008:
Years Ended March 31,
2009 2008
----------- -----------
Risk free interest rate 1.02% 4.85%
Average expected life 3 years 3 years
Expected volatility 112% 91%
Expected dividends None None
The detail of the options outstanding and exercisable as of March 31, 2009 is as
follows:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
--------------- ------------- ------------ --------------- ---------
$0.21 - $0.25 4,857,143 7.75 years $ 0.23 3,857,143 $ 0.22
$0.36 - $0.41 9,294,550 5.07 years $ 0.38 6,911,216 $ 0.36
$1.78 - $3.75 337,367 2.77 years $ 2.02 337,367 $ 2.02
---------- ----------
14,489,060 11,105,726
========== ==========
We recorded stock based compensation expense related to share issuances and to
options granted outside of our Stock Option Plan totaling $733,289 and $487,093
for the fiscal years ended March 31, 2009 and 2008, 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, 2009 and 2008.
As of March 31, 2009, we had $678,096 of remaining unrecognized stock option
expense, which is expected to be recognized over a weighted average remaining
vesting period of 1.70 years.
On March 31, 2009, our stock options had a negative intrinsic value since the
closing price on that date of $0.19 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 non interest-bearing liabilities have been included
as due to related parties in the accompanying consolidated balance sheet.
Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.
F-57
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
8. OTHER CURRENT LIABILITIES
At March 31, 2009 and 2008, other current liabilities were comprised of the
following items:
March 31, March 31,
2009 2008
---------- ----------
Accrued liquidated damages -- 337,400
Accrued interest 352,204 412,914
Accrued legal fees and other 327,294 340,495
---------- ----------
Total other current liabilities $ 679,498 $1,090,809
========== ==========
9. INCOME TAXES
INCOME TAXES
On July 13, 2006, the FASB issued FIN 48, which clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME Taxes, and prescribes a
recognition threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a tax return. Under
FIN 48, 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, FIN 48 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006.
We adopted the provisions of FIN 48 on April 1, 2007, and has commenced
analyzing filing positions in all of the federal and state jurisdictions where
it is required to file income tax returns, as well as all open tax years in
these jurisdictions. As a result of adoption, we have recorded no additional tax
liability. There are no unrecognized tax benefits as of April 1, 2008, or as of
March 31, 2009. As of March 31, 2009, we have not yet completed our analysis of
the deferred tax assets for net operating losses and we believe that it is more
likely than not that an ownership change may have occurred. As such, this amount
and the offsetting valuation allowance have been removed from our deferred tax
assets. We will complete a Section 382 analysis regarding the limitation of the
net operating loss, if we utilize the net operating loss.
Due to the existence of the valuation allowance, future changes in our
unrecognized tax benefits will not impact our effective tax rate.
We are subject to taxation in the U.S. and state jurisdictions. Our tax years
for 1994 and forward are subject to examination by the U.S. and 2004 and forward
by California tax authorities due to the carryforward of unutilized net
operating losses. We are currently not under examination by any taxing
authorities.
Our practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. During the twelve months ended March 31, 2009, we
did not recognize any interest or penalties. Upon adoption of FIN 48 on April 1,
2007, we did not record any interest or penalties.
The adoption of FIN 48 did not impact our financial condition, results of
operations or cash flows. At March 31, 2009, we had net deferred tax assets of
approximately $3.9 million. These deferred tax assets are primarily composed
of capitalized research and development costs and other accruals. Due to
uncertainties surrounding our ability to generate future taxable income to
realize these assets, a full valuation has been established to offset the net
deferred tax asset. Additionally, the future utilization of the our net
operating loss carryforwards to offset future taxable income may be subject to
an annual limitation as a result of ownership changes that may have occurred
previously or that could occur in the future. We have not yet determined whether
such an ownership change has occurred. Until this analysis has been completed we
have removed the deferred tax assets associated with these carryforwards from
its deferred tax asset schedule and have recorded a corresponding decrease to
their valuation allowance.
F-58
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
Significant components of our net deferred tax assets at March 31, 2009 are
shown below (in thousands). A valuation allowance of $3.9 million has been
established to offset the net deferred tax assets as of March 31, 2009, as
realization of such assets is uncertain.
YEAR ENDED MARCH 31,
--------------------------
2009 2008
------------ ------------
Deferred tax assets:
Capitalized research and development $ 3,245 $ 2,987
Other 626 136
------------ ------------
Total deferred tax assets 3,871 3,123
------------ ------------
Total deferred tax liabilities -- --
------------ ------------
Net deferred tax assets 3,871 3,123
Valuation allowance for deferred tax assets (3,871) (3,123)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The provision for income taxes on earnings subject to income taxes differs from
the statutory federal rate at March 31, 2009, due to the following (in
thousands):
2009 2008
------------ -------------
Federal income taxes at 34% $ (2,069) $ (1,323)
State income tax, net of federal benefit (355) (223)
Tax effect on non-deductible expenses
and credits 472 57
Increase in valuation allowance (1) 1,952 1,489
------------ -----------
$ -- $ --
============ ===========
- -------------------
(1) The removal of the valuation allowance related to the net operating losses
is not included in the increase in the valuation allowance. See above for
explanation.
Pursuant to Internal Revenue Code Sections 382, use of our net operating loss
carryforwards may be limited if a cumulative change in ownership of more than
50% occurs within a three-year period.
F-59
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
10. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
We entered into an employment agreement with our Chairman of the Board effective
April 1, 1999. The agreement, which is cancelable by either party upon sixty
days notice, will be in effect until the employee retires or ceases to be
employed by us. The Chairman of the Board was appointed President and CEO
effective June 1, 2001 upon which the base annual salary was increased from
$120,000 to $180,000. Effective January 1, 2005, the CEO's salary was increased
from $180,000 to $205,000 per year. The CEO is eligible for an annual bonus at
the discretion of the Board of Directors, of which $0 and $20,000 was earned
during each of the years ended March 31, 2007 and 2006, respectively. Under the
terms of the agreement, if the employee is terminated he may become eligible to
receive a salary continuation payment in the amount of at least twelve months'
base salary. Effective April 1, 2006, the CEO's salary was increased from
$205,000 to $240,000 per year. 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.
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
("CSO"). 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 250,000 stock
options to purchase the Company's common stock in connection the completing
certain milestones, such as the initiation and completion of certain clinical
trials, the submission of proposals to the FDA and the filing of a patent
application. Under the terms of the agreement, if the employee is terminated he
may become eligible to receive a salary continuation payment in the amount of
twelve months base salary. Effective April 1, 2006, the CSO's salary was
increased from $165,000 per year to $185,000 per year.
LEASE COMMITMENTS
We lease our office and research and development space the rate of $7,744 per
month under an operating lease agreement which expired in July 2007. We are
presently leasing its space on a month to month basis, on the same terms.
Rent expense approximated $91,000 and $105,000 for the years ended March 31,
2009 and 2008, respectively.
11. SUBSEQUENT EVENTS
In April 2009, holders of certain convertible notes converted $263,478 of
principal and accrued interest into 1,688,211 shares of our common stock per the
terms of the notes at an average conversion rate of approximately $0.16 per
share.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
In April 2009, we issued 71,519 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for scientific and financial consulting services valued at
$12,158 based on the value of the services provided.
In April 2009, we issued 490,000 shares of restricted common stock valued at the
closing price in payment for investor relations services.
In April 2009, we issued 25,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In April 2009, we issued 32,935 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for internal controls consulting services valued at $7,575
based on the value of the services provided.
In April 2009, we issued 12,372 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for regulatory affairs consulting services valued at $7,575
based on the value of the services provided.
F-60
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In April 2009, we issued 43,021 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for financial consulting services valued at $7,744 based on the
value of the services provided.
In April 2009, we issued 70,870 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
In April 2009, we issued 22,817 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, holders of certain convertible notes converted $139,256 of
principal and accrued interest into 878,059 shares of our common stock per the
terms of the notes at an average conversion rate of approximately $0.16 per
share.
In May 2009, we issued 13,043 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 10,714 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we raised an aggregate amount of $135,000 from the sale to
accredited investors of 10% convertible notes. The notes are convertible into
our common stock at a fixed conversion price of $0.20 per share prior to
maturity. If the noteholders exercise their conversion privilege, we have agreed
to issue a matching three year warrant carrying a strike price of $0.20 per
share. In connection with this financing, we agreed to issue s $15,000
convertible note on similar terms as compensation to the finder who arranged the
convertible debt placement.
In May 2009, we issued 51,118 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for financial consulting services valued at $9,713 based on the
value of the services provided.
In May 2009, we issued 22,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, we issued 34,602 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $7,613 based on the
value of the services provided.
In May 2009, we issued 40,104 shares of restricted common stock at $0.24 in
payment for financial advisory services valued at $9,625 based on the value of
the services provided.
In May 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we raised an aggregate amount of $135,000 from the sale to an
accredited investor of a 10% convertible note. The note is convertible into our
common stock at a fixed conversion price of $0.20 per share prior to maturity.
If the noteholder exercises his conversion privilege, we have agreed to issue a
three year warrant carrying a strike price of $0.20 per share equal to fifty
percent warrant coverage.
F-61
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2009
- --------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS (continued)
In June 2009, we issued 20,500 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $4,920
based on the value of the services provided.
In June 2009, we issued 57,055 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$12,552 based on the value of the services provided.
In June 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we issued 23,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $2,290
based on the value of the services provided.
In June 2009, we issued 48,106 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$10,583 based on the value of the services provided.
On June 15, 2009, we entered into a Promissory Note with our intellectual
property law firm for the amount of $24,001, which represented the amount we
owed to that firm. The Promissory Note calls for monthly payments of $4,000 from
June 2009 through November 2009. We have made the June payment.
On June 29, 2009, Mr. Joyce, our Chief Executive Officer entered into an Option
Suspension Agreement, whereby Mr. Joyce has agreed to not exercise his stock
options pending the filing of amended articles of incorporation of the Company
increasing the Company's authorized capital. Accordingly of Mr. Joyce's total
options, 2,857,143 cannot be exercised until the amended articles of
incorporation are filed, and 6,731,090 cannot be exercised until the later of
June 9, 2010 or the filing of the amended articles of incorporation. The
Agreement also provides Mr. Joyce certain protections in the event the Company
shall undergo a Change of Control Transaction while his options are suspended.
Such protections include the right to receive, in the form of cash payments, the
positive value of his options (which remain subject to suspension) at the time
of such transaction. A copy of the Option Suspension Agreement is filed as an
Exhibit to this Report.
In addition, Mr. Joyce has been granted 4,000,000 shares of restricted common
stock, at a price per share of $0.24, which shall vest in equal installments
over a thirty six month period commencing June 9, 2010; however such shares will
not be issued until the filing of the amended articles of incorporation.
In June 2009, the holders of the Restructured December 2008 10% Convertible
Notes and Related Convertible Notes (see Note 5) informally agreed to extend the
expiration date of the notes by three months from July 1, 2009 to October 1,
2009.
F-62
EXHIBIT 10.49
OPTION SUSPENSION AGREEMENT
This Option Suspension Agreement is entered into by and between Mr. James
Joyce, an individual ("Joyce") and Aethlon Medical, Inc., a Nevada corporation
(the "Company) as of June 29, 2009.
RECITALS:
WHEREAS, the Company is approaching the limits of its authorized common
stock (the "Common Stock");
WHEREAS, the Company's cash position requires that is raise new working
capital which would require the issuance or reservation of shares of Common
Stock for investors;
WHEREAS, Joyce, the Chief Executive Officer and a Director of the Company
has agreed to accommodate the Company's fundraising needs and lack of available
capital by suspending the exercisability of his stock options pending the
increase of the authorized capital of the Company; and
WHEREAS, the Board of Directors of the Company has determined to accept
Joyce's offer to suspend the exercisability of this stock options upon the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Joyce and the Company (each a
"Party" and collectively the "Parties") agree as follows:
1. SUSPENSION OF EXERCISE RIGHTS. The Parties agree that Joyce currently owns
the stock options set forth on SCHEDULE A hereto (the "Stock Options), some
of which are subject to continuing vesting. Joyce hereby agrees to suspend
the exercisability of his Stock Options as follows: (A) with respect to
2,857,143 Stock Options (related to the September 9, 2005 grant) Joyce will
not exercise his rights to acquire shares of Common Stock underlying such
Options until the date upon which the Company amends its Articles of
Incorporation in the State of Nevada to increase its authorized capital
stock to a number of shares that would permit the exercisability of all the
Stock Options (the "Charter Amendment"); and (B) with respect to the
balance of all Stock Options (6,731,090 Stock Options) the later of (i) the
filing and effectiveness of the Charter Amendment, or (ii) June 9, 2010.
The period of time from the date hereof until the date the Stock Options
become exercisable again, the "Suspension Period."
2. NO RESERVATION OF SHARES UNDERLYING STOCK OPTIONS. The Parties agree that
during the Suspension Period, the Company and the Board of Directors shall
have no obligation to reserve or set aside any shares of Common Stock
underlying the Stock Options suspended and that all such shares shall be
immediately deemed "not reserved" for issuance if so previously reserved,
and shall be available for reservation or issuance for other purposes at
the discretion of the Board of Directors. Joyce acknowledges and agrees
that any attempted exercise of the Stock Options during the Suspension
Period shall be null and void and of no force or effect.
1
3. EXTENSION OF EXERCISE PERIOD; CONTINUATION OF VESTING. The original
expiration date of each Stock Option shall be deemed extended by the number
of days to which each such Stock Option is subject to the Suspension
Period. The Suspension Period shall have no effect upon the vesting
schedule of any Stock Options and all Stock Options subject to vesting
shall continue vesting during the Suspension Period according to the terms
of the original vesting schedule.
4. CHANGE OF CONTROL DURING SUSPENSION PERIOD.
(A) In consideration of the fact that the Stock Options will not be
exercisable in full, if at all, during the Suspension Period, the Parties
recognize the economic risk to Joyce in the event the Stock Options hold
value and there is a Change of Control transaction (as defined below).
Accordingly, the Parties hereby agree as follows: If a Change of Control
shall occur prior to the filing of the Charter Amendment, and if any of the
Stock Options hold positive value (i.e., are "in the money") as compared to
the Fair Market Value (defined below) of each share of Common Stock of the
Company on the Determination Date (defined below), then in such event, the
Company shall, as a condition to such Change of Control transaction,
require that either the Company or the acquiring person or company (if
applicable) tender to Joyce the same consideration per share (whether such
consideration be in the form of cash, notes, securities or other property)
that he would have received had he been able to exercise such Stock Options
on the Determination Date. In the event a Change of Control transaction
shall occur prior to June 9, 2010, but subsequent to the filing and
effectiveness of the Amended Charter, then in such event, the Stock Options
still subject to the Suspension Period shall become immediately exercisable
pursuant to their terms such that Joyce's rights to exercise shall be
reinstated in advance of the Determination Date (as defined below.
(B) A "CHANGE OF CONTROL" shall mean: (a) a merger or consolidation of
the Company with or into any other corporation or other business entity
(except one in which the holders of capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least
a majority of the outstanding securities having the right to vote in an
election of the Board of Directors of the surviving corporation ("VOTING
STOCK")); (b) a sale, lease, exchange or other transfer (in one transaction
or a related series of transactions) of all or substantially all of the
Company's assets; or (c) the acquisition by any person or any group of
persons (other than the Company, any of its direct or indirect
subsidiaries, or any trustee, fiduciary or other person or entity holding
securities under any employee benefit plan or trust of the Company or any
of its direct or indirect subsidiaries) acting together in any transaction
or related series of transactions undertaken after the date hereof, of such
number of shares of the Company's Voting Stock as causes such person, or
group of persons, to own beneficially, directly or indirectly, as of the
time immediately after such transaction or series of transactions, fifty
percent (50%) or more of the combined voting power of the Voting Stock of
the Company other than as a result of an acquisition of securities directly
from the Company, or solely as a result of an acquisition of securities by
the Company which by reducing the number of shares of the Voting Stock
outstanding increases the proportionate voting power represented by the
Voting Stock owned by any such person or group of persons to fifty percent
(50%) or more of the combined voting power of such Voting Stock. The "FAIR
MARKET VALUE" of the Common Stock shall mean: (a) If the Company's Common
Stock is traded on an
2
exchange or is quoted on the National Association of Securities Dealers,
Inc. Automated Quotation ("NASDAQ") National Market or the NASDAQ SmallCap
Market, then the closing or last sale price, respectively, reported for the
last business day immediately preceding the Determination Date (as defined
below). (b) If the Company's Common Stock is not traded on an exchange or
on the NASDAQ National Market or the NASDAQ SmallCap Market but is traded
on the Over the Counter Bulletin Board, then the mean of the average of the
closing bid and asked prices reported for the last business day immediately
preceding the Determination Date. (c) Except as provided in clause (d)
below, if the Company's Common Stock is not publicly traded, then as the
Joyce and the Company agree or in the absence of agreement by arbitration
in accordance with the rules then in effect of the American Arbitration
Association, before a single arbitrator to be chosen from a panel of
persons qualified by education and training to pass on the matter to be
decided. (d) If the Determination Date is the date of a Change of Control,
then all amounts to be payable per share to holders of the Common Stock
pursuant to the Articles of Incorporation of the Company then in effect
assuming for the purposes of this clause (d) that all of the shares of
Common Stock then issuable upon exercise of the Option are outstanding at
the Determination Date. "DETERMINATION DATE" shall mean the date that is
five (5) business days prior to the date established as the effective date
of the Change of Control transaction.
5. NO OTHER AMENDMENT. Except as modified or amended hereby, the Stock Options
and their respective granting terms and agreements shall remain unchanged.
6. MISCELLANEOUS. Neither this Agreement nor any provision hereof shall be
waived, modified, discharged or terminated except by an instrument in
writing signed by the Parties hereto. This Agreement and the rights and
obligations hereunder are not transferable or assignable by Joyce. This
Agreement shall be governed by and construed in accordance with the laws of
the State of Nevada, without regard to principles of conflicts of law. Each
Party agrees to provide, if requested, any additional information that may
be requested or required to effect the intents and purposes of this
Agreement. This Agreement constitutes the full and entire understanding and
agreement between the parties with regard to the subject matter hereof and
no party shall be liable or bound to the other in any manner by any
representations, warranties, covenants and agreements except as
specifically set forth herein. In the event one or more of the provisions
of this Agreement should be held, for any reason, to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provisions of this Agreement,
and this Agreement shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
3
IN WITNESS WHEREOF, the undersigned has executed this Agreement as of the
date set forth on this signature page.
AETHLON MEDICAL, INC., a Nevada corporation
By: /s/ James A. Joyce
---------------------------
Name: James A. Joyce
Title: Chairman and Chief Executive Officer
By: /s/ Richard H. Tullis
---------------------------
Name: Richard H. Tullis
Title: VP & Chief Science Officer
JAMES JOYCE, Individually
/s/ James A. Joyce
- ------------------------------
James Joyce
4
SCHEDULE A
STOCK OPTIONS
- ----------------------- ----------------------------- ---------------------------- ------------------------
DATE OF GRANT EXPIRATION DATE NUMBER OF SHARES EXERCISE PRICE
UNDERLYING OPTION
- ----------------------- ----------------------------- ---------------------------- ------------------------
- ----------------------- ----------------------------- ---------------------------- ------------------------
February 23, 2005 February 23, 2010 1,115,550 $0.38
- ----------------------- ----------------------------- ---------------------------- ------------------------
February 23, 2005 February 23, 2010 557,775 $0.38
- ----------------------- ----------------------------- ---------------------------- ------------------------
February 23, 2005 February 23, 2011 557,775 $0.38
- ----------------------- ----------------------------- ---------------------------- ------------------------
September 9, 2005 September 9, 2015 2,857,143 $0.21
- ----------------------- ----------------------------- ---------------------------- ------------------------
June 13, 2007 June 13, 2017 2,500,000 $0.36
- ----------------------- ----------------------------- ---------------------------- ------------------------
December 15, 2008 December 15, 2018 2,000,000 $0.25
- ----------------------- ----------------------------- ---------------------------- ------------------------
TOTAL: 9,588,243
- ----------------------- ----------------------------- ---------------------------- ------------------------
5
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the previously filed
Registration Statements of Aethlon Medical, Inc. on Form S-8 (File No.
333-145290 and 333-127911 and 333-114017 and 333-49896) of our report, dated
July 1, 2009 on the financial statements of Aethlon Medical, Inc. and
Subsidiaries as of March 31, 2009 and 2008 and for each of the two years in the
two year period ended March 31, 2009 and the period January 31, 2004 (inception)
through March 31, 2008 (which included an explanatory paragraph expressing
substantial doubt as to the Company's ability to continue as a going
concern)appearing in this Annual Report on Form 10-K of Aethlon Medical, Inc.
for the year ended March 31, 2009.
/s/ Squar, Milner, Peterson, Miranda & Williamson, LLP
------------------------------------------------------
Squar, Milner, Peterson, Miranda & Williamson, LLP
Newport Beach, California
July 1, 2009
EXHIBIT 31.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James Joyce, certify that:
1. I have reviewed this Annual Report on Form 10-K of Aethlon Medical,
Inc.;
2. Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this Report;
3. Based on my knowledge, the financial statements, and other financial
information included in this Report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the smaller reporting company as of, and for, the periods presented
in this report;
4. The smaller reporting company's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the smaller reporting compnay
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the smaller reporting company, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this Report
is being prepared;
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable
assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the smaller reporting company's
disclosure controls and procedures and presented in this
Report and our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this Report based on such evaluation; and
(d) Disclosed in this Report any change in the smaller reporting
company's internal control over financial reporting that
occurred during the smaller reporting company's most recent
fiscal quarter (the smaller reporting company's fourth fiscal
quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
smaller reporting company's internal control over financial
reporting; and
5. The smaller reporting company's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal control over
financial reporting, to the smaller reporting company's auditors and
the audit committee of the smaller reporting company's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
smaller reporting company's ability to record, process,
summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the smaller
reporting company's internal control over financial reporting.
Date: July 2, 2009
/S/ JAMES A. JOYCE
-----------------------------
JAMES A. JOYCE
CHIEF EXECUTIVE OFFICER AND
CHIEF ACCOUNTING OFFICER
(PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL ACCOUNTING OFFICER)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Aethlon Medical, Inc. on Form
10-K for the fiscal year ended March 31, 2009 as filed with the Securities and
Exchange Commission on the date hereof, I, James A. Joyce, Chief Executive
Officer and Chief Accounting Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. Based on my knowledge, the Annual Report fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
as amended, and
2. The information contained in such Annual Report on Form 10-K fairly
presents, in all material respects, the financial condition and results of
operations of Aethlon Medical, Inc.
Date: July 2, 2009
By: /s/ James A. Joyce
-----------------------
James A. Joyce
Chief Executive Officer and Chief Accounting Officer
A signed original of this written statement required by Section 906, or other
document authenticating, acknowledging, or otherwise adopting the signature that
appears in typed form within the electronic version of this written statement
required by Section 906, has been provided to Aethlon Medical, Inc. and will be
retained by Aethlon Medical, Inc. and furnished to the Securities and Exchange
Commission or its staff upon request.
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