UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2013
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For transition period from ________ to __________
COMMISSION FILE NUMBER 000-21846
AETHLON MEDICAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
8910 University Center Lane, Suite 660,
San Diego, California
(Address of principal executive office)
13-3632859
(I.R.S. Employer
Identification No.)
92122
(Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (858) 459-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
TITLE OF EACH CLASS
NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE
NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE 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]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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. [_]
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 [_]
Non accelerated filer [_]
(Do not check if a smaller reporting company)
Accelerated filer [_]
Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the common stock held by non-affiliates of the registrant as of September 30, 2012 was approximately $17.2
million, computed by reference to the closing sale price of the common stock of $0.10 per share on the OTC Bulletin Board on September
30, 2012. Shares of common stock held by each executive officer and director and by each person who owns 10% or more of the
outstanding common stock have been excluded in that such persons may be deemed to be affiliates. The determination of affiliate status is
not necessarily a conclusive determination for other purposes.
The number of shares of the Common Stock of the registrant outstanding as of July 11, 2013 was 182,552,460.
TABLE OF CONTENTS
PART I.
Item 1.
Description of Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
Item 5.
Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II.
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
PART III.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
Item 15.
Exhibits, Financial Statements
Signatures
Certifications
PART IV.
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ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
PART I
The Aethlon Medical mission is to create innovative medical devices that address unmet medical needs in cancer, infectious disease, and
other life-threatening conditions. Our Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system is a revenue-stage
technology platform that provides the basis for a new class of devices that provide rapid, yet selective removal of disease promoting
particles from the entire circulatory system. At present, the Aethlon ADAPT product pipeline includes the Aethlon Hemopurifier® to
address infectious disease and cancer, and a medical device being developed under a 5-year contract from the Defense Advanced Research
Projects Agency (DARPA) to reduce the incidence of sepsis in combat-injured soldiers.
The Aethlon Hemopurifier®
On June 25, 2013, we disclosed that the United States Food and Drug Administration (FDA) approved an Investigational Device
Exemption (IDE) that allows us to initiate human feasibility studies of the Aethlon Hemopurifier® in the United States. Our
Hemopurifier® is a first-in-class medical device that targets the rapid elimination of life-threatening infectious disease and cancer
glycopathogens from circulation. Under the feasibility study protocol, we will enroll ten end-stage renal disease (ESRD) patients who are
infected with the Hepatitis C virus (HCV) to demonstrate the safety of Hemopurifier therapy. Successful completion of this study will
allow us the opportunity to initiate pivotal studies that are required for market clearance to treat HCV and other disease conditions in the
United States.
Specific to the treatment of HCV, we believe that our Hemopurifier is uniquely positioned as an adjuvant that can be incorporated with
either interferon-based standard of care (SOC) or emerging all-antiviral drug regimens without adding drug toxicity. In addition to
augmenting the early viral kinetic response to SOC, our Hemopurifier provides a candidate solution for viral rebound patients who
traditionally are forced to discontinue therapy at the point HCV establishes resistance to drug regimens. Additionally, our Hemopurifier
represents a therapeutic strategy to address the large population of HCV-infected dialysis patients for which SOC and emerging all-antiviral
strategies may be contraindicated or not yet cleared. According to the World Health Organization (WHO), HCV is a blood-borne pathogen
that affects upwards of 170 million persons, or 2-3% of the world's population. It is a leading cause of cirrhosis and liver transplantation.
Our FDA approved study calls for a single-site enrollment of ten HCV-infected ESRD patients who have not received any pharmaceutical
therapy for their HCV infection for at least 30 days. The protocol will consist of a control phase of three consecutive standard dialysis
treatments during week one followed by the inclusion of our Hemopurifier during a total of six dialysis sessions conducted during weeks
two and three. The rate of adverse events observed during the Hemopurifier therapy phase will be compared to the rate experienced during
the control phase. Per-treatment changes of viral load will be observed through quantitative PCR analysis. Additionally, we plan to
measure the number of HCV viral copies captured within the Hemopurifier during each treatment session.
We expect this study will begin later in 2013 with completion expected in the first half of 2014. We are preparing for a limited
manufacturing run to supply our studies here in the U.S. as well as for a compassionate-use program that has been established in India.
In studies previously conducted in India, we demonstrated that Hemopurifier therapy was well tolerated in treatment naïve HIV and HCV-
infected ESRD patients when included during normally scheduled four-hour dialysis sessions. In these studies, we observed that average
per treatment viral load reductions exceeded 50% in both disease conditions. In follow-on studies of non-ESRD individuals infected with
HCV, a three-treatment protocol of Hemopurifier therapy in combination with interferon-based standard of care (SOC) resulted in
undetectable HCV in as little as seven days in hardest to treat genotype-1 patients. The studies also documented the ability of the
Hemopurifier to capture as many as 300 billion HCV copies during a single six-hour treatment.
The feasibility study protocol approved by FDA was originally designed as a human safety challenge and model for addressing drug and
vaccine resistant bioterror and emerging pandemic threats. In vitro studies conducted by leading government and non-government
researchers have demonstrated that the Hemopurifier is able to capture a broad-spectrum of some of world’s deadliest viral pathogens.
These include: Dengue hemorrhagic fever (DHF), Ebola hemorrhagic fever (EHF), Lassa hemorrhagic fever (LHF), H5N1 avian influenza
(Bird Flu), H1N1 swine flu virus, the reconstructed 1918 influenza virus (r1918), West Nile virus (WNV) and Vaccinia and Monkeypox
(MPV), which serve as models for human smallpox infection. Human efficacy studies are not permissible against high-threat bioterror and
pandemic threats.
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Studies by independent researchers show that our Hemopurifier has also been discovered to capture tumor-secreted exosomes underlying
several forms of cancer. Tumor-derived exosomes have recently emerged to be a vital therapeutic target in cancer care. These
microvesicular particles suppress the immune response in cancer patients through apoptosis of immune cells and their quantity in circulation
correlates directly with disease progression. Beyond possessing immunosuppressive properties, tumor-secreted exosomes facilitate tumor
growth, metastasis, and the development of drug resistance. By addressing this unmet medical need, we believe our Hemopurifier is well
positioned as an adjunct to improve established cancer treatment regimens. In vitro studies to date have documented that the Hemopurifier
captures exosomes underlying lymphoma, melanoma, ovarian, and breast cancer.
In design, our Hemopurifier consists of the affinity lectin Galanthus nivalis agglutinin (GNA) immobilized in the outer-capillary space of
advanced plasma membrane technology. The design allows for extracorporeal therapeutic delivery to occur on standard CRRT and dialysis
instruments already located in hospitals and clinics worldwide. The mechanism of the Hemopurifier to rapidly eliminate a broad-spectrum
disease targets is based on GNA’s ability to selectively bind unique high mannose signatures that are abundant on the surface of cancer-
secreted exosomes and glycoproteins that reside on the outer membrane of infectious viral pathogens. In 2010, we established "good
manufacturing practice" (GMP) for the manufacture of the Hemopurifier® in an FDA-approved facility in San Diego, California. We have
also established a compassionate-use treatment program at the Medanta Medicity Institute in India that provides treatment access to HCV-
infected individuals.
Human Immunodeficiency Virus (HIV):
In addition to treating HCV-infected individuals, we have conducted a single proof of principal treatment study related to the treatment of
HIV. In the study, Hemopurifier® therapy reduced viral load by 93% in an HIV-AIDS infected individual without the administration of
antiviral drug therapy. The study protocol provided for 12 Hemopurifier® treatments, each four hours in duration, that were administered
over the course of one month. Researchers at a university have since discovered that the Hemopurifier® is able to capture exosomes that
transport NEF protein, which is known to suppress the immune response in HIV-infected individuals.
TRANSITION TO REVENUE STAGE ORGANIZATION
In May of 2011, we introduced and began marketing the Aethlon ADAPT™ system. On September 30th, 2011, we entered into a $6.8
million multi-year contract with the Defense Advanced Research Projects Agency (DARPA) resulting from our response to a program
entitled “Dialysis-Like Therapeutics.” Under this contract, our tasks include the development of a dialysis-like device to prevent sepsis, a
fatal bloodstream infection that is often the cause of death in combat-injured soldiers.
Originally, only the base year (year one contract covering October 1, 2011 through September 30, 2012) was effective for the parties,
however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. Years three through five are subject
to DARPA exercising their option to enter into contracts for those years.
As a result of achieving five contract milestones between October 1, 2011 and March 31, 2012, we reported $1,358,189 in contract revenue
at our March 31, 2012 fiscal year end. As a result of achieving six milestones in the fiscal year ended March 31, 2013, we reported
$1,230,004 in contract revenue for that fiscal year.
Year One Milestones
The year one contract (also referred to as “Year One”) contained eight milestones of which five were achieved during the fiscal year ended
March 31, 2012 and the remaining three were achieved during the fiscal year ended March 31, 2013. The details of the eight Year One
milestones achieved during the fiscal years ended March 31, 2012 and 2013 were as follows:
Year One Milestones Achieved During Fiscal Year Ended March 31, 2012:
Milestone 2.2.1.1 – Write requirements definition for the extracorporeal blood purification system and acquire necessary equipment with a
milestone payment of $358,284. Management considers this milestone to be substantive as it was not dependent on the passage of time nor
was it based solely on another party's efforts. We worked on this concept for a number of months beginning with a presentation to DARPA
in late 2010. We subsequently filed for IP protection on certain of the key concepts in March 2011 and our management visited selected
potential vendors to work out many of the details in the summer of 2011 before we were awarded the contract on September 30, 2011. We
ordered the breadboard device from one of our vendors before the milestone payment was made. We designed the breadboard prototype
and then presented the design to DARPA in order to achieve the milestone. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter. DARPA made the milestone payment in full.
Milestone 2.2.1.2 – Fabricate breadboard prototypes for anticoagulation-free anti-sepsis extracorporeal system (ASEPSYS) device.
Fabricate prototype blood tubing sets. Acquire anti-thrombogenic surface modified hollow fiber plasma separators with a milestone
payment of $183,367. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it
based solely on another party's efforts. The consideration for this milestone covers the cost of having the breadboard prototype developed
to our specifications, hiring an engineer to supervise the project, acquiring specially coated cartridges and associated overhead. The report
was accepted by the contracting officer's representative and the invoice was submitted thereafter. DARPA made the milestone payment in
full.
2
Milestone 2.2.2.1 – Begin to develop the ADAPT device to efficiently capture sepsis precursors and acquire important equipment and
supplies with a milestone payment of $416,424. Management considers this milestone to be substantive as it was not dependent on the
passage of time nor was it based solely on another party's efforts. It was critically important to obtain certain pieces of lab equipment as
early as possible after winning the contract in order to measure the binding ability of sepsis precursors. We demonstrated that we were able
to capture one of the identified possible sepsis precursors as part of our submission for approval. The consideration was also designed to
cover the salaries of new and existing scientists, lab space, materials as well as fringe and corporate overhead. The report was accepted by
the contracting officer's representative and the invoice was submitted thereafter. DARPA made the milestone payment in full.
Milestone 2.2.2.2 – Perform initial screening of the different proposed capture agents by measuring binding affinity and kinetics using
surface plasmon resonance (SPR) or biolayer surface interferometry (BLI) with a milestone payment amount of $216,747. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We demonstrated that we were able to capture several of the identified possible sepsis precursors as part of our submission for
approval. The consideration was also designed to cover the salaries of new and existing scientists, lab space, materials as well as fringe
and corporate overhead. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter. DARPA made the milestone payment in full.
Milestone 2.2.1.3 – Assemble and test breadboard ASEPSYS devices. Evaluate the use of different techniques and approaches to
eliminating anticoagulants. The milestone payment amount was $183,367. Management considers this milestone to be substantive as it
was not dependent on the passage of time nor was it based solely on another party's efforts. The consideration for this milestone covers the
cost of assembling and testing the breadboard prototype that we had developed to our specifications, hiring an engineer to supervise the
project, testing specially coated cartridges and associated overhead. The report was accepted by the contracting officer's representative and
the invoice was submitted thereafter. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter. DARPA made the milestone payment in full.
Year One Milestones Achieved During Fiscal Year Ended March 31, 2013:
Milestone 2.2.2.3 – Perform preliminary quantitative real time PCR to measure viral load, and specific DNA or RNA targets. The milestone
payment was $216,747. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it
based solely on another party's efforts. We demonstrated that we were able to measure viral load of one or more targets as part of our
submission for approval. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.2.1.4 – Obtain all necessary IRB documentation and obtain both institutional and Government approval in accordance with IRB
documentation submission guidance prior to conducting human or animal testing. The milestone payment was $183,367. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We obtained all of the required documentation from both institutional and Government authorities. The report was accepted by the
contracting officer's representative and the invoice was submitted thereafter.
Milestone M2 – Target capture > 50% in 24 hours for at least one target in blood or blood components. The milestone payment was
$216,747. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we were able to capture > 50% in 24 hours of one of the agreed targets in blood or blood
components. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Year Two Milestones
The year two contract (also referred to as “Year Two”) contained eight milestones of which three were achieved during the fiscal year
ended March 31, 2013. The details of the three Year Two milestones achieved during the fiscal year ended March 31, 2013 were as
follows:
Milestone 2.3.3.1 – Build the ADAPT capture cartridges with the identified affinity agents. Measure the rate of capture of the specific
targets from in ex vivo recirculation experiments from cell culture and blood. The milestone payment was $208,781. Management considers
this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we were able build the ADAPT capture cartridges with the identified affinity agents and to measure the rate of capture of
the specific targets from in ex vivo recirculation experiments from cell culture and blood. The report was accepted by the contracting
officer's representative and the invoice was submitted thereafter.
Milestone 2.3.2.1 – Demonstrate the effectiveness of the prototype device in vivo in animals preventing platelet activation or clotting in at
least a 2 hour blood pumping experiment at 75 mL/min blood flow. The milestone payment amount was $195,581. Management considers
this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. The
prototype device was successfully used in vivo in animals preventing platelet activation or clotting in at least a 2 hour blood pumping
experiment at 75 mL/min blood flow. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
3
Milestone M4 – Target capture > 50% in 24 hours for at least 5 targets in blood or blood components. The milestone payment was
$208,781. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we were able to capture > 50% in 24 hours for at least 5 of the agreed targets in blood or
blood components. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Year Two Milestones Achieved Following March 31, 2013:
Milestone 2.3.2.2 – Formulate initial design based on work from previous phase. Begin to build and test selected instrument design and
tubing sets. The milestone payment amount was $195,581. Management considers this milestone to be substantive as it was not dependent
on the passage of time nor was it based solely on another party's efforts. We demonstrated that we had begun to build and test selected
instrument design and tubing sets. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
While the above milestones were evaluated and approved by DARPA, there can be no assurance that even if DARPA elects to continue the
contract in future years, that we will be able to achieve the required milestones in those future years on time, if at all, or that DARPA's
evaluation of the milestone deliveries will result in full payment of the milestones in those future years, if at all.
DARPA recently awarded a related contract for $22,830,840 to Battelle Memorial Institute (“Battelle”) to be the systems integrator for the
various components being developed under the original contract, including our two components of the project. We agreed to become a
subcontractor to Battelle under that systems integrator contract. That subcontract will be under a cost plus basis and we expect to begin
generating revenues under the subcontract during the fiscal year ending March 31, 2014. Our expected revenue from the subcontract will
be at the discretion of Battelle.
CORPORATE HISTORY
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.
In October 2009, we established a new wholly owned subsidiary, Exosome Sciences, Inc., a Nevada corporation, as a corporate vehicle for
our exosome-related diagnostic activities. To date, this subsidiary has been inactive.
RESEARCH AND DEVELOPMENT
The cost of research and development, all of which has been charged to operations, amounted to approximately $1,440,000 and $1,089,000
in the fiscal years ended March 31, 2013 and 2012, respectively.
INTELLECTUAL PROPERTY
We currently own or have license rights to a number of U.S. and foreign patents and patent applications and endeavor to continually
improve our intellectual property position. We consider the protection of our technology, whether owned or licensed, to the exclusion of
use by others, to be vital to our business. While we intend to focus primarily on patented or patentable technology, we may also rely on
trade secrets, unpatented property, know-how, regulatory exclusivity, patent extensions and continuing technological innovation to develop
our competitive position. We also own certain trademarks.
U.S. PATENTS
We have been exclusively assigned all rights and title to and interest in an invention and related worldwide patent rights for a method to
treat cancer under an assignment agreement with the London Health Science Center Research, Inc. (LHSCRI) The invention provides for
the "Depression of anticancer immunity through extracorporeal removal of microvesicular particles" (including exosomes) for which a
patent was allowed by the U.S. Patent and Trademark Office (USPTO) in 2012 and patent applications have been filed abroad by us. The
agreement provides that we are responsible for paying certain patent application and filing costs as well as a 2% royalty on any future net
sales. Under the license agreement, LHSCRI sold and assigned all of its rights, title and interest in the worldwide patents to us.
4
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. 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. This license runs for the life of the patent, once it is
issued, unless it is terminated earlier.
The following table lists our issued patents and patent applications, including their ownership status:
PATENTS ISSUED IN THE UNITED STATES
PATENT #
8,288,172
7,226,429
6,528,057
PATENT NAME
Extracorporeal removal of microvesicular particles (exosomes) (method
patent)
Method for removal of viruses from blood by lectin affinity hemodialysis
Method for removal of HIV and other viruses from blood
ISSUANCE
DATE
10/16/12
06/05/07
03/04/03
OWNED OR
LICENSED
Owned
Owned
Licensed
5
PATENT APPLICATIONS IN THE UNITED STATES
APPLICATION #
11/756543
12/600236
13/351166
12/810295
APPLICATION NAME
Method for removal of viruses from blood by lectin affinity hemodialysis
Device and method for purifying virally infected blood
Affinity capture of circulating cancer biomarkers
Method and apparatus for increasing contaminant clearance rates during
extracorporeal fluid treatment
FILING
DATE
05/31/07
5/12/11
1/16/12
09/07/10
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
13/623662
Extracorporeal removal of microvesicular particles (medical device and
09/20/12
system-based claims)
13/626748
Methods and systems for reducing viral load of hepatitis c virus in
hemodialysis patients
13/808561
12/996000
Methods and compositions for quantifying exosomes
Enhanced antiviral therapy methods and devices
09/25/12
01/04/13
5/26/11
Owned
Owned
Owned
Owned
INTERNATIONAL PATENTS:
INTERNATIONAL PATENTS ISSUED
PATENT #
2,353,399
770,344
69929986.1-08
1,109,564
1,109,564
1,109,564
1,109,564
2342203
PATENT NAME
Method for removal of viruses from blood by lectin affinity hemodialysis
Method for removal of HIV and other viruses from blood
Method for removal of HIV and other viruses from blood
Method for removal of HIV and other viruses from blood
Method for removal of HIV and other viruses from blood
Method for removal of HIV and other viruses from blood
Method for removal of HIV and other viruses from blood
Method for removal of HIV and other viruses from blood
ISSUANCE
DATE
01/20/04
06/03/04
02/22/06
02/22/06
02/22/06
02/22/06
02/22/06
03/01/11
OWNED OR
LICENSED
Owned
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
INTERNATIONAL PATENT APPLICATIONS (SOME MAY MOVE TO THE US DURING NATIONAL PHASE OF APPLICATION
PROCESS)
APPLICATION NAME
APPLICATION #
4,703,672.8
2,516,403
08109006.5
7,752,778.6
9,104,740.6
Method for removal of viruses from blood by lectin affinity hemodialysis
Method for removal of viruses from blood by lectin affinity hemodialysis
Method for removal of viruses from blood by lectin affinity hemodialysis
Extracorporeal removal of microvesicular particles(exosomes)
Extracorporeal removal of microvesicular particles(exosomes)
8139/DELNP/2008 Extracorporeal removal of microvesicular particles(exosomes)
Removal of growth factors during surgery
6,787,633
PCT/US2012/031658 Methods and Devices Comprising Extracorporeal Blood Flow
08866242.4
Method and apparatus for increasing contaminant clearance rates during
extra corporeal fluid treatment
2644855
09815068.3
12100471.4
11804372.8
Extracorporeal removal of microvesicular particles
Methods for reducing viral load of hepatitus c virus in hemodialysis patients
Methods for reducing viral load of hepatitus c virus in hemodialysis patients
Methods and compositions for quantifying exosomes
FILING
DATE
*
01/20/04
01/20/04
03/09/07
03/09/07
03/09/07
05/27/08
3/30/12
12/19/08
03/09/07
09/15/09
09/15/09
02/06/13
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
Owned
Owned
Licensed
Owned
Owned
Owned
Owned
Owned
Owned
__________
* We received a decision - to - grant letter related to this European patent application. This will result in the issuance of patents in multiple
European countries.
6
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, including within the U.S., will
provide us with competitive advantages or will not be challenged by others, or will not expire prior to our successful commercialization of
our products. Furthermore, we cannot be certain that others will not independently develop similar products or will not design around
patents issued or licensed to us. We cannot guarantee that patents that are issued will not be challenged, invalidated or infringed upon or
designed around by others, or that the claims contained in such patents will not infringe the patent claims of others, or provide us with
significant protection against competitive products, or otherwise be commercially valuable. We may need to acquire licenses under patents
belonging to others for technology potentially useful or necessary to us. If any such licenses are required, we cannot be certain that they
will be available on terms acceptable to us, if at all. To the extent that we are unable to obtain patent protection for our products or
technology, our business may be materially adversely affected by competitors who develop substantially equivalent technology.
TRADEMARKS
We have obtained registered trademarks in the United States for the Exosome Sciences®, Hemopurifier®, Aethlon Medical® and Aethlon
Medical, Inc. and have adopted the Aethlon ADAPT™ and ELLSA trademarks in the United States. We have applied for a trademark on
Hemopurifier in India and that application is currently pending.
INDUSTRY
The industry for treating infectious disease and cancer is extremely competitive, and companies developing new treatment procedures face
significant capital and regulatory challenges. Additionally, as the Hemopurifier(R) is a first-in-class device, we have the additional
challenge of establishing medical industry support for our technology in the marketplace.
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. We are also advancing the Hemopurifier as a tool for cancer treatment in conjunction with existing, and to be
developed, cancer therapies. 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, or a device that limited the need or volume of existing drug therapies, 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 system 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.
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 $15,000 (or 115% of $15,000 if
paid in our common stock) until products utilizing the license are commercialized. In January 2013, we issued 246,429 shares of our
common stock to Boston University, which was equivalent to 115% of the $15,000 annual license fee.
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On November 7, 2006, we entered into an exclusive 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 "Extracorporeal removal of Microvesicular Particles" for which a patent has been allowed in the United States by the
USPTO as of June 2012. The agreement provides that we will pay certain patent application and filing costs as well as a 2% royalty on any
future net sales. Under the license agreement, we own the patents outright.
GOVERNMENT REGULATION IN THE U.S.
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.
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 FDA recently approved our investigational device exemption (IDE) to initiate human clinical studies in
the United States as a feasibility study.
Under the feasibility study protocol, we will enroll ten end stage renal disease (ESRD) patients who are infected with the Hepatitis C virus
(HCV) to demonstrate the safety of Hemopurifier therapy. The FDA approved Hemopurifier therapy feasibility study calls for a single-site
enrollment of ten HCV-infected end-stage renal disease (ESRD) patients who have not received any pharmaceutical therapy for their HCV
infection for at least 30 days. The protocol consists of a control phase which consists of three consecutive standard dialysis treatments
during week one followed by the inclusion of the Hemopurifier during a total of six dialysis sessions conducted during weeks two and three.
The rate of adverse events observed during the Hemopurifier therapy phase will be compared to the rate experienced during the control
phase. Per-treatment changes of viral load will be observed through quantitative PCR analysis. Additionally, we may also choose to
quantitate HCV viral copies captured within the Hemopurifier during each treatment session.
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. We must reach agreement with the IRB of the medical treatment center at which we plan
to conduct our clinical trial in the US. 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 be equivocal or may otherwise not be sufficient to obtain approval of the product.
PERVASIVE AND CONTINUING U.S. REGULATION
Should our device be cleared for market use in the United States by the FDA, numerous regulatory requirements continue to apply. These
include:
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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;
labeling regulations and FDA prohibitions against the promotion of products for uncleared, unapproved or off-label uses;
clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major
change in intended use;
· medical device reporting, 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
·
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.
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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 REGULATIONS AND CLINICAL TRIALS
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 market
approval, and the requirements can vary from region to region.
With respect to our clinical programs in India, we have been advised that safety and efficacy observations resulting from Hemopurifier®
therapy administration provide a basis to initialize commercialization on a hospital-by-hospital basis with approval of the institutional
review boards (IRBs) of such hospitals. However, medical device regulation could emerge from the Indian government that could increase
our clinical and commercialization challenges.
At present, our focus is directed toward the successful completion of Hepatitis-C treatment studies being conducted at the Medanta
Medicity Hospital in India. Once this study has been completed and commercialization initiated at that hospital, we will then approach the
IRBs of other hospitals regarding potential expansion of the Hemopurifier® therapy distribution channel within India.
GMP manufacturing of our Hemopurifier® occurs in collaboration with a contract manufacturer based in San Diego, California. We have
registered our contract manufacturing arrangement with the FDA and we have since received an export license from the FDA that allows
the export our Hemopurifier® for commercial purposes to India.
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 a 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 not yet initiated clinical trials in the European Union.
We have not yet initiated clinical trials in the European Union nor do we have a current commitment to conduct such trials.
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.
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SUBSIDIARIES
We have one wholly-owned subsidiary, Exosome Sciences, Inc.
EMPLOYEES
At July 10, 2013, we had nine full-time employees, comprised of our Chief Executive Officer, our President, our Chief Science Officer, our
Chief Financial Officer, four research scientists and an executive assistant. We utilize, whenever appropriate, contract and part-time
professionals in order to conserve cash and resources. We currently employ two corporate communications groups on a part-time basis. We
also use several consultants to assist us with certain portions of the work under our DARPA contract. 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. While we began to generate revenues during the fiscal year ended March 31,
2012, primarily from our contract with DARPA, our revenues have not been sufficient to cover our cost of operations. We have incurred
net losses of $4,892,040 and $8,111,340 for the fiscal years ended March 31, 2013 and 2012, respectively. At March 31, 2013 and 2012, we
had an accumulated deficit of $(61,475,325) and $(56,583,285), respectively.
Future profitability, if any, will require the successful commercialization of our Hemopurifier(R) technology, other products that may
emerge from our Aethlon ADAPT™ platform or from additional government contract or grant income. No assurances can be given when
or if this will occur or that we will ever 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, 2013 that we have a significant accumulated deficit, 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, 2013 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.
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, if at all,
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.
WE ARE RELIANT UPON LICENSES OF PATENTS AND TECHNOLOGIES FROM THIRD PARTIES FOR THE
DEVELOPMENT OF CERTAIN APPLICATIONS AND USES OF OUR DEVICES; THE TERMINATION OF ANY SUCH LICENSE,
OR A CHALLENGE TO THE PATENT AND INTELLECTUAL PROPERTY UNDERLYING SUCH LICENSE COULD HAVE A
MATERIAL AND ADVERSE EFFECT UPON OUR ABILITY TO CONTINUE THE DEVELOPMENT OF OUR DEVICES IN
CERTAIN FIELDS OF USE, WHICH WOULD ADVERSELY AFFECT OUR BUSINESS PROSPECTS AND THE VALUE OF YOUR
INVESTMENT IN OUR SECURITIES.
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We rely upon third party licenses for the development of specific uses for our Hemopurifier® devices, including in the area of cancer
treatment. Specifically, we are researching, developing and testing cancer-related applications for our devices under a license with Boston
University and with the London Health Science Center Research, Inc. and Mr. Thomas Ichim. Should either of these licenses be
prematurely terminated for any reason, or if the patents and intellectual property owned by such entities that we have licensed should be
challenged or defeated by third parties, our research efforts could be materially and adversely effected. There can be no assurances that
these licenses will continue in force for as long as we require for our research, development and testing of cancer treatments. There can be
no assurances that should these licenses terminate, or should the underlying patents and intellectual property be challenged or defeated, that
suitable replacements can be obtained or developed on terms acceptable to the Company, if at all. There is also the related risk that the
Company may not be able to make the required payments under those patent licenses, in which case the Company may lose one or more of
the licensed patents.
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:
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·
·
·
·
·
are more effective;
have fewer or less severe adverse side effects;
are better tolerated;
are more adaptable to various modes of dosing;
are easier to administer; or
are less expensive than the products or product candidates we are developing.
Even if we are successful in developing effective Hemopurifier(R) and other Aethlon ADAPT™ based-products, and obtain FDA and other
regulatory approvals necessary for commercializing them, our products may not compete effectively with other successful products.
Researchers are continually learning more about diseases, which may lead to new technologies for treatment. Our competitors may succeed
in developing and marketing products that are either more effective than those that we may develop, alone or with our collaborators, or that
are marketed before any products we develop are marketed.
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.
WE HAVE ISSUED NUMEROUS PROMISSORY NOTES THAT ARE CURRENTLY OVERDUE AND IN DEFAULT;
FAILURE TO CURE SUCH DEFAULTS COULD ADVERSELY AFFECT OUR ABILITY TO RAISE NEW CAPITAL AND TO
CONTINUE OPERATIONS.
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We have outstanding promissory notes in the aggregate principal amount of $2,261,916, which are currently overdue. We have no means
to repay the notes unless and until we raise new capital or generate a higher level of revenues. Although the majority of these notes are
convertible into our common stock at various rates and prices, there can be no assurance that the holders of these notes will opt to convert
some or all of the principal and interest due and owing on the notes in lieu of cash repayment. If we are unable to raise new capital we may
be unable to satisfy these note obligations. We may become the subject of multiple litigation claims seeking to recover payment on the
notes. New investors may be reluctant to fund new capital to the Company while these notes are overdue and outstanding. We will attempt
to negotiate extensions for the payment and other restructure of the notes as a method of curing the defaults, but there can be no assurance
that such extensions or restructures will be on terms favorable to the Company, if at all. If we are unable to satisfy the notes, or restructure
them, we may be unable to raise new capital and we may be subject to litigation claims, either of which could cause us to cease operations.
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
To achieve the levels of production necessary to commercialize our Hemopurifier(R) and other future Aethlon ADAPTTM-based 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. In 2010, we established GMP for the manufacture of Hemopurifiers® in an outsourced FDA-approved facility in San
Diego, California. To date, we have manufactured devices on a small scale for testing purposes and have begun to utilize the services of
that contract manufacturer. 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.
In addition, there can be no assurances that we will be able to adequately finance the manufacture and distribution of our products.
OUR AETHLON ADAPTTM TECHNOLOGY MAY BECOME OBSOLETE.
Our Aethlon ADAPTTM products may be made unmarketable by new scientific or technological developments where new treatment
modalities are introduced that are more efficacious and/or more economical than our Aethlon ADAPTTM 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, our Chief Science
Officer, Richard H. Tullis and our President, Rodney S. Kenley. Were we to lose one or more 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 Aethlon ADAPTTM technology. The loss of Dr. Tullis, Mr. Joyce and/or Mr. Kenley 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 Dr. 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.
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.
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We currently have an extremely small staff comprised of nine full-time employees consisting of our Chief Executive Officer, our President,
our Chief Science Officer, our Chief Financial Officer, four research scientists and an executive assistant. We utilize, whenever
appropriate, contract and part-time professionals in order to conserve cash and resources. We currently employ two corporate
communications groups on a part-time basis. We also use several consultants to assist us with certain portions of the work under our
DARPA contract. 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 A
SIGNIFICANT LEVEL OF 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.
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.
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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 eight issued international patents. We
have also applied for eight additional U.S. patents and thirteen 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.
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The FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied.
The FDA may require additional testing for safety and effectiveness.
The FDA may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them.
If regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its
distribution.
The FDA may change their approval policies and/or adopt new regulations.
Failure to comply with these or other regulatory requirements of the FDA may subject us to administrative or judicially imposed sanctions,
including:
· warning letters;
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civil penalties;
criminal penalties;
injunctions;
product seizure or detention;
product recalls; and
total or partial suspension of productions.
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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:
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serious adverse events related to our medical device candidates;
unsatisfactory results of any clinical trial;
the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules; and/or
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.
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.
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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:
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lack of adequate quality or sufficient prevention benefit, or unacceptable safety during pre-clinical studies or clinical trials;
failure to receive necessary regulatory approvals;
existence of proprietary rights of third parties; and/or
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) and our Aethlon ADAPTTM technology is protected by three issued U.S. patents and eight issued international
patents. We have been notified that another patent will issue in the U.S. 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, 2013, our intellectual property assets comprise 92% of our non-current assets, and 24% 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 and legislation 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 changes in
accounting rules and/or legislation 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.
OUR PRODUCTS ONCE COMMERCIALLY AVAILABLE 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 effect on our business and financial condition. Any liability for mandatory damages could exceed the amount of our
coverage. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.
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.
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RISKS RELATED TO OUR DEPENDENCE ON U.S. GOVERNMENT CONTRACTS
WE HAVE DERIVED SUBSTANTIALLY ALL OF OUR REVENUE FROM OUR CONTRACT WITH THE U.S.
GOVERNMENT. IF THE U.S. GOVERNMENT CHOOSES NOT TO PICK UP THE FUTURE YEARS UNDER OUR CONTRACT,
OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS COULD BE MATERIALLY HARMED.
We have derived and expect for the near future to continue to derive substantially all of our revenue from revenue under our DARPA
contract. If DARPA chooses not to continue our contract in years three through five of the contract, our revenues could be substantially
reduced. In addition, if we are unable to meet any of the DARPA contract milestones to the satisfaction of DARPA, if at all, we may not
earn payments under the contract. Any reduction in our revenues, or the termination of the DARPA contract for any reason, could have a
material and adverse effect on our business and operations. In addition, DARPA has the right to unilaterally cancel the contract at any time.
WE MAY FAIL TO OBTAIN ADDITIONAL GOVERNMENT CONTRACTS TO DEVELOP OUR AETHLON ADAPTTM
TECHNOLOGY FOR BIODEFENSE APPLICATIONS.
The U.S. Government has undertaken commitments to help secure improved countermeasures against bioterrorism and improved medical
treatments for U.S. armed forces. Over the past fiscal year, we were successful in entering in to a contract with DARPA. However, there
can be no assurance that we will be successful in obtaining additional government grants or contracts. The process of obtaining government
contracts is lengthy with the uncertainty that we will be successful in obtaining announced grants or contracts for therapeutics as a medical
device technology. Accordingly, we cannot be certain that we will be awarded any additional U.S. Government grants or contracts utilizing
our Hemopurifier(R) platform technology.
U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH CREATE ADDITIONAL
RISKS.
Our business plan to utilize the Aethlon ADAPT™ system, a medical device platform that converges single or multiple affinity drug agents
with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles from the
entire circulatory system, 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:
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suspend or prevent us for a period of time from receiving new contracts or extending existing contracts based on violations or
suspected violations of laws or regulations;
audit and object to our contract-related costs and fees, including allocated indirect costs;
control and potentially prohibit the export of our products; and
change certain terms and conditions in our contracts.
As a U.S. Government contractor, we are required to comply with applicable laws, regulations and standards relating to our accounting
practices and would be subject to periodic audits and reviews. As part of any such audit or review, the U.S. Government may review the
adequacy of, and our compliance with, our internal control systems and policies, including those relating to our purchasing, property,
estimating, compensation and management information systems. Based on the results of its audits, the U.S. Government may adjust our
contract-related costs and fees, including allocated indirect costs. In addition, if an audit or review uncovers any improper or illegal activity,
we would possibly be subject to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government. We could also
suffer serious harm to our reputation if allegations of impropriety were made against us. Although we have not had any government audits
and reviews to date, future audits and reviews could cause adverse effects. In addition, under U.S. Government purchasing regulations,
some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and
some marketing expenses, would possibly not be reimbursable or allowed under such contracts. Further, as a U.S. Government contractor,
we would be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions
and liabilities to which purely private sector companies are not.
OUR BUSINESS MAY BE HARMED AS A RESULT OF THE GOVERNMENT CONTRACTING PROCESS, WHICH MAY BE
A COMPETITIVE BIDDING PROCESS THAT INVOLVES RISKS AND REQUIREMENTS NOT PRESENT IN COMMERCIAL
CONTRACTING.
We expect that a significant portion of our near-term business will be under government contracts or subcontracts awarded through
competitive bidding. Competitive bidding for government contracts presents a number of risks or requirements, some of which are not
typically present in the commercial contracting process, including:
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the commitment of substantial time and attention of management and key employees to the preparation of bids and proposals for
contracts that may not be awarded to us;
the need to accurately estimate the resources and cost structure that will be required to perform any contract that we might be
awarded;
the possibility that we may be ineligible to respond to a request for proposal issued by the government;
the submission by third parties of protests to our responses to requests for proposal that could result in delays or withdrawals of
those requests for proposal; and
if our competitors protest or challenge contract awards made to us pursuant to competitive bidding, the potential that we may incur
expenses or delays, and that any such protest or challenge would result in the resubmission of bids based on modified specifications,
or in termination, reduction or modification of the awarded contract.
The U.S. Government may choose not to award us future contracts for the development of Aethlon ADAPTTM-based products and
other biodefense product candidates that we are developing, and may instead award such contracts to our competitors. If we are unable to
win particular contracts, we may not be able to operate in the market for products that are provided under those contracts for a number of
years. Additionally, if we are unable to consistently win new contract awards over an extended period, or if we fail to anticipate all of the
costs and resources that will be required to secure and, if applicable, perform such contract awards, our growth strategy and our business,
financial condition and operating results could be materially and adversely affected.
THE SUCCESS OF OUR BUSINESS WITH THE U.S. GOVERNMENT DEPENDS ON OUR COMPLIANCE WITH
REGULATIONS AND OBLIGATIONS UNDER OUR U.S. GOVERNMENT CONTRACTS AND VARIOUS FEDERAL STATUTES
AND REGULATIONS.
Our business with the U.S. Government is subject to specific procurement regulations and a variety of other legal compliance obligations.
These laws and rules include those related to:
§ procurement integrity;
§ export control;
§ government security;
§ employment practices;
§ protection of the environment;
§ accuracy of records and the recording of costs; and
§ foreign corrupt practices.
In addition, before awarding us any future contracts, the U.S. Government could require that we respond satisfactorily to a request to
substantiate our commercial viability and industrial capabilities. Compliance with these obligations increases our costs. Failure to comply
with these regulations and requirements could lead to suspension or debarment, from government contracting or subcontracting for a period
of time. The termination of a government contract or relationship as a result of our failure to satisfy any of these obligations would have a
negative impact on our operations and harm our reputation and ability to procure other government contracts in the future.
THE PRICING UNDER OUR DARPA CONTRACT IS BASED ON ESTIMATES OF THE TIME, RESOURCES AND EXPENSES
REQUIRED TO PERFORM THOSE CONTRACTS. IF OUR ESTIMATES ARE NOT ACCURATE, WE MAY NOT BE ABLE TO
EARN AN ADEQUATE RETURN OR MAY INCUR A LOSS UNDER THESE CONTRACTS.
Our contract with DARPA is on a firm fixed price basis. We expect that our future contracts, if any, with the U.S. Government also may be
fixed price contracts. Under a fixed price contract, we are required to deliver our products at a fixed price regardless of the actual costs we
incur and to absorb any costs in excess of the fixed price. Estimating costs that are related to performance in accordance with contract
specifications is difficult, particularly where the period of performance is over several years. Our failure to anticipate technical problems,
estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability of a fixed price
contract or cause a loss, which could in turn harm our operating results.
UNFAVORABLE PROVISIONS IN GOVERNMENT CONTRACTS, SOME OF WHICH MAY BE CUSTOMARY, MAY HARM
OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
Government contracts customarily contain provisions that give the U.S. Government substantial rights and remedies, many of which are not
typically found in commercial contracts, including provisions that allow the U.S. Government to:
§ terminate existing contracts, in whole or in part, for any reason or no reason;
§ unilaterally reduce or modify contracts or subcontracts, including by imposing equitable price adjustments;
§ cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
§ decline to exercise an option to renew a contract;
§ exercise an option to purchase only the minimum amount, if any, specified in a contract;
§ decline to exercise an option to purchase the maximum amount, if any, specified in a contract;
§ claim rights to products, including intellectual property, developed under the contract;
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§ take actions that result in a longer development timeline than expected;
§ direct the course of a development program in a manner not chosen by the government contractor;
§ suspend or debar the contractor from doing business with the government or a specific government agency;
§ pursue criminal or civil remedies under the False Claims Act and False Statements Act; and
§ control or prohibit the export of products.
Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the U.S.
Government’s convenience. Under general principles of government contracting law, if the U.S. government terminates a contract for
convenience, the other party to that contract may recover only its incurred or committed costs, settlement expenses and profit on work
completed prior to the termination. If the U.S. Government terminates a contract for default, the defaulting company is entitled to recover
costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring
undelivered items from another source. Our government contract and future contracts could be terminated under these circumstances. Some
U.S. Government contracts grant the U.S. Government the right to use, for or on behalf of the U.S. Government, any technologies
developed by the contractor under the government contract. If we were to develop technology under a contract with such a provision, we
might not be able to prohibit third parties, including our competitors, from using that technology in providing products and services to the
U.S. Government.
OUR BUSINESS IS SUBJECT TO AUDIT BY THE U.S. GOVERNMENT AND A NEGATIVE AUDIT COULD ADVERSELY
AFFECT OUR BUSINESS.
U.S. Government agencies such as the Defense Contract Audit Agency, or the DCAA, routinely audit and investigate government
contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws,
regulations and standards.
The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the
contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly
allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers improper
or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:
§ termination of contracts;
§ forfeiture of profits;
§ suspension of payments;
§ fines; and
§ suspension or prohibition from conducting business with the U.S. government.
In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.
LAWS AND REGULATIONS AFFECTING GOVERNMENT CONTRACTS MAKE IT MORE COSTLY AND DIFFICULT FOR
US TO SUCCESSFULLY CONDUCT OUR BUSINESS.
We must comply with numerous laws and regulations, including those relating to the formation, administration and performance of
government contracts, which can make it more difficult for us to retain our rights under these contracts. These laws and regulations affect
how we conduct business with federal, state and local government agencies. Among the most significant government contracting
regulations that affect our business are:
§ the Federal Acquisition Regulations, and agency-specific regulations supplemental to the Federal Acquisition Regulations, which
comprehensively regulate the procurement, formation, administration and performance of government contracts;
§ the business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees,
restrict the granting of gratuities and funding of lobbying activities and incorporate other requirements such as the Anti-Kickback Act
and the FCPA;
§ export and import control laws and regulations; and
§ laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes
and the exportation of certain products and technical data.
These domestic and foreign laws and regulations affect how we and our customers conduct business and, in some instances, impose
additional costs on our business. Any changes in applicable laws and regulations could restrict our ability to maintain our existing contracts
and obtain new contracts, which could limit our ability to conduct our business and materially and adversely affect our revenues and results
of operations.
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AS A U.S. GOVERNMENT CONTRACTOR, WE ARE SUBJECT TO A NUMBER OF PROCUREMENT RULES AND
REGULATIONS.
Government contractors must also comply with specific procurement regulations and other requirements. These requirements, although
customary in government contracts, impact our performance and compliance costs. In addition, current U.S. Government budgetary
constraints could lead to changes in the procurement environment, including the DoD’s recent initiative focused on efficiencies,
affordability and cost growth and other changes to its procurement practices. If and to the extent such changes occur, they could impact our
results of operations and liquidity, and could affect whether and, if so, how we pursue certain opportunities and the terms under which we
are able to do so.
In addition, failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract
modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and
financial condition. Our failure to comply with these regulations and requirements could also lead to suspension or debarment, for cause,
from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes,
including those related to procurement integrity, export control, government security regulations, employment practices, protection of the
environment, accuracy of records and the recording of costs, and foreign corruption. The termination of our government contract as a result
of any of these acts could have a negative impact on our results of operations and financial condition and could have a negative impact on
our reputation and ability to procure other government contracts in the future.
WE DEPEND ON COMPONENT AVAILABILITY, SUBCONTRACTOR PERFORMANCE AND OUR KEY SUPPLIERS TO
MANUFACTURE AND DELIVER OUR PRODUCTS AND SERVICES.
We are dependent upon the delivery by suppliers of materials and the assembly by subcontractors of major components and subsystems
used in our products in a timely and satisfactory manner and in full compliance with applicable terms and conditions. Some products require
relatively scarce raw materials. We are generally subject to specific procurement requirements, which may, in effect, limit the suppliers and
subcontractors we may utilize. In some instances, we are dependent on sole-source suppliers. If any of these suppliers or subcontractors
fails to meet our needs, we may not have readily available alternatives. In addition, some of our suppliers or subcontractors may be
impacted by the recent global financial crisis, which could impair their ability to meet their obligations to us. If we experience a material
supplier or subcontractor problem, our ability to satisfactorily and timely complete our customer obligations could be negatively impacted
which could result in reduced sales, termination of contracts and damage to our reputation and relationships with our customers. We could
also incur additional costs in addressing such a problem. Any of these events could have a negative impact on our results of operations and
financial condition.
RISKS RELATING TO 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.
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.
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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, 2013, the high and low closing sale prices of a share of our common stock were $0.14 and $0.06, 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.
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.
A DTC “CHILL” ON ELECTRONIC CLEARING OF TRADES IN OUR COMMON STOCK MAY AFFECT THE LIQUIDITY
OF OUR STOCK AND OUR ABILITY TO RAISE CAPITAL.
In September 2011, The Depositary Trust Company (DTC) placed a "chill" on the electronic clearing of trades in our shares which led to
some brokerage firms being unwilling to accept certificates and/or electronic deposits of our stock. We have since been successful in lifting
the “chill” and our shares now clear electronically making more brokers willing to trade in our common stock. There can be no assurances
that that DTC will not again place a chill on our common stock. A chill, if placed on our common stock, would affect the liquidity of our
shares which may make it difficult to purchase or sell shares in the open market. It may also have an adverse effect on our ability to raise
capital since investors may be unable to resell shares into the market. Our inability to raise capital on terms acceptable to us, if at all, could
have a material and adverse effect on our business and operations.
21
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY 22.0% OF OUR
OUTSTANDING COMMON SHARES AS OF JULY 10, 2013, 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 July 10, 2013, our officers and directors beneficially own or control approximately 22.0% of our outstanding common shares
(assuming the exercise of all outstanding options and warrants held by our officers and directors). These persons will have the ability to
substantially influence all matters submitted to our 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, 2013, there are outstanding purchase options and warrants entitling the holders to purchase 94,788,919 common shares at a
weighted average exercise price of $0.15 per share. That figure includes 1,305,230 warrants that are conditional upon the exercise of other
warrants or conversion of certain convertible debt instruments. There are 42,558,110 shares underlying promissory notes convertible into
common stock at a weighted average exercise price of $0.06. 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 500,000,000 shares of common stock as the result of a Special Meeting
of Stockholders held on June 4, 2012 at which time our number of authorized shares was increased from 250,000,000 to 500,000,000. We
have reserved for issuance 142,701,202 shares of common stock for existing options, warrants and convertible notes. We have issued and
outstanding, as of March 31, 2013, 173,674,201 shares of common stock. As a result, as of March 31, 2013 we had 1,727,192 common
shares available for issuance to new investors. Based on the increase in authorized shares approved at the Special Meeting of Stockholders
we have 183,624,597 common shares available for issuance to new investors. 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.
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 69,333,233 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 22.8% and 27.4% for the years ended March 31, 2013 and 2012, respectively.
For the past four fiscal years we issued a total of 10,932,758 shares as payment for services. The average price (premium)/discount of
common stock issued for services during this period, weighted by the number of shares issued was 11.8% and (6.6)% for the years ended
March 31, 2013 and 2012, 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.
22
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 1B. UNRESOLVED STAFF COMMENTS
As a Smaller Reporting Company, we are not required to furnish information under this Item 1B.
ITEM 2. PROPERTIES
We currently rent approximately 2,300 square feet of executive office space at 8910 University Center Lane, Suite 660, San Diego, CA
92122 at the rate of $6,475 per month on a four year lease that expires in September 2013. We also rent approximately 1,700 square feet of
laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $2,917 per month on a two year
lease that expires in October 2014. We believe these facilities will be sufficient for our operating needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various claims, lawsuits, and/or disputes with third parties or breach of contract actions incidental
to the normal course of business operations. Except as set forth below, 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.
On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands company ("Gemini"), filed a complaint against the Company in the Supreme
Court of the State of New York, County of New York, entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012
(the "Complaint"). In the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's
common stock. The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to
Gemini on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal and
interest under the note into shares of the Company's common stock. The Complaint also alleges that the Company failed to issue shares
upon the presentation of an exercise notice under a warrant originally issued to Gemini on November 22, 2010. The lawsuit also alleges
that the Company should have issued shares pursuant to the exercise of a warrant issued in 2009. The Company believes that it has
defenses to the claims asserted and it continues to vigorously defend the lawsuit, which is in the late discovery stage. No trial date has yet
been set. There can be no assurances, however, that the litigation will be decided in the Company's favor as to all, or any part, of Gemini's
Complaint. An adverse decision in the litigation could have an adverse effect on the Company's operations and could be dilutive to the
Company's shareholders.
ITEM 4. MINE SAFETY DISCLOSURES
We have no disclosure applicable to this item.
23
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.
PERIOD
Calendar 2013:
First Quarter
Calendar 2012:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Calendar 2011:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
BID PRICE
HIGH
LOW
$
0.15 $
0.11
0.11
0.13
0.18
0.12
0.22
0.10
0.15
0.06
0.06
0.06
0.07
0.05
0.05
0.12
0.04
0.08
There were approximately 207 record holders of our common stock at July 10, 2013. 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, 2013. Except as
stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions.
COMMON STOCK AND WARRANTS
Common Stock Issuances in the Fiscal Year Ended March 31, 2013:
During the fiscal year ended March 31, 2013, we issued 23,291,154 shares of restricted common stock to holders of notes issued by the
Company in exchange for the partial or full conversion of principal and interest of several notes payable in an aggregate amount of
$1,707,052 at an average conversion price of $0.07 per share based upon the conversion formulae in the respective notes. 1,234,000 of
those shares of restricted common stock were accounted for as losses on debt extinguishment for an aggregate amount of $139,839.
During the fiscal year ended March 31, 2013, we issued 116,000 shares of restricted common stock to a holder of a note payable to settle
past due accrued interest that we recorded as non-cash interest expense of $11,846.
During the fiscal year ended March 31, 2013, we issued 1,932,808 restricted shares of common stock to service providers for investor
relations, corporate communications and business development services valued at $170,849 based upon the fair value of the shares issued.
The average issuance price on the restricted share issuances was approximately $0.09 per share.
24
During the fiscal year ended March 31, 2013, we issued 963,373 shares of common stock pursuant to our S-8 registration statement
covering our Amended 2010 Stock Plan at an average price of $0.09 per share in payment for scientific consulting services valued at
$88,186 based on the value of the services provided.
On April 5, 2012, we completed a unit subscription agreement with one accredited investor (the “Purchaser”) pursuant to which the
Purchaser purchased $200,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par
value $0.001 per share (the “Common Stock”) at a price per share of $0.08 and (ii) a warrant to purchase such number of shares of
Common Stock as shall equal (a) fifty percent of the Subscription Amount divided by (b) $0.08 (the "Warrant Shares") at an exercise price
of $0.125 per Warrant Share, (each, a “Warrant” and collectively, the “Warrants”). Based on the foregoing, Units consisting of 2,500,000
shares of Common Stock and Warrants to purchase 1,250,000 shares of Common Stock were issued on April 5, 2012.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.125, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
On June 19, 2012, we completed a unit subscription agreement with seven accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased $592,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a
price per share of $0.072 and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the
Subscription Amount divided by (b) $0.072 (the "Warrant Shares") at an exercise price of $0.108 per Warrant Share. Based on the
foregoing, Units consisting of 8,222,222 shares of Common Stock and Warrants to purchase 4,111,111 shares of Common Stock were
issued on June 19, 2012.
On June 26, 2012, we completed a unit subscription agreement with one accredited investor pursuant to which the Purchaser purchased
$10,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a price per share of $0.072
and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the Subscription Amount divided
by (b) $0.072 (the "Warrant Shares") at an exercise price of $0.107 per Warrant Share. Based on the foregoing, Units consisting of 139,821
shares of Common Stock and Warrants to purchase 69,911 shares of Common Stock were issued on June 26, 2012.
On July 3, 2012, we issued 461,409 shares of common stock to the holder of a $25,000 October & November 2009 10% Convertible Note
in exchange for the value of the principal and related accrued interest of $8,000 under the same terms that we used to sell units consisting
of one share of common stock and one-half of a stock purchase warrant on June 29, 2012. As part of that structure, the noteholder also
received seven year warrants to purchase 230,705 share of common stock at a price of $0.107 per share.
On August 29, 2012, we completed a unit subscription agreement with seven accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $271,000 (the "Subscription Amount") of restricted Common Stock at a price of $0.08 per share. The
Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of the our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
3,387,500 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated to be $0.12 per share based upon 120% of the average of the closing
prices of our Common Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.12, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchasers may exercise the Warrants on a cashless basis if the shares of
Common Stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event that a Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Common Stock underlying the Warrants.
In October 2012, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $135,000 (the "Subscription Amount") of restricted Common Stock at an average price of $0.07 per
share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
1,823,412 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
25
In November 2012, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $213,000 (the "Subscription Amount") of restricted Common Stock at an average price of $0.06 per
share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
3,435,484 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
In December 2012, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $150,000 (the "Subscription Amount") of restricted Common Stock at an average price of $0.06 per
share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
2,619,684 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
In January 2013, we issued 246,429 shares of restricted common stock to the owner of a patent as a patent license payment valued at
$17,250.
In February 2013, we completed a unit subscription agreement with six accredited investors and one institutional investor (the
“Purchasers”) pursuant to which the Purchasers purchased an aggregate of $225,000 (the "Subscription Amount") of restricted Common
Stock at an average price of $0.06 per share. The Common Stock purchase price under the Subscription Agreement was determined to be
80% of the average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription
Agreement, resulting in the issuance of 3,515,625 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
In March 2013, we completed a unit subscription agreement with ten accredited investors and one institutional investor (the “Purchasers”)
pursuant to which the Purchasers purchased an aggregate of $313,834 (the "Subscription Amount") of restricted Common Stock at an
average price of $0.08 per share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the
average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription Agreement,
resulting in the issuance of 4,080,798 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
Warrant Issuances in the Fiscal Year Ended March 31, 2013:
In April 2012, we issued warrants to purchase 1,617,459 shares of Common Stock to the placement firm that arranged $1 million in bridge
financing in the fiscal year ended March 31, 2012. Those warrants were on the same terms as those received by the investors in the bridge
financing with a term of five years and an exercise price of $0.11.
On April 5, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,250,000 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.125, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
On June 19, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 4,111,111 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.108, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
26
On June 26, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 69,911 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.107, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
In July 2012, we issued 461,409 shares of common stock to the holder of a $25,000 October & November 2009 10% Convertible Note in
exchange for the value of the principal and related accrued interest of $8,000 under the same terms that we used to sell units consisting of
one share of common stock and one-half of a stock purchase warrant on June 29, 2012. As part of that structure, the noteholder also
received seven year warrants to purchase 230,705 share of common stock at a price of $0.107 per share.
On August 29, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,693,750 shares of Common
Stock. The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.12 per share, subject to
adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
In October 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 911,707 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.111 per share, subject
to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
In November 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,717,742 shares of Common
Stock. The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.093 per share,
subject to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless
basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the
event the Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with
respect to the Warrants or the Warrant Shares.
In December 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,309,843 shares of Common
Stock. The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.086 per share,
subject to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless
basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the
event the Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with
respect to the Warrants or the Warrant Shares.
In February 2013, under the unit subscription agreement noted above, we issued Warrants to purchase 1,757,813 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.096 per share, subject
to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
In March 2013, under the unit subscription agreement noted above, we issued Warrants to purchase 1,851,012 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.118 per share, subject
to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
Option Issuances in the Fiscal Year Ended March 31, 2013:
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
27
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth March 31, 2013 information on our equity compensation plans (including the potential effect of debt
instruments convertible into common stock) in effect as of that date:
(a)
Number of securities
to be issued
upon exercise
of outstanding
options, warrants
and rights
(1)(2)
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
Plan category
Equity compensation plans approved by security holders
– $
–
490,000
Equity compensation plans not approved by security holders (1)
(3)(4)
Totals
21,095,798 $
21,095,798
0.28
0.28
7,348,652
7,838,652
(1) The description of the material terms of non-plan issuances of equity instruments is discussed in Note 6 to the accompanying
consolidated financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
(3) On June 8, 2009, our board of directors approved the grant to Mr. Joyce of 4,000,000 shares of restricted common stock. The market
price of our stock on the grant date was $0.24 per share and the shares vested in equal installments over a thirty-six-month period
commencing June 30, 2010. However, Mr. Joyce deferred acceptance of the shares as permitted under the terms of the grant. However, all
shares must be issued and accepted by Mr. Joyce by the expiration of the thirty-six-month vesting period. As of March 31, 2013, Mr. Joyce
had accepted 600,000 of the grant and as of July 10, 2013, Mr. Joyce has accepted all 4,000,000 shares of the grant. However, the 600,000
shares previously accepted by Mr. Joyce were pledged as collateral for a loan and have been retained and/or sold by the lender and are no
longer owned by Mr. Joyce. It is anticipated that Mr. Joyce will receive stock certificates evidencing 3,400,000 shares in the next several
weeks.
(4) On March 31, 2013 we had 3,948,652 shares available under our 2010 Stock Incentive Plan.
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000, provides for the grant of Incentive Stock Options ("ISOs") to our
full-time employees (who may also be directors) and Nonstatutory Stock Options ("NSOs") to non-employee directors, consultants,
customers, vendors or providers of significant services. The exercise price of any ISO may not be less than the fair market value of 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.
At March 31, 2013, all of the grants previously made under the Plan had expired and 10,000 restricted shares had been issued under the
Plan, with 490,000 available for future issuance.
2003 CONSULTANT STOCK PLAN
Our 2003 Consultant Stock Plan, as amended from time to time (the "Stock Plan"), adopted by us in August 2003, advances our interests by
helping us obtain and retain the services of persons providing consulting services upon whose judgment, initiative, efforts and/or services
we are substantially dependent, by offering to or providing those persons with incentives or inducements affording such persons an
opportunity to become owners of our 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 grant 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. We have periodically amended the Stock Plan to increase the number of
shares available for issuance under the Stock Plan with the approval of our Board of Directors.
28
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.
On July 10, 2009, 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 February 17, 2010, we filed with the SEC a registration statement on Form S-8 for the purpose of registering 1,500,000 common shares
issuable under the Stock Plan under the Securities Act of 1933.
At March 31, 2013, we did not have any shares remaining under the 2003 Consultant Stock Plan and we have discontinued using this Stock
Plan.
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan (the "Incentive Plan"), which provides incentives to attract, retain and motivate
employees and directors whose present and potential contributions are important to the success of the Company by offering them an
opportunity to participate in our future performance through awards of options, the right to purchase common stock, stock bonuses and
stock appreciation rights and other awards. A total of 3,500,000 common shares were initially reserved for issuance under the Incentive
Plan.
In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 3,500,000 common shares issuable under the
Incentive Plan under the Securities Act of 1933 and in July 2012, we filed a registration statement on Form S-8 for the purpose of
registering 5,000,000 common shares issuable under the Incentive Plan under the Securities Act of 1933.
At March 31, 2013, we had 3,948,652 shares available under the Incentive Plan.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a new Board Compensation Program (the “New Program” or the “2012 Program”), which
modifies and supersedes the 2005 Directors Compensation Program (the “2005 Program”) that was previously in effect. Under the New
Program, in which only non-employee Directors may participate, an eligible Director will receive a grant of $15,000 worth of options to
acquire shares of Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the
Common Stock for the five trading days preceding the first day of the fiscal year; however for the two non-employee directors appointed to
our Board of Directors on July 24, 2012, Mr. Phillip A. Ward and Mr. Thomas V. Wornham, the exercise price for this initial grant, $0.076
per share, is based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date of their
appointment. These options will have a term of ten years and will be fully vested upon grant. In addition, each existing eligible Director
will receive the same grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued at the exercise
price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year;
provided however that for this current grant only, all of such grants shall be made at an exercise price of $0.076 per share based on the
average of the closing bid prices of the Common Stock for the five trading days preceding the date (July 24, 2012) of the appointment of
two newest directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible to participate in the New Program also will receive a grant of $20,000 worth of
options valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding
the first day of the fiscal year. In addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each
committee meeting attended and $1,000 for each formal Board meeting attended. These grants have not yet been issued for the 2014 fiscal
year.
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
At March 31, 2013 under the 2005 Directors Compensation Program we had issued 1,337,825 options to outside directors and 3,965,450
options to employee-directors, 514,550 outside directors’ options had been forfeited, 250,000 outside directors’ options had been exercised
and 3,671,550 options remained outstanding.
29
STAND-ALONE GRANTS
From time to time our Board of Directors grants restricted stock or common share purchase options or warrants to selected directors,
officers, employees and consultants as equity compensation to such persons on a stand-alone basis outside of any of our formal stock plans.
The terms of these grants are individually negotiated.
On June 8, 2009, our board of directors approved the grant to Mr. Joyce of 4,000,000 shares of restricted common stock at a price per share
of $0.24, the vesting and issuance of which occurred in equal installments over a thirty-six-month period commencing June 30, 2010. Mr.
Joyce deferred acceptance of the shares as permitted by the grant. However, all shares must be issued and accepted by Mr. Joyce by the
expiration of the thirty-six-month vesting period. As of July 10, 2013, Mr. Joyce has accepted all 4,000,000 shares of the grant. However,
the 600,000 shares previously accepted by Mr. Joyce were pledged as collateral for a loan and have been retained and/or sold by the lender
and are no longer owned by Mr. Joyce. It is anticipated that Mr. Joyce will receive stock certificates evidencing 3,400,000 shares in the
next several weeks.
As of March 31, 2013, we have issued 18,943,158 options (of which 3,186,015 have been exercised or cancelled) and authorized the
issuance of 4,000,000 shares of restricted stock outside of the 2005 Directors Compensation Plan, the 2012 Directors Compensation Plan,
the 2000 Stock Option Plan, the 2003 Consultant Stock Plan and the 2010 Incentive Stock Plan.
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, as amended
(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:
· whether or not the U.S. Government exercises the options for years three through five of our DARPA contract;
· whether or not markets for our products develop and, if they do develop, the pace at which they develop;
·
·
·
·
·
·
our ability to attract and retain the qualified personnel to implement our growth strategies;
our ability to obtain approval from the Food and Drug Administration for our products;
our ability to protect the patents on our proprietary technology;
our ability to fund our short-term and long-term operating needs;
changes in our business plan and corporate strategies; and
other risks and uncertainties discussed in greater detail in the sections of this document, including those captioned "RISK
FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
30
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 document as well as other public 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 document to reflect new events
or circumstances unless and to the extent required by applicable law.
Overview
Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") is a medical device company focused on creating innovative devices that
address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the
Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or
multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove
harmful particles from the entire circulatory system without loss of essential blood components.
In June 2013, the U.S. Food and Drug Administration ("FDA") approved our Investigational Device Exemption ("IDE") application to
initiate a ten patient human clinical trial in one location in the United States. Successful outcomes of that human trial as well as at least one
follow-on human trial will be required by the FDA in order to commercialize our products in the US. The regulatory agencies of certain
foreign countries where we intend to sell this device will also require one or more human clinical trials.
Some of our patents may expire before we receive FDA approval to market our products in the United States or we receive approval to
market our products in a foreign country. However, we believe that certain patent applications and/or other patents issued more recently
will help protect the proprietary nature of the Hemopurifier(R) treatment technology.
In prior periods, Aethlon was classified as a development stage enterprise under accounting principles generally accepted in the United
States of America ("GAAP") as it had not generated revenues from its planned principal operations. In the fiscal year ended March 31,
2012, we began to generate revenues from a government contract and have emerged from the development stage.
Results of Operations
Revenues
We recorded government contract revenue in the fiscal years ended March 31, 2013 and 2012. This revenue arose from work performed
under our government contract. On September 30, 2011, we entered into a contract with the United States of America, issued by SPAWAR
Systems Center Pacific, pursuant to a contract award from the Defense Advanced Research Projects Agency (“DARPA”). Under the
DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that
often results in the death of combat-injured soldiers.
The award from DARPA is a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years, including
payments of up to $1,975,047 in the first year. Fixed price contracts require the achievement of multiple, incremental milestones to receive
the full award during each year of the contract. Under the terms of the contract, we will perform certain incremental work towards the
achievement of specific milestones against which we will invoice the government for fixed payment amounts. Originally, only the base
year (year one contract covering October 1, 2011 through September 30, 2012) was effective for the parties, however, effective August 16,
2012, DARPA exercised the option on the second year of the contract. Years three through five are subject to DARPA exercising their
option to enter into contracts for those years.
The milestones are comprised of planning, engineering and clinical targets, the achievement of which in some cases will require the
participation and contribution of third party participants under the contract. There can be no assurance that we alone, or with third party
participants, will meet such milestones to the satisfaction of the government and in compliance with the terms of the contract or that we
will be paid the full amount of the contract revenues during any year of the contract term.
As a result of achieving five contract milestones between October 1, 2011 and March 31, 2012, we reported $1,358,189 in contract revenue
at our March 31, 2012 fiscal year end. As a result of achieving six milestones in the fiscal year ended March 31, 2013, we reported
$1,230,004 in contract revenue for that fiscal year.
We also recorded our first commercial sale in the fiscal year ended March 31, 2012. We shipped a diagnostic product that isolated
exosomes from blood serum to a life sciences company and invoiced them for $1,432, which was subsequently collected. There were no
commercial sales in the fiscal year ended March 31, 2013
Operating Expenses
Consolidated operating expenses were $4,805,358 for the fiscal year ended March 31, 2013 compared to $4,473,956 in the fiscal year
ended March 31, 2012, an increase of $331,402 or 7.4%. The net increase of $331,402 was due to an increase in professional fees of
$325,443 and an increase in payroll expense of $112,439, which were partially offset by a decrease in general and administrative expense of
$106,480.
31
The $325,443 increase in our professional fees primarily arose from an increase in DARPA-related professional fees of $611,813 due to
increased use of consultants on subtask 1 of the project. That was partially offset by a decrease of $286,370 in non-DARPA-related
professional fees. The decrease in non-DARPA-related professional fees was primarily due to decreased activity in our hepatitis C trial in
India.
The $112,439 increase in payroll and related expenses was principally driven by an increase in cash compensation of $106,129 and an
increase in stock compensation expense of $6,310. The increase in cash compensation was the result of hiring three new scientists in the
December 2011 quarter to work on subtask 2 of the DARPA project. Therefore, there was a partial year of payroll for those three
employees in the fiscal year ended March 31, 2012 compared to a full year in the fiscal year ended March 31, 2013. The increase in stock
compensation expense was primarily related to expense recognized for stock option grants to our outside Board members in the fiscal year
ended March 31, 2013.
The $106,480 decrease in general and administrative expenses primarily arose from a $112,677 reduction in expenses related to the
DARPA contract, which was partially offset by an increase in non-DARPA related general and administrative expenses of $6,197.
Other Expenses
In the fiscal year ended March 31, 2013, we recognized other expenses of $1,316,686 compared to $4,997,005 of other expense in the
fiscal year ended March 31, 2012. The following table breaks out the various components of our other expense over the fiscal years ended
March 31, 2013 and 2012:
Components of Other Expense
in Fiscal Year Ended
March 31,
2012
March 31,
2013
Change
LOSS ON EXTINGUISHMENT OF DEBT AND ON
SETTLEMENT OF ACCRUED INTEREST AND DAMAGES
$
139,839 $
77,265 $
62,574
CHANGE IN FAIR VALUE OF DERIVATIVE LIABILITY
44,705
766,903
(722,198)
INTEREST AND OTHER DEBT EXPENSES
1,132,314
3,793,758
(2,661,444)
INTEREST INCOME AND OTHER
(172)
359,079
(359,251)
TOTAL OTHER EXPENSE
$
1,316,686 $
4,997,005 $
(3,680,319)
We recorded a loss on extinguishment of debt and on settlement of accrued interest and damages of $139,839 and $77,265 in the fiscal
years ended March 31, 2013 and 2012, respectively. In the fiscal year ended March 31, 2013, that loss arose from the conversion to equity
of principal and accrued interest on certain notes payable. In the fiscal year ended March 31, 2012, the debt extinguishment related to a two
year extension to the term of two convertible notes and the similar two year extension and an adjustment to the exercise price of certain
warrants held by the note holder.
Both periods include changes in the fair value of derivative liability. For the fiscal year ended March 31, 2013, the change in the estimated
fair value of derivative liability was a loss of $44,705 and for the fiscal year ended March 31, 2012, the change in the estimated fair value
of derivative liability was a loss of $766,903.
We recorded a $359,251 decrease in interest income and other expense primarily due to the $360,185 charge that we recorded in the fiscal
year ended March 31, 2012 related to the issuance of a note in that amount as part of our termination agreement under the Tonaquint note
and warrant. There was no comparable event in the prior fiscal year.
32
Our interest and other debt expense decreased by $2,661,444 from the fiscal year ended March 31, 2012 to the fiscal year ended March 31,
2013. The following table breaks out the various components of our interest expense over the fiscal years ended March 31, 2013 and 2012:
Components of Interest Expense and Other Debt
Expenses in Fiscal Year Ended
March 31,
2012
March 31,
2013
Change
INTEREST EXPENSE
$
526,110 $
500,060 $
26,050
AMORTIZATION OF DEFERRED FINANCING COSTS
127,200
404,614
(277,414)
AMORTIZATION OF NOTE DISCOUNTS
467,158
2,194,248
(1,727,090)
NON CASH INTEREST EXPENSE
11,846
694,836
(682,990)
TOTAL INTEREST EXPENSE
$
1,132,314 $
3,793,758 $
(2,661,444)
As a result of the above factors, our net loss decreased from $(8,111,340) for the fiscal year ended March 31, 2012 to $(4,892,040) for the
fiscal year ended March 31, 2013.
Liquidity and Capital Resources
At March 31, 2013, we had a cash balance of $125,274 and a working capital deficit of $9,276,618. This compares to a cash balance of
$143,907 and a working capital deficit of $9,438,279 at March 31, 2012. Between April 1, 2013 and July 11, 2013, we raised aggregate
proceeds of $128,000 through private equity transactions, $400,000 in loans from two of our directors and collected $404,362 under our
DARPA contract. Our cash at March 31, 2013 plus additional funds raised to date subsequent to March 31, 2013 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. In addition, we will need to raise capital to
complete the recently approved human clinical trial in the U.S.
We do not expect revenue from operations will be sufficient to satisfy our funding requirements in the near term, and accordingly, our
ability to continue operations and meet our cash obligations as they become due and payable is expected to depend for at least the next
several years on our ability to sell securities, borrow funds or a combination thereof. Future capital requirements will depend upon many
factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved
in obtaining regulatory approvals, competing technological and market developments, as well as our ability to establish collaborative
arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing negative
cash flows and net losses for the foreseeable future.
Should the U.S. Government elect not to exercise the options for years three through five of our DARPA contract, the effects may be
material to us. The loss of revenues from the DARPA contract would have a material impact on our revenues, operating cash flows and
liquidity.
DARPA recently awarded a related contract to Battelle Memorial Institute (“Battelle”) to be the systems integrator for the various
components being developed under the original contract, including our two components of the project. We agreed to become a
subcontractor to Battelle under that systems integrator contract. That subcontract will be under a cost plus basis and we expect to begin
generating revenues under the subcontract during the fiscal year ending March 31, 2014. Any revenues we derive under the subcontract
will be at the direction of Battelle.
Beyond the immediate future, we currently believe that the following four areas may generate revenue for us:
(1)
(2)
(3)
(4)
Developing future products using the Aethlon ADAPTTM system with drug industry collaborators. Revenues in this area could come
from product development fees, fees from research, regulatory and manufacturing support or from downstream royalties;
Applying for and winning additional U.S. Government grant or contract income;
Licensing or selling our ELLSA research diagnostic tools that identify and quantify exosomes; and
Deriving revenues from a test market evaluation for the Hemopurifier® in India following the successful results to date in our
Hepatitis-C-oriented clinical trial currently being conducted in that country. We will need to establish one or more distributors to
supply Hemopurifiers® to the Indian market.
33
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):
Cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net (decrease) increase in cash
(In thousands)
For the year ended
March 31,
2013
March 31,
2012
$
$
(2,099) $
–
2,080
(19) $
(1,841)
(2)
1,971
128
NET CASH FROM OPERATING ACTIVITIES. We used cash in our operating activities due to our losses from operations. Net cash used
in operating activities was approximately $2,099,000 in fiscal 2013 compared to net cash used in operating activities of approximately
$1,841,000 in fiscal 2012, an increase of $258,000. The $258,000 increase was primarily due to approximately $128,000 less in receipts
under our DARPA contract due to the timing of milestones achieved in each fiscal year and increased expenses under that contract.
NET CASH FROM INVESTING ACTIVITIES. During the fiscal year ended March 31, 2013, we did not purchase any equipment or have
any other investing activities. During the fiscal year ended March 31, 2012, we used approximately $2,000 in cash for purchases of
equipment.
NET CASH FROM FINANCING ACTIVITIES. Net cash generated from financing activities increased from approximately $1,971,000 in
the fiscal year ended March 31, 2012 to approximately $2,080,000 in the fiscal year ended March 31, 2013. Included in net cash provided
by financing activities in fiscal 2012 were approximately $2,110,000 from the issuance of common stock, which was partially offset by
approximately $30,000 in a note repayment. In fiscal 2012, we received approximately $1,694,000 in proceeds from the issuance of
convertible notes payable, $300,000 from the issuance of common stock, $200,000 from the collection of notes receivable associated with
certain convertible note transactions, all of which were partially offset by approximately $223,000 in repayments of notes payable and
related accrued interest in cash.
CONVERTIBLE NOTES PAYABLE AND WARRANTS
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated 12% Series A Convertible Promissory Notes (the "Amended and Restated Notes")
with the holders of certain promissory notes previously issued by the Company (“Amended Series A 10% Convertible Notes” or the "Prior
Notes"), and all amendments to the Prior Notes.
The Amended and Restated Notes, in the principal amount of $900,000 matured on December 31, 2010. In connection with the
restructuring we paid $54,001 of accrued and default interest through the date of the restructuring, liquidated damages of $205,000 and
$54,003 of prepaid interest through the expiration date in the aggregate amount of $313,004 through the issuance of units ("Units") at a
fixed rate of $0.20 per Unit, each Unit consisting of one share of our common stock and one common stock purchase warrant to purchase
one share of our common stock at a fixed exercise price of $0.20 per share as prescribed in the Amended and Restated Note Agreement.
The noteholders have antidilution price protection on the Amended and Restated Notes.
In addition to the extension of the expiration date of the Amended and Restated Notes to December 31, 2010, we agreed to increase the
annual interest rate from 10% to 12%. We also agreed to change the exercise prices on all of the warrants held by the noteholders to $0.20
per share, to change certain formerly contingent warrants to non-contingent warrants and to extend the expiration date of their warrants to
February 2016.
As of December 31, 2010, the Amended and Restated Notes matured and as of March 31, 2013 remain in default. We are accruing interest
at the revised default rate of 20% following the expiration date of December 31, 2010.
During the fiscal year ended March 31, 2013, the holders of $15,000 of the Amended and Restated Notes converted their principal and
related accrued interest into common stock per the conversion formula.
We have begun discussions with the noteholders regarding an extension to the notes but there can be no assurance that we will be able to do
so on terms that we deem acceptable or at all. At March 31, 2013, the balance of the Amended and Restated Notes was $885,000 and
interest payable on the Amended and Restated Notes totaled $398,250.
34
DECEMBER 2006 10% CONVERTIBLE NOTES
At March 31, 2013, one note representing $17,000 of the December 2006 10% Notes remained outstanding and in default. This note is
convertible into our common stock at $0.17 per share. At March 31, 2013, the $17,000 balance of the note was in default and interest
payable on this note totaled $15,888 and we are recording interest at the default rate of 15%.
2008 10% CONVERTIBLE NOTES
One 2008 10% Convertible Note in the amount of $25,000 which matured in January 2010 remained outstanding at September 30, 2012.
This note is convertible into our common stock at $0.50 per share. At March 31, 2013, the $25,000 principal balance was in default and
interest payable on the remaining note totaled $15,417 and we are recording interest at the default rate of 15%.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale to accredited investors of 10% convertible notes ("October & November
2009 10% Convertible Notes"). The October & November 2009 10% Convertible Notes matured at various dates between April 2011 and
May 2011 and are convertible into our common stock at a fixed conversion price of $0.25 per share prior to maturity. The investors also
received matching three year warrants to purchase unregistered shares of our common stock at a price of $0.25 per share. We measured the
fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes.
We are amortizing this discount using the effective interest method over the term of the notes.
Deferred financing costs of $20,250 incurred in connection with this financing were issued in the form of a convertible note with warrants
on the same terms as those received by the investors. We capitalized the $20,250 of deferred financing costs and amortized them over the
term of the notes using the effective interest method.
Prior to March 31, 2012, $355,000 of the October and November 2009 financing had been converted to common stock. On March 31, 2012,
we agreed to extend the expiration date and to change the exercise price of certain warrants of one of the note holders by two years in
exchange for the extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10%
Convertible Note (see below) by that same two year period. We recorded a charge of $77,265 relating to this modification.
In July 2012, we issued 461,409 shares of common stock to the holder of the $25,000 note in exchange for the value of the principal and
related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and one-half of a
stock purchase warrant on June 29, 2012 (see Note 6). As part of that structure, the noteholder also received seven year warrants to
purchase 230,705 share of common stock at a price of $0.107 per share. We recorded a loss on conversion of $45,796 on the conversions.
At March 31, 2013, there was one note remaining for $50,000 and interest payable on that note was $20,000.
APRIL 2010 10% CONVERTIBLE NOTE
In April 2010, we raised $75,000 from the sale to an accredited investor of a 10% convertible note. The convertible note matured in
October 2011 and is convertible into our common stock at a fixed conversion price of $0.25 per share prior to maturity. The investor also
received three year warrants to purchase 300,000 unregistered shares of our common stock at a price of $0.25 per share.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the
principal of the notes. We amortized this discount using the effective interest method over the term of the note.
On March 31, 2012, we agreed to extend the expiration date and to change the exercise price of certain warrants of the note holder by two
years in exchange for his extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10%
Convertible Note by that same two year period. We recorded a charge of $77,265 relating to this modification.
At March 31, 2013, the remaining outstanding principal balance is $75,000 and interest payable on this note totaled $23,938.
35
JULY 2010 6% CONVERTIBLE NOTES
In July 2010, we entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") with Tonaquint, Inc., a Utah corporation
(the "Investor"), whereby we issued and sold, and the Investor purchased: (i) a Convertible Promissory Note of the Company in the
principal amount of $890,000 (the "Tonaquint Convertible Note") and (ii) a Warrant to purchase common stock of the Company (the
"Warrant"). As consideration for the issuance and sale of the Tonaquint Convertible Note and Warrant, the Investor paid cash in the amount
of $400,000 and issued two Secured Trust Deed Notes to us (the "Trust Notes") each in the principal amount of $200,000. The variance of
$90,000 represents fees and expenses paid by us and an original issue discount which was recorded as deferred offering costs.
Over the term of the Tonaquint Convertible Note, all of the principal and accrued interest was converted to common stock per the terms of
the Convertible Note. On June 28, 2011, we entered into a Termination Agreement with Tonaquint under which both parties agreed to
terminate the warrant to prevent continuing dilution of our common stock and to eliminate confusion or disagreement as to the number of
shares of common stock available for issuance under the warrant in the future. Accordingly, under the Termination Agreement we issued
3,599,913 shares of common stock upon the final exercise of the warrant, whereupon the warrant was terminated and is of no further force
or effect. The Termination Agreement also provides for a "Common Stock Sale Limitation" on all of our common stock held by Tonaquint,
Inc. Under the "Common Stock Sale Limitation", the daily limitation on the number of shares of common stock which Tonaquint, Inc. may
sell into the market on any trading day is limited to the greater of (i) $5,000 of sales amount, or (ii) 10% of the Average Daily Volume of
our common stock sold on the Over The Counter Bulletin Board, where the Average Daily Volume shall mean the average daily volume
for the prior three month period as reported on each trading day on Yahoo Finance with respect to our common stock. Under the terms of
the Termination Agreement, Tonaquint, Inc. has waived and released us from any obligation to pay or perform any fees, penalties, costs, or
assessments that were or are due, or would have become due, under the convertible note, the warrant and the note purchase agreement. In
consideration of the termination of the warrant, the waiving of all fees, penalties, the creation of the selling program and other factors, we
agreed to issue an unsecured non-convertible promissory note (the "New Note") in the principal amount of $360,185, which provides for
annual interest at a rate of 6%, payable monthly in either cash or our stock, at our option. The New Note originally had a maturity date of
April 30, 2012 and was subsequently extended to August 31, 2013. At March 31, 2013, the balance of this note was $131,381 and interest
payable totaled $1,629 (see Note 4 and Note 14).
SEPTEMBER 2010 10% CONVERTIBLE NOTES
On September 3, 2010, we entered into a Subscription Agreement with three accredited investors (the “Purchasers”) providing for the
issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial
closing under the Subscription Agreement resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal
amount of $743,600, (ii) five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of
$0.31125 per share, and (iii) five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of
$0.43575 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and
matured on September 3, 2011. The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due
diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of
our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common
stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days
preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.30
nor less than $0.20. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
The following conversions of the September 2010 10% Convertible Note have taken place during the fiscal years ended March 31, 2013
and 2012:
Principal converted
Accrued interest converted
$
$
Fiscal Year Ended
March 31, 2013
Fiscal Year Ended
March 31, 2012
405,500
19,255
30,000 $
64,164 $
At March 31, 2013, the remaining principal balance of $308,100 was in default and interest payable on these notes totaled $52,393 and we
are recording interest at the default rate of 15%.
36
APRIL 2011 10% CONVERTIBLE NOTES
In April 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the issuance and
sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $385,000. The closing under the
Subscription Agreement resulted in the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of
$385,000, (ii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.125 per
share, and (iii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.175 per
share. The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on April 1,
2012. The aggregate gross cash proceeds to us were $350,000, the balance of the principal amount representing a due diligence fee and an
original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock at
a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as reported by
Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days preceding the
proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.20 nor less than
$0.10. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
In addition, we issued (i) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.125
per share, and (ii) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.175 per
share to the Purchasers. These warrants were issued as an antidilution adjustment under certain common stock purchase warrants held by
the Purchasers that were acquired from us in September 2010.
At March 31, 2013, the outstanding principal balance was $400,400 and was in default and interest payable on these notes totaled $100,100
and we are recording interest at the default rate of 15%.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised $357,656 in 10% convertible notes. Those notes had a fixed conversion
price of $0.09 per share and carried an interest rate of 10%. The convertible notes matured in July and August 2012. We also issued those
investors five year warrants to purchase 3,973,957 shares of common stock at $0.125 per share.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a $257,926 discount against the
principal of the notes. We amortized this discount using the effective interest method over the term of the note.
Effective July 14, 2012, holders of three notes totaling $100,000 agreed to extend the expiration date of their notes to July 13, 2013.
At March 31, 2013, the outstanding principal balance was $357,655, of which $257,655 was in default and interest payable on these notes
totaled $68,704. Following the expiration of the maturity dates on the $257,655 of notes that are now in default, we began to accrue interest
at the default interest rate of 15%.
SEPTEMBER 2011 CONVERTIBLE NOTES
On September 23, 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the
issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $253,760. The
warrants carried a five-year term to purchase an aggregate of 3,625,143 shares of our common stock at an exercise price of $0.10 per
share. The convertible promissory notes do not bear an interest rate and mature on September 23, 2012. The aggregate net cash proceeds
to us were $175,000, the balance of the principal amount representing a due diligence fee and an original issuance discount. The
convertible promissory notes are convertible at the option of the holders into shares of our common stock at a price per share equal to
$0.07. Subject to adjustments as described in the notes, the conversion price may not be more than $0.07. There are no registration
requirements with respect to the shares of common stock underlying the notes or the warrants.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a $168,804 discount against the
principal of the notes. We amortized this discount using the effective interest method over the term of the note.
The following conversions of the September 2011 Convertible Note have taken place during the fiscal years ended March 31, 2013 and
2012:
Principal converted
$
60,000 $
Fiscal Year Ended
March 31, 2013
Fiscal Year Ended
March 31, 2012
15,000
At March 31, 2013, the outstanding principal balance was $178,760 and was in default and there was no accrued interest as these notes do
not bear interest.
37
NOVEMBER 2011 CONVERTIBLE NOTES
In November 2011, we raised $525,000 in 5% Original Issue Discount Unsecured Convertible Debentures from five accredited investors
pursuant to which the investors purchased an aggregate principal amount of $525,000 for an aggregate purchase price of $500,000. The
debentures bear interest at 20% per annum and matured on April 20, 2012. The debentures will be convertible at the option of the holders
at any time into shares of our common stock, at a conversion price equal to $0.0779, subject to adjustment. In connection with the
debentures, the purchasers received warrants to purchase 3,369,706 shares of our common stock. The warrants are exercisable for a period
of five years from the date of issuance at an exercise price of $0.11, subject to adjustment.
Until December 31, 2012, upon any proposed issuance by us of our common stock or equivalents (or a combination thereof as defined in
the subscription agreement) for cash consideration, the purchasers may elect, in their sole discretion, to exchange all or some of the
debentures then held by such purchaser for any securities issued in a subsequent financing on a $1.00 for $1.00 basis, provided, however ,
this right shall not apply with respect to (i) an Exempt Issuance (as defined in the debenture) or (ii) an underwritten public offering of our
common stock.
A Financial Industry Regulatory Authority (FINRA) registered broker-dealer was engaged as placement agent in connection with the
transaction. We paid the placement agent a cash fee in the amount of $50,000 (representing a 8% sales commission and a 2%
unaccountable expense allowance) and issued the placement agent or its designees warrants to purchase an aggregate of 808,729 shares of
common stock at $0.11 per share. The warrants issued to the placement agent may be exercised on a cashless basis. In the event the
placement agent exercises the warrants on a cashless basis, we will not receive any proceeds.
During the fiscal year ended March 31, 2013, all of the outstanding principal balances on these notes and all related accrued interest of
$53,803 were converted into common stock.
FEBRUARY 2012 CONVERTIBLE NOTES
In February 2012, we entered into a subscription agreement with five accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate principal amount of $525,000 of 5% Original Issue Discount Unsecured Convertible Debentures for an
aggregate purchase price of $500,000 (the “Debenture”). These subscriptions represent the completion of the $1,000,000 securities offering
that was initiated and priced in November 2011 (see above).
The Debentures bear interest at 20% per annum and matured on April 20, 2012. The Debentures will be convertible at the option of the
holders at any time into shares of our common stock, at a conversion price equal to $0.0779, subject to adjustment. In connection with the
subscription agreement, the Purchasers received warrants to purchase 3,369,707 shares of our common stock (the “Warrants”). The
Warrants are exercisable for a period of five years from the date of issuance at an exercise price of $0.11 per share, subject to adjustment.
Each Purchaser may exercise such Purchaser’s Warrant on a cashless basis if the shares of common stock underlying the Warrant are not
then registered pursuant to an effective registration statement. In the event the Purchasers exercise the Warrants on a cashless basis, we will
not receive any proceeds. The conversion price of the Debenture and the exercise price of the Warrants are subject to customary adjustment
provisions for stock splits, stock dividends, recapitalizations and the like.
Until December 31, 2012, upon any proposed issuance by us of our Common Stock or Common Stock Equivalents (or a combination
thereof as defined in the subscription agreement) for cash consideration (the “Subsequent Financing”), a Purchaser may elect, in its sole
discretion, to exchange all or some of the Debenture then held by such Purchaser for any securities issued in a Subsequent Financing on a
$1.00 for $1.00 basis, provided, however, this right shall not apply with respect to (i) an Exempt Issuance (as defined in the Debenture) or
(ii) an underwritten public offering of our common stock.
Each Purchaser has contractually agreed to restrict its ability to exercise the Warrant and convert the Debenture such that the number of
shares of our common stock held by the Purchaser and its affiliates after such conversion or exercise does not exceed 4.99% of our then
issued and outstanding shares of common stock.
The full principal amount of the Debenture is due upon a default under the terms of the Debenture. The Debenture is a general unsecured
debt obligation of ours arising other than in the ordinary course of business which constitutes a direct financial obligation of the Company.
A FINRA registered broker-dealer was engaged as placement agent in connection with the transaction. We paid the placement agent a cash
fee in the amount of $50,000 (representing an 8% sales commission and a 2% unaccountable expense allowance) and issued the placement
agent or its designees warrants to purchase an aggregate of 815,774 shares of common stock at $0.11 per share. The warrants issued to the
placement agent may be exercised on a cashless basis. In the event the placement agent exercises the warrants on a cashless basis, we will
not receive any proceeds.
38
During the fiscal year ended March 31, 2013, all of the outstanding principal balances on these notes and all related accrued interest of
$55,432 were converted into common stock.
LAW FIRM NOTE
On March 22, 2012, we entered into a Promissory Note with our corporate law firm for the amount of $75,000, which represented the
majority of the amount we owed to that firm. The Promissory Note has a maturity date of December 31, 2012 and bears interest at five
percent per annum. The note is convertible at the option of the holder into shares of our common stock at a 10% discount to the market
price of the common stock on the date prior to conversion with a floor price on such conversions of $0.08 per share. This ability of the
holder to convert became exercisable upon the amendment of the Articles of Incorporation increasing the authorized shares of our common
stock to a number greater than 250,000,000. As that increase in the authorized number of shares of our common stock was approved by our
stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June 30, 2012 (see
Note 4). Subsequent to fiscal year ended March , 31, 2013, the parties have agreed to extend the Maturity Date of the Note to October 1,
2013.
At March 31, 2013, the outstanding principal balance on this note was $75,000 and the interest payable on this note totaled $3,854.
SECURITIES ISSUED FOR SERVICES
We have issued securities in payment of services to reduce our obligations and to avoid using our cash resources. In the fiscal year ended
March 31, 2013 we issued 2,896,181 common shares for services of which 1,932,808 were restricted and were for investor relations
services, business development and corporate communications services. We also issued 246,429 for licensing rights. Included in the
2,896,181 common shares issued for services are 963,373 shares, registered under Form S-8 registration statements, which were issued as
follows: 101,250 for financial consulting, 550,028 for scientific consulting and 312,095 for legal services. The average price discount of
common shares issued for these services, weighted by the number of shares issued for services in this period, was approximately 11.8%.
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, 2013
we issued 23,281,154 restricted common shares for repayment in full of notes, including accrued interest, in the aggregate amount of
$1,695,060. The price discount of the common stock issued for debt was approximately 22.8%.
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, 2013 consolidated financial statements
that our working capital deficiency and our accumulated deficit are conditions that, among others, raise substantial doubt about our ability
to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with GAAP requires us to make a number of estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements. Such estimates and assumptions affect the reported amounts of expenses during the reporting period. On an ongoing basis, we
evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. 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. We believe that the estimates and assumptions that are most important to the portrayal of our financial condition
and results of operations, in that they require the most difficult, subjective or complex judgments, form the basis for the accounting policies
deemed to be most critical to us. These critical accounting policies relate to revenue recognition, stock purchase warrants issued with notes
payable, beneficial conversion feature of convertible notes payable, impairment of intangible assets and long lived assets, stock
compensation, 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 our future financial conditions or results of operations.
39
Fair Value Measurements
We measure the fair value of applicable financial and non-financial instruments based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when
determining fair value.
The fair value of derivative liabilities is determined based on unobservable inputs that are not corroborated by market data, which is a Level
3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated
statements of operations.
The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection
with our April 2011 convertible note, July & August 2011 10% convertible notes and the September 2011 convertible note offerings and
with respect to warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
Risk free interest rate
Average expected life
Expected volatility
Expected dividends
Fiscal Year Ended March 31, 2013
0.05% - 1.56%
0.25 – 3.6 years
76.0% - 107.1%
None
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.
Revenue Recognition
With respect to revenue recognition, we entered into a government contract with DARPA and have recognized revenue during the fiscal
years ended March 31, 2013 and 2012 of $1,230,004 and $1,358,189, respectively, under such contract. We adopted the Milestone method
of revenue recognition for the DARPA contract under ASC 605-28 “Revenue Recognition – Milestone Method” and we believe we meet
the requirements under ASC 605-28 for reporting contract revenue under the Milestone Method for the fiscal years ended March 31, 2013
and 2012.
In order to account for this contract, we identify the deliverables included within the contract and evaluate which deliverables represent
separate units of accounting based on if certain criteria are met, including whether the delivered element has standalone value to the
collaborator. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria
are applied to each of the separate units.
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement is entered into that the event will be achieved. A vendor’s assessment that it
expects to achieve a milestone does not necessarily mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part on either: (a) the vendor’s performance; or (b) a specific outcome resulting
from the vendor’s performance.
(3) If achieved, the event would result in additional payments being due to the vendor.
A milestone does not include events for which the occurrence is either: (a) contingent solely upon the passage of time; or (b) the result of a
counterparty’s performance.
The policy for recognizing deliverable consideration contingent upon achievement of a milestone must be applied consistently to similar
deliverables.
The assessment of whether a milestone is substantive is performed at the inception of the arrangement. The consideration earned from the
achievement of a milestone must meet all of the following for the milestone to be considered substantive:
(1) The consideration is commensurate with either: (a) the vendor’s performance to achieve the milestone; or (b) the enhancement of the
value of the delivered item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone;
40
(2) The consideration relates solely to past performance; and
(3) The consideration is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration)
within the arrangement.
A milestone is not considered substantive if any portion of the associated milestone consideration relates to the remaining deliverables in
the unit of accounting (i.e., it does not relate solely to past performance). To recognize the milestone consideration in its entirety as
revenue in the period in which the milestone is achieved, the milestone must be substantive in its entirety. Milestone consideration cannot
be bifurcated into substantive and nonsubstantive components. In addition, if a portion of the consideration earned from achieving a
milestone may be refunded or adjusted based on future performance, the related milestone is not considered substantive.
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
(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. This guidance 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 years ended March 31, 2013 and 2012.
Stock Purchase Warrants
We granted warrants in connection with the issuance of certain notes payable. When such warrants are classified as equity, we measure the
relative estimated fair value of such warrants which represents a discount from the face amount of the notes payable. Such discounts are
amortized to interest expense over the term of the notes.
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"). We measure the estimated fair value of the BCF in circumstances in which the
conversion feature is not required to be separated from the host instrument and accounted for separately, and record that value in the
consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the
term of the notes.
Share-based Compensation
We account for share-based compensation awards using the fair-value method and record such expense based on the grant date fair value in
the consolidated financial statements over the requisite service period. For the fiscal years ended March 31, 2013 and 2012, we recognized
$793,710 and $758,963 of share-based compensation expense, respectively.
DERIVATIVE INSTRUMENTS
We evaluate free-standing derivative instruments (or embedded derivatives) to properly classify such instruments within equity or as
liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each reporting date. If the classification changes as a result of events during a
reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of
times a contract may be reclassified.
Instruments classified as derivative liabilities are remeasured each reporting period (or upon reclassification) and the change in fair value is
recorded on our consolidated statement of operations in other expense (income).
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.
41
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company, we are not required to furnish information under this Item 7A.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying Index to Financial Statements are attached hereto and filed as a part of
this Report under Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) of the Exchange Act) as of a date within 90 days prior to filing the Company's March 31, 2013 Form 10-K.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, due to the
material weaknesses in our internal controls over financial reporting identified below, our disclosure controls and procedures are not
effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports
that we file or submit under the Exchange Act and are not effective in ensuring that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
(a) MANAGEMENT'S 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, 2013. In making this assessment, the Company used the criteria set forth by the Committee
of Sponsoring Organizations of The Treadway Commission 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, 2013
due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for fiscal 2013 identified a material weakness relating to a lack of sufficient
segregation of duties, particularly in cash disbursements. Specifically, this material weakness is such that the design of controls over the
area of cash disbursements relies primarily on detective controls and could be strengthened by adding preventative controls to properly
safeguard company assets.
Management has also identified a material weakness relating to 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. 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.
The Company is in the process of developing and implementing remediation plans to address its material weaknesses.
42
Management has identified specific remedial actions to address the material weaknesses described above:
·
·
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.
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.
(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, 2013 that have
materially affected or are reasonably likely to materially affect these controls.
ITEM 9B. OTHER INFORMATION
During the fourth quarter of the year ended March 31, 2013, we issued the following securities that were not registered under the Securities
Act and have not been included previously in a Current Report on Form 8-K. We did not employ any form of general solicitation or
advertising in connection with the offer and sale of the securities described below. In addition, we believe the recipients of the securities are
"accredited investors" as defined in Rule 501(a) of the Securities Act. For these reasons, among others, the offer and sale of the following
securities were made in reliance on the exemption from registration provided by Section 4(2) of the Securities Act or Regulation D
promulgated by the SEC under the Securities Act:
On January 4, 2013, we issued 246,429 shares of restricted common stock to the owner of a patent as a patent license payment valued at
$17,250.
On January 4, 2013, we issued 379,005 shares of restricted common stock to a consultant valued at $31,667 based on the closing price on
that date for corporate advisory services.
On various dates between February 5, 2013 and March 15, 2013, we issued 1,406,726 shares of restricted common stock to noteholders in
exchange for the conversion of principal and interest of several notes payable and convertible notes payable in an aggregate amount of
$90,000 at an average conversion price of $0.06 per share based upon the conversion formulae in the respective notes.
On various dates between February 7, 2013 and March 18, 2013, we issued 7,596,423 shares of restricted common stock to accredited and
institutional investors in exchange for cash investments of $538,834 at an average purchase price of $0.07. Those investors also received
seven year warrants to purchase 3,798,212 shares of common stock at an average exercise price of $0.107.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
PART III
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. 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, 2013, we believe that all filing requirements
applicable to our officers, directors, and greater than 10% beneficial owners were complied with except as follows:
Mr. Franklyn S. Barry, Jr., one of our directors, did not timely file one report on Form 4 pertaining to one late reported transaction. The
date of the transaction was July 24, 2012. The relevant report was filed on August 6, 2012.
Mr. Edward G. Broenniman, also one of our directors, did not timely file one report on Form 4 pertaining to one late reported transaction.
The date of the transaction was July 24, 2012. The relevant report was filed on August 6, 2012.
43
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The names, ages and positions of our directors and executive officers as of July 10, 2013 are listed below:
NAMES
James A. Joyce (1)
TITLE OR POSITION
Chairman, Chief Executive Officer and Secretary
AGE
51
Richard H. Tullis, PhD (2)
Vice President, Chief Science Officer and Director
Rodney S. Kenley (3)
James B. Frakes (4)
Franklyn S. Barry, Jr.
Edward G. Broenniman
Chetan S. Shah, MD
Phillip A. Ward
Thomas V. Wornham
President and Director
Chief Financial Officer and Senior Vice President - Finance
Director
Director
Director
Director
Director
68
63
56
73
77
44
71
53
(1) Effective June 1, 2001, Mr. Joyce was appointed our President and Chief Executive Officer, replacing Mr. Barry, who continues as a
member of the board of directors. Mr. Joyce resigned from the position of President upon the appointment of Mr. Kenley to such position
on October 27, 2010.
(2) Effective June 1, 2001, Dr. Tullis was appointed as our Chief Science Officer.
(3) Effective October 27, 2010, Mr. Kenley was appointed as our President.
(4) Effective September 27, 2010, Mr. Frakes was appointed as our Chief Financial Officer.
Certain additional information concerning the individuals named above is set forth below. This information is based on information
furnished us by each individual noted.
Resumes of Management:
James A. Joyce, Chairman, CEO 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, formerly a wholly-owned
subsidiary of Aethlon Medical, Inc. Previously, Dr. Tullis co-founded Molecular Biosystems, Inc., a former NYSE company. At Molecular
Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization, Senior Research Scientist and Member of the Board of Directors. In
research, Dr. Tullis developed and patented the first application of oligonucleotides to antisense antibiotics and developed new methods for
the chemical synthesis of DNA via methoxy-hosphorochloridites. Dr. Tullis also co-developed the first applications of covalently coupled
DNA-enzyme conjugates using synthetic oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis founded, and
served as President and CEO of Synthetic Genetics, Inc., a pioneer in custom DNA synthesis, which was sold to Molecular Biology
Resources in 1991. Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed its IPO under his management, and
was co-founder of DNA Sciences, Inc., a company that was eventually acquired by Genetic Vectors. Dr. Tullis received his Ph.D. in
Biochemistry and Cell Biology from the University of California at San Diego, and has done extensive post-doctoral work at UCSD, USC,
and the University of Hawaii.
44
Rodney S. Kenley, President and Director
Mr. Kenley has been President and a Director since October 2010. He has 34 years of experience in healthcare, most of which have been
spent in the extracorporeal blood purification arena. Mr. Kenley held several positions at Baxter Healthcare (Travenol) from 1977 through
1990 including International Marketing Manager, Business Unit Manager for Peritoneal and Hemodialysis products, Manager of New
Business Development, Director of Worldwide Product Planning, Director of Advanced Product Development, and VP of Electronic Drug
Infusion. During this tenure he conceived of and managed the launch of several new products that have been highly commercially
successful including the HomeChoice peritoneal dialysis cycler.
Mr. Kenley founded Aksys Ltd. in January 1991 to develop and commercialize his concept of a daily home hemodialysis system which was
commercially launched in 2002 as the PHD system. In 2004, Mr. Kenley initiated the development of a second-generation home
hemodialysis system in partnership with DEKA Research & Development Corporation in Manchester, New Hampshire. In 2007, the assets
of Aksys Ltd. were acquired by DEKA, where Mr. Kenley was employed prior to joining Aethlon.
Mr. Kenley is the recipient of over 30 patents.
Mr. Kenley received his Bachelor of Arts degree in Biology and Chemistry from Wabash College, a Masters of Science degree in
Molecular Biology from Northwestern University and a Masters of Management from the Kellogg School of Management, also at
Northwestern University.
James B. Frakes, Chief Financial Officer and Senior Vice President – Finance
Mr. Frakes joined Aethlon Medical in January 2008 and brought 16 consecutive years of financial responsibility for publicly traded
companies, as well as specific knowledge and experience in equity and debt transactions, acquisitions, public reporting and Sarbanes-Oxley
section 404 internal control requirements.
He previously served as the CFO for Left Behind Games Inc., a start-up video game company. Prior to 2006, he served as CFO of NTN
Buzztime, Inc., an interactive entertainment company with $40 million in sales, where he played a key role in acquisitions that doubled the
company's revenue. Mr. Frakes received an MBA from the University of Southern California and completed his BA with Honors at
Stanford University.
Franklyn S. Barry, Jr.
Mr. Barry 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.
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon Medical in March 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.
Chetan S. Shah, MD
Dr. Shah became a director of Aethlon Medical in June 2013. Dr. Shah is a board certified Otolaryngologist. He is an Advisory Board
Member at The Bank of Princeton, and a founder, partner and Board member of the Surgery Center at Hamilton as well as Physician
Management Systems and Princeton Eye & Ear. Dr. Shah serves on the board of two other private companies. He holds teaching positions
and serves on multiple hospital committees in the area and is on the Audiology and Speech Language Pathology Committee for the State of
New Jersey. Dr. Shah received his Bachelor’s degree and Medical Degree from Rutgers University and Robert Wood Johnson Medical
School.
45
Phillip A. Ward
Mr. Ward became a director of Aethlon Medical in July 2012. He is the former Chairman and CEO of Bignell-Ward-Bignell Corporation;
the former President and CEO of Hawk Financial Services Corporation, a premium finance company; a former Executive Director and
COO of Investments of Golden Eagle Insurance Corporation, a property and casualty California insurance company; and former Executive
Vice President and COO Finance at Big Bear Supermarkets, where he was also in charge of acquisitions, as well as leasing and sales of all
operating units and real properties.
Thomas V. Wornham
Mr. Wornham became a director of Aethlon Medical in July 2012 after retiring as Executive Vice President & Regional Manager at Wells
Fargo Bank in San Diego. Mr. Wornham is currently Chairman of the Board of the San Diego Water Authority and the past Chairman of
the San Diego Regional Chamber of Commerce, The Century Club of San Diego, and the San Diego Regional Economic Development
Corporation. Mr. Wornham graduated from University of California Berkeley, with a BA in Political Science.
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 CEO, President and other officers, by
reviewing analyses and reports sent to them, and by participating in Board and committee meetings. Our bylaws provide that each of the
directors serves for a term that extends to 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, Broenniman, Ward and Wornham serve. Mr. Ward is
Chairman of the Audit Committee, and Mr. Wornham is Chairman of the Compensation Committee.
In July 2012, our Board of Directors approved a new Board Compensation Program (the “New Program” or the “2012 Program”), which
modifies and supersedes the 2005 Directors Compensation Program (the “2005 Program”) that was previously in effect. Under the New
Program, in which only non-employee Directors may participate, an eligible Director will receive a grant of $15,000 worth of options to
acquire shares of Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the
Common Stock for the five trading days preceding the first day of the fiscal year; however for the new non-employee directors, the
exercise price for this initial grant, $0.076 per share, is based on the average of the closing bid prices of the Common Stock for the five
trading days preceding the date of their appointment (July 24, 2012). These options will have a term of ten years and will be fully vested
upon grant. In addition, each existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of
Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for
the five trading days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be
made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading days
preceding the date (July 24, 2012) of the appointment of two new directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible to participate in the New Program also will receive a grant of $20,000 worth of
options valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding
the first day of the fiscal year. In addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each
committee meeting attended and $1,000 for each formal Board meeting attended.
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
At March 31, 2013 under the 2005 Directors Compensation Program we had issued 1,337,825 options to outside directors and 3,965,450
options to employee-directors, 514,550 outside directors’ options had been forfeited, 250,000 outside directors’ options had been exercised
and 3,671,550 options remained outstanding.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become
directors or executive officers except Mr. Wornham is the son-in-law of Mr. Ward.
There are no arrangements or understandings between any two or more of our directors or executive officers or between any of our
directors or executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or officer,
and there is no arrangement, plan or understanding as to whether non-management shareholders will exercise their voting rights to continue
to elect the current Board of Directors. There are also no arrangements, agreements or understandings between non-management
shareholders that may directly or indirectly participate in or influence the management of our affairs.
46
SCIENCE ADVISORY BOARD
Each person listed below is a current member of our Science Advisory Board (SAB). During the fiscal years ended March 31, 2013 and
2012, we divided our Science Advisory Board into three groups: the Extracorporeal Therapy Advisory Board, the Sepsis and Inflammation
Advisory Board and the Cancer Advisory Board. The role of the Science Advisory Board is to provide scientific guidance related to the
development of our Aethlon ADAPT(TM) 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 stipends for
attending SAB meetings.
Extracorporeal Therapy Advisory Board
Gregory T. A. Kovacs, M.D., Ph.D.
John A. Kellum, M.D
Nathan W. Levin, M.D.
Claudio Ronco, M.D.
David M. Ward, M.D.
Sepsis & Inflammation Advisory Board
Irshad H. Chaudry, Ph.D.
Larry D. Cowgill, D.V.M., Ph.D.
Charles J. Fisher, Jr., M.D.
Geert Schmid-Schцnbein, Ph.D.
Cancer Advisory Board
Laszlo Radvanyi, Ph.D.
EXTRACORPOREAL THERAPY ADVISORY BOARD
Gregory T.A. Kovacs, M.D., Ph.D.
Dr. Kovacs is a Professor of Electrical Engineering at Stanford University with a courtesy appointment in the Department of Medicine. He
received a BASc degree in Electrical Engineering from the University of British Columbia, an MS degree in Bioengineering from the
University of California, Berkeley, and a PhD and an MD degree from Stanford University. Dr. Kovacs is the Director of Medical Device
Technologies for the Astrobionics Program at the NASA Ames Research Center, and Principal Investigator for the NASA/Stanford
National Center for Space Biological Technologies. This Center is charged with developing advanced medical devices to enable extended
human spaceflight and instrumentation/payloads for biological experiments. Dr. Kovacs also has extensive industry experience including
co-founding and providing technical guidance for several companies, including Cepheid in Sunnyvale, CA, supplier of advanced
instrumentation for clinical and research nucleic acid diagnostics. Through Northrup Grumman, Cepheid supplies the automated biothreat
detection systems in use by the United States Postal Service. He is a long-standing member of the Defense Sciences Research Council
(DARPA), and has served as Associate Chair and Chairman. In this capacity, he has led or co-led studies on a variety of topics from
chemical and biological agent detection and decontamination, miniaturized biological instrumentation, jungle warfare technologies, and
many others. Between 2008 and 2011, Dr. Kovacs was on leave from Stanford University to serve as director of the Microsystems
Technology Office at DARPA.
John A. Kellum, M.D.
Dr. Kellum is a tenured professor of Critical Care Medicine at the University of Pittsburgh. He is a clinician scientist whose research
interests span various aspects of Critical Care Medicine, but center in critical care nephrology (including acid-base, and renal replacement
therapy), sepsis and multi-organ failure (including blood purification), and clinical epidemiology. His research has received continuous
funding from the National Institutes of Health since 2001 and he has active funding from multiple different NIH Institutes. Dr. Kellum has
authored more than 300 publications and has also edited several major textbooks including Critical Care Nephrology 2nd Edition (WB
Saunders), and Stewart's Textbook of Acid-Base, 2nd Edition (www.acidbase.org). He has won several teaching awards, lectures widely,
and has given more than 300 seminars and invited lectures related to his research. Dr. Kellum has been involved in the development of
several clinical practice guidelines. He is a founding member and past president of the Acute Dialysis Quality Initiative (www.ADQI.net)
and is co-chair of the Kidney Diseases Improving Global Outcomes (KDIGO) clinical practice guideline on acute kidney injury
(www.kdigo.org). Finally Dr. Kellum is a leader in electronic research especially in critical illness and is the Director of CARe (Center for
Assistance in Research using the eRecord) also at the University of Pittsburgh.
Nathan W. Levin, M.D.
Dr. Levin is the Chairman, Research Board of the Renal Research Institute and Professor of Clinical Medicine, Albert Einstein College of
Medicine. Past Medical and Research Director, Renal Research Institute (1997-2010). Dr. Levin is the Chair of the Selection Committee
for the Lillian Jean Kaplan International Prize for Advancement in the Understanding of Polycystic Kidney Disease (PKD). He is the Co-
Founder of Sustainable Kidney Care Foundation. Dr. Levin is an advisor to the Board of KidneyTel. He has lectured nationally and
internationally on topics relating to chronic kidney disease (CKD) and hemodialysis. He is the Principal Investigator of the NIH sponsored
study of Frequent Dialysis. Dr. Levin is currently an adjunct Professor of Medicine at the School of Medicine, The University of North
Carolina at Chapel Hill. He is the Honorary Chair, Peking University, in Beijing, China. Dr. Levin contributes to the global CKD
community in a variety of functions.
47
Claudio Ronco, M.D.
Dr. Ronco is Director of the Department of Nephrology at St. Bortolo Hospital in Vicenza. He is a member of the council of several
scientific societies and is Editor in Chief of the International Journal of Artificial Organs. He has received numerous awards and honors,
including the International Medal of Excellence from the National Kidney Foundation (NKF) and honorary membership of the Spanish
Society of Nephrology (SSN). Dr. Ronco has organized several congresses and meetings in the area of nephrology and intensive care and is
a member of several advisory groups for clinical trials and dialysis research. He has co-authored over 650 papers, 36 book chapters, 45
books and seven monographic journal issues, and has delivered more than 450 lectures at international meetings and universities. In 1989,
Dr. Ronco was awarded his diploma in pediatric nephrology at the University of Naples, having achieved a specialized diploma in medical
nephrology at the Post-graduate School of Internal Medicine at the University of Padua in 1979. He graduated in medicine from the
University of Padua, having been an intern at the Institute of Clinical Internal Medicine at the same institution.
David M. Ward, M.D.
Dr. Ward trained in nephrology in Scotland and did a second fellowship in renal immunopathology at Scripps Research Foundation. Since
1977 he has been a member of the Division of Nephrology at UCSD. He directed the dialysis unit and clinical nephrology program at
UCSD for 19 years, and has directed the therapeutic apheresis program for the last 22 years. At different times he has served the UCSD
Medical School as Assistant Dean for Clinical Affairs, Chief of Staff of the Hospital, and Chairman of the UCSD Medical Group. Special
interests include immunological diseases, glomerular diseases, transplantation medicine, apheresis medicine, hemodialysis technology,
innovative extracorporeal blood circuits, and general clinical nephrology. He practices, publishes and teaches in these areas, including
authoring chapters in standard textbooks such as "Rheumatology" and "Clinical Dialysis".
SEPSIS & INFLAMMATION ADVISORY BOARD
Irshad H. Chaudry, Ph.D.
Dr. Chaudry is the Editor-in-Chief of the journal SHOCK®, a leading research publication that reviews novel therapeutic advances to
address shock, trauma, sepsis, inflammation, ischemia, and related pathobiological states, with particular emphasis on the biologic
mechanisms that determine the response to such injury. Dr. Chaudry received a B.S. as well as a M.S. with honors from Sind University,
and a Ph.D. from Monash University, Australia. After his postdoctoral training atToronto University, Canada, he was appointed Instructor
and subsequently an Assistant Professor at the Jewish Hospital and Washington University School of Medicine. He then moved to Yale
University as an Associate Professor and subsequently became a Professor. He moved to Michigan State University in 1986 as Professor
and Director of Research and in 1996 became the Director of the Center for Surgical Research at Brown University. In 2000, he became the
Director of the Center for Surgical Research at the University of Alabama at Birmingham, and the Vice Chairman of the Department of
Surgery. He has over 500 publications to his credit and is a recipient of the NIH MERIT award.
Larry D. Cowgill, D.V.M., Ph.D.
Dr. Cowgill received his DVM degree from the University of California at Davis and completed his internship and residency training at the
University of Pennsylvania. He was a National Institutes of Health Special Research Fellow at the Renal and Electrolyte Section of the
University of Pennsylvania School of Medicine and earned a PhD in Comparative Medical Sciences. He is Board Certified in Small Animal
Internal Medicine and is Associate Dean for Southern California Clinical Programs, Co-Director of the UC Veterinary Medical Center-San
Diego (UCVMC-SD), and Professor in the Department of Medicine and Epidemiology. He oversees the Clinical Nephrology programs and
the Companion Animal Hemodialysis Units at the Veterinary Medical Teaching Hospital at Davis and the UCVMC-SD. Dr. Cowgill has
more than 35 years of experience in veterinary internal medicine, nephrology, and teaching and has trained many of the leading veterinary
nephrologists throughout the world. He is a pioneer in the application of hemodialysis in companion and remains a leading authority in the
development of blood purification therapies for renal diseases in animals and people.
Charles J. Fisher, Jr., M.D.
Dr. Fisher, founder & CEO of Margaux Biologics, Inc., is a physician scientist with a distinguished career in both academia and industry
spanning over 30 years. Prior to joining industry, Dr. Fisher served as Professor and Head of Critical Care Medicine at The Cleveland
Clinic Foundation, and has held professor, division chief and director positions at the University of California at Davis Medical
Center, Case Western Reserve University and The Cleveland Clinic Foundation. His research in sepsis, host defense and endothelial
dysfunction led to his assisting in the founding of Incyte, and his later recruitment to Eli Lilly & Co, where he led the Xigris (activated
Protein C) Global Product Team and successfully registered the first drug approved for the treatment of sepsis. He was recruited to Abbott
Laboratories as Vice President for Global Pharmaceutical Development and, among other accomplishments, led the registration of Humira
(first fully humanized anti-TNF mab). Other medical firsts include his contributions to the development of, and later approval of, sTNF:fc
(Enbrel, 1st soluble anti-TNF tx) and IL-1ra (Kinneret, 1st anti-IL-1 tx). Dr. Fisher has numerous patents and publications to his credit.
Prior to founding Margaux Biologics, he was Chief Medical Officer and Executive Vice President of Cardiome Pharma Corp. where he led
the team that invented, developed, registered and sold to Merck ($800M) vernakalant, a novel, first in class, multi-ion channel drug for atrial
fibrillation (Brinavess).
48
Additionally, Dr. Fisher is a decorated, multi tour combat veteran, with extensive military experience in special operations. He is a Life
Member of the Special Operations Medical Association (SOMA), has served as a member of the Defense Science Research Council and on
DARPA panels, including one focused on universal host defense. His unique background of direct patient care, basic and clinical research,
on the ground combat experience, and leadership at all levels, has led to an exemplary track record of building teams, delivering results,
medical firsts and saving lives.
Geert Schmid-Schцnbein, Ph.D
Dr. Schmid-Schonbein is Distinguished Professor of Bioengineering, Adjunct Professor in Medicine at the University of California, San
Diego (UCSD) and director of the UCSD Microcirculation Laboratory where he and his team are studying organ injury mechanisms,
apoptosis in hypertension, and triggers for inflammation in the blood circulation. Dr. Schmid-Schonbein earned his Ph.D. in
bioengineering from UCSD in 1976. After a three-year post-doctoral fellowship at Columbia University, he returned to UCSD in 1979 as an
assistant professor. Some of Dr. Schmid-Schonbein's early research discoveries involved the behavior of infection-fighting white blood
cells. Using engineering techniques, he made the first determination of the force with which white blood cells adhere to the walls of blood
vessels as part of the initial process of inflammation. Later, Dr. Schmid-Schonbein concluded that the survival of an acutely ill patient can
hinge on the degree to which white blood cells are activated. Recently his group discovered a mechanism that leads to activation of white
blood cells, which is due to digestive enzymes and may cause cardiovascular disease. Among his many distinctions, Dr. Schmid-Schonbein
is a member of the National Academy of Engineering and a fellow of the American Heart Association. He is a founding fellow of the
American Institute for Medical and Biological Engineering, and winner of the Melville Medal from the American Society of Mechanical
Engineering.
CANCER ADVISORY BOARD
Dr. Radvanyi received his Ph.D. in clinical biochemistry from the University of Toronto. His main research area is tumor immunology
studying immune regulation in cancer and identifying new antigens as targets for anti-cancer T-cell therapy. After completing postdoctoral
work in Toronto and at Harvard University in Boston at the Joslin Diabetes Center, Dr. Radvanyi joined the Immunology Group at Sanofi-
Pasteur in Toronto in 2000 as a Senior Scientist where he helped lead an antigen discovery program that led to the discovery of a group of
over-expressed breast cancer-specific genes that are candidates for antigen-specific vaccines against breast cancer. In 2005, Dr. Radvanyi
joined the faculty of the University of Texas, MD Anderson Cancer Center, where he also holds the additional appointment as Associate
Professor, Department of Breast Medical Oncology, Division of Cancer Medicine.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director or
executive officer of the Company: (1) any bankruptcy petition filed by or against such person or any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a
criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or
banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the 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; and (5) being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree or finding, not
subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or
regulation, law or regulation respecting financial institutions or insurance companies or law or regulation prohibiting mail or wire fraud or
fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed,
suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as
defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has
disciplinary authority over its members or associated persons.
CODE OF ETHICS.
On February 23, 2005, the Board of Directors approved a "Code of Business Conduct and Ethics,” which applies to our principal executive
officer, our principal financial officer, our principal accounting officer and persons performing similar tasks. Our Code of Business
Conduct and Ethics is available on our company website at www.aethlonmedical.com.
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors formed an Audit Committee in May of 1999 (the "Audit Committee"). Mr. Phillip A. Ward (the Chairman of the
Audit Committee), Mr. Franklyn S. Barry, Jr., Mr. Edward Broenniman, Dr. Chetan S. Shah and Mr. Thomas V. Wornham serve as
members of the Committee. We believe that each of Mr. Ward, Mr. Broenniman and Mr. Barry is an "audit committee financial expert" as
that term is defined by Item 407 of Regulation S-K.
49
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 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. Thomas V. Wornham
(the Chairman of the Compensation Committee), Mr. Franklyn S. Barry, Jr., Mr. Edward Broenniman, Dr. Chetan S. Shah and Mr. Phillip
A. Ward serve as members of the Committee. 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, 2013 and March 31, 2012. The following table summarizes all compensation for fiscal year 2013 and
2012 received by our Chief Executive Officer, and the Company's two most highly compensated executive officers who earned more than
$100,000 in fiscal year 2013.
SUMMARY COMPENSATION TABLE FOR 2013 AND 2012 FISCAL YEARS
NAMED EXECUTIVE
OFFICER AND
PRINCIPAL POSITION
YEAR
SALARY
($)
BONUS
($)
STOCK
AWARDS
($)(5)
OPTION
AWARDS
($)(5)
NON-
EQUITY
INCENTIVE
PLAN
COMPEN-
SATION
($)
NON-
QUALIFIED
DEFERRED
COMPEN-
SATION
EARNINGS
($)
ALL
OTHER
COMP.
($)
TOTAL
($)
James A. Joyce (1)
CHIEF EXECUTIVE
OFFICER
2013 $ 325,000 $ 12,500
2012 $ 325,000 $
–
Richard H. Tullis, PhD (2)
VICE PRESIDENT AND
CHIEF SCIENCE
OFFICER
James B. Frakes (3)
CHIEF FINANCIAL
OFFICER AND SVP-
FINANCE
2013 $ 195,000 $ 10,000 $
2012 $ 195,000 $
– $
2013 $ 180,000 $ 7,500 $
2012 $ 180,000 $
– $
Rodney S. Kenley (4)
PRESIDENT
2013 $ 240,000 $ 10,000 $
– $
2012 $ 240,000 $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $
– $337,500
– $325,000
– $205,000
– $195,000
– $187,500
– $
– $180,000
– $
– $
– $250,000
– $240,000
(1) The aggregate number of stock awards and stock option awards issued to Mr. Joyce and outstanding as of March 31, 2013 is 4,000,000
(see share restricted stock grant below) and 12,088,243, respectively.
(2) The aggregate number of stock awards and stock option awards issued to Dr. Tullis and outstanding as of March 31, 2013 is zero and
2,617,175, respectively.
50
(3) Mr. Frakes was appointed as Chief Financial Officer on September 27, 2010 after previously serving as Senior Vice President-Finance
on a part-time basis. The aggregate number of stock awards and stock option awards outstanding as of March 31, 2013 is zero and
500,000, respectively.
(4) Mr. Kenley was appointed President on October 27, 2011. The aggregate number of stock awards and stock option awards issued to
Mr. Kenley and outstanding as of March 31, 2013 is zero and 1,000,000, respectively.
In addition, Mr. Joyce was granted 4,000,000 shares of restricted common stock, at a price per share of $0.24, which vested in equal
installments over a thirty-six month period commencing June 30, 2010; however Mr. Joyce deferred acceptance of the shares as permitted
by the grant. All shares must be issued and accepted by Mr. Joyce by the expiration of the thirty-six month vesting period. We began
recording the stock-based compensation expense associated with this grant in June 2010. As of July 10, 2013, Mr. Joyce has accepted all
4,000,000 shares of the grant. However, the 600,000 shares previously accepted by Mr. Joyce were pledged as collateral for a loan and
have been retained and/or sold by the lender and are no longer owned by Mr. Joyce. It is anticipated that Mr. Joyce will receive stock
certificates evidencing 3,400,000 shares in the next several weeks.
(5) See note 6 to our financial statements regarding the assumptions made in valuing the stock/option awards in the above table.
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Joyce effective April 1, 1999. Effective June 1, 2001, Mr. Joyce was appointed
President and Chief Executive Officer and his base annual salary was increased from $120,000 to $180,000. Effective January 1, 2005, Mr.
Joyce's salary was increased from $180,000 to $205,000 per year. Under the terms of the agreement, his employment continues at a salary
of $205,000 per year for successive one-year periods, unless given notice of termination 60 days prior to the anniversary of his employment
agreement. Effective April 1, 2006. Mr. Joyce's salary was increased from $205,000 to $240,000. His salary was subsequently increased to
$265,000 per year and effective May 1, 2008, his salary was increased from $265,000 to $290,000 per year. Effective April 1, 2010, his
salary was increased from $290,000 to $325,000 per year.
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. Effective April 1, 2010,
his salary was increased from $180,000 to $195,000 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.
On September 27, 2010, Mr. Frakes was appointed our Chief Financial Officer. We have not entered into a written employment agreement
with Mr. Frakes. As Chief Financial Officer, Mr. Frakes receives an annual salary of $180,000 and medical insurance benefits. In addition,
in connection with his appointment, we granted Mr. Frakes an option to acquire up to 500,000 shares of our common stock. The option
vested as to 250,000 shares on the grant date and vested as to the remaining 250,000 shares one year from the grant date.
Mr. Kenley was appointed our President on October 27, 2010. Pursuant to a written offer of employment executed by us and Mr. Kenley,
he receives an annual salary of $240,000 and medical insurance benefits. Effective October 27, 2010, he also was granted an option to
acquire up to 1,000,000 shares of our common stock. The option will vest as to 250,000 shares on October 27, 2011 and as to 20,833 shares
each month thereafter.
51
OUTSTANDING EQUITY AWARDS AT 2013 FISCAL YEAR-END
The following table sets forth certain information concerning stock option awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2013 FISCAL YEAR END
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE
(#)
1,115,550(1)
557,775(1)
557,775(1)
2,857,143(1)
2,500,000(2)
2,000,000(3)
1,500,000(4)
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE
(#)
–
–
–
–
–
–
500,000
433,588(5)
433,587(5)
750,000(6)
1,000,000(7)
500,000(8)
–
–
–
–
–
NAME
James A. Joyce
Richard H. Tullis
James B. Frakes
Rodney S. Kenley
666,651(9)
333,349
OPTIONS AWARDS
EQUITY
INCENTIVE PLAN
AWARDS
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED
OPTIONS
UNEXERCISABLE
(#)
–
–
–
–
–
–
–
–
–
–
–
–
–
OPTION
EXERCISE
PRICE
($)
$0.38
$0.38
$0.38
$0.21
$0.36
$0.25
$0.25
$0.38
$0.38
$0.41
$0.25
$0.25
$0.25
DATE OF
OPTION
EXPIRATION
02/23/15
02/23/15
02/23/15
12/18/15
09/21/17
02/21/19
09/27/20
02/23/15
02/23/15
06/14/18
09/27/20
09/27/20
10/27/20
(1) This option was fully vested as of March 31, 2010 and as a result of the Option Suspension Agreement, the expiration date was
extended by 100 days. Subsequent to March 31, 2010, the expiration date of this option was extended to February 23, 2015 (see Item 13 to
the Financial Statements).
(2) The option vested 1,000,000 shares at grant, with 500,000 shares vesting each annual anniversary date through June 13, 2010 and as a
result of the Option Suspension Agreement, the expiration date was extended by 100 days.
(3) The option vested 1,000,000 at grant, with 500,000 shares vesting on December 31, 2009 and December 31, 2010 and as a result of the
Option Suspension Agreement, the expiration date was extended by 100 days.
(4) The option vested 1,000,000 at grant, with 500,000 vesting on each anniversary date through September 27, 2013.
On March 26, 2012, Mr. Joyce entered into an Option Suspension Agreement whereby Mr. Joyce agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital (which was completed in June
2012). Accordingly, none of Mr. Joyce’s options could be exercised until the amended Articles of Incorporation were filed. The agreement
also provided Mr. Joyce certain protections in the event that the Company underwent a change of control transaction while exercise of his
options was suspended. Such protections included the right to receive, in the form of cash payments, the positive value of his options
(which remained subject to suspension) at the time of such transaction. As the Company has filed the amended Articles of Incorporation,
the Agreement has lapsed and is no longer effective.
(5) This option was fully vested as of March 31, 2010. Subsequent to March 31, 2010, the expiration date of this option was extended to
February 23, 2015 (see Item 13 to the Financial Statements).
(6) This option was fully vested as of December 15, 2011.
(7) The option was fully vested as of September 27, 2011.
(8) The option was fully vested as of September 27, 2011.
52
On March 26, 2012, Mr. Frakes entered into an Option Suspension Agreement whereby Mr. Frakes agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital (which was completed in June
2012). Accordingly, none of Mr. Frakes’ options could be exercised until the amended Articles of Incorporation were filed. The agreement
also provided Mr. Frakes certain protections in the event that the Company underwent a change of control transaction while exercise of his
options was suspended. Such protections included the right to receive, in the form of cash payments, the positive value of his options
(which remained subject to suspension) at the time of such transaction. As the Company has filed the amended Articles of Incorporation,
the Agreement has lapsed and is no longer effective.
(9) The option vested 250,000 on October 27, 2011 and the remaining 750,000 vests over the 36 months following that date.
STOCK AWARDS
NUMBER OF
SHARES OR
UNITS OF
STOCK THAT
HAVE NOT
VESTED
(#)
MARKET
VALUE OF
SHARES OR
UNITS THAT
HAVE NOT
VESTED
($)
EQUITY
INCENTIVE PLAN
AWARDS:
NUMBER OF
UNEARNED
SHARES, UNITS
OR OTHER
RIGHTS THAT
HAVE NOT
VESTED
(#)
EQUITY INCENTIVE
PLAN AWARDS:
MARKET OR
PAYOUT VALUE OF
UNEARNED
SHARES, UNITS OR
OTHER RIGHTS
THAT HAVE NOT
VESTED
($)
333,334(1) $
$
–
$
–
$
–
80,000
–
–
–
– $
– $
– $
– $
–
–
–
–
NAME
James A. Joyce
Richard H. Tullis, PhD
James B. Frakes
Rodney S. Kenley
(1) On June 8, 2009, Mr. Joyce was granted 4,000,000 shares of restricted common stock, at a price per share of $0.24, which vested in
equal installments over a thirty-six month period commencing June 30, 2010; however Mr. Joyce may, from time to time, defer acceptance
of the shares. All shares must be issued and accepted by Mr. Joyce by the expiration of the thirty-six month vesting period. As of July 10,
2013, Mr. Joyce has accepted all 4,000,000 shares of the grant. However, the 600,000 shares previously accepted by Mr. Joyce were
pledged as collateral for a loan and have been retained and/or sold by the lender and are no longer owned by Mr. Joyce. It is anticipated
that Mr. Joyce will receive stock certificates evidencing 3,400,000 shares in the next several weeks.
DIRECTOR COMPENSATION FOR 2013 FISCAL YEAR
The following director compensation disclosure reflects all compensation awarded to, earned by or paid to the directors below for the fiscal
year ended March 31, 2013.
James A. Joyce (1)
Richard H. Tullis (2)
Rodney S. Kenley (3)
Edward G. Broenniman (4)
Franklyn S. Barry, Jr. (5)
Chetan S. Shah, MD
Phillip A. Ward (6)
Thomas V. Wornham (7)
Fees
Earned
or Paid
in Cash
($)
–
–
–
5,000
5,000
–
3,000
3,000
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All
Other
Compensation
($)
–
–
–
–
–
–
–
–
–
–
–
34,539
34,539
–
27,977
27,977
53
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
($)
–
–
–
39,539
39,539
–
30,977
30,977
(1) All compensation received by Mr. Joyce in fiscal year 2012 is disclosed in the Summary Compensation Table above. Mr. Joyce
received no compensation as a director in fiscal year 2012.
(2) All compensation received by Dr. Tullis in fiscal year 2012 is disclosed in the Summary Compensation Table above. Dr. Tullis
received no compensation as a director in fiscal year 2012.
(3) All compensation received by Mr. Kenley in fiscal year 2012 is disclosed in the Summary Compensation Table above. Mr. Kenley
received no compensation as a director in fiscal year 2012.
(4) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2013 are 0 and 1,869,251. Mr.
Broenniman received a stock option grant of 460,526 shares on July 24, 2012 for his service as an outside director. The option vested
198,026 at grant, with 262,500 vesting in the June 2013 quarter.
(5) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2013 are 0 and 1,725,076. Mr. Barry
received a stock option grant of 460,526 shares on July 24, 2012 for his service as an outside director. The option vested 198,026 at grant,
with 262,500 vesting in the June 2013 quarter.
(6) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2013 are 0 and 373,026. Mr. Ward
received a stock option grant of 373,026 shares on July 24, 2012 for his service as an outside director. The option vested 198,026 at grant,
with 175,000 vesting in the June 2013 quarter.
(7) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2013 are 0 and 373,026. Mr.
Wornham received a stock option grant of 373,026 shares on July 24, 2012 for his service as an outside director. The option vested 198,026
at grant, with 175,000 vesting in the June 2013 quarter.
Directors Compensation Program
In July 2012, our Board of Directors approved a new Board Compensation Program (the “New Program”), which modifies and supersedes
the 2005 Directors Compensation Program (the “2005 Program”) that was previously in effect. Under the New Program, in which only
non-employee Directors may participate, an eligible Director will receive a grant of $15,000 worth of options to acquire shares of Common
Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five
trading days preceding the first day of the fiscal year; however for the new non-employee directors, the exercise price for this initial grant,
$0.076 per share, is based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date of their
appointment (July 24, 2012). These options will have a term of ten years and will be fully vested upon grant. In addition, each existing
eligible Director will receive the same grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued
at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the first day of
the fiscal year; provided however that for this current grant only, all of such grants shall be made at an exercise price of $0.076 per share
based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date (July 24, 2012) of the
appointment of two new directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible to participate in the New Program also will receive a grant of $20,000 worth of
options valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding
the first day of the fiscal year. These grants have not yet been issued for the 2014 fiscal year.
In addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each committee meeting attended
and $1,000 for each formal Board meeting attended.
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
At March 31, 2013 under the 2005 Directors Compensation Program we had issued 1,337,825 options to outside directors and 3,965,450
options to employee-directors, 514,550 outside directors’ options had been forfeited, 250,000 outside directors’ options had been exercised
and 3,671,550 options remained outstanding.
54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth information as of July 10, 2013, 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:
TITLE OF CLASS
NAME AND ADDRESS
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP (1)
(2)
PERCENT OF
BENEFICIAL
OWNERSHIP
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
* Less than 1%
James A. Joyce, Chief Executive Officer and Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Richard H. Tullis, PhD, Chief Scientific Officer and Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Rodney S. Kenley, President and Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
James B. Frakes, Chief Financial Officer
8910 University Center Lane, Suite 660
San Diego, CA 92122
Franklyn S. Barry, Jr., Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Edward G. Broenniman, Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Chetan Shah, MD, Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Phillip A. Ward, Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Thomas V. Wornham, Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Ellen R Weiner Family Revocable Trust (12)
10645 N. Tatum Blvd., Suite 200-166
Phoenix, AZ 85028
Estate of Allen S. Bird
PO Box 371179
Las Vegas, NV 89137
Alpha Capital Anstalt (12)
c/o LH Financial Services Corp.
150 Central Park South, 2nd Floor
New York, NY 10019
Rakesh Patel, MD (12)
Adam Sackstein, MD (12)
All Current Directors and Executive Officers as a Group (8
members)
15,388,243 shares (3)
3,135,925 shares (4)
686,660 shares (5)
510,000 shares (6)
1,747,835 shares (7)
2,051,425 shares (8)
13,000,000 shares (9)
7.9%
1.7%
*
*
*
1.1%
7.0%
9,370,572 shares (10) (17)
4.99%
512,847 shares (11)
*
19,933,166 shares (13)
9.9%
8,067,998 shares (13)
4.2%
9,587,799 shares (14)
4.99%
9,936,715 shares (15)
9,791,460 shares (16)
46,403,507 shares (17)
5.3%
5.3%
22.0% (17)
(1) Based on 182,552,460 shares of Common Stock outstanding on the transfer records of the Company as of July 10, 2013.
55
(2) Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. Under Rule 13d-3(d)(1), shares not outstanding that
are subject to options, warrants, rights or conversion privileges exercisable by a person within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by such person but not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed. Except where otherwise noted, the Company believes that each individual or entity named
has sole investment and voting power with respect to the shares of Common Stock indicated as beneficially owned by such person, subject
to community property laws, where applicable.
(3) Includes 2,231,100 stock options exercisable at $0.38 per-share, 2,857,143 stock options exercisable at $0.21 per share, 2,500,000 stock
options exercisable at $0.36 per share and 4,000,000 stock options exercisable at $0.25 per share.
In addition, Mr. Joyce was granted 4,000,000 shares of restricted common stock, which vested over a 36-month period commencing June
30, 2010. As of July 10, 2013, Mr. Joyce has accepted all 4,000,000 shares of the grant. However, the 600,000 shares previously accepted
by Mr. Joyce were pledged as collateral for a loan and have been retained and/or sold by the lender and are no longer owned by Mr. Joyce.
It is anticipated that Mr. Joyce will receive stock certificates evidencing 3,400,000 shares in the next several weeks.
On March 26, 2012, Mr. Joyce entered into an Option Suspension Agreement whereby Mr. Joyce agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital (which was completed in June
2012). Accordingly, none of Mr. Joyce’s options can be exercised until the amended Articles of Incorporation have been filed. The
agreement also provides Mr. Joyce certain protections in the event that the Company should undergo a change of control transaction while
exercise of his options is 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. Mr. Joyce may revoke such Agreement without penalty to
him. The agreement has lapsed and is no longer effective.
(4) Includes 867,175 stock options exercisable at $0.38 per share, 750,000 stock options exercisable at $0.41 per share and 1,000,000 stock
options exercisable at $0.25 per share.
(5) Includes 666,660 stock options exercisable at $0.25 per share. An additional 333,340 stock options (exercisable at $0.25 per share)
granted to Mr. Kenley are excluded from the table as that portion will vest after 60 days from March 31, 2013.
(6) Includes 500,000 stock options exercisable at $0.25 per share.
On March 26, 2012, Mr. Frakes entered into an Option Suspension Agreement whereby Mr. Frakes agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital (which was completed in June
2012). Accordingly, none of Mr. Frakes’ options can be exercised until the amended Articles of Incorporation have been filed. The
agreement also provides Mr. Frakes certain protections in the event that the Company should undergo a change of control transaction while
exercise of his options is 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. Mr. Frakes may revoke such Agreement without penalty to
him. The agreement has lapsed and is no longer effective.
(7) Includes 264,550 stock options exercisable at $0.38 per share, 500,000 stock options exercisable at $0.41 per share, 416,666 stock
options exercisable at $0.25 per share and 460,526 stock options exercisable at $0.076 per share. An additional 83,334 stock options
(exercisable at $0.25 per share) granted to Mr. Barry are excluded from the table as that portion will vest after 60 days from March 31,
2013.
(8) Includes 308,725 stock options exercisable at $0.38 per share, 500,000 stock options exercisable at $0.41 per share, 500,000 stock
options exercisable at $0.25 per share and 460,526 stock options exercisable at $0.076 per share. An additional 100,000 stock options
(exercisable at $0.25 per share) granted to Mr. Broenniman are excluded from the table as that portion will vest after 60 days from March
31, 2013.
(9) Includes warrants to purchase 4,250,000 shares of common stock at exercise prices ranging from $0.093 per share to $0.125 per share.
(10) Includes 373,026 stock options exercisable at $0.076 per share. Also includes certain shares issuable upon the conversion of
convertible notes and exercise of warrants held by Phillip A. Ward. Mr. Ward owns a convertible note in the principal amount of $100,000
convertible into 1,111,111 shares of common stock at $0.09 per share; and a convertible note in the principal amount of $157,656
convertible into 1,751,733 shares of common stock at $0.09 per share; and warrants to purchase 100,000 shares of common stock at an
exercise price of $0.176 per share; warrants to purchase 194,118 shares of common stock at an exercise price of $0.17 per share; warrants to
purchase 555,556 shares of common stock at an exercise price of $0.18 per share; warrants to purchase 555,556 shares of common stock at
an exercise price of $0.18 per share; warrants to purchase 555,556 shares of common stock at an exercise price of $0.18 per share; warrants
to purchase 194,118 shares of common stock at an exercise price of $0.17 per share; warrants to purchase 1,111,111 shares of common
stock at $0.125 per share; and warrants to purchase 1,751,735 shares of common stock at $0.125 per share. Mr. Ward's beneficial ownership
is limited contractually to the extent that exercise of such notes and warrants would cause the aggregate number of shares of common stock
beneficially owned by Mr. Ward to exceed 4.99% of our outstanding shares. Accordingly, beneficial ownership for Mr. Ward does not
reflect 3,019,063 shares underlying such notes and warrants that would cause the number of shares beneficially owned by Mr. Ward to be
6.5% of our outstanding shares.
56
(11) Includes 373,026 stock options exercisable at $0.076 per share.
(12) More-than-5% stockholder.
(13) Includes certain shares issuable upon conversion of a convertible note and exercise of warrants held by the Ellen R. Weiner Family
Revocable Trust (the "Trust") and all shares issuable upon conversion of a convertible note and exercise of warrants held by the Estate of
Allan S. Bird (the "Estate"). The Trust owns a convertible promissory note in the principal amount of $660,000 convertible into 15,751,790
shares at $0.0419 per share and 8,769,897 warrants to purchase common shares at $0.0419 per share. The Estate owns a convertible
promissory note in the principal amount of $225,000 convertible into 5,369,928 shares at $0.0419 per share and 2,698,070 warrants to
purchase common shares at $0.0419 per share. Beneficial ownership by each of the Trust and the Estate is limited contractually 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 does not reflect 5,728,854 shares underlying the convertible note and
warrants that would cause the number of shares beneficially owned by the Trust to be 12.4% of our outstanding shares. Mr. Bird was Ms.
Weiner's father-in-law. The Ellen R. Weiner Family Trust disclaims any beneficial ownership of the Estate's note, associated warrants and
underlying common stock. The Estate of Mr. Bird disclaims any beneficial ownership of the Trust's note, associated warrants and
underlying common stock.
(14) Includes certain shares issuable upon the conversion of convertible notes and exercise of warrants held by Alpha Capital Anstalt
(“Alpha”). Alpha owns a convertible note in the principal amount of $210,000 convertible into 3,846,153 shares of common stock at
$0.0546 per share; a convertible note in the principal amount of $275,000 convertible into 5,036,630 shares of common stock at $0.0546
per share; and a convertible note in the principal amount of $122,500 convertible into 2,041,667 shares of common stock at $0.06 per
share; and warrants to purchase 1,237,500 shares of common stock at an exercise price of $0.07 per share; warrants to purchase 495,000
shares of common stock at an exercise price of $0.07 per share; warrants to purchase 1,375,000 shares of common stock at an exercise price
of $0.07 per share; warrants to purchase 1,375,000 shares of common stock at an exercise price of $0.07 per share; warrants to purchase
3,257,500 shares of common stock at an exercise price of $0.07 per share; warrants to purchase 3,257,500 shares of common stock at an
exercise price of $0.07 per share; and warrants to purchase 2,178,571 shares of common stock at an exercise price of $0.07 per share.
Alpha’s beneficial ownership is limited contractually to the extent that exercise of such notes and warrants would cause the aggregate
number of shares of common stock beneficially owned by Alpha to exceed 4.99% of our outstanding shares. Accordingly, beneficial
ownership for Alpha does not reflect 14,512,722 shares underlying such notes and warrants that would cause the number of shares
beneficially owned by Alpha to be 11.7% of our outstanding shares.
(15) Includes warrants to purchase 3,312,238 shares of common stock at exercise prices ranging from $0.093 per share to $0.125 per share.
(16) Includes warrants to purchase 3,185,496 shares of common stock at exercise prices ranging from $0.086 per share to $0.125 per share.
(17) As Mr. Ward’s beneficial ownership is limited contractually, beneficial ownership for the directors and executive officers as a group
does not reflect 3,019,063 shares underlying Mr. Ward’s notes and warrants that would cause the number of shares beneficially owned by
the group to be 23.4% of our outstanding shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The following describes all transactions since April 1, 2011, 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 8, 2009, the Board of Directors had approved the grant of 4,000,000 shares of restricted common stock, at a price per share of
$0.24 to Mr. James Joyce, our Chief Executive Officer, with the shares vesting over a thirty-six month period commencing June 30, 2010.
On May 21, 2010, the Board of Directors agreed that Mr. Joyce may, from time to time, defer acceptance of the shares under the vesting
schedule provided that all shares must be issued and accepted by Mr. Joyce by the expiration of the thirty-six month vesting period. As of
July 10, 013, Mr. Joyce has accepted all of such shares. However, the 600,000 shares previously accepted by Mr. Joyce were pledged as
collateral for a loan and have been retained and/or sold by the lender and are no longer owned by Mr. Joyce. It is anticipated that Mr. Joyce
will receive stock certificates evidencing 3,400,000 shares in the next several weeks.
On March 26, 2012, Mr. Joyce entered into an Option Suspension Agreement whereby Mr. Joyce agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital. Accordingly, none of Mr.
Joyce’s options can be exercised until the amended Articles of Incorporation have been filed. Those amended Articles of Incorporation
were filed on June 4, 2012.
On March 26, 2012, Mr. Frakes entered into an Option Suspension Agreement whereby Mr. Frakes agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital. Accordingly, none of Mr.
Frakes’ options can be exercised until the amended Articles of Incorporation have been filed. Those amended Articles of Incorporation
were filed on June 4, 2012.
57
On July 24, 2012, our Board of Directors granted, to our four outside directors, ten year options to acquire an aggregate of 1,667,105 shares
of our common stock, all with an exercise price of $0.076 per share.
On June 26, 2012, prior to joining our Board of Directors, Mr. Wornham purchased $10,000 of units (the "Units" and each a "Unit"), with
each Unit consisting of (i) one share of Common Stock at a price per share of $0.072 and (ii) a warrant to purchase such number of shares
of Common Stock as shall equal (a) fifty percent of the Subscription Amount divided by (b) $0.072 (the "Warrant Shares") at an exercise
price of $0.107 per Warrant Share.
In July and August 2011, we entered into two convertible notes with trusts controlled by Mr. Ward. Those notes totaled $257,656. Those
notes had a fixed conversion price of $0.09 per share and carried an interest rate of 10%. The convertible notes matured in July and August
2012. As part of the convertible note transaction, we also issued five year warrants to purchase 2,862,846 shares of common stock at
$0.125 per share.
Between March 2012 and June 2013, Dr. Shah participated in several private equity placements under which he invested an aggregate
amount of $625,556 into Aethlon Medical and in return received 8.5 million restricted shares of our Common Stock and seven year
warrants to purchase 4,250,000 shares of our Common Stock.
In June 2013, we borrowed $80,000 at a 10% interest rate from Mr. Ward. We repaid that loan and paid accrued interest of $133 to Mr.
Ward in June 2013.
In July 2013, we borrowed $400,000 from Mr. Ward and Dr. Shah under 90 day notes bearing 10% interest (the “Notes”). If we do not pay
back those loans by October 9, 2013, then the notes will bear interest at a penalty rate of 12% and the noteholders will have the right at
their discretion (i) to convert their principal and accrued interest into shares of common stock at $0.088 per share (the “Conversion Price”)
and (ii) receive warrants to purchase common stock equal to 50% of the principal converted under the Notes, with an exercise price of
$0.132 per share. We have reserved 6,931,818 shares of common stock to support the conversion in full of the Notes and accrued interest as
well as the exercise in full of the warrants (should such conversion and/or issuance occur). These securities are not reflected in the
Beneficial Ownership Table (Item 12 above) since neither Mr. Ward nor Dr. Shah has the right under the terms of the Notes to acquire
common stock or common stock warrants within sixty days of the date of issuance of the Notes.
Director Independence
Each of Mr. Barry, Mr. Broenniman, Dr. Shah, Mr. Ward and Mr. Wornham is an independent director as that term is defined by NYSE
Rule 303A.02(a). The Company currently has a compensation and audit committee. Of the members of the Company's board of directors,
each of Mr. Barry, Mr. Broenniman, Dr. Shah, Mr. Ward and Mr. Wornham meets the NYSE's independence standards for members of
such committees.
58
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, 2013 and 2012:
Audit Fees (1)
Audit Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Fiscal Year
2013
Fiscal Year
2012
$
$
104,032 $
5,774
3,850
–
113,656 $
113,571
2,500
5,239
–
121,310
(1) Audit fees include fees and expenses for professional services rendered in connection with the audit of our financial statements for fiscal
2013 and 2012 and for reviews of the financial statements included in each of our quarterly reports on Form 10-Q during fiscal 2013 and
2012.
(2) Audit Related Fees consist of fees billed for assurance related services that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under “Audit Fees.” Included in Audit Related Fees for fiscal 2013 and 2012 are
fees and expenses related to reviews of registration statements and SEC filings other than Forms 10-K and 10-Q.
(3) Tax fees include the aggregate fees billed during fiscal year 2013 and 2012 for professional services for preparation of income tax
returns.
(4) All Other Fees consist of fees paid for products and services other than the Services reported above. No such fees were billed by Squar,
Milner, Peterson, Miranda & Williamson, LLP for fiscal 2013 or 2012.
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, audit-related, tax and other permitted non-audit
services to be performed for us by our independent auditor. The audit committee approved all of the services for which Squar Milner
billed us as set forth in the above table.
PART IV.
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 years ended March 31, 2013 and 2012:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
59
2. Exhibits
2.1
2.2
2.3
2.4
3.1
3.2
4.1
4.2
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and Aethlon, Inc. dated March 10, 1999 (1)
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and Hemex, Inc. dated March 10, 1999 (1)
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and Syngen Research, Inc. (2)
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and Cell Activation, Inc. (3)
Articles of Incorporation of Aethlon Medical, Inc., as amended (4)
Bylaws of Aethlon Medical, Inc., as amended *
Amended and Restated 2003 Consultant Stock Plan (5)
Amended 2010 Stock Incentive Plan (6)
10.1
Employment Agreement between Aethlon Medical, Inc. and James A. Joyce dated April 1, 1999 (7)++
10.2
Patent License Agreement by and amongst Aethlon Medical, Inc., Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra
(8)
10.3
Employment Agreement by and between Aethlon Medical, Inc. and Dr. Richard H. Tullis (8)++
10.4
Cooperative Agreement by and between Aethlon Medical, Inc. and George Mason University (9)
10.5
Stock Option Agreement by and between Aethlon Medical, Inc. and James A Joyce (10)++
10.6
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis (10)++
10.7
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry, Jr. (10)++
10.8
Stock Option Agreement by and between Aethlon Medical, Inc. and Ed Broenniman (10)++
10.9
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce(11)++
10.10 Option Agreement by and between Aethlon Medical, Inc. and Trustees of Boston University (12)
10.11 Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce (13)++
10.12 Option Suspension Agreement dated June 29, 2009 (14)++
10.13 Form of Class C Common Stock Purchase Warrant (15)
10.14 Form of 10% Convertible Note (15)
10.15 Stock Option Agreement of James A. Joyce (16)++
10.16 Stock Option Agreement of Franklyn S. Barry (16)++
10.17 Stock Option Agreement of Edward G. Broenniman (16)++
10.18 Stock Option Agreement of Richard H. Tullis (16)++
10.19 Form of Liquidated Damages Note dated December 30, 2008 (17)
10.20 Form of Common Stock Purchase Warrant (18)
10.21 Form of Unit Subscription Agreement (18)
10.22 Form of Common Stock Purchase Warrant dated July 10, 2009 (19)
60
10.23 Form of Common Stock Purchase Warrant dated August 24, 2009 (20)
10.24 Office Lease by and between Glenborough Aventine, LLC and Aethlon Medical, Inc. dated September 16, 2009 (4)
10.25 Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc. dated September 28, 2009 (4)
10.26 Form of 10% Convertible Note (21)
10.27 Form of Class C Common Stock Purchase Warrant (21)
10.28 First Amendment to Lease by and between Glenborough Aventine, LLC and Aethlon Medical, Inc. dated February 1, 2010 (21)
10.29 Securities Purchase Agreement by and between Aethlon Medical, Inc. and Gemini Master Fund, Ltd. dated February 12, 2010 (21)
10.30 Convertible Promissory Note issued by Aethlon Medical, Inc. to Gemini Master Fund, Ltd. dated February 12, 2010 (21)
10.31 Warrant to Purchase Common Stock issued by Aethlon Medical, Inc. to Gemini Master Fund, Ltd. dated February 12, 2010 (21)
10.32 Secured Promissory Note issued to Aethlon Medical, Inc. by Gemini Master Fund, Ltd. dated February 12, 2010 (21)
10.33 Form of Amended and Restated 12% Convertible Note(22)
10.34 Form of Amended and Restated Warrant (22)
10.35 Form of Amended and Restated Warrant (QB) (22)
10.36 Form of Amended and Restated Registration Rights Agreement (22)
10.37 Note and Warrant Purchase Agreement by and between Aethlon Medical, Inc. and Tonaquint, Inc. dated July 15, 2010 (23)
10.38 Secured Convertible Promissory Note issued by Aethlon Medical, Inc. to Tonaquint, Inc. dated July 15, 2010 (23)
10.39 Warrant to Purchase Shares of Common Stock issued by Aethlon Medical, Inc. to Tonaquint, Inc. dated July 15, 2010 (23)
10.40 Buyer Trust Deed Note #1 issued to Aethlon Medical, Inc. by Tonaquint, Inc. dated July 15, 2010 (23)
10.41 Form of Buyer Trust Deed Note #2 dated July 15, 2010 (23)
10.42 Trust Deed issued by Tonaquint, Inc. for the benefit of Aethlon Medical, Inc. dated July 15, 2010 (23)
10.43 Escrow Agreement by and among Tonaquint, Inc., Aethlon Medical, Inc. and Griffiths & Turner/GT Title Services, Inc. dated July
15, 2010 (23)
10.44 Deed of Reconveyance executed by Tonaquint, Inc. in favor of Aethlon Medical, Inc. dated July 15, 2010 (23)
10.45 Form of Request for Full Reconveyance (23)
10.46
Irrevocable Instructions to Transfer Agent dated July 15, 2010 (23)
10.47 Form of Subscription Agreement dated September 2010 (24)
10.48 Form of Class [A/B] Common Stock Purchase Warrant dated September 2010 (24)
10.49 Form of Convertible Promissory Note dated September 2010 (24)
10.50 Offer of Employment by and between Aethlon Medical, Inc. and Rodney S. Kenley dated October 27, 2010 (25)++
61
10.51 Stock Option Agreement of Rodney S. Kenley dated October 27, 2010 (25)++
10.52 Settlement Agreement by and between Aethlon Medical, Inc. and Gemini Master Fund, Ltd. dated November 22, 2010 (26)
10.53 Warrant to Purchase Shares of Common Stock issued by Aethlon Medical, Inc. to Gemini Master Fund, Ltd. dated November 22,
2010 (26)
10.54 Extension Agreement by and between Aethlon Medical, Inc. and Gemini Master Fund, Ltd. dated March 21, 2011 (27)
10.55 Amended and Restated Convertible Promissory Note issued by Aethlon Medical, Inc. to Gemini Master Fund, Ltd. dated February
15, 2011 (27)
10.56 Form of Subscription Agreement dated April 1, 2011 (28)
10.57 Form of Convertible Promissory Note dated April 1, 2011 (28)
10.58 Form of Class A Common Stock Purchase Warrant dated April 1, 2011 (28)
10.59 Form of Class B Common Stock Purchase Warrant dated April 1, 2011 (28)
10.60 Termination Agreement dated June 28, 2011 (30)
10.61 Unsecured Promissory Note dated June 28, 2011 (30)
10.62 Settlement Agreement dated August 15, 2011 (31)
10.63 Subscription Agreement dated September 23, 2011 (32)
10.64 Form of Convertible Promissory Note dated September 23, 2011 (32)
10.65 Form of Class A Common Stock Purchase Warrant dated September 28, 2011 (32)
10.66 Subscription Agreement dated November 10, 2011 (33)
10.67 Form of 5% OID Unsecured Convertible Debenture dated November 10, 2011 (33)
10.68 Form of Common Stock Purchase Warrant dated November 10, 2011 (33)
10.69 Supplement No. 1 to the Securities Purchase Agreement dated November 2011 (34)
10.70 Unit Subscription Agreement dated March 29, 2012 (35)
10.71 Form of Common Stock Purchase Warrant dated March 29, 2012 (35)
10.72 Unit Subscription Agreement dated June 19, 2012 (36)
10.73 Form of Common Stock Purchase Warrant dated June 19, 2012 (36)
10.74 Unit Subscription Agreement dated August 29, 2012 (37)
10.75 Form of Common Stock Purchase Warrant dated August 29, 2012 (37)
10.76 Unit Subscription Agreement dated October, November and December 2012 (38)
10.77 Form of Common Stock Purchase Warrant dated October, November and December 2012 (38)
10.78 Form of Convertible Promissory Note dated July 9, 2013 *
14
21
Code of Ethics (29)
List of subsidiaries (22)
62
23.1 Consent of Independent Registered Public Accounting Firm (Squar, Milner, Peterson, Miranda & Williamson, LLP) *
31.1 Certification of our Chief Executive 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.*
31.2 Certification of our Chief Financial 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.*
32.1 Statement of our Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)*
32.2 Statement of our Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)*
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document*
XBRL Schema Document*
XBRL Calculation Linkbase Document*
XBRL Definition Linkbase Document*
XBRL Label Linkbase Document*
XBRL Presentation Linkbase Document*
* Filed herewith
++ Indicates a management contract or compensatory plan or arrangement
(1) Filed with the Company's Current Report on Form 8-K dated March 26, 1999 and incorporated by reference.
(2) Filed with the Company's Current Report on Form 8-K dated January 24, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K dated April 25, 2000 and incorporated by reference.
(4) Filed with the Company's Annual Report on Form 10-K filed on June 29, 2012 for the year ended March 31, 2012 and incorporated by
reference.
(5) Filed with the Company Registration Statement on Form S-8 (File No. 333-164939) filed on February 17, 2010 and incorporated by
reference.
(6) Filed with the Company’s Registration Statement on Form S-8 (File No. 333-182902) filed on July 27, 2012 and incorporated by
reference.
(7) Filed with the Company's Annual Report on Form 10-KSB filed on July 15, 1999 for the year ended March 31, 1999 and incorporated
by reference.
(8) Filed with the Company's Annual Report on Form 10-KSB/A filed on September 10, 2004 for the year ended March 31, 2004 and
incorporated by reference.
(9) Filed with the Company's Amendment No.2 to Registration Statement on Form SB-2 (File No. 333-117203) filed on October 28, 2004
and incorporated by reference.
(10) Filed with the Company's Annual Report on Form 10-KSB filed on July 14, 2005 for the year ended March 31, 2005 and incorporated
by reference.
(11) Filed with the Company's Current Report on Form 8-K filed on September 12, 2005 and incorporated by reference.
(12) Filed with the Company's Current Report on Form 8-K filed on February 23, 2006 and incorporated by reference.
(13) Filed with the Company’s Registration Statement on Form S-8 (File No. 333-168483) filed on August 2, 2010 and incorporated by
reference.
(14) Filed with the Company's Annual Report on Form 10-K filed on July 2, 2009 for the year ended March 31, 2009 and incorporated by
reference.
(15) Filed with the Company's Current Report on Form 8-K dated August 12, 2008 and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K dated December 19, 2008 and incorporated by reference.
63
(17) Filed with the Company's Current Report on Form 8-K dated January 2, 2009 and incorporated by reference.
(18) Filed with the Company's Current Report on Form 8-K dated January 20, 2009 and incorporated by reference.
(19) Filed with the Company’s Quarterly Report on Form 10-Q filed on August 14, 2009 for the period ended June 30, 2009 and
incorporated by reference.
(20) Filed with the Company’s Current Report on Form 8-K dated August 25, 2009 and incorporated by reference.
(21) Filed with the Company’s Quarterly Report on Form 10-Q filed on February 16, 2010 for the period ended December 31, 2009 and
incorporated by reference.
(22) Filed with the Company’s Annual Report on Form 10-K filed on July 2, 2010 for the year ended March 31, 2010 and incorporated by
reference.
(23) Filed with the Company’s Current Report on Form 8-K dated July 16, 2010 and incorporated by reference.
(24) Filed with the Company’s Current Report on Form 8-K dated September 3, 2010 and incorporated by reference.
(25) Filed with the Company’s Current Report on Form 8-K dated November 1, 2010 and incorporated by reference.
(26) Filed with the Company’s Current Report on Form 8-K dated November 26, 2010 and incorporated by reference.
(27) Filed with the Company’s Current Report on Form 8-K dated March 25, 2011 and incorporated by reference.
(28) Filed with the Company’s Current Report on Form 8-K dated April 7, 2011 and incorporated by reference.
(29) Filed with the Company's Annual Report on Form 10-KSB filed on July 13, 2007 for the year ended March 31, 2007 and incorporated
by reference.
(30) Filed with the Company’s Current Report on Form 8-K dated June 29, 2011 and incorporated by reference.
(31) Filed with the Company’s Quarterly Report on Form 10-Q filed on August 22, 2011 for the period ended June 30, 2011 and
incorporated by reference.
(32) Filed with the Company’s Current Report on Form 8-K dated September 28, 2011 and incorporated by reference.
(33) Filed with the Company’s Quarterly Report on Form 10-Q filed on November 18, 2011 for the period ended September 30, 2011 and
incorporated by reference.
(34) Filed with the Company’s Current Report on Form 8-K dated February 29, 2012 and incorporated by reference.
(35) Filed with the Company’s Current Report on Form 8-K dated April 6, 2012 and incorporated by reference.
(36) Filed with the Company’s Current Report on Form 8-K dated June 26, 2012 and incorporated by reference.
(37) Filed with the Company’s Current Report on Form 8-K dated September 6, 2012 and incorporated by reference.
64
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 15th day of July, 2013.
SIGNATURES
By:
/s/ JAMES A. JOYCE
James A. Joyce
Chairman, Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, 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
James A. Joyce
/s/ JAMES B. FRAKES
James B. Frakes
/s/ FRANKLYN S. BARRY, JR.
Franklyn S. Barry, Jr.
/s/ EDWARD G. BROENNIMAN
Edward G. Broenniman
/s/ RICHARD H. TULLIS
Richard H. Tullis
/s/ RODNEY S. KENLEY
Rodney S. Kenley
/s/ PHILLIP A. WARD
Phillip A. Ward
/s/ THOMAS V. WORNHAM
Thomas V. Wornham
Chairman of the Board and Chief Executive Officer
July 15, 2013
Chief Financial Officer
Director
Director
Director
Director
Director
Director
65
July 15, 2013
July 15, 2013
July 15, 2013
July 15, 2013
July 15, 2013
July 15, 2013
July 15, 2013
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
F-2
F-3
F-4
F-5
F-7
F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Aethlon Medical, Inc. and Subsidiary (the "Company") as of March 31,
2013 and 2012 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, 2013. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control
over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Aethlon Medical, Inc. and Subsidiary as of March 31, 2013 and 2012 and the consolidated results of their operations and cash
flows for each of the years in the two-year period ended March 31, 2013 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, and has negative
working capital of approximately $9,277,000 and an accumulated deficit of approximately $61,475,000 as of March 31, 2013. 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 15, 2013
F-2
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, 2013 March 31, 2012
CURRENT ASSETS
Cash
Accounts receivable
Deferred financing costs
Prepaid expenses
TOTAL CURRENT ASSETS
NON-CURRENT ASSETS
Property and equipment, net
Patents, net
Deposits
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable
Due to related parties
Notes payable
Convertible notes payable, net of discounts
Derivative liabilities
Accrued liquidated damages
Other current liabilities
TOTAL CURRENT LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 13)
STOCKHOLDERS’ DEFICIT
Common stock, $0.001 par value, 500,000,000 and 250,000,000 shares authorized at
March 31, 2013 and 2012, respectively; 173,674,201 and 117,515,892 issued and
outstanding at March 31, 2013 and 2012, respectively
Additional paid-in capital
Accumulated deficit
TOTAL STOCKHOLDERS’ DEFICIT
$
125,274 $
208,781
863
29,602
364,520
145
121,653
10,376
$
496,694
143,907
400,114
120,563
31,452
696,036
1,465
130,817
10,376
838,694
$
822,832 $
736,070
321,381
2,367,631
3,588,239
437,800
1,367,185
586,340
730,070
654,796
3,005,473
3,588,615
437,800
1,131,221
9,641,138
10,134,315
173,685
52,157,196
(61,475,325)
117,518
47,170,146
(56,583,285)
(9,144,444)
(9,295,621)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT
$
496,694 $
838,694
See accompanying notes to the consolidated financial statements.
F-3
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012
REVENUES:
Government contract revenue
Product sales
Total revenues
OPERATING EXPENSES
Professional fees
Payroll and related
General and administrative
OPERATING LOSS
OTHER (INCOME) EXPENSE
Loss on debt conversion and on debt extinguishment
Change in fair value of derivative liabilities
Interest and other debt expenses
Interest income and other
NET LOSS
Basic and diluted net loss per share
Years Ended March 31,
2013
2012
$
1,230,004 $
–
1,230,004
1,892,270
2,166,989
746,099
4,805,358
(3,575,354)
139,839
44,705
1,132,314
(172)
1,316,686
1,358,189
1,432
1,359,621
1,566,827
2,054,550
852,579
4,473,956
(3,114,335)
77,265
766,903
3,793,758
359,079
4,997,005
$
$
(4,892,040) $
(8,111,340)
(0.03) $
(0.08)
Weighted average number of common shares outstanding - basic and diluted
149,223,601
101,765,705
See accompanying notes to the consolidated financial statements.
F-4
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012
COMMON STOCK
SHARES AMOUNT
ADDITIONAL
PAID IN
CAPITAL
ACCUMULATED
DEFICIT
TOTAL
STOCKHOLDERS'
(DEFICIT)
BALANCE - MARCH 31, 2011
77,467,361 $
77,469 $
42,418,778 $
(48,471,945) $
(5,975,698)
Issuance of common stock for cash
3,750,000 $
3,750 $
296,250 $
– $
300,000
Issuances of common stock upon
conversions of notes payable
28,859,559
28,856
2,029,434
Issuance of common stock under warrant
exercises
3,699,914
3,700
(3,700)
Issuance of common stock for services
3,451,558
3,455
338,092
Patent license fees paid with issuance of
common stock
Reclassification of warrant derivative
liability into equity
Debt discount recorded in connection
with beneficial conversion feature
Non-cash interest expense
Loss on debt extinguishment
Stock-based compensation expense
Net loss
287,500
288
16,962
–
–
–
–
–
–
–
–
–
–
–
–
289,124
792,878
156,100
77,265
758,963
–
–
–
–
–
–
–
–
–
2,058,290
–
341,547
17,250
289,124
792,878
156,100
77,265
758,963
BALANCE - MARCH 31, 2012
117,515,892 $
117,518 $
47,170,146 $
(56,583,285) $
(9,295,621)
See accompanying notes to the consolidated financial statements.
F-5
–
(8,111,340)
(8,111,340)
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012
BALANCE - MARCH 31, 2012
117,515,892 $
117,518 $
47,170,146 $
(56,583,285) $
(9,295,621)
COMMON STOCK
SHARES AMOUNT
ADDITIONAL
PAID IN
CAPITAL
ACCUMULATED
DEFICIT
TOTAL
STOCKHOLDERS'
(DEFICIT)
Issuance of common stock for cash
29,724,545
29,726
2,080,108
Issuances of common stock upon
conversions of notes payable
21,941,154
21,941
1,673,118
Issuance of common stock for services
2,896,181
2,896
256,139
Patent license fees paid with issuance of
common stock
246,429
246
17,004
Reclassification of warrant derivative
liability into equity
–
Issuance of common stock for interest
116,000
–
120
45,081
11,726
Loss on debt conversion
1,234,000
1,238
138,601
–
–
–
–
–
–
–
–
2,109,834
1,695,059
259,035
17,250
45,081
11,846
139,839
765,273
Stock-based compensation expense
Net loss
–
–
–
–
765,273
–
(4,892,040)
(4,892,040)
BALANCE - MARCH 31, 2013
173,674,201 $
173,685 $
52,157,196
$
(61,475,325)
$
(9,144,444)
See accompanying notes to the consolidated financial statements.
F-6
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Loss on debt extinguishment
Non-cash interest expense
Loss on debt conversion
Change in estimated fair value of derivative liabilities
Loss on settlement of convertible note termination
Fair market value of equity instruments issued for services
Stock based compensation
Patent license fees paid with issuance of common stock
Amortization of debt discount and deferred financing costs
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses
Other assets
Accounts payable and accrued liabilities
Due to related parties
Net cash used in operating activities
Cash flows from investing activities:
Purchases of property and equipment
Net cash used in investing activities
2013
2012
$
(4,892,040) $
(8,111,340)
10,484
–
11,846
139,839
44,705
–
259,035
765,273
17,250
594,358
191,333
1,850
–
751,210
6,000
17,219
77,265
694,836
–
766,903
360,186
341,547
758,963
17,250
2,598,861
(400,114
(1,741)
5,930
920,380
112,500
(2,098,857)
(1,841,355)
–
–
(1,735)
(1,735)
See accompanying notes to the consolidated financial statements.
F-7
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2013 AND 2012
Cash flows from financing activities:
Principal repayments of notes payable
Proceeds from the issuance of convertible notes payable
Proceeds from the collection of secured notes receivable
Net proceeds from the issuance of common stock
Net cash provided by financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
Supplemental disclosure of cash flow information - Cash paid during the year for:
Interest
Income taxes
Supplement information for non-cash investing and financing activities:
Conversion of debt, accrued liabilities and accrued interest to common stock
Debt discount on notes payable associated with embedded conversion feature and detachable
warrants
Reclassification of accounts payable to notes payable
Recording deferred financing costs associated with notes payable and convertible notes
payable
Reclassification of warrant derivative liability into equity
Reclassification of note payable to convertible notes payable
2013
2012
(29,610)
–
–
2,109,834
(223,078)
1,694,371
200,000
300,000
2,080,224
1,971,293
(18,633)
143,907
128,203
15,704
125,274 $
143,907
2,821 $
– $
29,645
–
1,695,059 $
2,058,290
– $
– $
1,362,082
124,610
7,500 $
45,081 $
75,000 $
367,445
289,124
–
$
$
$
$
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-8
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") is a medical device company focused on creating innovative devices that
address unmet medical needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the
Aethlon ADAPT™ (Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or
multiple affinity drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove
harmful particles from the entire circulatory system without loss of essential blood components. On June 25, 2013, the United States Food
and Drug Administration (FDA) approved an Investigational Device Exemption (IDE) that allows us to initiate human feasibility studies of
the Aethlon Hemopurifier® in the United States. Under the feasibility study protocol, we will enroll ten end-stage renal disease patients
who are infected with the Hepatitis C virus (HCV) to demonstrate the safety of Hemopurifier therapy. Successful completion of this study
will allow us the opportunity to initiate pivotal studies that are required for market clearance to treat HCV and other disease conditions in
the United States.
Successful outcomes of human trials will also be required by the regulatory agencies of certain foreign countries where we intend to sell
this device. Some of our patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe
that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R)
treatment technology.
In prior years, Aethlon was classified as a development stage enterprise under accounting principles generally accepted in the United States
of America ("GAAP") as it had not generated revenues from its planned principal operations. In the three months ended December 31,
2011, we began to generate revenues from a government contract with the Advanced Research Projects Agency (DARPA) of the U.S.
Department of Defense and have emerged from the development stage. Subsequent to December 31, 2011, we recorded the first
commercial shipment of one of our products to a life sciences company for diagnostics use.
Our common stock is quoted on the Over-the-Counter Bulletin Board administered by the Financial Industry Regulatory Authority
("OTCBB") under the symbol "AEMD.OB."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Aethlon Medical, Inc. and its wholly-owned subsidiary
Exosome Sciences, Inc. (collectively hereinafter referred to as the "Company" or "Aethlon"). All intercompany balances have been
eliminated in consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We have
incurred continuing losses from operations, are in default on certain debt agreements, and have negative working capital of approximately
$9,277,000, and an accumulated deficit of approximately $61,475,000 at March 31, 2013. These factors, among other matters, raise
substantial doubt about our ability to continue as a going concern. A significant amount of additional capital will be necessary to advance
the development of our products to the point at which they may become commercially viable. We intend to fund operations, working
capital and other cash requirements (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, 2014 through debt and/or equity financing arrangements as well as
through the receipts under our original DARPA contract and the related subcontract with Battelle (See Note 14).
We are currently addressing our liquidity issue by seeking additional investment capital through private placements of common stock and
debt and by applying for additional grants issued by government agencies in the United States. We believe that our cash on hand and funds
expected to be received from additional private investment and/or government grants will be sufficient to meet our liquidity needs for fiscal
2014. However, no assurance can be given that we will receive any funds in addition to the funds we have received to date.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have
sufficient funds to execute our intended business plan or generate positive operating results.
The consolidated financial statements do not include any adjustments related to this uncertainty and as to the recoverability and
classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to
continue as a going concern.
F-9
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
RISKS AND UNCERTAINTIES
We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our operations are
subject to significant risk and uncertainties including financial, operational, technological, regulatory, and including the potential risk of
business failure.
USE OF ESTIMATES
We prepare our consolidated financial statements in conformity with GAAP, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. Significant estimates made
by management include, among others, revenue recognition, realization of long-lived assets, valuation of derivative liabilities, estimating
fair value associated with debt and equity transactions and valuation of deferred tax assets. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Accounting standards define "cash and cash equivalents" as any short-term, highly liquid investment that is both readily convertible to
known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest
rates. For the purpose of financial statement presentation, we consider all highly liquid investment instruments with original maturities of
three months or less when purchased, or any investment redeemable without penalty or loss of interest to be cash equivalents. As of March
31, 2013 and 2012, we had no assets that were classified as cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our cash, accounts receivable, accounts payable and accrued liabilities approximates their estimated fair values due
to the short-term maturities of those financial instruments. The carrying amount of the notes payable approximates their fair value due to
the short maturity of the notes and as the interest rate approximates current market interest rates for similar instruments. Derivative
liabilities recorded in connection with warrants and embedded conversion features of certain convertible notes payable are reported at their
estimated fair value, with changes in fair value being reported in results of operations (see Note 12).
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.
We do not have any assets or liabilities that are measured at fair value on a recurring basis and, during the years ended March 31, 2013 and
2012, did not have any assets or liabilities that were measured at fair value on a nonrecurring basis except as described in Note 12 under
derivative liabilities.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at two financial institutions in checking accounts and related cash management accounts. 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 below such insured amounts at both March 31, 2013 and 2012.
All of our accounts receivable at March 31, 2013 and 2012 and all of our revenue in the fiscal year ended March 31, 2013 were from the
U.S. Department of Defense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the
related assets, which range from two to five years. Repairs and maintenance are charged to expense as incurred while improvements are
capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated
depreciation with any gain or loss included in the consolidated statements of operations.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the consolidated
financial statements and their respective tax basis. Deferred income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. We record a valuation allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in
the foreseeable future, it is more likely than not that some portion of the deferred tax assets may not be realized.
F-10
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
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, 2013 and 2012.
LOSS PER SHARE
Basic loss per share is computed by dividing net income available to common stockholders by the weighted average number of common
shares outstanding during the period of computation. Diluted loss per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common shares that would have been outstanding if potential common shares
had been issued, if such additional common shares were dilutive. As we had net losses for all periods presented, basic and diluted loss per
share are the same, and additional potential common shares have been excluded as their effect would be antidilutive.
As of March 31, 2013 and 2012, a total of 142,701,202 and 130,756,916 potential common shares, consisting of shares underlying
outstanding stock options, warrants and convertible notes payable were excluded as their inclusion would be antidilutive.
SEGMENTS
We currently operate in one segment, and accordingly, no additional segment related disclosures are required.
DEFERRED FINANCING COSTS
Costs related to the issuance of debt are capitalized and amortized to interest expense over the life of the related debt using the effective
interest method. We recorded amortization expense related to our deferred offering costs of $127,200 and $404,614 during the fiscal years
ended March 31, 2013 and 2012, respectively.
REVENUE RECOGNITION
With respect to revenue recognition, we entered into a government contract with DARPA and have recognized revenue of $1,230,004 and
$1,358,189 under that contract during the fiscal years ended March 31, 2013 and 2012, respectively. We adopted the Milestone method of
revenue recognition for the DARPA contract under ASC 605-28 “Revenue Recognition – Milestone Method” and we believe we meet the
requirements under ASC 605-28 for reporting contract revenue under the Milestone Method for the fiscal years ended March 31, 2013 and
2012.
In order to account for this contract, we identify the deliverables included within the contract and evaluate which deliverables represent
separate units of accounting based on if certain criteria are met, including whether the delivered element has standalone value to the
collaborator. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria
are applied to each of the separate units.
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement is entered into that the event will be achieved. A vendor’s assessment that it
expects to achieve a milestone does not necessarily mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part on either: (a) the vendor’s performance; or (b) a specific outcome resulting
from the vendor’s performance.
(3) If achieved, the event would result in additional payments being due to the vendor.
F-11
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
A milestone does not include events for which the occurrence is either: (a) contingent solely upon the passage of time; or (b) the result of a
counterparty’s performance.
The policy for recognizing deliverable consideration contingent upon achievement of a milestone must be applied consistently to similar
deliverables.
The assessment of whether a milestone is substantive is performed at the inception of the arrangement. The consideration earned from the
achievement of a milestone must meet all of the following for the milestone to be considered substantive:
(1) The consideration is commensurate with either: (a) the vendor’s performance to achieve the milestone; or (b) the enhancement of the
value of the delivered item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone;
(2) The consideration relates solely to past performance; and
(3) The consideration is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration)
within the arrangement.
A milestone is not considered substantive if any portion of the associated milestone consideration relates to the remaining deliverables in
the unit of accounting (i.e., it does not relate solely to past performance). To recognize the milestone consideration in its entirety as
revenue in the period in which the milestone is achieved, the milestone must be substantive in its entirety. Milestone consideration cannot
be bifurcated into substantive and nonsubstantive components. In addition, if a portion of the consideration earned from achieving a
milestone may be refunded or adjusted based on future performance, the related milestone is not considered substantive.
See Note 14 for the additional disclosure information required under ASC 605-28.
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation plans are accounted for under the fair value method.
Accordingly, share-based compensation is measured when all granting activities have been completed, generally the grant date, based on
the fair value of the award. The exercise price of options is generally equal to the market price of the Company's common stock (defined as
the closing price as quoted on the OTCBB on the date of grant. Compensation cost recognized by the Company includes (a) compensation
cost for all equity incentive awards granted prior to April 1, 2006, but not yet vested, based on the grant-date fair value estimated in
accordance with the original provisions of the then current accounting standards, and (b) compensation cost for all equity incentive awards
granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent
accounting standards. We use a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 6).
The following table summarizes share-based compensation expenses relating to shares and options granted and the effect on loss per
common share during the years ended March 31, 2013 and 2012:
Vesting of Stock Options
Incremental fair value of option Modifications
Vesting Expense Associated with CEO Restricted Stock Grant
Total Stock-Based Compensation Expense
March 31, 2013 March 31, 2012
372,296
$
–
386,667
758,963
355,578 $
23,028
386,667
765,273 $
$
Basic and diluted loss per common share
$
(0.01) $
(0.01)
F-12
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
We account for transactions involving services provided by third parties where we issue equity instruments as part of the total
consideration using the fair value of the consideration received (i.e. the value of the goods or services) or the fair value of the equity
instruments issued, whichever is more reliably measurable. In transactions, when the value of the goods and/or services are not readily
determinable and (1) the fair value of the equity instruments is more reliably measurable and (2) the counterparty receives equity
instruments in full or partial settlement of the transactions, we use the following methodology:
a) For transactions where goods have already been delivered or services rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
b) For transactions where the instruments are issued on a fully vested, non-forfeitable basis, the equity instruments are valued on or about
the date of the contract.
c) For any transactions not meeting the criteria in (a) or (b) above, we re-measure the consideration at each reporting date based on its then
current stock value.
We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual
forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after March 31, 2006 is recognized in the
period the forfeiture estimate is changed. The effect of forfeiture adjustments for the fiscal year ended March 31, 2013 was insignificant.
PATENTS
Patents include both foreign and domestic patents. There were several patents pending at March 31, 2013. We capitalize the cost of patents
and patents pending, some of which were acquired, and amortize such costs over the shorter of the remaining legal life or their estimated
economic life, upon issuance of the patent. The unamortized costs of patents and patents pending is written off when we determine there is
no future benefit to those assets.
STOCK PURCHASE WARRANTS
We granted warrants in connection with the issuance of convertible notes payable and the issuance of common stock for cash. When such
warrants are classified as equity, we measure the relative estimated fair value of such warrants which represents a discount from the face
amount of the convertible notes payable. Such discounts are amortized to interest expense over the term of the notes.
DERIVATIVE INSTRUMENTS
We evaluate free-standing derivative instruments (or embedded derivatives) to properly classify such instruments within equity or as
liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each reporting date. If the classification changes as a result of events during a
reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of
times a contract may be reclassified.
Instruments classified as derivative liabilities are remeasured each reporting period (or upon reclassification) and the change in fair value is
recorded on our consolidated statement of operations in other (income) expense.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of conversion that is below market value. Such feature is normally
characterized as a "Beneficial Conversion Feature" ("BCF"). We measure the estimated fair value of the BCF in circumstances in which the
conversion feature is not required to be separated from the host instrument and accounted for separately, and record that value in the
consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the
term of the notes.
F-13
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
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 (see Note 8).
RESEARCH AND DEVELOPMENT EXPENSES
We incurred approximately $1,440,000 and $1,089,000 of research and development expenses for the years ended March 31, 2013 and
2012, respectively, which are included in various operating expenses in the accompanying consolidated statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect
on our consolidated financial statements.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
Management has evaluated significant recent accounting pronouncements that are not yet effective for the Company and does not believe
any such pronouncements will have a significant effect on the Company’s present or future consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following:
Furniture and office equipment at cost
Accumulated depreciation
March 31, 2013 March 31, 2012
289,031
$
(287,566)
1,465
289,031 $
(288,886)
145 $
$
Depreciation expense for the years ended March 31, 2013 and 2012 approximated $1,000 and $8,000, respectively.
3. PATENTS
Patents consist of the following:
Patents
Patents pending and trademarks
Accumulated amortization
March 31, 2013 March 31, 2012
157,442
$
54,203
(80,828)
130,817
157,442 $
54,203
(89,992)
121,653 $
$
Amortization of patents for the years ended March 31, 2013 and 2012 approximated $9,000. Future amortization expense on patents is
estimated to be approximately $9,000 per year based on the estimated life of the patents. The weighted average remaining life of our
patents is approximately 7.5 years.
4. NOTES PAYABLE
Notes payable consist of the following:
March 31, 2013
March 31, 2012
Principal Balance
Accrued Interest
12% Notes payable, past due
10% Note payable, past due
IP Law Firm Note
Law Firm Note
Tonaquint Note
Total
$
$
185,000 $
5,000
–
–
131,381
321,381 $
Principal Balance Accrued Interest
185,000 $
5,000
29,610
75,000
298,312
5,375
986
104
326,062 $
5,875
–
–
1,629
333,566 $
360,186
654,796 $
1,835
306,612
During the fiscal year ended March 31, 2013, we recorded interest expense of $57,966 related to the contractual interest rates of our notes
payable.
F-14
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
12% NOTES
From August 1999 through May 2005, we entered into various borrowing arrangements for the issuance of notes payable from private
placement offerings (the "12% Notes"). On April 21, 2010, a holder of $100,000 of the12% Notes converted his principal balance and
$71,758 of accrued interest into 687,033 shares of common stock at an agreed conversion price of $0.25 per share. We incurred a loss upon
this conversion of $68,703 since the closing price of our common stock was $0.35 at the date of conversion. At March 31, 2013, 12%
Notes with a principal balance of $185,000 are outstanding, all of which are past due, in default, and bearing interest at the default rate of
15%. At March 31, 2013, interest payable on the 12% Notes totaled $326,062.
10% NOTES
At March 31, 2013, one 10% Note in the amount of $5,000, which is past due and in default, remained outstanding. At March 31, 2013,
interest payable on this note totaled $5,875.
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.
IP LAW FIRM NOTE
On August 2, 2011, we entered into a Promissory Note with our intellectual property law firm for the amount of $49,610, which
represented the amount we owed to that firm. The Promissory Note calls for monthly payments of $5,000 from August 2011 through
December 2011. From the period August 2 through March 31, 2012, we made four $5,000 payments, and as a result, have reduced the note
balance to $29,610 as of March 31, 2012. The note bore interest at 10% per annum and at March 31, 2012, interest payable on this note
totaled $986. We paid off this note with cash in April 2012.
LAW FIRM NOTE
On March 22, 2012, we entered into a Promissory Note with our corporate law firm for the amount of $75,000, which represented the
majority of the amount we owed to that firm. The Promissory Note has a maturity date of December 31, 2012 and bears interest at five
percent per annum. The note is convertible at the option of the holder into shares of our common stock at a 10% discount to the market
price of the common stock on the date prior to conversion with a floor price on such conversions of $0.08 per share. This ability of the
holder to convert became exercisable upon the next amendment of the Articles of Incorporation increasing the authorized shares of our
common stock to a number greater than 250,000,000. As that increase in the authorized number of shares of our common stock was
approved by our stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June
30, 2012 (See Note 5).
TONAQUINT NOTE
On June 28, 2011, we entered into a Termination Agreement with Tonaquint, Inc. (See Note 5) under which both parties agreed that in
consideration of the termination of a warrant, the waiving of all fees, penalties, the creation of the selling program and other factors, we
agreed to issue an unsecured non-convertible promissory note (the "New Note") in the principal amount of $360,186, which provides for
annual interest at a rate of 6%, payable monthly in either cash or our stock, at our option. The New Note originally had a maturity date of
April 30, 2012.
We subsequently extended the note initially to July 31, 2012 and then to July 31, 2013 and subsequently to August 31, 2013 (see Note 14)
and converted $236,305 of the principal of the note into common stock (see Note 6). We also recorded into principal $7,500 of the lender’s
legal fees related to documentation of the extension agreement. During the fiscal year ended March 31, 2013, we recorded a loss on
conversion of $82,627 on those partial conversions. At March 31, 2013, the balance of this note was $131,381 and accrued interest totaled
$1,629.
F-15
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following at March 31, 2013:
Principal
Unamortized
Discount
Net
Amount
Accrued
Interest
Amended and Restated Series A 12% Convertible Notes, past
due
$
2008 10% Convertible Notes, past due
December 2006 10% Convertible Notes, past due
October & November 2009 10% Convertible Notes
April 2010 10% Convertible Note
September 2010 10% Convertible Notes, past due
April 2011 10% Convertible Notes, past due
July and August 2011 10% Convertible Notes, $257,656 past
885,000 $
25,000
17,000
50,000
75,000
308,100
400,400
due
September 2011 Convertible Notes, past due
Law Firm Note
Total – Convertible Notes
357,655
178,760
75,000
2,371,915 $
$
– $
–
–
(389)
(3,895)
–
–
–
–
–
(4,284) $
885,000 $
25,000
17,000
49,611
71,105
308,100
400,400
357,655
178,760
75,000
2,367,631 $
398,250
15,417
15,888
20,000
23,938
52,393
100,100
68,704
–
3,854
698,544
All of the Convertible Notes Payable in the above table are presently past due or will be due within one year of the March 31, 2013
consolidated balance sheet date. As a result, we expect to amortize all of the remaining discounts during the fiscal year ending March 31,
2014.
During the fiscal year ended March 31, 2013, we recorded interest expense of $459,199 related to the contractual interest rates of our
convertible notes and interest expense of $467,158 related to the amortization of debt discounts on the convertible notes for a total of
$926,357.
Convertible Notes Payable consist of the following at March 31, 2012:
Amended and Restated Series A 12% Convertible Notes, past
due
2008 10% Convertible Notes, past due
December 2006 10% Convertible Notes, past due
October & November 2009 10% Convertible Notes, $25,000
past due
April 2010 10% Convertible Note
September 2010 10% Convertible Notes
April 2011 10% Convertible Notes
July and August 2011 10% Convertible Notes
September 2011 Convertible Notes
November 2011 Convertible Notes
February 2012 Convertible Notes
Total – Convertible Notes
Principal
Unamortized
Discount
Net
Amount
Accrued
Interest
$
$
900,000 $
25,000
17,000
75,000
75,000
338,100
400,400
357,655
238,760
525,000
525,000
3,476,915 $
– $
–
–
900,000 $
25,000
17,000
(4,833)
(10,107)
–
–
(109,911)
(106,932)
(51,220)
(188,439)
(471,442) $
70,167
64,893
338,100
400,400
247,744
131,828
473,780
336,561
3,005,473 $
168,750
11,667
13,246
22,500
16,438
70,804
40,040
24,262
–
39,177
12,120
419,004
During the fiscal year ended March 31, 2012, we recorded interest expense of $399,113 related to the contractual interest rates of our
convertible notes and interest expense of $2,194,247 related to the amortization of debt discounts on the convertible notes for a total of
$2,593,360.
F-16
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated 12% Series A Convertible Promissory Notes (the "Amended and Restated Notes")
with the holders of certain promissory notes previously issued by the Company (“Amended Series A 10% Convertible Notes” or the "Prior
Notes"), and all amendments to the Prior Notes.
The Amended and Restated Notes, in the principal amount of $900,000 matured on December 31, 2010. In connection with the
restructuring we paid $54,001 of accrued and default interest through the date of the restructuring, liquidated damages of $205,000 and
$54,003 of prepaid interest through the expiration date in the aggregate amount of $313,004 through the issuance of units ("Units") at a
fixed rate of $0.20 per Unit, each Unit consisting of one share of our common stock and one common stock purchase warrant to purchase
one share of our common stock at a fixed exercise price of $0.20 per share as prescribed in the Amended and Restated Note Agreement.
The noteholders have antidilution price protection on the Amended and Restated Notes.
In addition to the extension of the expiration date of the Amended and Restated Notes to December 31, 2010, we agreed to increase the
annual interest rate from ten percent to twelve percent. We also agreed to change the exercise prices on all of the warrants held by the
noteholders to $0.20 per share, to change certain formerly contingent warrants to non-contingent warrants and to extend the expiration date
of their warrants to February 2016.
As of December 31, 2010, the Amended and Restated Notes matured and as of March 31, 2013 remain in default. We are accruing interest
at the revised default rate of 20% following the expiration date of December 31, 2010.
During the fiscal year ended March 31, 2013, the holders of $15,000 of the Amended and Restated Notes converted their principal and
related accrued interest into common stock per the conversion formula.
We have begun discussions with the noteholders regarding an extension to the notes but there can be no assurance that we will be able to do
so on terms that we deem acceptable or at all. At March 31, 2013, the balance of the Amended and Restated Notes was $885,000 and
interest payable on the Amended and Restated Notes totaled $398,250.
DECEMBER 2006 10% CONVERTIBLE NOTES
At March 31, 2013, one note representing $17,000 of the December 2006 10% Notes remained outstanding and in default. This note is
convertible into our common stock at $0.17 per share. At March 31, 2013, the $17,000 balance of the note was in default and interest
payable on this note totaled $15,888 and we are recording interest at the default rate of 15%.
2008 10% CONVERTIBLE NOTES
One 2008 10% Convertible Note in the amount of $25,000 which matured in January 2010 remained outstanding at September 30, 2012.
This note is convertible into our common stock at $0.50 per share. At March 31, 2013, the $25,000 principal balance was in default and
interest payable on the remaining note totaled $15,417 and we are recording interest at the default rate of 15%.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale to accredited investors of 10% convertible notes ("October & November
2009 10% Convertible Notes"). The October & November 2009 10% Convertible Notes matured at various dates between April 2011 and
May 2011 and are convertible into our common stock at a fixed conversion price of $0.25 per share prior to maturity. The investors also
received matching three year warrants to purchase unregistered shares of our common stock at a price of $0.25 per share. We measured the
fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes.
We are amortizing this discount using the effective interest method over the term of the notes.
Deferred financing costs of $20,250 incurred in connection with this financing were issued in the form of a convertible note with warrants
on the same terms as those received by the investors. We capitalized the $20,250 of deferred financing costs and amortized them over the
term of the notes using the effective interest method.
Prior to March 31, 2012, $355,000 of the October and November 2009 financing had been converted to common stock. On March 31, 2012,
we agreed to extend the expiration date and to change the exercise price of certain warrants of one of the note holders by two years in
exchange for the extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10%
Convertible Note (see below) by that same two year period. We recorded a charge of $77,265 relating to this modification.
F-17
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
In July 2012, we issued 461,409 shares of common stock to the holder of the $25,000 note in exchange for the value of the principal and
related accrued interest of $8,000 under the same terms that we used to sell units consisting of one share of common stock and one-half of a
stock purchase warrant on June 29, 2012 (see Note 6). The 461,409 share issuance was priced based on 80% of the trailing five day average
before issuance to be consistent with the equity unit structure. As part of that structure, the noteholder also received seven year warrants to
purchase 230,705 share of common stock at a price of $0.107 per share. The $16,149 value of the warrant was calculated using the
binomial lattice valuation methodology. We recorded a loss on conversion of $45,796 on the conversions.
At March 31, 2013, there was one note remaining for $50,000 and interest payable on that note was $20,000.
APRIL 2010 10% CONVERTIBLE NOTE
In April 2010, we raised $75,000 from the sale to an accredited investor of a 10% convertible note. The convertible note matured in
October 2011 and is convertible into our common stock at a fixed conversion price of $0.25 per share prior to maturity. The investor also
received three year warrants to purchase 300,000 unregistered shares of our common stock at a price of $0.25 per share.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the
principal of the notes. We amortized this discount using the effective interest method over the term of the note.
On March 31, 2012, we agreed to extend the expiration date and to change the exercise price of certain warrants of the note holder by two
years in exchange for his extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April 2010 10%
Convertible Note by that same two year period. We recorded a charge of $77,265 relating to this modification.
At March 31, 2013, the remaining outstanding principal balance is $75,000 and interest payable on this note totaled $23,938.
JULY 2010 6% CONVERTIBLE NOTES
In July 2010, we entered into a Note and Warrant Purchase Agreement (the "Purchase Agreement") with Tonaquint, Inc., a Utah corporation
(the "Investor"), whereby we issued and sold, and the Investor purchased: (i) a Convertible Promissory Note of the Company in the
principal amount of $890,000 (the "Company Note") and (ii) a Warrant to purchase common stock of the Company (the "Warrant"). As
consideration for the issuance and sale of the Company Note and Warrant, the Investor paid cash in the amount of $400,000 and issued two
Secured Trust Deed Notes to us (the "Trust Notes") each in the principal amount of $200,000. The variance of $90,000 represents fees and
expenses paid by us and an original issue discount which was recorded as deferred offering costs.
Over the term of the Tonaquint Convertible Note, all of the principal and accrued interest was converted to common stock per the terms of
the Convertible Note. On June 28, 2011, we entered into a Termination Agreement with Tonaquint under which both parties agreed to
terminate the warrant to prevent continuing dilution of our common stock and to eliminate confusion or disagreement as to the number of
shares of common stock available for issuance under the warrant in the future. Accordingly, under the Termination Agreement we issued
3,599,913 shares of common stock upon the final exercise of the warrant, whereupon the warrant was terminated and is of no further force
or effect. The Termination Agreement also provides for a "Common Stock Sale Limitation" on all of our common stock held by Tonaquint,
Inc. Under the "Common Stock Sale Limitation", the daily limitation on the number of shares of common stock which Tonaquint, Inc. may
sell into the market on any trading day is limited to the greater of (i) $5,000 of sales amount, or (ii) 10% of the Average Daily Volume of
our common stock sold on the Over The Counter Bulletin Board, where the Average Daily Volume shall mean the average daily volume
for the prior three month period as reported on each trading day on Yahoo Finance with respect to our common stock. Under the terms of
the Termination Agreement, Tonaquint, Inc. has waived and released us from any obligation to pay or perform any fees, penalties, costs, or
assessments that were or are due, or would have become due, under the convertible note, the warrant and the note purchase agreement. In
consideration of the termination of the warrant, the waiving of all fees, penalties, the creation of the selling program and other factors, we
agreed to issue an unsecured non-convertible promissory note (the "New Note") in the principal amount of $360,185, which provides for
annual interest at a rate of 6%, payable monthly in either cash or our stock, at our option. The New Note originally had a maturity date of
April 30, 2012 and was subsequently extended to August 31, 2013. At March 31, 2013, the balance of this note was $131,381 and interest
payable totaled $1,629 (see Note 4 and Note 14).
F-18
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
SEPTEMBER 2010 10% CONVERTIBLE NOTES
On September 3, 2010, we entered into a Subscription Agreement with three accredited investors (the “Purchasers”) providing for the
issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial
closing under the Subscription Agreement resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal
amount of $743,600, (ii) five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of
$0.31125 per share, and (iii) five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of
$0.43575 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and
matured on September 3, 2011. The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due
diligence fee and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of
our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common
stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days
preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.30
nor less than $0.20. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
The following conversions of the September 2010 10% Convertible Note have taken place during the fiscal years ended March 31, 2013
and 2012:
Principal converted
Accrued interest converted
$
$
Fiscal Year Ended
March 31, 2013
Fiscal Year Ended
March 31, 2012
405,500
19,255
30,000 $
64,164 $
At March 31, 2013, the remaining principal balance of $308,100 was in default and interest payable on these notes totaled $52,393 and we
are recording interest at the default rate of 15%.
APRIL 2011 10% CONVERTIBLE NOTES
In April 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the issuance and
sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $385,000. The closing under the
Subscription Agreement resulted in the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of
$385,000, (ii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.125 per
share, and (iii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.175 per
share. The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on April 1,
2012. The aggregate gross cash proceeds to us were $350,000, the balance of the principal amount representing a due diligence fee and an
original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common stock at
a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock as reported by
Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days preceding the
proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than $0.20 nor less than
$0.10. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
In addition, we issued (i) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.125
per share, and (ii) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.175 per
share to the Purchasers. These warrants were issued as an antidilution adjustment under certain common stock purchase warrants held by
the Purchasers that were acquired from us in September 2010.
At March 31, 2013, the outstanding principal balance was $400,400 and was in default and interest payable on these notes totaled $100,100
and we are recording interest at the default rate of 15%.
F-19
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised $357,656 in 10% convertible notes. Those notes had a fixed conversion
price of $0.09 per share and carried an interest rate of 10%. The convertible notes matured in July and August 2012. We also issued those
investors five year warrants to purchase 3,973,957 shares of common stock at $0.125 per share.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a $257,926 discount against the
principal of the notes. We amortized this discount using the effective interest method over the term of the note.
Effective July 14, 2012, holders of three notes totaling $100,000 agreed to extend the expiration date of their notes to July 13, 2013.
At March 31, 2013, the outstanding principal balance was $357,655, of which $257,655 was in default and interest payable on these notes
totaled $68,704. Following the expiration of the maturity dates on the $257,655 of notes that are now in default, we began to accrue interest
at the default interest rate of 15%.
SEPTEMBER 2011 CONVERTIBLE NOTES
On September 23, 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the
issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $253,760. The
warrants carried a five-year term to purchase an aggregate of 3,625,143 shares of our common stock at an exercise price of $0.10 per
share. The convertible promissory notes do not bear an interest rate and mature on September 23, 2012. The aggregate net cash proceeds
to us were $175,000, the balance of the principal amount representing a due diligence fee and an original issuance discount. The
convertible promissory notes are convertible at the option of the holders into shares of our common stock at a price per share equal to
$0.07. Subject to adjustments as described in the notes, the conversion price may not be more than $0.07. There are no registration
requirements with respect to the shares of common stock underlying the notes or the warrants.
We measured the fair value of the warrants and the beneficial conversion feature of the notes and recorded a $168,804 discount against the
principal of the notes. We amortized this discount using the effective interest method over the term of the note.
The following conversions of the September 2011 Convertible Note have taken place during the fiscal years ended March 31, 2013 and
2012:
Principal converted
$
60,000 $
Fiscal Year Ended
March 31, 2013
Fiscal Year Ended
March 31, 2012
15,000
At March 31, 2013, the outstanding principal balance was $178,760 and was in default and there was no accrued interest as these notes do
not bear interest.
NOVEMBER 2011 CONVERTIBLE NOTES
In November 2011, we raised $525,000 in 5% Original Issue Discount Unsecured Convertible Debentures from five accredited investors
pursuant to which the investors purchased an aggregate principal amount of $525,000 for an aggregate purchase price of $500,000. The
debentures bear interest at 20% per annum and matured on April 20, 2012. The debentures will be convertible at the option of the holders
at any time into shares of our common stock, at a conversion price equal to $0.0779, subject to adjustment. In connection with the
debentures, the purchasers received warrants to purchase 3,369,706 shares of our common stock. The warrants are exercisable for a period
of five years from the date of issuance at an exercise price of $0.11, subject to adjustment.
F-20
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
Until December 31, 2012, upon any proposed issuance by us of our common stock or equivalents (or a combination thereof as defined in
the subscription agreement) for cash consideration, the purchasers may elect, in their sole discretion, to exchange all or some of the
debentures then held by such purchaser for any securities issued in a subsequent financing on a $1.00 for $1.00 basis, provided, however ,
this right shall not apply with respect to (i) an Exempt Issuance (as defined in the debenture) or (ii) an underwritten public offering of our
common stock.
A Financial Industry Regulatory Authority (FINRA) registered broker-dealer was engaged as placement agent in connection with the
transaction. We paid the placement agent a cash fee in the amount of $50,000 (representing a 8% sales commission and a 2%
unaccountable expense allowance) and issued the placement agent or its designees warrants to purchase an aggregate of 808,729 shares of
common stock at $0.11 per share. The warrants issued to the placement agent may be exercised on a cashless basis. In the event the
placement agent exercises the warrants on a cashless basis, we will not receive any proceeds.
During the fiscal year ended March 31, 2013, all of the outstanding principal balances on these notes and all related accrued interest of
$53,803 were converted into common stock.
FEBRUARY 2012 CONVERTIBLE NOTES
In February 2012, we entered into a subscription agreement with five accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate principal amount of $525,000 of 5% Original Issue Discount Unsecured Convertible Debentures for an
aggregate purchase price of $500,000 (the “Debenture”). These subscriptions represent the completion of the $1,000,000 securities offering
that was initiated and priced in November 2011 (see above).
The Debentures bear interest at 20% per annum and matured on April 20, 2012. The Debentures will be convertible at the option of the
holders at any time into shares of our common stock, at a conversion price equal to $0.0779, subject to adjustment. In connection with the
subscription agreement, the Purchasers received warrants to purchase 3,369,707 shares of our common stock (the “Warrants”). The
Warrants are exercisable for a period of five years from the date of issuance at an exercise price of $0.11 per share, subject to adjustment.
Each Purchaser may exercise such Purchaser’s Warrant on a cashless basis if the shares of common stock underlying the Warrant are not
then registered pursuant to an effective registration statement. In the event the Purchasers exercise the Warrants on a cashless basis, we will
not receive any proceeds. The conversion price of the Debenture and the exercise price of the Warrants are subject to customary adjustment
provisions for stock splits, stock dividends, recapitalizations and the like.
Until December 31, 2012, upon any proposed issuance by us of our Common Stock or Common Stock Equivalents (or a combination
thereof as defined in the subscription agreement) for cash consideration (the “Subsequent Financing”), a Purchaser may elect, in its sole
discretion, to exchange all or some of the Debenture then held by such Purchaser for any securities issued in a Subsequent Financing on a
$1.00 for $1.00 basis, provided, however, this right shall not apply with respect to (i) an Exempt Issuance (as defined in the Debenture) or
(ii) an underwritten public offering of our common stock.
Each Purchaser has contractually agreed to restrict its ability to exercise the Warrant and convert the Debenture such that the number of
shares of our common stock held by the Purchaser and its affiliates after such conversion or exercise does not exceed 4.99% of our then
issued and outstanding shares of common stock.
The full principal amount of the Debenture is due upon a default under the terms of the Debenture. The Debenture is a general unsecured
debt obligation of ours arising other than in the ordinary course of business which constitutes a direct financial obligation of the Company.
A FINRA registered broker-dealer was engaged as placement agent in connection with the transaction. We paid the placement agent a cash
fee in the amount of $50,000 (representing an 8% sales commission and a 2% unaccountable expense allowance) and issued the placement
agent or its designees warrants to purchase an aggregate of 815,774 shares of common stock at $0.11 per share. The warrants issued to the
placement agent may be exercised on a cashless basis. In the event the placement agent exercises the warrants on a cashless basis, we will
not receive any proceeds.
During the fiscal year ended March 31, 2013, all of the outstanding principal balances on these notes and all related accrued interest of
$55,432 were converted into common stock.
LAW FIRM NOTE
On March 22, 2012, we entered into a Promissory Note with our corporate law firm for the amount of $75,000, which represented the
majority of the amount we owed to that firm. The Promissory Note has a maturity date of December 31, 2012 and bears interest at five
percent per annum. The note is convertible at the option of the holder into shares of our common stock at a 10% discount to the market
price of the common stock on the date prior to conversion with a floor price on such conversions of $0.08 per share. This ability of the
holder to convert became exercisable upon the amendment of the Articles of Incorporation increasing the authorized shares of our common
stock to a number greater than 250,000,000. As that increase in the authorized number of shares of our common stock was approved by our
stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June 30, 2012 (see
Note 4). Subsequent to March 31, 2013, the parties have agreed to extend the Maturity Date of the Note to October 1, 2013.
F-21
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
At March 31, 2013, the outstanding principal balance on this note was $75,000 and the interest payable on this note totaled $3,854.
6. EQUITY TRANSACTIONS
2003 CONSULTANT STOCK PLAN
Our 2003 Consultant Stock Plan, as amended from time to time (the "Stock Plan"), adopted by us in August 2003, advances our interests by
helping us obtain and retain the services of persons providing consulting services upon whose judgment, initiative, efforts and/or services
we are substantially dependent, by offering to or providing those persons with incentives or inducements affording such persons an
opportunity to become owners of our 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 grant 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. We have periodically amended the Stock Plan to increase the number of
shares available for issuance under the Stock Plan with the approval of our Board of Directors.
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.
On July 10, 2009, 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 February 17, 2010, we filed with the SEC a registration statement on Form S-8 for the purpose of registering 1,500,000 common shares
issuable under the Stock Plan under the Securities Act of 1933.
At March 31, 2013, we did not have any shares remaining under the 2003 Consultant Stock Plan and we have discontinued using this Stock
Plan.
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February 2005, we adopted our 2005 Directors Compensation Program (the
"2005 Directors Compensation Program") which advances our interests 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 2005 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, 2013 under the 2005 Directors Compensation Program we had issued 1,337,825 options to outside directors and 3,965,450
options to employee-directors, 514,550 outside directors’ options had been forfeited, 250,000 outside directors’ options had been exercised
and 3,671,550 options remained outstanding.
F-22
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan (the "Incentive Plan"), which provides incentives to attract, retain and motivate
employees and directors whose present and potential contributions are important to the success of the Company by offering them an
opportunity to participate in our future performance through awards of options, the right to purchase common stock, stock bonuses and
stock appreciation rights and other awards. A total of 3,500,000 common shares were initially reserved for issuance under the Incentive
Plan.
In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 3,500,000 common shares issuable under the
Incentive Plan under the Securities Act of 1933 and in July 2012, we filed a registration statement on Form S-8 for the purpose of
registering an additional 5,000,000 common shares issuable under the Incentive Plan under the Securities Act of 1933.
At March 31, 2013, we had 3,948,652 shares available under the Incentive Plan.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a new Board Compensation Program (the “New Program” or the “2012 Program”), which
modifies and supersedes the 2005 Directors Compensation Program (the “2005 Program”) that was previously in effect. Under the New
Program, in which only non-employee Directors may participate, an eligible Director will receive a grant of $15,000 worth of options to
acquire shares of Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the
Common Stock for the five trading days preceding the first day of the fiscal year; however for the new non-employee directors, the
exercise price for this initial grant, $0.076 per share, is based on the average of the closing bid prices of the Common Stock for the five
trading days preceding the date of their appointment (July 24, 2012). These options will have a term of ten years and will be fully vested
upon grant. In addition, each existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of
Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for
the five trading days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be
made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading days
preceding the date (July 24, 2012) of the appointment of two new directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible to participate in the New Program also will receive a grant of $20,000 worth of
options valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding
the first day of the fiscal year. In addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each
committee meeting attended and $1,000 for each formal Board meeting attended.
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
COMMON STOCK
Fiscal Year Ended March 31, 2012:
During the fiscal year ended March 31, 2012, we issued 28,859,559 shares of restricted common stock to noteholders in exchange for the
conversion of principal and interest of several notes payable and convertible notes payable in an aggregate amount of $2,058,290 at an
average conversion price of $0.07 per share based upon the conversion formulae in the respective notes.
In the fiscal year ended March 31, 2012 we issued 3,451,558 shares of stock to consultants as compensation under stock-based
compensation expense for services valued at $341,547 based upon the fair value of the shares issued. Of that aggregate amount, 2,974,017
shares of common stock were issued to regulatory affairs advisors, science advisors, corporate communications consultants and internal
audit consultants pursuant to our S-8 registration statements covering our Amended and Restated 2003 Consultant Stock Plan or 2010 Stock
Incentive Plan for regulatory affairs, primarily managing our hepatitis C trial in India, scientific consulting and corporate
communications valued at $279,747 based upon the fair value of the shares issued. The average issuance price on the S-8 issuances was
approximately $0.09 per share. Additionally, we issued 477,541 restricted shares of common stock to certain consultants for investor
relations services valued at $61,800 based upon the fair value of the shares issued. The average issuance price on the restricted share
issuances was approximately $0.13 per share.
During the fiscal year ended March 31, 2012, we issued 3,699,914 shares of restricted common stock related to net warrant cashless
exercises.
F-23
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
In January 2012, we issued 287,500 shares of restricted common stock to the owner of a patent as a patent license payment valued at
$17,250.
On March 29, 2012, we entered into a unit subscription agreement (the "Subscription Agreement") with one accredited investor (the
“Purchaser”) pursuant to which the Purchaser purchased an aggregate of $300,000 (the "Subscription Amount") of units (the "Units" and
each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par value $0.001 per share (the “Common Stock”) at a price
per share of $0.08, and (ii) a warrant to purchase such number of shares of Common Stock of the Company as shall equal (a) fifty percent
of the Subscription Amount divided by (b) $0.08 (the "Warrant Shares") at an exercise price of $0.125 per Warrant Share, (each, a
“Warrant” and collectively, the “Warrants”). Based on the foregoing, Units consisting of 3,750,000 shares of Common Stock and Warrants
to purchase 1,875,000 shares of Common Stock were issued.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.125, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
In March 2012, we entered into a consulting agreement with Catalyst Financial Resources to provide corporate communications and media
relations services. The term of the agreement is twelve months although it can be terminated by either party. The agreement calls for
monthly compensation of $12,500 comprised of $7,500 in cash and $5,000 in either notes or common stock.
Fiscal Year Ended March 31, 2013:
During the fiscal year ended March 31, 2013, we issued 23,291,154 shares of restricted common stock to holders of notes issued by the
Company in exchange for the partial or full conversion of principal and interest of several notes payable in an aggregate amount of
$1,707,052 at an average conversion price of $0.07 per share based upon the conversion formulae in the respective notes. 1,234,000 of
those shares of restricted common stock were accounted for as losses on debt extinguishment for an aggregate amount of $139,839.
During the fiscal year ended March 31, 2013, we issued 116,000 shares of restricted common stock to settle past due accrued interest that
we recorded as non-cash interest expense of $11,846.
During the fiscal year ended March 31, 2013, we issued 1,932,808 restricted shares of common stock to service providers for investor
relations, corporate communications and business development services valued at $170,849 based upon the fair value of the shares issued.
The average issuance price on the restricted share issuances was approximately $0.09 per share.
During the fiscal year ended March 31, 2013, we issued 963,373 shares of common stock pursuant to our S-8 registration statement
covering our Amended 2010 Stock Plan at an average price of $0.09 per share in payment for scientific consulting services valued at
$88,186 based on the value of the services provided.
On April 5, 2012, we completed a unit subscription agreement with one accredited investor (the “Purchaser”) pursuant to which the
Purchaser purchased $200,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par
value $0.001 per share (the “Common Stock”) at a price per share of $0.08 and (ii) a warrant to purchase such number of shares of
Common Stock as shall equal (a) fifty percent of the Subscription Amount divided by (b) $0.08 (the "Warrant Shares") at an exercise price
of $0.125 per Warrant Share, (each, a “Warrant” and collectively, the “Warrants”). Based on the foregoing, Units consisting of 2,500,000
shares of Common Stock and Warrants to purchase 1,250,000 shares of Common Stock were issued on April 5, 2012.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.125, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
F-24
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
On June 19, 2012, we completed a unit subscription agreement with seven accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased $592,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a
price per share of $0.072 and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the
Subscription Amount divided by (b) $0.072 (the "Warrant Shares") at an exercise price of $0.108 per Warrant Share. Based on the
foregoing, Units consisting of 8,222,222 shares of Common Stock and Warrants to purchase 4,111,111 shares of Common Stock were
issued on June 19, 2012.
On June 26, 2012, we completed a unit subscription agreement with one accredited investor pursuant to which the Purchaser purchased
$10,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a price per share of $0.072
and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the Subscription Amount divided
by (b) $0.072 (the "Warrant Shares") at an exercise price of $0.107 per Warrant Share. Based on the foregoing, Units consisting of 139,821
shares of Common Stock and Warrants to purchase 69,911 shares of Common Stock were issued on June 26, 2012.
In July 2012, we issued 461,409 shares of common stock to the holder of a $25,000 October & November 2009 10% Convertible Note (See
Note 5) in exchange for the value of the principal and related accrued interest of $8,000 under the same terms that we used to sell units
consisting of one share of common stock and one-half of a stock purchase warrant on June 29, 2012 (See Note 6). As part of that structure,
the noteholder also received seven year warrants to purchase 230,705 share of common stock at a price of $0.107 per share.
On August 29, 2012, we completed a unit subscription agreement with seven accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $271,000 (the "Subscription Amount") of restricted Common Stock at a price of $0.08 per share. The
Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of the our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
3,387,500 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated to be $0.12 per share based upon 120% of the average of the closing
prices of our Common Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.12, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchasers may exercise the Warrants on a cashless basis if the shares of
Common Stock underlying the Warrants are not then registered pursuant to an effective registration statement. In the event that a Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Common Stock underlying the Warrants.
In October 2012, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $135,000 (the "Subscription Amount") of restricted Common Stock at an average price of $0.07 per
share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
1,823,412 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
In November 2012, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $213,000 (the "Subscription Amount") of restricted Common Stock at an average price of $0.06 per
share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
3,435,484 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
F-25
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
In December 2012, we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased an aggregate of $150,000 (the "Subscription Amount") of restricted Common Stock at an average price of $0.06 per
share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of our
Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of
2,619,684 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
In January 2013, we issued 246,429 shares of restricted common stock to the owner of a patent as a patent license payment valued at
$17,250.
In February 2013, we completed a unit subscription agreement with six accredited investors and one institutional investor (the
“Purchasers”) pursuant to which the Purchasers purchased an aggregate of $225,000 (the "Subscription Amount") of restricted Common
Stock at an average price of $0.06 per share. The Common Stock purchase price under the Subscription Agreement was determined to be
80% of the average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription
Agreement, resulting in the issuance of 3,515,625 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
In March 2013, we completed a unit subscription agreement with ten accredited investors and one institutional investor (the “Purchasers”)
pursuant to which the Purchasers purchased an aggregate of $313,834 (the "Subscription Amount") of restricted Common Stock at an
average price of $0.08 per share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the
average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription Agreement,
resulting in the issuance of 4,080,798 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant for each two shares of Common Stock purchased under the
Subscription Agreement. The Warrant exercise price was calculated based upon 120% of the average of the closing prices of our Common
Stock for the five-day period immediately preceding the parties entering into the Subscription Agreement.
WARRANTS
Fiscal Year Ended March 31, 2012:
In April 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the issuance and
sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $385,000. The closing under the
Subscription Agreement resulted in the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of
$385,000, (ii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.125 per
share, and (iii) five-year warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.175 per
share.
In addition, we issued (i) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.125
per share, and (iii) five-year warrants to purchase an aggregate of 812,500 shares of our common stock at an exercise price of $0.175 per
share to the Purchasers. These warrants were issued as an antidilution adjustment under certain common stock purchase warrants held by
Purchasers that were acquired from us in September 2010.
In May 2011, we agreed to modify three warrants held by an institutional investor as the result of antidilution protection.
In July and August 2011, we raised $357,656 in 10% convertible notes. Those notes had a fixed conversion price of $0.09 per share and
carried an interest rate of 10%. The convertible notes mature in July and August 2012. We also issued those investors five year warrants to
purchase 3,973,957 shares of common stock at $0.125 per share.
On September 23, 2011, we entered into a Subscription Agreement with two accredited investors (the “Purchasers”) providing for the
issuance and sale of convertible promissory notes and corresponding warrants in the aggregate principal amount of $253,760. The
warrants carried a five-year term to purchase an aggregate of 3,625,143 shares of our common stock at an exercise price of $0.10 per
share. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
F-26
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
In November 2011, we raised $525,000 in 5% Original Issue Discount Unsecured Convertible Debentures from five accredited investors
pursuant to which the investors purchased an aggregate principal amount of $525,000 for an aggregate purchase price of $500,000. The
debentures bear interest at 20% per annum and mature on April 20, 2012. The debentures will be convertible at the option of the holders at
any time into shares of our common stock, at a conversion price equal to $0.0779, subject to adjustment. In connection with the debentures,
the purchasers received warrants to purchase 3,369,706 shares of our Common Stock. The warrants are exercisable for a period of five
years from the date of issuance at an exercise price of $0.11, subject to adjustment.
In February 2012, we raised $525,000 in 5% Original Issue Discount Unsecured Convertible Debentures from five accredited investors
pursuant to which the investors purchased an aggregate principal amount of $525,000 for an aggregate purchase price of $500,000. The
debentures bear interest at 20% per annum and mature on April 20, 2012. These subscriptions represent the completion of the $1,000,000
securities offering that was initiated and priced in November 2011. In connection with the subscription agreement, the investors received
warrants to purchase 3,369,707 shares of our common stock. The warrants are exercisable for a period of five years from the date of
issuance at an exercise price of $0.11 per share, subject to adjustment.
On March 29, 2012, we entered into a unit subscription agreement (the "Subscription Agreement") with one accredited investor (the
“Purchaser”) pursuant to which the Purchaser purchased an aggregate of $300,000 (the "Subscription Amount") of units (the "Units" and
each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par value $0.001 per share (the “Common Stock”) at a price
per share of $0.08 and (ii) a warrant to purchase such number of shares of Common Stock of the Company as shall equal (a) fifty percent of
the Subscription Amount divided by (b) $0.08 (the "Warrant Shares") at an exercise price of $0.125 per Warrant Share, (each, a “Warrant”
and collectively, the “Warrants”). Based on the foregoing, Units consisting of 3,750,000 shares of Common Stock and Warrants to
purchase 1,875,000 shares of Common Stock were issued.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.125, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
During the fiscal year ended March 31, 2012, we issued 3,699,914 shares of restricted common stock related to net warrant cashless
exercises.
On March 31, 2012, we agreed to extend by two years the expiration date of seven warrants for a total of 2,480,000 shares held by a note
holder and to reduce the exercise price on those warrants from $0.25 per share on six of the warrants and $0.19 on the seventh warrant to
$0.125 per share in exchange for his extension of $50,000 of the October & November 2009 10% Convertible Notes and the $75,000 April
2010 10% Convertible Note by that same two year period. We recorded a charge of $104,196 relating to this modification.
Fiscal Year Ended March 31, 2013:
In April 2012, we issued warrants to purchase 1,617,459 shares of Common Stock to the placement firm that arranged $1 million in bridge
financing in the fiscal year ended March 31, 2012. Those warrants were on the same terms as those received by the investors in the bridge
financing with a term of five years and an exercise price of $0.11.
On April 5, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,250,000 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.125, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
On June 19, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 4,111,111 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.108, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
F-27
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
On June 26, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 69,911 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.107, subject to adjustments for
stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of
common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the Purchaser
exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or
the Warrant Shares.
In July 2012, we issued 461,409 shares of common stock to the holder of a $25,000 October & November 2009 10% Convertible Note in
exchange for the value of the principal and related accrued interest of $8,000 under the same terms that we used to sell units consisting of
one share of common stock and one-half of a stock purchase warrant on June 29, 2012. As part of that structure, the noteholder also
received seven year warrants to purchase 230,705 share of common stock at a price of $0.107 per share.
On August 29, 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,693,750 shares of Common
Stock. The Warrants are exercisable for a period of seven years from the date of issuance at an exercise price of $0.12 per share, subject to
adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
In October 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 911,707 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.111 per share, subject
to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
In November 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,717,742 shares of Common
Stock. The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.093 per share,
subject to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless
basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the
event the Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with
respect to the Warrants or the Warrant Shares.
In December 2012, under the unit subscription agreement noted above, we issued Warrants to purchase 1,309,843 shares of Common
Stock. The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.086 per share,
subject to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless
basis if the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the
event the Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with
respect to the Warrants or the Warrant Shares.
In February 2013, under the unit subscription agreement noted above, we issued Warrants to purchase 1,757,813 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.096 per share, subject
to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
In March 2013, under the unit subscription agreement noted above, we issued Warrants to purchase 1,851,012 shares of Common Stock.
The Warrants are exercisable for a period of seven years from the date of issuance at an average exercise price of $0.118 per share, subject
to adjustments for stock splits, stock dividends, recapitalizations and the like. The Purchaser may exercise the Warrant on a cashless basis if
the shares of common stock underlying the Warrant are not then registered pursuant to an effective registration statement. In the event the
Purchaser exercises the Warrant on a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the
Warrants or the Warrant Shares.
F-28
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
A summary of the aggregate warrant activity for the years ended March 31, 2013 and 2012 is presented below:
Outstanding, beginning of year
Granted
Exercised
Cancelled/Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average estimated fair value of
warrants granted
Year Ended March 31,
2013
2012
Warrants
Weighted Average
Exercise Price
Warrants
Weighted Average
Exercise Price
59,807,849 $
16,710,445 $
– $
(871,000) $
75,647,294 $
75,647,294 $
$
0.14
0.11
–
0.25
0.11
0.11
0.07
38,675,169 $
28,159,240 $
(1,209,623) $
(5,816,937) $
59,807,849 $
59,807,849 $
$
0.26
0.11
0.23
0.26
0.14
0.14
0.11
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:
Risk free interest rate
Average expected life
Expected volatility
Expected dividends
Year Ended March 31,
2013
0.86%-1.56%
5 to 7 years
90.3% - 94.3%
None
2012
0.10%-2.24%
1.0 to 5 years
52.1% - 90.5%
None
The detail of the warrants outstanding and exercisable as of March 31, 2013 is as follows:
Range of
Exercise Prices
$0.10 or Below
$0.11 - $0.19
$0.20 - $0.25
Number
Outstanding
34,261,862
26,487,500
14,897,932
75,647,294
Warrants Outstanding
Weighted Average
Remaining
Life (Years)
Warrants Exercisable
Weighted Average
Exercise Price
Number
Outstanding
Weighted Average
Exercise Price
0.10
0.12
0.21
34,261,862 $
26,487,500 $
14,897,932 $
75,647,294
0.10
0.12
0.21
3.24 $
4.94 $
2.62 $
F-29
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
OPTIONS:
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000, provides for the grant of incentive stock options ("ISOs") to our
full-time employees (who may also be directors) and nonstatutory stock options ("NSOs") to non-employee directors, consultants,
customers, vendors or providers of significant services. The exercise price of any ISO may not be less than the fair market value of 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.
At March 31, 2012, all of the grants previously made under the Plan had expired and 10,000 restricted shares had been issued under the
2000 Stock Option Plan, with 490,000 available for future issuance.
2003 CONSULTANT STOCK PLAN
Our 2003 Consultant Stock Plan, as amended from time to time (the "Stock Plan"), adopted by us in August 2003, advances our interests by
helping us obtain and retain the services of persons providing consulting services upon whose judgment, initiative, efforts and/or services
we are substantially dependent, by offering to or providing those persons with incentives or inducements affording such persons an
opportunity to become owners of our 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 grant 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. We have periodically amended the Stock Plan to increase the number of
shares available for issuance under the Stock Plan with the approval of our Board of Directors.
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.
On July 10, 2009, 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 February 17, 2010, we filed with the SEC a registration statement on Form S-8 for the purpose of registering 1,500,000 common shares
issuable under the Stock Plan under the Securities Act of 1933.
At March 31, 2013, we did not have any shares remaining under the 2003 Consultant Stock Plan and we have discontinued using this Stock
Plan.
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan (the "Incentive Plan"), which provides incentives to attract, retain and motivate
employees and directors whose present and potential contributions are important to the success of the Company by offering them an
opportunity to participate in our future performance through awards of options, the right to purchase common stock, stock bonuses and
stock appreciation rights and other awards. A total of 3,500,000 common shares were initially reserved for issuance under the Incentive
Plan.
F-30
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 3,500,000 common shares issuable under the
Incentive Plan under the Securities Act of 1933 and in July 2012, we filed a registration statement on Form S-8 for the purpose of
registering an additional 5,000,000 common shares issuable under the Incentive Plan under the Securities Act of 1933.
At March 31, 2013, we had 3,948,652 shares available under the Incentive Plan.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a new Board Compensation Program (the “New Program” or the “2012 Program”), which
modifies and supersedes the 2005 Directors Compensation Program (the “2005 Program”) that was previously in effect. Under the New
Program, in which only non-employee Directors may participate, an eligible Director will receive a grant of $15,000 worth of options to
acquire shares of Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the
Common Stock for the five trading days preceding the first day of the fiscal year; however for the new non-employee directors, the
exercise price for this initial grant, $0.076 per share, is based on the average of the closing bid prices of the Common Stock for the five
trading days preceding the date of their appointment (July 24, 2012). These options will have a term of ten years and will be fully vested
upon grant. In addition, each existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of
Common Stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for
the five trading days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be
made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading days
preceding the date (July 24, 2012) of the appointment of two new directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible to participate in the New Program also will receive a grant of $20,000 worth of
options valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding
the first day of the fiscal year. In addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each
committee meeting attended and $1,000 for each formal Board meeting attended.
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
At March 31, 2013 under the 2005 Program and the 2012 Program we had issued 3,004,930 options to outside directors and 3,965,450
options to employee-directors, 514,550 outside directors’ options had been forfeited, 867,175 employee-directors’ options had been
forfeited, 250,000 outside directors’ options had been exercised and 5,338,655 options remained outstanding.
STAND-ALONE GRANTS
From time to time our Board of Directors grants restricted stock or common share purchase options or warrants to selected directors,
officers, employees and consultants as equity compensation to such persons on a stand-alone basis outside of any of our formal stock plans.
The terms of these grants are individually negotiated.
On June 8, 2009, our board of directors approved the grant to Mr. Joyce of 4,000,000 shares of restricted common stock at a price per share
of $0.24, the vesting and issuance of which will occur in equal installments over a thirty-six-month period commencing June 30, 2010. Mr.
Joyce may, from time to time, defer acceptance of the shares. However, all shares must be issued and accepted by Mr. Joyce by the
expiration of the thirty-six-month vesting period. As of July 10, 2012, Mr. Joyce has accepted all 4,000,000 shares of the grant. However,
the 600,000 shares previously accepted by Mr. Joyce were pledged as collateral for a loan and have been retained and/or sold by the lender
and are no longer owned by Mr. Joyce. It is anticipated that Mr. Joyce will receive stock certificates evidencing 3,400,000 shares in the
next several weeks.
As of March 31, 2013, we have granted 18,943,158 options (of which 3,186,015 have been exercised or cancelled) and authorized the
issuance of 4,000,000 shares of restricted stock outside of the 2005 Directors Compensation Plan, the 2012 Directors Compensation Plan,
the 2000 Stock Option Plan, the 2003 Consultant Stock Plan and the 2010 Incentive Stock Plan.
On March 26, 2012, Mr. Joyce entered into an Option Suspension Agreement whereby Mr. Joyce agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital. Accordingly, none of Mr.
Joyce’s options can be exercised until the amended Articles of Incorporation have been filed. Those amended Articles of Incorporation
were filed on June 4, 2012.
On March 26, 2012, Mr. Frakes entered into an Option Suspension Agreement whereby Mr. Frakes agreed not to exercise his stock options
pending the filing of amended Articles of Incorporation of the Company increasing our authorized capital. Accordingly, none of Mr.
Frakes’ options can be exercised until the amended Articles of Incorporation have been filed. Those amended Articles of Incorporation
were filed on June 4, 2012.
In the fiscal year ended March 31, 2013, our Board of Directors granted, to our four outside directors, ten year options to acquire an
aggregate of 1,667,105 shares of our common stock, all with an exercise price of $0.076 per share.
F-31
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
The following is a summary of the stock options outstanding at March 31, 2013 and 2012 and the changes during the two years then ended:
Outstanding, beginning of year
Granted
Exercised
Cancelled/Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average estimated fair value of
options granted
Year Ended March 31,
2013
2012
Options
Weighted Average
Exercise Price
Options
Weighted Average
Exercise Price
19,428,693 $
1,667,105 $
– $
– $
21,095,798 $
19,141,625 $
$
0.31
0.08
–
–
0.28
0.29
0.08
19,933,560 $
– $
– $
(504,867) $
19,428,693 $
17,416,191 $
$
0.32
–
–
1.17
0.31
0.32
–
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, 2013 and March 31, 2012:
Risk free interest rate
Average expected life
Expected volatility
Expected dividends
Year Ended March 31,
2013
1.44%
10.0 years
117.53%
None
2012
–
–
–
–
The detail of the options outstanding and exercisable as of March 31, 2013 is as follows:
Range of
Exercise Prices
$ 0.08
$0.21 - $0.25
$0.36 - $0.41
Number
Outstanding
1,667,105
11,207,143
8,221,550
21,095,798
Options Outstanding
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
9.92 years $
5.96 years $
3.43 years $
0.08
0.24
0.38
Options Exercisable
Weighted
Average
Exercise
Price
0.08
0.24
0.38
Number
Outstanding
792,105 $
10,127,970 $
8,221,550 $
19,141,625
We recorded stock-based compensation expense related to share issuances and to options granted outside of our Stock Option Plan totaling
$765,273 and $758,963 for the fiscal years ended March 31, 2013 and 2012, 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, 2013 and 2012.
Our total stock-based compensation for fiscal years ended March 31, 2013 and 2012 included the following:
Vesting of restricted stock grant
Incremental fair value of option modifications
Vesting of stock options
Total Stock-Based Compensation
March 31, 2013 March 31, 2012
386,668
$
–
372,295
758,963
386,668 $
23,027
355,578
765,273 $
$
As of March 31, 2013, we had $204,755 of remaining unrecognized stock option expense, which is expected to be recognized over a
weighted average remaining vesting period of 0.57 years.
F-32
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
On March 31, 2013, our stock options had a negative intrinsic value since the closing price on that date of $0.11 per share was below the
weighted average exercise price of our stock options.
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain of our officers and other related parties have advanced us funds, agreed to defer compensation and/or paid expenses on our behalf
to cover working capital deficiencies. These unsecured and non interest-bearing liabilities have been included as due to related parties in
the accompanying consolidated balance sheets.
Other related party transactions are disclosed elsewhere in these notes to consolidated financial statements.
8. ACCRUED LIQUIDATED DAMAGES
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 we will become obligated for future payments and the amount, or range of amounts, of such future
payments can be reasonably estimated.
We have entered into registration payment arrangements in connection with certain financing arrangements, pursuant to which we raised an
approximate aggregate amount of $2,020,000, that require us to register the shares of common stock underlying the convertible debt and
warrants issued in these financing transactions. Under these agreements we are liable for liquidated damages to the investors if we fail to
file and/or maintain effective registration statements covering the specified underlying shares of common stock as noted below:
· With respect to a $1,000,000 financing agreement – damages accrue at a rate of 1% - 1.5% per month until such time as the
underlying shares of common stock would have been eligible for sale under Rule 144.
· With respect to financing agreements totaling $715,000 – damages accruing at a rate of 2% per month, subject to an aggregate
maximum liquidated damages amount of $150,000.
· With respect to equity investments totaling $305,000 – damages accruing at a rate of 2% per month until the expiration dates of
warrants issued in connection with this financing, which range from December 31,2010 through February 8, 2011 and are payable in
common stock.
Since we have either failed to file, or failed to maintain the registration obligations under these agreements, as of March 31, 2013, we have
accrued estimated aggregate liquidated damages of $437,800 in connection with the liquidated damage provisions of these agreements,
which we believe represents our maximum exposure under these provisions. Accordingly, we do not expect to accrue any further
liquidated damages in connection with these agreements. The actual amount of liquidated damages paid, if any, may differ from our
estimates as it is our intention to negotiate with the investors the settlement of liquidated damages due and, as such, the ultimate amounts
we may actually pay may be less than the amount currently accrued.
9. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
Accrued interest
Accrued legal fees
Other accrued liabilities
Total other current liabilities
F-33
March 31,
2013
March 31,
2012
$
$
1,032,110 $
179,465
155,610
1,367,185 $
798,988
179,465
152,768
1,131,221
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
10. INCOME TAXES
On July 13, 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), subsequently codified in ASC 740, Income Taxes, which
clarifies the accounting for uncertainty in income taxes recognized in an entity's financial, 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 ASC 740, the
impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a
50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
We adopted the provisions of ASC 740 relating to uncertain tax provisions on April 1, 2007, and have 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, no additional tax liabilities have been recorded. There are no unrecognized tax benefits as of March
31, 2013 or March 31, 2012. As of March 31, 2013, we have not yet completed our analysis of the deferred tax assets relating to federal and
state net operating losses of $38.3 million and $33.1 million, respectively, 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 plan to complete a Section 382 analysis regarding the limitation of the net operating loss prior to utilizing any net operating losses.
Due to the existence of the valuation allowance, any 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 2009 and forward are subject to examination by the U.S. and
2008 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, 2013, we did not recognize any interest or penalties relating to tax matters. Upon adoption of ASC 740 on April 1, 2007, we did
not record any interest or penalties.
At March 31, 2013, we had net deferred tax assets of approximately $7.4 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 assets. 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.
Significant components of our net deferred tax assets at March 31, 2013 and 2012 are shown below (in thousands). A valuation allowance
of $7.4 million has been established to offset the net deferred tax assets as of March 31, 2013, as realization of such assets is uncertain.
Deferred tax assets:
Capitalized research and development
Other
Total deferred tax assets
Total deferred tax liabilities
Net deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
F-34
YEAR ENDED MARCH 31,
2012
2013
$
3,442 $
3,951
7,393
–
7,393
(7,393)
$
– $
3,442
3,803
7,245
–
7,245
(7,245)
–
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate at March 31, 2013, due to the
following (in thousands):
Federal income taxes at 34%
State income tax, net of federal benefit
Tax effect on non-deductible expenses and credits
Increase in valuation allowance1
2013
2012
$
$
(1,663) $
(285)
77
1,871
– $
(2,758)
(473)
1,244)
1,987
–
1 The change in the valuation analysis includes the removal of the current year net operating loss.
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.
11. ACCOUNTS RECEIVABLE
At March 31, 2013 and 2012, we carried accounts receivable balances of $208,781 and $400,114, respectively. All of those receivable
balances represented unpaid invoices under our DARPA contract. All of those amounts were subsequently collected.
12. FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES" (“ASC 820”) in connection with financial assets
and liabilities measured at fair value on a recurring basis subsequent to initial recognition.
ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when
determining fair value.
The fair value of our recorded derivative liabilities is determined based on unobservable inputs that are not corroborated by market data,
which is a Level 3 classification. We record derivative liabilities on our balance sheet at fair value with changes in fair value recorded in
our consolidated statements of operations. Our fair value measurements at the reporting date were as follows:
F-35
At March 31, 2013:
Description
Derivative Liabilities
Total Assets
At March 31, 2012:
Description
Derivative Liabilities
Total Assets
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
– $
– $
– $
– $
3,588,239
3,588,239
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
– $
– $
– $
– $
3,588,615
3,588,615
$
$
$
$
The following outlines the significant weighted average assumptions used to estimate the fair value information presented, in connection
with our April 2011 convertible note, July & August 2011 10% convertible notes and the September 2011 convertible note offerings and
with respect to warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
Risk free interest rate
Average expected life
Expected volatility
Expected dividends
Fiscal Year Ended March 31, 2013
0.05% - 1.56%
0.25 – 3.6 years
76.0% - 107.1%
None
The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the year ended March 31, 2013:
April 1,
2012
Recorded New
Derivative
Liabilities
Change in
estimated fair
value recognized
in results
of operations
Reclassification of
Derivative Liability
to Paid in
capital
March 31,
2013
Derivative
liabilities
$
3,588,615 $
– $
(44,705) $
44,329 $
3,588,239
F-36
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
The table below sets forth a summary of changes in the fair value of our Level 3 financial instruments for the year ended March 31, 2012:
April 1,
2011
Recorded
New Derivative
Liabilities
Change in
estimated fair
value recognized
in results
of operations
March 31,
2012
Derivative liabilities
$
2,002,896 $
2,352,622 $
(766,903) $
3,588,615
The fair value of derivative liabilities that we recorded in the fiscal year ended March 31, 2012 was related to our April 2011 convertible
note, July & August 2011 10% convertible notes and the September 2011 convertible note offerings (see Note 5) and was based upon an
independent valuation report.
13. 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. 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. On April 1, 2010, his salary was increased from $290,000 to $325,000 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. On April 1, 2010, his salary was increased from $185,000 to $195,000 per year.
LEASE COMMITMENTS
We currently rent approximately 2,300 square feet of executive office space at 8910 University Center Lane, Suite 660, San Diego, CA
92122 at the rate of $6,475 per month on a four year lease that expires in September 2013. We also rent approximately 1,700 square feet of
laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $2,917 per month on a two year
lease that expires in October 2014.
F-37
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
Rent expense approximated $119,000 for the fiscal years ended March 31, 2013 and 2012, respectively. As of March 31, 2013,
commitments under the lease agreements are as follows:
FISCAL YEAR ENDED MARCH 31,
2014
2015
2016
2017
8910 University Center Lane, Suite 660,
San Diego, CA 92122 office lease
$
40,211 $
– $
11585 Sorrento Valley Road, Suite 109, San
Diego, California 92121 office lease
Total Lease Commitments
$
38,174
78,385 $
22,755
22,755 $
– $
–
– $
–
–
–
LEGAL MATTERS
From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated
litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or
injunctions prohibiting us from selling one or more products or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that
period or future periods. Other than as mentioned here, we are not presently a party to any pending or threatened legal proceedings.
On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands company ("Gemini"), filed a complaint against the Company in the Supreme
Court of the State of New York, County of New York, entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012
(the "Complaint"). In the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's
common stock. The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to
Gemini on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal and
interest under the note into shares of the Company's common stock. The Complaint also alleges that the Company failed to issue shares
upon the presentation of an exercise notice under a warrant originally issued to Gemini on November 22, 2010. The lawsuit also alleges
that the Company should have issued shares pursuant to the exercise of a warrant issued in 2009. The Company believes that it has
defenses to the claims asserted and it continues to vigorously defend the lawsuit, which is in the late discovery stage. No trial date has yet
been set. There can be no assurances, however, that the litigation will be decided in the Company's favor as to all, or any part, of Gemini's
Complaint. An adverse decision in the litigation could have an adverse effect on the Company's operations and could be dilutive to the
Company's shareholders.
14. DARPA CONTRACT AND RELATED REVENUE RECOGNITION
As discussed in Note 1, we entered into a government contract with DARPA on September 30, 2011 and commenced work on such contract
in October 2011. Originally, only the base year (year one contract) was effective for the parties, however, effective August 16, 2012,
DARPA exercised the option on the second year of the contract. Years three through five are subject to DARPA exercising their option to
enter into contracts for those years.
As a result of achieving five contract milestones between October 1, 2011 and March 31, 2012, we reported $1,358,189 in contract revenue
for the fiscal year ended March 31, 2012. As a result of achieving six milestones in the fiscal year ended March 31, 2013, we reported
$1,230,004 in contract revenue for that fiscal year.
Originally, only the base year (year one contract covering October 1, 2011 through September 30, 2012) was effective for the parties,
however, effective August 16, 2012, DARPA exercised the option on the second year of the contract. Years three through five are subject
to DARPA exercising their option to enter into contracts for those years.
F-38
Year One Milestones
The year one contract (also referred to as “Year One”) contained eight milestones of which five were achieved during the fiscal year ended
March 31, 2012 and the remaining three were achieved during the fiscal year ended March 31, 2012. The details of the eight Year One
milestones achieved during the fiscal years ended March 31, 2012 and 2013 were as follows:
Year One Milestones Achieved During Fiscal Year Ended March 31, 2012:
Milestone 2.2.1.1 – Write requirements definition for the extracorporeal blood purification system and acquire necessary equipment with a
milestone payment of $358,284. Management considers this milestone to be substantive as it was not dependent on the passage of time nor
was it based solely on another party's efforts. We worked on this concept for a number of months beginning with a presentation to DARPA
in late 2010. We subsequently filed for IP protection on certain of the key concepts in March 2011 and our management visited selected
potential vendors to work out many of the details in the summer of 2011 before we were awarded the contract on September 30, 2011. We
ordered the breadboard device from one of our vendors before the milestone payment was made. We designed the breadboard prototype
and then presented the design to DARPA in order to achieve the milestone. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter. DARPA made the milestone payment in full.
Milestone 2.2.1.2 -- Fabricate breadboard prototypes for anticoagulation-free anti-sepsis extracorporeal system (ASEPSYS) device.
Fabricate prototype blood tubing sets. Acquire anti-thrombogenic surface modified hollow fiber plasma separators with a milestone
payment of $183,367. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it
based solely on another party's efforts. The consideration for this milestone covers the cost of having the breadboard prototype developed
to our specifications, hiring an engineer to supervise the project, acquiring specially coated cartridges and associated overhead. The report
was accepted by the contracting officer's representative and the invoice was submitted thereafter. DARPA made the milestone payment in
full.
Milestone 2.2.2.1 – Begin to develop the ADAPT device to efficiently capture sepsis precursors and acquire important equipment and
supplies with a milestone payment of $416,424. Management considers this milestone to be substantive as it was not dependent on the
passage of time nor was it based solely on another party's efforts. It was critically important to obtain certain pieces of lab equipment as
early as possible after winning the contract in order to measure the binding ability of sepsis precursors. We demonstrated that we were able
to capture one of the identified possible sepsis precursors as part of our submission for approval. The consideration was also designed to
cover the salaries of new and existing scientists, lab space, materials as well as fringe and corporate overhead. The report was accepted by
the contracting officer's representative and the invoice was submitted thereafter. DARPA made the milestone payment in full.
Milestone 2.2.2.2 - Perform initial screening of the different proposed capture agents by measuring binding affinity and kinetics using
surface plasmon resonance (SPR) or biolayer surface interferometry (BLI) with a milestone payment amount of $216,747. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We demonstrated that we were able to capture several of the identified possible sepsis precursors as part of our submission for
approval. The consideration was also designed to cover the salaries of new and existing scientists, lab space, materials as well as fringe
and corporate overhead. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter. DARPA made the milestone payment in full.
Milestone 2.2.1.3 - Assemble and test breadboard ASEPSYS devices. Evaluate the use of different techniques and approaches to
eliminating anticoagulants. The milestone payment amount was $183,367. Management considers this milestone to be substantive as it
was not dependent on the passage of time nor was it based solely on another party's efforts. The consideration for this milestone covers the
cost of assembling and testing the breadboard prototype that we had developed to our specifications, hiring an engineer to supervise the
project, testing specially coated cartridges and associated overhead. The report was accepted by the contracting officer's representative and
the invoice was submitted thereafter. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter. DARPA made the milestone payment in full.
Year One Milestones Achieved During Fiscal Year Ended March 31, 2013:
Milestone 2.2.2.3 – Perform preliminary quantitative real time PCR to measure viral load, and specific DNA or RNA targets. The milestone
payment was $216,747. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it
based solely on another party's efforts. We demonstrated that we were able to measure viral load of one or more targets as part of our
submission for approval. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.2.1.4 – Obtain all necessary IRB documentation and obtain both institutional and Government approval in accordance with IRB
documentation submission guidance prior to conducting human or animal testing. The milestone payment was $183,367. Management
considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's
efforts. We obtained all of the required documentation from both institutional and Government authorities. The report was accepted by the
contracting officer's representative and the invoice was submitted thereafter.
F-39
Milestone M2 – Target capture > 50% in 24 hours for at least one target in blood or blood components. The milestone payment was
$216,747. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we were able to capture > 50% in 24 hours of one of the agreed targets in blood or blood
components. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Year Two Milestones
The year two contract (also referred to as “Year Two”) contained eight milestones of which three were achieved during the fiscal year
ended March 31, 2013. The details of the three Year Two milestones achieved during the fiscal year ended March 31, 2013 were as
follows:
Milestone 2.3.3.1 – Build the ADAPT capture cartridges with the identified affinity agents. Measure the rate of capture of the specific
targets from in ex vivo recirculation experiments from cell culture and blood. The milestone payment was $208,781. Management considers
this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we were able build the ADAPT capture cartridges with the identified affinity agents and to measure the rate of capture of
the specific targets from in ex vivo recirculation experiments from cell culture and blood. The report was accepted by the contracting
officer's representative and the invoice was submitted thereafter.
Milestone 2.3.2.1 – Demonstrate the effectiveness of the prototype device in vivo in animals preventing platelet activation or clotting in at
least a 2 hour blood pumping experiment at 75 mL/min blood flow. The milestone payment amount was $195,581. Management considers
this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. The
prototype device was successfully used in vivo in animals preventing platelet activation or clotting in at least a 2 hour blood pumping
experiment at 75 mL/min blood flow. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone M4 – Target capture > 50% in 24 hours for at least 5 targets in blood or blood components. The milestone payment was
$208,781. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on
another party's efforts. We demonstrated that we were able to capture > 50% in 24 hours for at least 5 of the agreed targets in blood or
blood components. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
F-40
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2013 AND 2012
15. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the fiscal year ended March 31, 2013, we did not deem any unusual or infrequently occurring items or
adjustments to be material to our fourth quarter results.
During the fourth quarter of the fiscal year ended March 31, 2012, we did not deem any unusual or infrequently occurring items or
adjustments to be material to our fourth quarter results.
16. SUBSEQUENT EVENTS
Management has evaluated events subsequent to March 31, 2013 through the date that the accompanying condensed consolidated financial
statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of
and/or disclosure in such financial statements.
In April 2013, we invoiced the US Government for the twelfth milestone under our DARPA contract in the amount of $195,581 and
subsequently received that payment.
In May 2013, we issued to a scientific advisory board member and a scientific consultant a three year option to purchase 125,000 shares of
our common stock at a price of $0.11 per share.
In June 2013, we entered into a 5% convertible note with our corporate law firm for the amount of $47,000, which represented
approximately one-half of the amount we owed to that firm. The convertible note has a maturity date of October 1, 2014 and bears interest
at five percent per annum. The note is convertible at the option of the holder into shares of our common stock at a 10% discount to the
market price of the common stock on the date prior to conversion with a floor price on such conversions of $0.07 per share.
In June 2013, we completed a unit subscription agreement with three accredited investors (the “Purchasers”) pursuant to which the
Purchasers purchased $128,000 of units (the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock at a
price per share of $0.081 and (ii) a warrant to purchase such number of shares of Common Stock as shall equal (a) fifty percent of the
Subscription Amount divided by (b) $0.081 (the "Warrant Shares") at an exercise price of $0.121 per Warrant Share. This resulted in the
issuance of 1,580,248 shares of Common Stock and 790,124 Warrant Shares.
In June 2013, we issued to our CEO the remaining 3,400,000 shares under his restricted share grant (see Note 6), all of which were vested.
In the three months ended June 30 2013, we issued 3,675,278 shares of restricted common stock to the holders of three notes issued by the
Company in exchange for the partial conversion of principal and interest in an aggregate amount of $246,500 at an average conversion
price of $0.07 per share.
In June 2013, we borrowed $80,000 at a 10% interest rate from one of our directors. We repaid that loan and paid accrued interest of $133
in June 2013.
In July 2013, we borrowed $400,000 from two of our directors under 90 day notes bearing 10% interest (the “Notes”). If we do not pay
back those loans by October 9, 2013, then the notes will bear interest at a penalty rate of 12% and the noteholders will have the right at
their discretion (i) to convert their principal and accrued interest into shares of common stock at $0.088 per share (the “Conversion Price”)
and (ii) receive warrants to purchase common stock equal to 50% of the principal converted under the Notes, with an exercise price of
$0.132 per share. We have reserved 6,931,818 shares of common stock to support the conversion in full of the Notes and accrued interest as
well as the exercise in full of the warrants (should such conversion and/or issuance occur).
F-41
Exhibit 3.2
BISHOP EQUITIES, INC.
BY-LAWS
ARTICLE I - MEETINGS OF STOCKHOLDERS
1. Stockholders' Meetings shall he held in the office of the corporation, at Carson City, NV, or at such other place or places as the
Directors shall from time to time determine.
2. The annual meeting of the stockholders of this corporation shall be held at 11 A.M., on the 1st day of June of each year
beginning in 1992, at which time there shall be elected by the stockholders of the corporation a Board of Directors for the ensuing year, and
the stockholders shall transact such other business as shall properly come before them.
3. A notice setting out the time and place of such annual meeting shall be mailed postage prepaid to each of the stockholders of
record, at his address and as the same appears on the stock book of the Company, or if no such address appears, at his last known place of
business, at least ten (10) days prior to the annual meeting.
4. If a quorum is not present at the annual meeting, the stockholders present, in person or by proxy, may adjourn to such future
time as shall be agreed upon by them, and notice of such adjournment shall be mailed, postage prepaid, to each stockholder of record at
least ten (10) days before such date to which the meeting was adjourned; but if a quorum is present, they may adjourn from day to day as
they see fit, and no notice of such adjournment need be given.
5. Special meetings of the stockholders may be called at anytime by the President; by all of the directors provided there are no
more than three, or if more than three, by any three Directors; or by the holder of a majority share of the capital stock of the corporation.
The Secretary shall send a notice of such called meeting to each stockholder of record at least ten (10) days before such meeting, and such
notice shall state the time and place of the meeting, and the object thereof. No business shall be transacted at a special meeting except as
stated in the notice to the stockholders, unless by unanimous consent of all stockholders present, either in person or by proxy, all such stock
being represented at the meeting.
6. A majority of the stock issued and outstanding, either in person or by proxy, shall constitute a quorum for the transaction of
business at any meeting of the stockholders.
7. Each stockholder shall be entitled to one vote for each share of stock in his own name on the books of the company, whether
represented in person or by proxy.
8. All proxies shall be in writing and signed.
9. The following order of business shall be observed at all meetings of the stockholders so far as is practicable:
a.
b.
c.
d.
e.
f.
g.
Call the roll;
Reading, correcting, and approving of the minutes of the previous meeting;
Reports of officers;
Reports or Committees;
Election of Directors;
Unfinished business; and
New business.
ARTICLE II - STOCK
1. Certificates of stock shall be in a form adopted by the Board of Directors and shall be signed by the President and Secretary of
the Corporation.
2. All certificates shall be consecutively numbered; the name of the person owning the shares represented thereby, with the
number of such shares and the date of issue shall be entered on the company's books.
3. All certificates of stock transferred by endorsement thereon shall be surrendered by cancellation and new certificates issued to
the purchaser or assignee.
ARTICLE III - DIRECTORS
1. A Board of Directors, consisting of at least one (1) person shall be chosen annually by the stockholders at their meeting to
manage the affairs of the company. The Directors' term of office shall be one (1) year, and Directors may be re-elected for successive
annual terms.
2
2. Vacancies on the board of Directors by reason of death, resignation or other causes shall be filled by the remaining Director or
Directors choosing a Director or Directors to fill the unexpired term.
3. Regular meetings of the Board of Directors shall be held at 1 P.M., on the 1st day of June of each year beginning in 1992 at the
office of the company at Carson City, NV, or at such other time or place as the Board of Directors shall by resolution appoint; special
meetings may be called by the President or any Director giving ten (10) days notice to each Director. Special meetings may also be called
by execution of the appropriate waiver of notice and call when executed by a majority of the Directors of the company. A majority of the
Directors shall constitute a quorum.
4. The Directors shall have the general management and control of the business and affairs of the company and shall exercise all
the powers that may be exercised or performed by the corporation, under the statutes, the certificates of incorporation, and the By-Laws.
Such management will be by equal vote of each member of the Board of Directors with each Board member having an equal vote.
5. A resolution, in writing, signed by all or a majority of the members of the Board of Directors, shall constitute action by the
Board of Directors to effect therein expressed, with the same force and effect as though such resolution had been passed at a duly convened
meeting; and it shall be the duty of the Secretary of record every such resolution in the Minute Book or the corporation under its proper
date.
ARTICLE IV - OFFICERS
1. The officers of this company shall consist of: a President, one or more Vice Presidents, Secretary, Treasurer, Resident Agent,
and such other officers as shall, from time to time, be elected or appointed by the Board of Directors.
2. The PRESIDENT shall preside at all meetings of the Directors and the Stockholders and shall have general charge and control
over the affairs of the corporation subject to the Board of Directors. He shall sign or countersign all certificates, contracts and other
instruments of the corporation as authorized by the Board of Directors and shall perform all such other duties as are incident to his office or
are required by him by the Board of Directors.
3. The VICE PRESIDENT shall exercise the functions of the President during the absence or disability of the President and shall
have such powers and such duties as may be assigned to him from time to time by the Board of Directors.
3
4. The SECRETARY shall issue notices for all meetings as required by the By-Laws, shall keep a record of the minutes of the
proceedings of the meetings of the Stockholders and Directors, shall have charge of the corporate books, and shall make such reports and
perform such other duties as are incident to his office, or properly required of him by the Board of Directors. He shall be responsible that
the corporation complies with Section 78.105 of the Nevada Corporation Laws and supplies to the Nevada Resident Agent or Principal
Office in Nevada, any and all amendments to the Corporation's Articles of Incorporation and any and all amendments or changes to the By-
Laws of the Corporation. In compliance with Section 78.105, he will also supply to the Nevada Resident Agent or Principal Office in
Nevada, and maintain, a current statement setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the
present and complete Post Office address, including street and number, if any, where such stock ledger or duplicate stock ledger specified in
the section is kept.
5. The TREASURER shall have the custody of all monies and securities of the corporation and shall keep regular books of
account. He shall disburse the funds of the corporation in payment of the just demands against the corporation, or as may be ordered by the
Board of Directors, making proper vouchers for such disbursements and shall render to the Board of Directors, from time to time, as may be
required of him, an account of all his transactions as Treasurer and of the financial condition of the corporation. He shall perform all duties
incident to his office or which are properly required of him by the Board of Directors.
6. The RESIDENT AGENT shall be in charge of the corporation's registered office in the State of Nevada, upon whom process
against the corporation may be served and shall perform all duties required of him by statute.
7. The salaries of all officers shall be fixed by the Board of Directors and may be changed from time to time by a majority vote of
the Board.
8. Each of such officers shall serve for a term of one (1) year or until their successors are chosen and qualified. Officers may be re-
elected or appointed for successive annual terms.
9. The Board of Directors may appoint such other officers and agents, as it shall deem necessary or expedient, who shall hold
their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board
of Directors.
4
ARTICLE V - INDEMNIFICATION OF OFFICERS AND DIRECTORS
1. The corporation shall indemnify any and all of its Directors and Officers, and its former Directors and Officers, or any person
who may have served at the Corporations request as a Director or Officer of another corporation in which it owns shares of capital stock or
of which it is a creditor, against expenses actually and necessarily incurred by them in connection with the defense of any action, suit or
proceeding in which they, or any of them, are made parties, or a party, by reason of being or having been Director(s) or Officer(s) of the
corporation, or of such other corporation, except, in relation to matters as to which any such Director or Officer or former Director or
Officer or person shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of duty.
Such indemnification shall not be deemed exclusive of any other rights to which those indemnified may be entitled, under By-Law,
agreement, vote of stockholders or otherwise.
ARTICLE VI - AMENDMENTS
1. Any of these By-Laws may be amended by a majority vote of the stockholders at any annual meeting or at any special meeting
called for that purpose.
2. The Board of Directors may amend the By-Laws or adopt additional By-laws, but shall not alter or repeal any By-Laws adopted
by the stockholders of the company.
CERTIFIED TO BE THE BY-LAWS OF:
BISHOP EQUITIES, INC.
BY:
/s/ Maureen Abato
Secretary
5
FIRST AMENDMENT
TO
BY-LAWS
OF
AETHLON MEDICAL, INC.
Effective as of July 24, 2012, Section 1 of Article III of the By-laws of Aethlon Medical, Inc. (the “Corporation”) hereby is
amended and restated in its entirety as follows:
“1. The number of Directors constituting the Board of Directors shall be no less than one (1) and shall be fixed by resolution of the
Board of Directors from time to time. The Directors’ term of office shall be one (1) year, and Directors may be re-elected for
successive annual terms.”
I hereby certify that (a) I am the duly elected and acting Secretary of the Corporation, and (b) the foregoing amendment was duly
adopted by resolution of the Board of Directors of the Corporation on July 24, 2012.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of July 24, 2012.
/s/ James A. Joyce
James A. Joyce
Secretary
6
Exhibit 10.78
THIS NOTE AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS. NEITHER THE NOTE NOR SUCH SHARES OF COMMON STOCK MAY BE OFFERED FOR SALE,
SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND UNDER ANY APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF
COUNSEL, SATISFACTORY TO THE COMPANY, THAT AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE.
AETHLON MEDICAL, INC.
10% CONVERTIBLE NOTE
$____________
FOR VALUE RECEIVED, Aethlon Medical, Inc., a Nevada corporation (the "Company"), promises to pay to ______________________,
whose address is _________________________, or registered assigns (the "Holder"), the sum of _________________________
($___________) in lawful money of the United States of America on or before the Maturity Date as defined herein, with all Interest
thereon as defined and specified herein.
1 . Interest. Unless there shall be an Event of Default, this Note shall bear interest ("Interest") equal to ten percent (10%) per
annum on the unpaid principal balance, computed on a three hundred sixty (360)-day year, during the term of the Note. The Company shall
pay all Interest on or before the Maturity Date. In no event shall the rate of Interest payable on this Note exceed the maximum rate of
Interest permitted to be charged under applicable law. On and after an Event of Default, this Note shall bear Interest equal to twelve percent
(12%) per annum on the unpaid principal balance, computed on a three hundred sixty (360)-day year.
2 . Payments. All payments under this Note shall first be credited against the payment of accrued and unpaid Interest, if any,
and the remainder shall be credited against principal. All payments due hereunder shall be payable in legal tender of the United States of
America, and in same day funds delivered to Holder by cashier's check, certified check, bank wire transfer or any other means of
guaranteed funds to the mailing address provided below, or at such other place as the Holder shall designate in writing for such purpose
from time to time. If a payment under this Note otherwise would become due and payable on a Saturday, Sunday or legal holiday (any other
day being a "Business Day"), the due date of the payment shall be extended to the next succeeding Business Day, and Interest, if any, shall
be payable thereon during such extension.
3 . Pre-Payments and Maturity Date. This Note shall be due and payable in full, including all accrued Interest thereon, on
October 9, 2013 (the "Maturity Date"). At any time on or prior to the Maturity Date, the Company shall have the right to prepay this Note,
in whole or in part, provided that on such prepayment date, the Company will pay in respect of the redeemed Note cash equal to the face
amount plus accrued Interest on the Note (or portion thereof) redeemed. At any time after the Maturity Date, the Company shall have the
right to repay this Note subject to the right of the Holder to convert in advance of such repayment date. The Company may prepay this Note
at any time after issuance without penalty.
4. Conversion of Note Upon an Event of Default; Issuance Of Purchase Warrant.
4.1 Conversion of Note/Conversion Price. At any time after the Maturity Date, any unpaid portion of the principal and
Interest due and payable under this Note shall be convertible in whole or in part, at the option of the Holder, into shares of the Company's
Common Stock (the "Common Stock") at a price per share equal to 80% of the closing bid price of the Common Stock of the Company on
the trading day immediately prior to the date of issuance of this Note (the "Conversion Price"). For clarity, the Conversion Price of this
Note is $0.088 per share. No fractional shares will be issued. In lieu thereof, the Company will pay cash for fractional share amounts equal
to the fair market value of the Common Stock as quoted as the closing bid price of the Common Stock on the date of conversion.
4.2 Adjustment Based Upon Stock Dividends, Combination of Shares or Recapitalization. The Conversion Price shall
be adjusted in the event that the Company shall at any time (i) pay a stock dividend on the Common Stock; (ii) subdivide its outstanding
Common Stock into a greater number of shares; (iii) combine its outstanding Common Stock into a smaller number of shares; (iv) issue by
reclassification of its Common Stock any other special capital stock of the Company; or (v) distribute to all holders of Common Stock
evidences of indebtedness or assets (excluding cash dividends) or rights or warrants to subscribe for Common Stock (other than those
mentioned above). Upon the occurrence of an event requiring adjustment of the Conversion Price, and thereafter, the Holder, upon
surrender of this Note for conversion, shall be entitled to receive the number of shares of Common Stock or other capital stock of the
Company that the Holder would have owned or have been entitled to receive after the happening of any of the events described above had
this Note been converted immediately prior to the happening of such event.
4.2 Adjustment Based Upon Merger or Consolidation. In case of any consolidation or merger to which the Company
is a party (other than a merger in which the Company is the surviving entity and which does not result in any reclassification of or change in
the outstanding Common Stock of the Company), or in case of any sale or conveyance to another person, firm, or corporation of the
property of the Company as an entirety or substantially as an entirety, the Holder shall have the right to convert this Note into the kind and
amount of securities and property (including cash) receivable upon such consolidation, merger, sale or conveyance by the Holder of the
number of shares of Common Stock into which such Note might have been converted immediately prior thereto.
4.3 Exercise of Conversion Privilege.
4.3.1 The Conversion Privilege provided for in this Note shall be exercisable by the Holder by written notice
to the Company or its successor and the surrender of this Note in exchange for the number of shares (or other securities and property,
including cash, in the event of an adjustment of the Conversion Price) into which this Note is convertible based upon the Conversion Price.
in full of the principal amount of the accrued Interest on this Note.
4.3.2 The Holder's conversion right may be exercised at any time and from time to time but prior to payment
4.3.3 The Holder may exercise the right to convert all or any portion of the principal amount and accrued
Interest on this Note by delivery of (i) this Note and (ii) a completed Conversion Notice in the form attached as Exhibit A on a Business
Day to the Company's principal executive offices. Such conversion shall be deemed to have been made immediately prior to the close of
business on the Business Day of such delivery a conversion notice (the "Conversion Date"), and the Holder shall be treated for all purposes
as the record holder of the shares of Common Stock into which this Note is converted as of such date.
4 . 4 Issuance of Certificate. Upon the conversion of this Note, the Company shall, within five (5) Business Days of
such conversion, issue to the Holder a certificate or certificates representing the number of shares of the Common Stock (or other securities
in the event of an adjustment of the Conversion Price) to which the conversion relates. In the alternative, the Company shall instruct the
issuance of shares electronically as a "DWAC" issuance.
4.5 Issuance of Purchase Warrant. Upon the conversion of this Note, or any portion of the principal or Interest due
and payable hereunder, the Holder shall receive, in addition to the Common Stock issuable hereunder, a warrant (the "Warrant") to
purchase shares of Common Stock equal to (x) 50% of the dollar amount of the principal and Interest being converted, divided by (y)
$0.088 (the "Warrant Shares"). The Warrant Shares shall be exercisable at a per share price of $0.132 per share (equivalent to 120% of the
closing bid price of the Common Stock on the trading day immediately prior to the issuance date of this Note). The Warrant shall be in the
form of that attached hereto as Exhibit B.
5 . Reservation of Shares of Common Stock. The Company shall reserve out of its authorized shares of Common Stock, and
other securities in the event of an adjustment of the Conversion Price, a number of shares sufficient to enable it to comply with its
obligation to issue shares of Common Stock under this Note and under the Warrant, and other securities in the event of an adjustment of the
Conversion Price, upon the conversion of this Note or the exercise of the Warrant.
6. Transfer Restrictions; Exemption from Registration.
6.1 The Holder agrees that (i) this Note and the shares of Common Stock issuable upon conversion have not been
registered under the Act and may not be sold or transferred without registration under the Act or unless an exemption from such registration
is available; (ii) the Holder has acquired this Note and will acquire the Common Stock for its own account for investment purposes only
and not with a view toward resale or distribution; and (iii) if a registration statement that includes the Common Stock is not effective at the
time Common Stock is issued to Holder upon conversion under this Note, and the Common Stock is not exempt from registration under
Rule 144, then the Common Stock shall be inscribed with the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF HOLDER'S COUNSEL, IN A CUSTOMARY FORM, THAT
REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT.
6.2 If an opinion of counsel of Holder provides that registration is not required for the proposed conversion or transfer
of this Note or the proposed transfer of the shares of Common Stock issuable upon conversion and that the proposed conversion or transfer
in the absence of registration would require the Company to take any action including executing and filing forms or other documents with
the Securities and Exchange Commission (the "SEC") or any state securities agency, or delivering to the Holder any form or document in
order to establish the right of the Holder to effectuate the proposed conversion or transfer, the Company agrees promptly, at its expense, to
take any such action; and provided, further, that the Company will reimburse the Holder in full for any expenses (including but not limited
to the fees and disbursements of such counsel, but excluding brokers' commissions) incurred by the Holder or owner of shares of Common
Stock on his, her or its behalf in connection with such conversion or transfer of the Note or transfer of the shares of Common Stock.
7 . Default. The Company shall perform its obligations and covenants hereunder pertaining to the indebtedness evidenced
hereby. The following provisions shall apply upon failure of the Company so to perform.
7.1 Event of Default. Any of the following events shall constitute an "Event of Default" hereunder:
7.1.1 Failure by the Company to pay principal when due and payable hereunder on the Maturity Date;
7.1.2 The entry of an order for relief under Federal Bankruptcy Code as to the Company or entry of any order
appointing a receiver or trustee for the Company or approving a petition in reorganization or other similar relief under bankruptcy or similar
laws in the United States of America or any other competent jurisdiction, and if such order, if involuntary, is not satisfied or withdrawn
within sixty (60) days after entry thereof; or the filing of a petition by the Company seeking any of the foregoing, or consenting thereto; or
the filing of a petition to take advantage of any debtor's act; or making a general assignment for the benefit of creditors; or admitting in
writing inability to pay debts as they mature.
other amounts due hereunder, shall become immediately due and payable.
7.2 Acceleration. Upon any Event of Default, all sums evidenced hereby, including all principal, Interest, fees and all
within the respective periods prescribed above, the Company will give prompt written notice thereof to the Holder of this Note.
7 . 3 Notice by Company. Upon the happening of any Event of Default specified in this paragraph that is not cured
7 . 4 No Waiver. Failure of the Holder to exercise any option hereunder shall not constitute a waiver of the right to
exercise the same in the event of any subsequent Event of Default, or in the event of continuance of any existing Event of Default after
demand or performance thereof.
8. Assignment, Transfer or Loss of the Note.
8.1 No Holder of this Note may assign, transfer, hypothecate or sell all or any part of this Note or in any way alienate
or encumber the Note without the express written consent of the Company, the granting or denial of which shall be within the absolute
discretion of the Company. Any attempt to effect such transfer without the consent of the Company shall be null and void. The Company
has not registered this Note under the Act or the applicable securities laws of any state in reliance on exemptions from registration. Such
exemptions depend upon the investment intent of the Holder at the time he acquires his Note. The Holder is acquiring this Note for his own
account for investment purposes only and not with a view toward distribution or resale of such Note within the meaning of the Act and the
applicable securities laws of any state. The Company shall be under no duty to register the Note or to comply with an exemption in
connection with the sale, transfer or other disposition under the applicable laws and regulations of the Act or the applicable securities laws
of any state. The Company may require the Holder to provide, at his expense, an opinion of counsel satisfactory to the Company to the
effect that any proposed transfer or other assignment of the Note will not result in a violation of the applicable federal or state securities
laws or any other applicable federal or state laws or regulations.
9. Notices. All notices provided for herein shall be validly given if in writing and delivered personally or sent by certified mail,
postage prepaid, to the office of the Company or such other address as the Company may from time to time designate in writing sent by
certified mail, postage prepaid, to the Holder at his address set forth above or such other address as the Holder may from time to time
designate in writing to the Company by certified mail, postage prepaid.
1 0 . Usury. All Interest, Default Interest, fees, charges, goods, things in action or any other sums or things of value, or other
contractual obligations (collectively, the "Additional Sums") paid by the Company hereunder, whether pursuant to this Note or otherwise,
with respect to the indebtedness evidenced hereby, or any other document or instrument in any way pertaining to the indebtedness, which,
under the laws of the State of California may be deemed to be Interest with respect to such loan or indebtedness, shall, for the purpose of
any laws of the State of California, which may limit the maximum amount of Interest to be charged with respect to such loan or
indebtedness, be payable by the Company as, and shall be deemed to be, Interest and for such purposes only, the agreed upon and
contracted rate of Interest shall be deemed to be increased by the Additional Sums. Notwithstanding any provision of this Note to the
contrary, the total liability for payments in the nature of Interest under this Note shall not exceed the limits imposed by applicable law. The
Company shall not assert a claim, and shall actively resist any attempts to compel it to assert a claim, respecting a benefit under any present
or future usury laws against any Holder of this Note.
11. Construction. This Note shall be governed as to its validity, interpretation, construction, effect and in all other respects by
and in accordance with the laws and interpretations thereof of the State of California. Unless the context otherwise requires, the use of
terms in singular and masculine form shall include in all instances singular and plural number and masculine, feminine and neuter gender.
1 2 . Severability. In the event any one or more of the provisions contained in this Note or any future amendment hereto shall
for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any
other provision of this Note or such other agreement, and in lieu of each such invalid, illegal or unenforceable provision there shall be
added automatically as a part of this Note a provision as similar in terms to such invalid, illegal or unenforceable provision as may be
possible and be valid, legal and enforceable.
1 3 . Entire Agreement. This Note represents the entire agreement and understanding between the parties concerning the
subject matter hereof and supersede all prior and contemporaneous agreements, understandings, representations and warranties with respect
thereto.
1 4 . Governing Law; Jurisdiction; Jury Trial. The corporate laws of the State of Nevada shall govern all issues concerning
the relative rights of the Company and its shareholders. All other questions concerning the construction, validity, enforcement and
interpretation of this Note shall be governed by the internal laws of the State of California, without giving effect to any choice of law or
conflict of law provision or rule (whether of the State of California or any other jurisdictions) that would cause the application of the laws
of any jurisdictions other than the State of California. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of San Diego for the adjudication of any dispute hereunder or in connection herewith or therewith, or with
any transaction contemplated hereby or discussed herein, or in any manner arising in connection with or related to the transactions
contemplated hereby or involving the parties hereto whether at law or equity and under any contract, tort or any other claim whatsoever
and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action
or proceeding is improper. Each party hereby irrevocably waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing or faxing a copy thereof to such party at the address for such notices as listed in this Note and
agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law. EACH PARTY HEREBY IRREVOCABLY WAIVES ANY
RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION
CONTEMPLATED HEREBY.
1 5 . Headings. The headings used in this Note are used for convenience only and are not to be considered in construing or
interpreting this Note.
16. Definitions.
"Person" means any individual, corporation, partnership, joint venture, trust, estate, unincorporated organization or government or
any agency or political subdivision thereof.
1 7 . Miscellaneous. Except as otherwise provided herein, the Company waives demand, diligence, presentment for payment
and protest, notice of extension, dishonor, maturity and protest. Time is of the essence with respect to the performance of each and every
covenant, condition, term and provision hereof.
IN WITNESS WHEREOF, this Note has been issued on the 9th day of July 2013.
AETHLON MEDICAL, INC.
By /s/ James Frakes
James Frakes
Chief Financial Officer
EXHIBIT A
CONVERSION NOTICE
(To be signed only upon conversion of this Note)
TO: AETHLON MEDICAL, INC.
The undersigned, the registered holder of the 10 % Convertible Note (the "Note") of AETHLON MEDICAL, INC. (the "Company"),
hereby surrenders the Note for conversion into shares of Common Stock of the Company (the "Common Stock") to the extent of $_______
unpaid principal amount of the Note and $_______ unpaid accrued Interest due under the Note, all in accordance with the provisions of
such Note. The undersigned requests (i) that a certificate representing shares of Common Stock, bearing the appropriate legends, be issued
to the undersigned, and (ii) if the unpaid principal amount so converted is less than the entire unpaid principal amount of the Note, that a
new substitute note representing the portion of said unpaid principal amount that is not so converted be issued in accordance with the
provisions of the Note.
________________________________________
(Signature and name of the registered holder)
________________________________________
Print Name
Dated:___________________________________
EXHIBIT B
Form or Common Stock Purchase Warrant
(To be issued only upon conversion of this Note)
NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT
BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B)
AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT
TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE
PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING
ARRANGEMENT SECURED BY THE SECURITIES.
Right to Purchase _______________ shares of Common Stock of Aethlon
Medical, Inc. (subject to adjustment as provided herein)
COMMON STOCK PURCHASE WARRANT
No. _____________
Issue Date: ____________
AETHLON MEDICAL, INC., a corporation organized under the laws of the State of Nevada (the “Company”), hereby certifies
that, for value received, the_____________ (the “Holder”) is entitled, subject to the terms set forth below, to purchase from the Company
at any time commencing after the Issue Date until 5:00 p.m., P.S.T, on the Expiration Date (as defined below), up to _________ fully paid
and non-assessable shares of Common Stock at a per share purchase price of $0.132. The aforedescribed purchase price per share, as
adjusted from time to time as herein provided, is referred to herein as the "Purchase Price." This Common Stock Purchase Warrant (this
“Warrant”) is being issued to the Holder in connection with the conversion of that 10% Convertible Promissory Note dated July__, 2013
issued by Company to Holder. This Warrant may be exercised at any time and from time to time but no later than 5:00 p.m., P.S.T., seven
years from the date of issuance of this Warrant (the “Expiration Date”), at which point it shall become void and all rights under this Warrant
shall cease.
As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
(a) The term “Company” shall include Aethlon Medical, Inc. and any corporation which shall succeed or assume the
obligations of Aethlon Medical, Inc. hereunder.
(b) The term “Common Stock” includes (a) the Company's Common Stock, $.001 par value per share, as authorized on the
date of this Warrant, and (b) any other securities into which or for which any of the securities described in (a) may be converted or
exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise.
(c) The term “Other Securities” refers to any stock (other than Common Stock) and other securities of the Company or any
other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the
exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in
exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise.
(d) The term “Warrant Shares” shall mean the Common Stock issuable upon exercise of this Warrant.
1. Exercise of Warrant.
1 . 1 . Number of Shares Issuable upon Exercise. From and after the Issue Date through and including the Expiration
Date, the Holder hereof shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2
or upon exercise of this Warrant in part in accordance with subsection 1.3, shares of Common Stock of the Company, subject to adjustment
pursuant to Section 4.
1.2. Full Exercise. This Warrant may be exercised in full by the Holder hereof by delivery of an original or facsimile
copy of the form of subscription attached as Exhibit A hereto (the “Subscription Form”) duly executed by such Holder and delivery within
two (2) days thereafter of payment, in cash, wire transfer or by certified or official bank check payable to the order of the Company, in the
amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price
then in effect. The original Warrant is not required to be surrendered to the Company until it has been fully exercised.
1 . 3 . Partial Exercise. This Warrant may be exercised in part (but not for a fractional share) by delivery of a
Subscription Form in the manner and at the place provided in subsection 1.2, except that the amount payable by the Holder on such partial
exercise shall be the amount obtained by multiplying (a) the number of whole shares of Common Stock designated by the Holder in the
Subscription Form by (b) the Purchase Price then in effect. On any such partial exercise, provided the Holder has surrendered the original
Warrant, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant of like
tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, the
whole number of shares of Common Stock for which such Warrant may still be exercised.
1 . 4 . Company Acknowledgment. The Company will, at the time of the exercise of the Warrant, upon the request of
the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder any rights to which such Holder shall continue
to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such
failure shall not affect the continuing obligation of the Company to afford to such Holder any such rights.
1.5 Delivery of Stock Certificates, etc. on Exercise. The Company agrees that the shares of Common Stock purchased
upon exercise of this Warrant shall be deemed to be issued to the Holder hereof as the record owner of such shares as of the close of
business on the date on which delivery of a Subscription Form shall have occurred and payment shall have been made for such shares as
aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within five (5) business days
thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and
delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct in compliance
with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and non-assessable shares of
Common Stock (or Other Securities) to which such Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which
such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then fair market value of one full share of Common
Stock, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled
upon such exercise pursuant to Section 1 or otherwise.
2. Adjustment for Reorganization, Consolidation, Merger, etc.
2.1. Fundamental Transaction. If, at any time while this Warrant is outstanding, (A) the Company effects any merger or
consolidation of the Company with or into another entity, (B) the Company effects any sale of all or substantially all of its assets in one or a
series of related transactions, (C) any tender offer or exchange offer (whether by the Company or another entity) is completed pursuant to
which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, (D) the Company
consummates a stock purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization,
spin-off or scheme of arrangement) with one or more persons or entities whereby such other persons or entities acquire more than 50% of
the outstanding shares of Common Stock (not including any shares of Common Stock held by such other persons or entities making or
party to, or associated or affiliated with the other persons or entities making or party to, such stock purchase agreement or other business
combination), (E) any "person" or "group" (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act) is or shall
become the "beneficial owner" (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% of the aggregate Common
Stock of the Company, or (F) the Company effects any reclassification of the Common Stock or any compulsory share exchange pursuant
to which the Common Stock is effectively converted into or exchanged for other securities, cash or property (in any such case, a
"Fundamental Transaction"), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each
Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at
the option of the Holder, (a) upon exercise of this Warrant, the number of shares of Common Stock of the successor or acquiring
corporation or of the Company, if it is the surviving corporation, and any additional consideration (the "Alternate Consideration")
receivable upon or as a result of such reorganization, reclassification, merger, consolidation or disposition of assets by a Holder of the
number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event or (b) if the Company is acquired
in (1) a transaction where the consideration paid to the holders of the Common Stock consists solely of cash, (2) a “Rule 13e-3 transaction”
as defined in Rule 13e-3 under the 1934 Act, or (3) a transaction involving a person or entity not traded on a national securities exchange,
the Nasdaq Global Select Market, the Nasdaq Global Market or the Nasdaq Capital Market, cash equal to the Black-Scholes Value. For
purposes of any such exercise, the determination of the Purchase Price shall be appropriately adjusted to apply to such Alternate
Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Company shall apportion the Purchase Price among the Alternate Consideration in a reasonable manner reflecting the
relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the
securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. To the extent necessary to effectuate
the foregoing provisions, any successor to the Company or surviving entity in such Fundamental Transaction shall issue to the Holder a
new warrant consistent with the foregoing provisions and evidencing the Holder's right to exercise such warrant into Alternate
Consideration. The terms of any agreement pursuant to which a Fundamental Transaction is effected shall include terms requiring any such
successor or surviving entity to comply with the provisions of this Section 3.1 and insuring that this Warrant (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous to a Fundamental Transaction. “Black-Scholes Value” shall
be determined in accordance with the Black-Scholes Option Pricing Model obtained from the “OV” function on Bloomberg L.P. using (i) a
price per share of Common Stock equal to the VWAP of the Common Stock for the Trading Day immediately preceding the date of
consummation of the applicable Fundamental Transaction, (ii) a risk-free interest rate corresponding to the U.S. Treasury rate for a period
equal to the remaining term of this Warrant as of the date of such request and (iii) an expected volatility equal to the 100 day volatility
obtained from the HVT function on Bloomberg L.P. determined as of the Trading Day immediately following the public announcement of
the applicable Fundamental Transaction.
2 . 2 . Dissolution. In the event of any sale or conveyance of all or substantially all of the assets of the Company in
connection with a plan of complete liquidation of the Company, or in the case of the dissolution, liquidation or winding-up of the
Company, all rights under this Warrant shall terminate on a date fixed by the Company, such date so fixed to be not earlier than the date of
the commencement of the proceedings for such dissolution, liquidation or winding-up and not later than thirty (30) days after such
commencement date. Notice of such termination of purchase rights shall be given to the Holder at least thirty (30) days prior to such
termination date.
2 . 3 . Continuation of Terms . Except as provided in Section 2.2, upon any reorganization, consolidation, merger or
transfer referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the Other
Securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger,
as the case may be, and shall be binding upon the issuer of any Other Securities, including, in the case of any such transfer, the person
acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the
terms of this Warrant as provided in Section 3.1. In the event this Warrant does not continue in full force and effect after the consummation
of the transaction described in this Section 2, then the Company shall at its expense deliver or cause to be delivered the securities and
property (including cash, where applicable) receivable by the Holder of the Warrants to a bank or trust company having its principal office
in California, as trustee for the Holder of the Warrants. Such property shall be delivered to the Holder only upon payment of the Warrant
exercise price.
3 . Extraordinary Events Regarding Common Stock. In the event that the Company shall (a) issue additional shares of the
Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock,
or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such
event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a
fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the
denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so
obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner
upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the
Holder of this Warrant shall thereafter, on the exercise hereof, be entitled to receive shall be adjusted to a number determined by
multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such
exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in
effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise.
4 . Certificate as to Adjustments . In each case of any adjustment or readjustment in the shares of Common Stock (or Other
Securities) issuable on the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer or other
appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate
setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based,
including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other
Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities)
outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon
exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this
Warrant. The Company will forthwith mail a copy of each such certificate to the Holder of the Warrant and any Warrant Agent of the
Company (appointed pursuant to Section 10 hereof).
5 . Rights of Holder. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or
consent or receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as
having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of this Warrant and prior to
its exercise, any of the following shall occur:
5.1. The Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them
to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current
or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or
substantially all of the assets of the Company, or a consolidation or merger of the Company with another entity;
5.2 There shall be proposed any capital reorganization or reclassification of the Common Stock, or a sale of all or
then, in any one or more of said cases, the Company shall cause to be mailed to the Holder, at the earliest practicable time (and, in any
event, not less than thirty (30) days before any record date or other date set for definitive action), written notice of the date on which the
books of the Company shall close or a record shall be taken to determine the stockholders entitled to such dividend or distribution or
entitled to vote on such reorganization, reclassification, sale, consolidation or merger, as the case may be. Such notice shall also set forth
such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase
Price and the kind and amount of the Common Stock and other securities and property deliverable upon exercise of this Warrant. Such
notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said distribution or shall be
entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale,
consolidation or merger, as the case may be. Without limiting the obligation of the Company to provide notice to the Holder of actions
hereunder, it is agreed that failure of the Company to give notice shall not invalidate such action of the Company.
6. Reservation of Stock, etc. Issuable on Exercise of Warrant; Financial Statements . The Company will at all times reserve and
keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock (or Other Securities) from
time to time issuable on the exercise of the Warrant. This Warrant entitles the Holder hereof to receive copies of all financial and other
information distributed or required to be distributed to the holders of the Company's Common Stock.
7 . Assignment; Exchange of Warrant. Subject to compliance with applicable securities laws, this Warrant, and the rights
evidenced hereby, may be transferred by any registered holder hereof (a "Transferor"). On the surrender for exchange of this Warrant, with
the Transferor's endorsement in the form of Exhibit B attached hereto (the “Transferor Endorsement Form") and together with an opinion of
counsel reasonably satisfactory to the Company that the transfer of this Warrant will be in compliance with applicable securities laws, the
Company will issue and deliver to or on the order of the Transferor thereof a new Warrant or Warrants of like tenor, in the name of the
Transferor and/or the transferee(s) (upon payment by such Holder of any applicable transfer taxes) specified in such Transferor
Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock
called for on the face or faces of the Warrant so surrendered by the Transferor.
8 . Replacement of Warrant . On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or
security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of
this Warrant, the Company at its expense, twice only, will execute and deliver, in lieu thereof, a new Warrant of like tenor.
9. Registration Under the Securities Act of 1933.
9 . 1 . Registration and Legends. The Holder understands that (i) the Company has not registered the Warrant or the
Warrant Shares under the Securities Act of 1933, as amended (the “Securities Act”), or the applicable securities laws of any state in reliance
on exemptions from registration and (ii) such exemptions depend upon the Holder's investment intent at the time the Holder acquires the
Warrant or the Warrant Shares. The Holder therefore represents and warrants that it is acquiring the Warrant, and will acquire the Warrant
Shares, for the Holder's own account for investment and not with a view to distribution, assignment, resale or other transfer of the Warrant
or the Warrant Shares. Because the Warrant and the Warrant Shares are not registered, the Holder is aware that the Holder must hold them
indefinitely unless they are registered under the Securities Act and any applicable securities laws or the Holder must obtain exemptions
from such registration. Upon exercise, in part or in whole, of this Warrant, the Warrant Shares shall bear the following legend:
The shares of Common Stock represented by this certificate have not been registered under the Securities
Act of 1933, as amended ("Act") or any applicable state securities laws, and they may not be offered for
sale, sold, transferred, pledged or hypothecated without an effective registration statement under the Act
and under any applicable state securities laws, or an opinion of counsel, satisfactory to the company, that
an exemption from such registration is available.
10. Warrant Agent. The Company may, by written notice to the Holder of the Warrant, appoint an agent (a “Warrant Agent”)
for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this
Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8 or any of the foregoing, and thereafter any such issuance,
exchange or replacement, as the case may be, shall be made at such office by such Warrant Agent.
11. Transfer on the Company's Books. Until this Warrant is transferred on the books of the Company, the Company may treat
the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
1 2 . Notices. All notices, demands, requests, consents, approvals, and other communications required or permitted hereunder
shall be in writing and, unless otherwise specified herein, shall be (i) personally served, (ii) deposited in the mail, registered or certified,
return receipt requested, postage prepaid, (iii) delivered by reputable air courier service with charges prepaid, or (iv) transmitted by hand
delivery, telegram, or facsimile, addressed as set forth below or to such other address as such party shall have specified most recently by
written notice. Any notice or other communication required or permitted to be given hereunder shall be deemed effective (a) upon hand
delivery or delivery by facsimile, with accurate confirmation generated by the transmitting facsimile machine, at the address or number
designated below (if delivered on a business day during normal business hours where such notice is to be received), or the first business day
following such delivery (if delivered other than on a business day during normal business hours where such notice is to be received) or (b)
on the second business day following the date of mailing by express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for such communications shall be: if to the Company, to: Aethlon
Medical, Inc., 8910 University Center Lane, Suite 660, San Diego, CA 92122, Attn: James A. Joyce, CEO, telecopier: (858) 272-2738,and
(ii) if to the Holder, to the Holder’s last known address and telecopier number as it shall appear on the books of the Company.
13. Law Governing This Warrant. This Warrant shall be governed by and construed in accordance with the laws of the State of
California without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions
contemplated by this Warrant shall be brought only in the state courts of California or in the federal courts located in the state and county of
California. The parties to this Warrant hereby irrevocably waive any objection to jurisdiction and venue of any action instituted hereunder
and shall not assert any defense based on lack of jurisdiction or venue or based upon forum non conveniens. The Company and Holder
waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event
that any provision of this Warrant or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed
modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not
affect the validity or enforceability of any other provision of any agreement. Each party hereby irrevocably waives personal service of
process and consents to process being served in any suit, action or proceeding in connection with this Warrant by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this
Warrant and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein
shall be deemed to limit in any way any right to serve process in any other manner permitted by law.
14. Survival. All agreements, covenants, representations and warranties herein shall survive the execution and delivery of this
Warrant and any investigation at any time made by or on behalf of any parties hereto and the exercise, sale and purchase of this Warrant
(and any other securities or property) issuable on exercise hereof.
15. Binding Effect. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure
to the benefit of its successors and assigns hereunder.
1 6 . Parties Bound and Benefitted. Nothing in this Warrant expressed and nothing that may be implied from any of the
provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company and the
Holder any right, remedy or claim under promise or agreement hereof, and all covenants, conditions, stipulations, promises and agreements
contained in this Warrant shall be for the sole and exclusive benefit of the Company and its successors and of the Holder, its successors and,
if permitted, its assignees.
IN WITNESS WHEREOF, the Company has executed this Warrant as of the date first written above.
AETHLON MEDICAL, INC.
By: _____________________
Name: James Frakes
Chief Financial Officer
HOLDER:
By:
Name:
Title:
Exhibit A
FORM OF SUBSCRIPTION
(to be signed only on exercise of Warrant)
TO: AETHLON MEDICAL, INC.
The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check
applicable box):
___ ________ shares of the Common Stock covered by such Warrant.
The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant,
which is $___________. Such payment takes the form of $__________ in lawful money of the United States.
The undersigned
_____________________________________________________
_________________________________________________.
the certificates
requests
that
for
such
shares be
issued
whose
in
the name of, and delivered
address
to
is
The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within
Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act"),
or pursuant to an exemption from registration under the Securities Act.
Dated:___________________
____________________________________
(Signature must conform to name of holder as specified on the face
of the Warrant)
____________________________________
____________________________________
(Address)
Exhibit B
FORM OF TRANSFEROR ENDORSEMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the
heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of
AETHLON MEDICAL, INC. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number
Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on
the books of AETHLON MEDICAL, INC. with full power of substitution in the premises.
Transferees
Percentage Transferred
Number Transferred
Dated: ______________, ___________
Signed in the presence of:
_________________________________
(Name)
ACCEPTED AND AGREED:
[TRANSFEREE]
_________________________________
(Name)
____________________________________
(Signature must conform to name of holder as specified on the face of the
warrant)
____________________________________
____________________________________
(address)
____________________________________
____________________________________
(address)
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements of Aethlon Medical, Inc. on Form S-8 (File Nos. 333-
182902, 333-168483, 333-168481, 333-164939, 333-160532, 333-145290, 333-127911, 333-114017 and 333-49896) of our report dated
July 15, 2013 relating to the audits of the consolidated financial statements of Aethlon Medical, Inc. and Subsidiary (collectively the
“Company”) as of March 31, 2013 and 2012 and for each of the years then ended appearing in this Annual Report on Form 10-K for the
year ended March 31, 2013. Such audit report includes an explanatory paragraph expressing substantial doubt regarding the Company’s
ability to continue as a going concern.
/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
Newport Beach, California
July 15, 2013
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), 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 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 registrant as of, and for, the periods presented in this report;
4. The registrant'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 registrant and have:
(a)
(b)
(c)
(d)
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 registrant, 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;
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;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report 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
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
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 registrant's ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 15, 2013
/s/ JAMES A. JOYCE
JAMES A. JOYCE
CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER )
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James Frakes, certify that:
1. I have reviewed this Annual Report on Form 10-K of Aethlon Medical, Inc.;
2. Based on my knowledge, this 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 registrant as of, and for, the periods presented in this report;
4. The registrant'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 registrant and have:
(a)
(b)
(c)
(d)
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 registrant, 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;
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;
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report 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
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
(a)
(b)
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 registrant's ability to record, process, summarize and report financial information;
and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: July 15, 2013
/s/ JAMES B. FRAKES
JAMES B. FRAKES
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL 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. (the “Registrant”) on Form 10-K for the fiscal year ended March
31, 2013 as filed with the Securities and Exchange Commission on the date hereof, I, James A. Joyce, Chief Executive Officer of the
Registrant, 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 on Form 10-K 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 Quarterly Report on Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of Aethlon Medical, Inc.
Dated: July 15, 2013
/s/ JAMES A. JOYCE
James A. Joyce
Chief Executive Officer
Aethlon Medical, Inc.
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.
EXHIBIT 32.2
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 Quarterly Report of Aethlon Medical, Inc. (the “Registrant”) on Form 10-K for the fiscal year ended March
31, 2013 as filed with the Securities and Exchange Commission on the date hereof, I, James B. Frakes, Chief Financial Officer of the
Registrant, 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 on Form 10-K 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 Quarterly Report on Form 10-K fairly presents, in all material respects, the financial
condition and results of operations of Aethlon Medical, Inc.
Dated: July 15, 2013
/s/ JAMES B. FRAKES
James B. Frakes
Chief Financial Officer
Aethlon Medical, Inc.