Table of Contents
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, 2017
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
COMMISSION FILE NUMBER 001-37487
AETHLON MEDICAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of
incorporation or organization)
9635 Granite Ridge Drive, Suite 100
San Diego, California
(Address of principal executive office)
13-3632859
(I.R.S. Employer
Identification No.)
92123
(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
COMMON STOCK, $.001 PAR VALUE
THE NASDAQ STOCK MARKET LLC
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
NONE
(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. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting
company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer [_]
Non-accelerated filer [_]
Emerging growth company [_]
Accelerated filer [_]
Smaller reporting company [X]
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]
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, 2016 was approximately $27
million, computed by reference to the closing sale price of the common stock of $5.02 per share on the Nasdaq Capital Market on
September 30, 2016. 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 June 28, 2017 was 8,869,571.
Explanatory Note: On April 14, 2015, the registrant completed a 1-for-50 reverse stock split. Accordingly, the registrant’s authorized
common stock was reduced from 500,000,000 shares to 10,000,000 shares, and each 50 shares of outstanding common stock held by
stockholders were combined into one share of common stock. This Form 10-K reflects, and the accompanying consolidated financial
statements and accompanying notes have been retroactively revised to reflect, such reverse stock split as if it had occurred on April 1,
2014. All shares and per share amounts have been revised accordingly.
TABLE OF CONTENTS
PART I.
PAGE
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, 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 Accounting Fees and Services
Item 15.
Exhibits, Financial Statements
Signatures
Certifications
PART IV.
i
1
12
31
31
32
32
33
38
38
48
48
48
48
49
50
53
57
59
60
61
68
ITEM 1. DESCRIPTION OF BUSINESS
Overview and Corporate History
PART I
We are a medical technology company focused on addressing unmet needs in global health and biodefense. The Aethlon
Hemopurifier® is a clinical-stage therapeutic device designed for the single-use removal of life-threatening viruses from the circulatory
system of infected individuals. We believe the Hemopurifier® can fulfill the broad-spectrum countermeasure objectives set forth by the
U.S. Government to protect citizens from bioterror and pandemic threats. In human studies, the Hemopurifier® has been administered to
HIV, Hepatitis-C and Ebola infected individuals. Additionally, the Hemopurifier® has also been validated to capture Zika virus, Lassa
virus, MERS-CoV, Cytomegalovirus, Epstein-Barr virus, Herpes Simplex virus, Chikungunya virus, Dengue virus, West Nile virus,
Smallpox related viruses, H1N1 Swine Flu virus, H5N1 Bird Flu virus, and the reconstructed Spanish flu virus of 1918. In several cases,
these validations were conducted in collaboration with leading government or non-government research institutes. In the United States, we
are focused on the clinical advancement of the Hemopurifier® through FDA cleared clinical studies. We recently concluded an FDA
approved feasibility study to demonstrate safety of our device in health compromised individuals infected with a viral pathogen. We are
also the majority owner of Exosome Sciences, Inc. (ESI), a company focused on the discovery of exosomal biomarkers to diagnose and
monitor life-threatening diseases. Included among ESI’s endeavors is the advancement of a TauSome™ biomarker candidate to diagnose
Chronic Traumatic Encephalopathy (CTE) in the living. ESI previously documented that TauSome levels in former NFL players to be 9x
higher than same age-group control subjects.
We (Aethlon Medical, Inc.) were formed on March 10, 1999. Our executive offices are located at 9635 Granite Ridge Drive, Suite
100, San Diego, California 92123. Our telephone number is (858) 459-7800. All references to “us” or “we” are references to Aethlon
Medical, Inc., combined with its majority-owned subsidiary, Exosome Sciences, Inc.
Target Market and Strategy
Our primary therapeutic business segment is directed toward commercializing our Hemopurifier® to address a significant unmet
need in global health; the broad-spectrum treatment of infectious viruses that are not addressed with an approved antiviral drug agent. Of
the approximate 300 viruses known to be infectious to man, only 9 are addressed with approved antiviral drugs. We also believe our device
can serve as a first-line countermeasure against newly emerging viruses or those that have been genetically engineered to be agents of
bioterrorism. We are not aware of an antiviral drug strategy to combat such threats. We have also demonstrated that our Hemopurifier® can
combine to improve the benefit of an antiviral drug regimen.
In oncology indications, we have been exploring the ability of the Hemopurifier® to capture tumor-derived exosomes, which
promote cancer progression and seed the spread of metastasis.
The second facet of our business is conducted through ESI, which is our diagnostic business segment that is advancing the
validation of exosomal biomarkers to diagnose and monitor life-threatening disease conditions that may be current or future therapeutic
targets of Aethlon Medical.
We also pursue grants or contracts with the U.S. Government. We recently completed two Department of Defense (DOD)
contracts with the Defense Advanced Research Projects Agency (DARPA) that involved the advancement of a device to treat sepsis. In
these programs, we competed 29 of 29 milestone tasks, which resulted in the generation of approximately $5,936,000 in revenue from our
primary contract with DARPA over the period October 1, 2011 through September 30, 2016. While both of those contracts are now
complete, we intend to conduct further government contract business in the future.
The Mechanism of the Hemopurifier
The Hemopurifier is an extracorporeal (situated or occurring outside the body) device designed for the single-use removal of viral
pathogens from the circulatory system of infected individuals. Hemopurifier therapy is delivered through the established infrastructure of
continuous renal replacement therapy (CRRT) and dialysis instruments located in hospitals and clinics worldwide. Traditional
extracorporeal techniques, including dialysis and plasmapheresis, indiscriminately eliminate circulating disease targets by molecule size,
which can also result in the elimination of blood components required for health.
1
However, the Hemopurifier is an interactive technology as it incorporates an affinity lectin that binds to the glycan shield that
cloaks infectious viruses from the surveillance of the immune system thus having a specificity to capture viruses, while essential blood
components are returned back to the patient. The resulting mechanism has been demonstrated capture a broad-spectrum of different strains,
species and families of viruses.
The Hemopurifier - U.S. Clinical Trials
On March 13, 2017, we disclosed that we concluded an FDA-approved feasibility study of Hemopurifier therapy, which
demonstrated safety of our device in health compromised individuals infected with a viral pathogen as a model to advance our device as a
broad-spectrum countermeasure against infectious viral pathogens. More specifically, the feasibility study was conducted on Hepatitis C
virus (HCV) infected dialysis patients at DaVita MedCenter Dialysis in Houston, Texas. The principal investigator of the study was Dr.
Ronald Ralph. We reported that there were no device-related adverse events in enrolled subjects who met the study inclusion-exclusion
criteria. We also reported that an average capture of 154 million HCV viruses (in International Units, I.U.) within the Hemopurifier®
during 4-hour treatments.
We now plan to submit an Expedited Access Pathway (EAP) program submission to the FDA, which will include a request for a
“Breakthrough Technology” designation, which was established under the 21st Century Cures Act signed into law in 2016. If our
application is accepted, we believe the regulatory advancement of our device with the FDA will be accelerated.
Additionally, we are advancing the Hemopurifier® to fulfill the broad-spectrum treatment objectives of the 2016 Public Health
Emergency Medical Countermeasure Enterprise (PHEMCE), which defines the plan of the U.S. government to protect citizens against
bioterror and pandemic threats. Based on preclinical and clinical studies, we believe the Hemopurifier® is the most advanced broad-
spectrum treatment countermeasure. Our goal would be for our device to be procured by the U.S. government for the strategic national
stockpile.
The Hemopurifier – Human Studies Conducted Overseas
EBOLA Virus
Time Magazine named the Hemopurifier® to be a “Top 25 Invention” as the result of treating an ebola-infected physician at
Frankfurt University Hospital in Germany. The physician was comatose with multiple organ failure at the time of treatment with the
Hemopurifier®. At the American Society of Nephrology Annual Meeting, Dr. Helmut Geiger, Chief of Nephrology at Frankfurt University
Hospital reported that the patient received a single 6.5 hour Hemopurifier® treatment. Prior to treatment, viral load was measured at
400,000 c/ml. Post-treatment viral load at reported to be 1,000 c/ml. Dr. Geiger also reported that 242 million copies of Ebola virus were
measured to be captured within the Hemopurifier® during treatment. The patient made a full recovery.
Hepatitis C Virus
Previously, we also conducted Hepatitis C virus treatment studies at the Apollo Hospital, Fortis Hospital, and most recently the
Medanta Medicity Institute in India.
In the Medanta Medicity Institute study, twelve Hepatitis C virus-infected individuals were enrolled to receive three six-hour
Hemopurifier treatments during the first three days of a 48-week peginterferon+ribavirin treatment regimen. The study was conducted
under the leadership of Dr. Vijay Kher at the Medanta Medicity Institute, a multi-specialty medical institute established to be a premier
center for medical tourism in India. Dr. Kher’s staff reported that Hemopurifier therapy was well tolerated and without device-related
adverse events in the twelve treated patients.
Of these twelve patients, ten completed the Hemopurifier-peginterferon+ribavirin treatment protocol, including eight genotype-1
patients and two genotype-3 patients. Eight of the ten patients achieved a sustained virologic response, which is the clinical definition of
treatment cure and is defined as undetectable Hepatitis C virus in the blood 24 weeks after the completion of the 48-week
peginterferon+ribavirin drug regimen. Both genotype-3 patients achieved a sustained virologic response, while six of the eight genotype-1
patients achieved a sustained virologic response.
2
Of the ten patients who completed the full treatment protocol, five also achieved a rapid virologic response, defined as
undetectable Hepatitis C virus in the blood at day 30 of therapy. Rapid virologic response represents the clinical endpoint that best predicts
sustained virologic response cure rates resulting from peginterferon+ribavirin therapy. As a point of reference, the landmark Individualized
Dosing Efficacy vs Flat Dosing to Assess Optimal Pegylated Interferon Therapy study of 3,070 Hepatitis C virus genotype-1 patients
documented that 10.35% (n=318/3070) of peginterferon+ribavirin-treated patients achieved a rapid virologic response. Patients who
achieved a rapid virologic response had sustained virologic response rates of 86.2% (n=274/318) versus sustained virologic response rates
of 32.5% (n=897/2752) in non-rapid virologic response patients. Two of the genotype-1 patients who achieved a rapid virologic response
also achieved an immediate virologic response, defined as undetectable Hepatitis C virus in the blood seven days after initiation of
Hemopurifier-peginterferon+ribavirin treatment protocol. The earliest measured report of undetectable Hepatitis C virus in blood in the
Individualized Dosing Efficacy vs Flat Dosing to Assess Optimal Pegylated Interferon Therapy study was on day 14 of the study.
Data from two patients was not included in the reported Hemopurifier-peginterferon+ribavirin dataset. One of these patients was a
genotype-5 patient who discontinued peginterferon+ribavirin therapy at day 180, yet still achieved a sustained virologic response. The
second patient was a genotype-3 patient who also achieved a sustained virologic response, yet was unable to tolerate
peginterferon+ribavirin therapy and discontinued therapy at day 90. Overall, ten of the twelve patients who enrolled in the study achieved a
sustained virologic response and seven of the twelve patients achieved a rapid virologic response.
Hemopurifier - Human Immunodeficiency Virus; Single Proof Study
In addition to treating Ebola and Hepatitis C virus-infected individuals, we also conducted a single proof-of-principle treatment
study related to the treatment of Human Immunodeficiency Virus. In the study, Hemopurifier therapy reduced viral load by 93% in a
Human Immunodeficiency Virus (HIV) infected individual without the administration of antiviral drug therapy. The study protocol
provided for 12 Hemopurifier treatments, each four hours in duration, which were administered over the course of one month.
Exosome Sciences, Inc. - Diagnostic Candidates
Through our majority-owned subsidiary Exosome, which is our diagnostic product-oriented business segment, we are developing
exosome-based product candidates to diagnose and monitor neurological disorders and cancer. Since it began operations in 2013, Exosome
researchers have disclosed that they have isolated brain-specific biomarkers associated with Alzheimer's Disease and Chronic Traumatic
Encephalopathy (CTE). Specific to CTE, Exosome is participating in a research collaboration with The Boston University CTE Center to
study the correlation of a biomarker known as tausome with CTE. The initial results from that research collaboration were published in an
article entitled “Preliminary Study of Plasma Exosomal Tau as a Potential Biomarker for Chronic Traumatic Encephalopathy” in the
Journal of Alzheimer's Disease on April 12, 2016.
In January 2017, Exosome announced plans to initiate a clinical study involving retired NFL players and a data-supported
biomarker candidate to detect and monitor CTE in living individuals. CTE is a neurodegenerative disease that has often been found in
American football players, boxers and other individuals with a history of repetitive head trauma. At present, CTE diagnosis is determined
after death through an analysis of brain tissue.
The goal of the study is to establish a clinical collaboration with up to 200 former professional football players and clinical
investigators at multiple U.S. locations. If fully enrolled, the study would be the largest to date in former NFL players, who are at a high
risk of suffering from CTE. The goal of the study will be to further validate a CTE biomarker candidate known as plasma exosomal tau, or
a TauSome™.
Kendall Van Keuren-Jensen, Ph.D., Co-Director of the Translational Genomics Research Institute's (TGen) Center for
Noninvasive Diagnostics in Phoenix, will serve as principal investigator for the study. Dr. Van Keuren-Jensen is neurodegenerative disease
thought leader whose research includes discovery and detection of biomarkers for central nervous system disorders.
U.S. Government Contract with the Defense Advanced Research Projects Agency
We entered into a contract with DARPA on September 30, 2011. Under the DARPA award, we have been engaged to develop a
therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers.
The award from DARPA was a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years. Fixed
price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract.
Under the terms of the contract, we performed certain incremental work towards the achievement of specific milestones against which we
invoiced the government for fixed payment amounts.
3
Originally, only the base year (year one of the contract) was effective for the parties; however, DARPA subsequently exercised its
option on the remaining years of the contract. The milestones were comprised of planning, engineering and clinical targets, the
achievement of which in some cases required the participation and contribution of third-party participants under the contract. We
commenced work under the contract in October 2011 and completed the contract in September 2016.
In February 2014, DARPA reduced the scope of our contract in years three through five of the contract. The reduction in scope
focused our research on exosomes, viruses and blood processing instrumentation. This scope reduction reduced the possible payments under
the contract by $858,469 over years three through five.
In the fiscal year ended March 31, 2017, we invoiced the U.S. Government for the final two milestones under our DARPA
contract in the aggregate amount of $387,438. In the fiscal year ended March 31, 2016, we invoiced the U.S. Government for four
milestones under our DARPA contract in the amount of $863,011. As the DARPA contract was completed on September 30, 2016, we do
not expect to record any future revenue related to that contract.
Subcontract with Battelle Memorial Institute
We entered into a subcontract agreement with Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor
on the systems integration portion of the original DARPA contract, and we were one of several subcontractors on that systems integration
project. The Battelle subcontract was under a time and materials basis, and we began generating revenues under the subcontract in the three
months ended September 30, 2013. That contract has now concluded. The Battelle subcontract was our first cost-reimbursable contract.
Our revenue under this contract was a function of cost reimbursement plus an overhead mark-up for hours devoted to the project
by specific employees (with specific hourly rates for those employees), for travel expenses related to the project, for any equipment
purchased for the project and for the cost of any consultants hired by us to perform work on the project. Each payment required approval by
the program manager at Battelle.
Research and Development Costs
A substantial portion of our operating budget is used for research and development activities. The cost of research and
development, all of which has been charged to operations, amounted to approximately $673,000 and $782,000 in the fiscal years ended
March 31, 2017 and 2016, respectively.
Intellectual Property
We currently own or have license rights to a number of U.S. and foreign patents and patent applications and endeavor to
continually improve our intellectual property position. We consider the protection of our technology, whether owned or licensed, to the
exclusion of use by others, to be vital to our business. While we intend to focus primarily on patented or patentable technology, we may
also rely on trade secrets, unpatented property, know-how, regulatory exclusivity, patent extensions and continuing technological
innovation to develop our competitive position. We also own certain trademarks.
Patents
We have been exclusively assigned all rights and title to and interest in an invention and related worldwide patent rights for a
method to treat cancer under an assignment agreement with the London Health Science Center Research, Inc. The invention provides for the
"Depression of anticancer immunity through extracorporeal removal of microvesicular particles" (including exosomes) for which the U.S.
Patent and Trademark Office issued a patent in 2012 (patent #8,288,172) and for which we have filed additional patent applications
domestically and abroad (patent applications #US13/623662, #US14/180093, #US14/185033, #EP7,752,778.6, #HK9,104,740.6,
#IN8139/DELNP/2008 and #CA2644855). Please see the tables below for more information regarding these patents and patent
applications.
4
The following table lists all of our issued patents and patent applications, including their ownership status:
Patents Issued in the United States
PATENT #
9,364,601
8,288,172
7,226,429
6,528,057
PATENT NAME
Extracorporeal removal of microvesicular particles
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
6/14/16
10/16/12
6/5/07
3/4/03
OWNED OR
LICENSED
Owned
Owned
Owned
Licensed
EXPIRATION
DATE
10/2/29
3/30/29
1/20/24
8/30/19
Patent Applications Pending in the United States
APPLICATION #
15/121736
62/370490
14/856361
14/790684
14/490418
14/185033
13/808561
APPLICATION NAME
Brain specific exosome based diagnostics and extracorporeal therapies
Multiplex cerebrospinal fluid processing system
Device and method for purifying virally infected blood
Affinity capture of circulating biomarkers
Method for removal of viruses from blood by lectin affinity
hemodialysis
Extracorporeal removal of microvesicular particles
Methods and compositions for quantifying exosomes
FILING
DATE
8/25/16
8/03/16
9/16/15
7/02/15
9/18/14
2/20/14
8/14/13
OWNED OR
LICENSED
Owned
Owned
Owned
Owned
Owned
Owned
Owned
Foreign Patents
PATENT #
PATENT NAME
2353399 Method for removal of viruses from blood by lectin affinity hemodialysis
(Russia)
ISSUANCE
DATE
4/27/09
OWNED OR
LICENSED
Owned
EXPIRATION
DATE
1/20/24
770344 Method for removal of HIV and other viruses from blood (Australia)
DE69929986 Method for removal of HIV and other viruses from blood (Germany)
1109564 Method for removal of HIV and other viruses from blood (France)
1109564 Method for removal of HIV and other viruses from blood (Great Britain)
1109564 Method for removal of HIV and other viruses from blood (Italy)
2342203 Method for removal of HIV and other viruses from blood (Canada)
1624785 Method for removal of viruses from blood by lectin affinity hemodialysis
6/3/04
2/22/06
2/22/06
2/22/06
2/22/06
3/1/11
7/17/13
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Owned
8/30/19
8/30/19
8/30/19
8/30/19
8/30/19
8/30/19
1/20/24
(Belgium)
1624785 Method for removal of viruses from blood by lectin affinity hemodialysis
7/17/13
Owned
1/20/24
(Ireland)
1624785 Method for removal of viruses from blood by lectin affinity hemodialysis (Italy)
1624785 Method for removal of viruses from blood by lectin affinity hemodialysis (Great
7/17/13
7/17/13
Owned
Owned
1/20/24
1/20/24
Britain)
1624785 Method for removal of viruses from blood by lectin affinity hemodialysis
7/17/13
Owned
1/20/24
(France)
1624785 Method for removal of viruses from blood by lectin affinity hemodialysis
7/17/13
Owned
1/20/24
(Germany)
2516403 Method for removal of viruses from blood by lectin affinity hemodialysis
8/12/14
Owned
1/20/24
(Canada)
2591359 Methods for quantifying exosomes (Germany)
2591359 Methods for quantifying exosomes (France)
2591359 Methods for quantifying exosomes (Great Britain)
2591359 Methods for quantifying exosomes (Spain)
3/01/17
3/01/17
3/01/17
3/01/17
Owned
Owned
Owned
Owned
7/07/31
7/07/31
7/07/31
7/07/31
5
Foreign Patent Applications
APPLICATION #
EP20070752778
9104740.6
8139/DELNP/2008
2644855
2939652
15755141.7
APPLICATION NAME
Extracorporeal removal of microvesicular particles (exosomes)
(Europe)
Extracorporeal removal of microvesicular particles (exosomes) (Hong
Kong)
Extracorporeal removal of microvesicular particles (exosomes) (India)
Extracorporeal removal of microvesicular particles (Canada)
Brain specific exosome based diagnostics and extracorporeal therapies
(Canada)
Brain specific exosome based diagnostics and extracorporeal therapies
(Europe)
International Patent Applications
APPLICATION #
PCT/US2016/062194
PCT/US2016/
028482
APPLICATION NAME
Exosomal tau as a biomarker for brain disorders
Methods for delivering regional citrate anticoagulation during
extracorporeal blood treatments
FILING
DATE
3/9/07
OWNED OR
LICENSED
Owned
3/9/07
3/9/07
3/9/07
Owned
Owned
Owned
8/12/06
Owned
9/12/16
Owned
FILING
DATE
11/16/16
4/20/16
OWNED OR
LICENSED
Owned
Owned
We expect that our ability to enforce our patents and proprietary rights in many countries will be adversely impacted due to
possible changes in law, our lack of familiarity with foreign law, or our lack of professional resources in jurisdictions outside the U.S. We
cannot guarantee that any patents issued or licensed to us, including within the U.S., will provide us with competitive advantages or will
not be challenged by others, or will not expire prior to our successful commercialization of our products. Furthermore, we cannot be certain
that others will not independently develop similar products or will not design around patents issued or licensed to us. We cannot guarantee
that patents that are issued will not be challenged, invalidated or infringed upon or designed around by others, or that the claims contained
in such patents will not infringe the patent claims of others, or provide us with significant protection against competitive products, or
otherwise be commercially valuable. We may need to acquire licenses under patents belonging to others for technology potentially useful or
necessary to us. If any such licenses are required, we cannot be certain that they will be available on terms acceptable to us, if at all. To the
extent that we are unable to obtain patent protection for our products or technology, our business may be materially adversely affected by
competitors who develop substantially equivalent technology.
Trademarks
We have obtained trademark registrations in the U.S. for Hemopurifier, Aethlon Medical, Inc., and the Exosome Sciences Logo
and obtained a trademark registration in India for Hemopurifier. Exosome Sciences, Inc. has applied for the Tausome trademark in the U.S.,
which application is currently pending. We also have common law trademark rights in Aethlon ADAPT™ and ELLSA™.
Licensing and Assignment Agreements
Effective January 1, 2000, we entered into an agreement with a related party under which an invention and related patent rights for
a method of removing Human Immunodeficiency and other viruses from the blood using the Hemopurifier were assigned to us by the
inventors in exchange for an 8.75% royalty to be paid on future net sales of the patented product or process and shares of our common
stock. On March 4, 2003, the related patent (patent #6,528,057) was issued, and we issued 3,922 shares of unregistered common stock to
that related party. The license runs for the life of the patent, which expires in August 2019.
On November 7, 2006, we entered into an exclusive assignment agreement with the London Health Science Center Research, Inc.
under which an invention and related patent rights for a method to treat cancer were assigned to us. The invention provides for the
"Extracorporeal removal of microvesicular particles" for which the U.S. Patent and Trademark Office allowed a patent (patent #8,288,172)
in the U.S. as of October 2012. The agreement provides for an upfront payment of 800 shares of unregistered common stock and a 2%
royalty on any future net sales. We are also responsible for paying certain patent application and filing costs. Under the assignment
agreement, we own the patents outright for the life of the patent, which expires in March 2029. Under certain circumstances, ownership of
the patents may revert to the London Health Science Center Research, Inc. if there is an uncured substantial breach of the assignment
agreement.
6
Industry
The industry for treating infectious disease and cancer is extremely competitive, and companies developing new treatment
procedures face significant capital and regulatory challenges. Additionally, as the Hemopurifier is a new device, we have the additional
challenge of establishing medical industry support, which will be driven by treatment data resulting from clinical studies of each disease
condition that we pursue. The industry includes pharmaceutical companies and medical device companies competing to treat illnesses on a
worldwide basis.
Competition
We are advancing our Hemopurifier as a treatment strategy to enhance and prolong current drug therapies by removing the viral
strains that cause drug resistance. We are also advancing the Hemopurifier as a tool for cancer treatment in conjunction with existing, and to
be developed, cancer therapies. The Hemopurifier also may prolong life for infected patients who have become drug resistant or have been
infected with a viral pathogen for which there is no drug or vaccine therapy. We believe our Hemopurifier augments the benefit of drug
therapies and should not be considered a competitor to such treatments. However, if the industry considered the Hemopurifier to be a
potential replacement for drug therapy, or a device that limited the need or volume of existing drug therapies, then the marketplace for the
Hemopurifier would be extremely competitive. We believe our Hemopurifier is the sole therapeutic device able to selectively remove
viruses and immunosuppressive proteins from circulation. However, we are aware that Asahi Kasei Kurary Medical based in Japan has
created a double filtration plasmapheresis system that indiscriminately removes particles from blood in a certain molecule range that
includes Hepatitis C virus. Asahi Kasei Kurary Medical is now marketing this device in Japan as an adjunct therapy for Hepatitis C virus.
We may also face competition from producers of antiviral drugs and vaccines.
Government Regulation of Medical Devices
The Hemopurifier is subject to regulation by numerous regulatory bodies, primarily the FDA, and comparable international
regulatory agencies. These agencies require manufacturers of medical devices to comply with applicable laws and regulations governing the
development, testing, manufacturing, labeling, marketing, storage, distribution, advertising and promotion, and post-marketing surveillance
reporting of medical devices. Devices are generally subject to varying levels of regulatory control, the most comprehensive of which
requires that a clinical evaluation program be conducted before a device receives approval for commercial distribution. Failure to obtain
approval or clearance to market our product and products under development and to meet the ongoing requirements of these regulatory
authorities could prevent us from commercializing the Hemopurifier and future products in the U.S. and elsewhere.
Hemopurifier Investigational Device Exemption and Supplement
In 2013, the FDA approved our investigational device exemption to initiate human clinical studies in the U.S. as a feasibility study
entitled “A Clinical Safety Study of the Aethlon Hemopurifier® in Chronic ESRD Patients With HCV Infection.” We were required to
reach agreement with the internal review board of DaVita MedCenter Dialysis prior to beginning our U.S. clinical trial. We are also
required to obtain patients' informed consent that complies with both FDA requirements and state and federal privacy regulations. We, the
FDA or the internal review board at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various
reasons, including a belief that the risks to study subjects outweigh the benefits. Even if a trial is completed, the results of clinical testing
may not demonstrate the safety and efficacy of the device, may be equivocal or may otherwise not be sufficient to obtain approval of the
product. The investigational device exemption is part of the FDA’s clearance process. This process is discussed in detail in the “Pre-
Marketing Regulations in the U.S.” section below.
In December 2014, the FDA approved our request for a supplement to our investigational device exemption to establish a protocol
to clinically investigate the use of the Hemopurifier for the treatment of Ebola-infected patients in the U.S. Under the supplement, we may
treat up to 20 Ebola-infected persons, at no more than 10 institutions in the U.S., using the supplement protocol; however, this is not a
clinical trial. We must clearly distinguish data collected in the supplement protocol from data collected in our chronic Hepatitis C virus
clinical trial (discussed above). Prior to treating Ebola-infected patients, we must comply with specified patient protection procedures
established by the applicable institution including its institutional review board. Also, we must report any unanticipated device-related
adverse events resulting from the supplement protocol to the FDA within 10 working days. Even if the protocol is established, and patients
are treated, the results of such treatments may not demonstrate the safety and efficacy of the device.
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DaVita MedCenter Dialysis treated a total of eight patients per the protocol under our clinical trial and then notified us that it was
unlikely that they would be able to locate additional HCV patients undergoing dialysis to treat as part of the trial. Therefore on April 11,
2017, we notified the FDA that we were concluding the trial with the eight patients treated. The FDA accepted that decision to terminate
the trial with eight patients completed. We have six months to complete and submit the final report on the trial to the FDA.
Pre-Marketing Regulations in the U.S.
Unless an exemption applies, each medical device distributed commercially in the U.S. requires either prior 510(k) clearance or
premarket approval, or PMA, from the FDA. The FDA classifies medical devices into one of three classes. Class I devices are subject to
only general controls, such as establishment registration and device listing, labeling, medical device reporting, and prohibitions against
adulteration and misbranding. Class II medical devices generally require prior 510(k) clearance before they may be commercially marketed
in the U.S. Devices deemed by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices
deemed not substantially equivalent to a predicate device, are placed in Class III, generally requiring submission of a PMA supported by
clinical trial data. Our Hemopurifier is a Class III product and thus will require submission and approval of a PMA. In the future, we may
develop new products that are considered to be Class II and require the clearance of a 510(k).
510(k) Clearance Pathway
To obtain 510(k) clearance, a premarket notification must be submitted to FDA demonstrating that the proposed device is
substantially equivalent to a previously cleared 510(k) device or a device that was in commercial distribution before May 28, 1976 for
which the FDA has not yet called for the submission of premarket approval applications. FDA’s 510(k) clearance pathway usually takes
from three to twelve months, but it can take significantly longer. The FDA may require additional information, including clinical data, to
make a determination regarding substantial equivalence.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would
constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, require
premarket approval. The FDA requires each manufacturer to determine whether the proposed change requires submission of a 510(k), or a
premarket approval, but the FDA can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees
with a manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until
510(k) clearance or premarket approval is obtained. If the FDA requires a 510(k) holder to seek 510(k) clearance or premarket approval for
any modifications to a previously cleared product, the 510(k) holder also may be required to cease marketing or recall the modified device
until this clearance or approval is obtained.
Premarket Approval Pathway
A PMA must be supported by extensive data, including but not limited to data obtained from technical, preclinical and clinical
studies and relating to manufacturing and labeling to demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
After a PMA submission is sufficiently complete, the FDA will accept the application and begin an in-depth review, which
generally takes between one and three years, but may take significantly longer. During this review period, the FDA will typically request
additional information or clarification of the information already provided. Also, an advisory panel of experts from outside the FDA may
be convened to review and evaluate the application and provide recommendations to the FDA as to the approvability of the device. The
FDA may or may not accept the panel’s recommendation. In addition, the FDA will conduct a pre-approval inspection of the
manufacturing facility to ensure compliance with Quality System Regulation, or QSR. New PMA applications or PMA supplements are
required for modifications that affect the safety or effectiveness of the device, including, for example, certain types of modifications to the
device’s indication for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of
information as a PMA application, except that the supplement is limited to information needed to support any changes from the device
covered by the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.
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Clinical Trials
Clinical trials are almost always required to support a PMA. To perform a clinical trial in the U.S. for a significant risk device,
FDA requires the device sponsor to file an Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval
prior to commencing the human clinical trial. An IDE amendment or supplement must also be submitted before initiating a significant
change to the clinical protocol or device under an existing IDE. The IDE application must be supported by appropriate data, such as animal
and laboratory testing results, and any available data on human clinical experience, showing that it is safe to test the device in humans and
that the testing protocol is scientifically sound.
The IDE must be approved in advance by the FDA for a specific number of patients. Clinical trials conducted in the U.S. for
significant risk devices may begin once the IDE application is approved by the FDA and the appropriate institutional review boards, or
IRBs, overseeing the welfare of the research subjects and responsible for that particular clinical trial. Under its regulations, the FDA
responds to an IDE or an IDE amendment within 30 days. The FDA may approve the IDE or amendment, grant an approval with certain
conditions, or identify deficiencies and request additional information. It is common for the FDA to require additional information before
approving an IDE or amendment for a new trial, and thus final FDA approval on a submission may require more than the initial 30 days.
The FDA may also require that a small-scale feasibility study be conducted before a pivotal trial may commence. In a feasibility trial, the
FDA limits the number of patients, sites and investigators that may participate. Feasibility trials are typically structured to obtain
information on safety and to help determine how large a pivotal trial should be to obtain statistically significant results.
Clinical trials are subject to extensive recordkeeping and reporting requirements. Our clinical trials must be conducted under the
oversight of an IRB for the relevant clinical trial sites and must comply with FDA regulations, including but not limited to those relating to
good clinical practices. We are also required to obtain the patients’ informed consent in form and substance that complies with both FDA
requirements and state and federal privacy and human subject protection regulations. We, the FDA or the IRB may suspend a clinical trial
at any time for various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is
completed, the results of clinical testing may not adequately demonstrate the safety and effectiveness of the device or may otherwise not be
sufficient to obtain FDA approval to market the product in the U.S.
Post-Marketing Regulations in the U.S.
Should our Hemopurifier device be cleared for market use in the U.S. by the FDA, numerous regulatory requirements continue to
apply. These include:
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the FDA's Quality System Regulation which requires manufacturers, including third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or off-label uses;
clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major
change in intended use;
· medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious
injury if the malfunction were to recur;
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product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; and
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety
and effectiveness data for the device.
The regulations also require that we report to the FDA any incident in which our product may have caused or contributed to a
death or serious injury or in which our product malfunctioned and, if the malfunction were to recur, would likely cause or contribute to
death or serious injury.
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We will also be required to register with FDA as a medical device manufacturer within 30 days of commercial distribution of our
products and must obtain all necessary state permits or licenses to operate our business. As a manufacturer, we are subject to announced and
unannounced inspections by FDA to determine our compliance with quality system regulation and other regulations, and these inspections
may include the manufacturing facilities of our suppliers. Failure by us or by our suppliers to comply with applicable regulatory
requirements can result in enforcement action by the FDA or state authorities, which may include any of the following sanctions:
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications for repair, replacement, refunds;
recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for premarket approval of new products or modified products;
operating restrictions;
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· withdrawing PMA approvals that have already been granted;
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refusal to grant export approval for our products; or
criminal prosecution.
Compliance with U.S. Health Care Laws
Should our Hemopurifier device be cleared for market use in the U.S. by the FDA, we must comply with various U.S. federal and
state laws, rules and regulations pertaining to healthcare fraud and abuse, including anti-kickback regulations, as well as other healthcare
laws in connection with the commercialization of our products. Fraud and abuse laws are interpreted broadly and enforced aggressively by
various state and federal agencies, including the U.S. Department of Justice, the U.S. Office of Inspector General for the Department of
Health and Human Services and various state agencies.
The U.S. federal Anti-Kickback Statute, 42 U.S.C. § 1320a-7b, as amended, prohibits persons, including a medical device
manufacturer (or a party acting on its behalf), from knowingly or willfully soliciting, receiving, offering or paying remuneration, directly or
indirectly, in exchange for or to induce either the referral of an individual for a service or product or the purchasing, ordering, arranging for,
or recommending the ordering of, any service or product for which payment may be made by Medicare, Medicaid or any other federal
healthcare program. This statute has been interpreted to apply to arrangements between medical device manufacturers on one hand and
healthcare providers on the other. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly
interpreted to include anything of value, such as cash payments, gifts or gift certificates, discounts, waiver of payments, credit
arrangements, ownership interests, the furnishing of services, supplies or equipment, and the provision of anything at less than its fair
market value. Courts have broadly interpreted the scope of the law, holding that it may be violated if merely one purpose of an arrangement
is to induce referrals, irrespective of the existence of other legitimate purposes. The Anti-Kickback Statute prohibits many arrangements
and practices that are lawful in businesses outside of the healthcare industry. Although there are a number of statutory exemptions and
regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions and safe harbors are drawn narrowly,
and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to scrutiny if they do
not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for safe harbor protection from federal
Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by the recently enacted Patient Protection and
Affordable Care Act of 2010 and the Health Care and Education Affordability Reconciliation Act of 2010, collectively, the Affordable
Care Act or ACA, which, among other things, amends the intent requirement of the federal Anti-Kickback Statute such that a person or
entity no longer needs to have actual knowledge of the statute or specific intent to violate it in order to have committed a violation. In
addition, the ACA provides that the government may assert that a claim including items or services resulting from a violation of the federal
Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act (discussed below) or the civil
monetary penalties statute, which imposes fines against any person who is determined to have presented or caused to be presented claims to
a federal healthcare program that the person knows or should know is for an item or service that was not provided as claimed or is false or
fraudulent. In addition to the federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often, these laws closely
follow the language of the federal law, although they do not always have the same scope, exceptions, safe harbors or sanctions. In some
states, these anti-kickback laws apply not only to payments made by government healthcare programs but also to payments made by other
third-party payors, including commercial insurance companies.
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We may also be subject to various federal and state marketing laws, such as the federal Physician Payments Sunshine Act, which
generally require certain types of expenditures in the U.S. and the particular states to be tracked and reported. The federal Physician
Payment Sunshine Act, being implemented as the Open Payments Program, requires certain pharmaceutical and medical device
manufacturers to engage in extensive tracking of payments or transfers of value to physicians and teaching hospitals, maintenance of a
payments database, and public reporting of the payment data. Device manufacturers with products for which payment is available under
Medicare, Medicaid or the State Children’s Health Insurance Program are required to track and report such payments. Moreover, several
states have enacted legislation requiring pharmaceutical and medical device companies to establish marketing compliance programs or even
prohibit providing meals to prescribers or other marketing related activities. Compliance with such requirements may require investment in
infrastructure to ensure that tracking and reporting is performed properly. Although compliance programs can mitigate the risk of
investigation and prosecution for violations of these laws, the risks cannot be entirely eliminated.
International Regulation
International development and sales of medical devices are subject to foreign government regulations, which vary substantially
from country to country. The time required to obtain approval by a foreign country may be longer or shorter than that required for FDA
approval, and the requirements may differ. For example, the primary regulatory authority with respect to medical devices in Europe is that
of the European Union. The unification of these countries into a common market has resulted in the unification of laws, standards and
procedures across these countries, which may expedite the introduction of medical devices like those we are offering and developing.
The European Union has adopted numerous directives and standards regulating the design, manufacture, clinical trials, labeling
and adverse event reporting for medical devices. Devices that comply with the requirements of relevant directives will be entitled to bear
CE Conformity Marking, indicating that the device conforms to the essential requirements of the applicable directives and, accordingly, can
be commercially distributed throughout the European Union. Actual implementation of these directives, however, may vary on a country-
by-country basis.
To date, we have not begun any process to obtain the CE Mark and have no immediate plans to test or commercialize the
Hemopurifier in any European Union countries.
Manufacturing
Manufacturing of our Hemopurifier occurs in collaboration with a contract manufacturer based in San Diego, California that is
compliant with the Good Manufacturing Practice regulations promulgated by the FDA. Our contract manufacturer is registered with the
FDA. We also have received an export license from the FDA that allows the export of our Hemopurifier for commercial purposes to India.
To date, our manufacture of the Hemopurifier has been limited to quantities necessary to support our clinical studies.
Sources and Suppliers
We are not dependent on any specific vendors for the materials used in our Hemopurifier. The key raw materials in the
Hemopurifier include the affinity lectin Galanthus nivalis agglutinin, pharmaceutical grade diatomaceous earth, plasmapheresis cartridges
and certain chemical binding agents. The affinity lectin is available from several life science supply companies in the U.S. Diatomaceous
earth is available from several life science supply companies in the U.S. To date, we have purchased plasmapheresis cartridges from one
vendor in Europe however similar cartridges are commercially available from vendors on a worldwide basis should that European vendor
cease to be available for any reason, including prohibitive pricing. The chemical binding agents are available from several life science
supply companies on a worldwide basis. We typically purchase our raw materials on purchase order basis. Therefore, we remain subject to
risks of supply shortages and price increases that potentially could materially adversely affect our financial condition and operating results
if and when we begin large-scale manufacture of the Hemopurifier.
The key raw materials used by Exosome Sciences, Inc. in its research are blood samples supplied by research partners and a
number of chemical and lab products commercially available from vendors on a worldwide basis. Exosome Sciences, Inc. is not dependent
on any specific vendors for the materials used in its research activities.
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Sales and Marketing
We do not currently have any sales and marketing capability. With respect to commercialization efforts in the future, we intend to
build or contract for distribution, sales and marketing capabilities for any product candidate that is approved. From time to time, we have
had and are having strategic discussions with potential collaboration partners for our product candidates, although no assurance can be
given that we will be able to enter into one or more collaboration agreements for our product candidates on acceptable terms, if at all.
Product Liability
The risk of product liability claims, product recalls and associated adverse publicity is inherent in the testing, manufacturing,
marketing and sale of medical products. We have limited clinical trial liability insurance coverage. We cannot assure you that future
insurance coverage will be adequate or available. We may not be able to secure product liability insurance coverage on acceptable terms or
at reasonable costs when needed. Any liability for mandatory damages could exceed the amount of our coverage. A successful product
liability claim against us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial
negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates.
Employees
We have seven full-time employees consisting of our Chief Executive Officer, our President, our Chief Financial Officer, three
research scientists and an executive assistant. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
We believe our employee relations are good. None of our employees are represented by a labor union or are subject to collective-
bargaining agreements.
ITEM 1A. RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below as well as
the other information in this Annual Report before deciding to invest in or maintain your investment in our company. The risks described
below are not intended to be an all-inclusive list of all of the potential risks relating to an investment in our securities. Any of the risk
factors described below could significantly and adversely affect our business, prospects, financial condition and results of operations.
Additional risks and uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely
affect our business. As a result, the trading price or value of our securities could be materially adversely affected and you may lose all or
part of your investment.
Risks Relating to Our Financial Position and Need for Additional Capital
We have incurred significant losses and expect to continue to incur losses for the foreseeable future.
We have never been profitable. We have generated revenues during the fiscal years ended March 31, 2017 and March 31, 2016, in
the amounts of $392,073, and $886,572, respectively, primarily from our contract with the Defense Advanced Research Projects Agency,
or DARPA. However, our revenues continue to be insufficient to cover our cost of operations. Additionally, our contracts with DARPA
have now ended, and we cannot be assured when, if at all, we will be able to enter into future government contracts. Future profitability, if
any, will require the successful commercialization of our Hemopurifier technology, other products that may emerge from our potential
diagnostic products or from additional government contract or grant income. We cannot assure you when or if we will be able to
successfully commercialize one or more of our products, or if commercialization is successful, whether we will ever be profitable.
We have received 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, 2017 that our net loss and negative cash flows from operating activities during our fiscal year ended March 31, 2017 and
our accumulated deficit as of March 31, 2017 raised substantial doubt about our ability to continue as a going concern. Note 1 to our
financial statements for the year ended March 31, 2017 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.
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We will require additional financing to sustain our operations, and without it, we will not be able to continue operations.
We raised $2,759,355 in net proceeds from sales of common stock and $577,460 in net proceeds from convertible notes under our
S-3 registration statement during the fiscal year ended March 31, 2017. However, we will require significant additional financing to
finalize the current and expected additional future clinical trials in the U.S., as well as fund all of our continued research and development
activities for the Hemopurifier and other future products through the remainder of the fiscal year ending March 31, 2018. In addition, as we
expand our activities, our overhead costs to support personnel, laboratory materials and infrastructure will increase. Should the financing
we require to sustain our working capital needs be unavailable to us on reasonable terms, if at all, when we require it, we may be unable to
support our research and FDA clearance activities including our planned clinical trials. The failure to implement our research and clearance
activities would have a material adverse effect on our ability to commercialize our products.
We will need to raise additional funds through debt or equity financings in the future to achieve our business objectives and to satisfy
our cash obligations, which would dilute the ownership of our existing stockholders.
We will need to raise additional funds through debt and/or equity financings in order to complete our ultimate business objectives,
including funding working capital to support development and regulatory clearance of our products. We also may choose to raise additional
funds in debt or equity financings if they are available to us on reasonable terms to increase our working capital and to strengthen our
financial position. Any sales of additional equity or convertible debt securities would result in dilution of the equity interests of our existing
stockholders, which could be substantial. Also, new investors may require that we and certain of our stockholders enter into voting
arrangements that give them additional voting control or representation on our Board of Directors.
Risks Related to Our Business Operations
We face intense competition in the medical device industry.
We compete with numerous U.S. and foreign companies in the medical device industry, and many of our competitors have greater
financial, personnel, operational and research and development resources than we do. Our competitors are developing vaccine candidates,
which could compete with the Hemopurifier medical device candidates we are developing. Our commercial opportunities will be reduced
or eliminated if our competitors develop and market products for any of the diseases we target that:
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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 the Hemopurifier and potential diagnostic products, and obtain FDA and other regulatory
approvals necessary for commercializing them, our products may not compete effectively with other successful products. Researchers are
continually learning more about diseases, which may lead to new technologies for treatment. Our competitors may succeed in developing
and marketing products that are either more effective than those that we may develop, alone or with our collaborators, or that are marketed
before any products we develop are marketed. Our competitors include fully integrated pharmaceutical companies and biotechnology
companies as well as universities and public and private research institutions. Many of the organizations competing with us have
substantially greater capital resources, larger research and development staffs and facilities, greater experience in product development and
in obtaining regulatory approvals, and greater marketing capabilities than we do. If our competitors develop more effective pharmaceutical
treatments for infectious disease or cancer, or bring those treatments to market before we can commercialize the Hemopurifier for such
uses, we may be unable to obtain any market traction for our products, or the diseases we seek to treat may be substantially addressed by
competing treatments. If we are unable to successfully compete against larger companies in the pharmaceutical industry, we may never
generate significant revenue or be profitable.
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We have limited experience in identifying and working with large-scale contracts with medical device manufacturers; manufacture of
our devices must comply with good manufacturing practices in the U.S.
To achieve the levels of production necessary to commercialize our Hemopurifier and other future products, we will need to
secure large-scale manufacturing agreements with contract manufacturers which comply with good manufacturing practice standards and
other standards prescribed by various federal, state and local regulatory agencies in the U.S. and any other country of use. We have limited
experience coordinating and overseeing the manufacture of medical device products on a large-scale. We cannot assure you that
manufacturing and control problems will not arise as we attempt to commercialize our products or that such manufacturing can be
completed in a timely manner or at a commercially reasonable cost. In addition, we cannot assure you that we will be able to adequately
finance the manufacture and distribution of our products on terms acceptable to us, if at all. If we cannot successfully oversee and finance
the manufacture of our products when they have obtained regulatory clearances, we may never generate revenue from product sales and we
may never be profitable.
Our Aethlon Hemopurifier technology may become obsolete.
Our Aethlon Hemopurifier 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 products. The homeland security industry is
growing rapidly with many competitors that are trying to develop products or vaccines to protect against infectious disease. Any one of our
competitors could develop a more effective product which would render our technology obsolete. Further, our ability to achieve significant
and sustained penetration of our key target markets will depend upon our success in developing or acquiring technologies developed by
other companies, either independently, through joint ventures or through acquisitions. If we fail to develop or acquire, and manufacture and
sell, products that satisfy our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by
quickly introducing competitive products, then market acceptance of our products could be reduced and our business could be adversely
affected. We cannot assure you that our products will remain competitive with products based on new technologies.
Our use of hazardous materials, chemicals and viruses exposes us to potential liabilities for which we may not have adequate insurance.
Our research and development involves the controlled use of hazardous materials, chemicals and viruses. The primary hazardous
materials include chemicals needed to construct the Hemopurifier cartridges and the infected plasma samples used in preclinical testing of
the Hemopurifier. All other chemicals are fully inventoried and reported to the appropriate authorities, such as the fire department, who
inspect the facility on a regular basis. We are subject to federal, state, local and foreign laws governing the use, manufacture, storage,
handling and disposal of such materials. Although we believe that our safety procedures for the use, manufacture, storage, handling and
disposal of such materials comply with the standards prescribed by federal, state, local and foreign regulations, we cannot completely
eliminate the risk of accidental contamination or injury from these materials. We have had no incidents or problems involving hazardous
chemicals or biological samples. In the event of such an accident, we could be held liable for significant damages or fines.
We currently carry a limited amount of insurance to protect us from damages arising from hazardous materials. Our product
liability policy has a $3,000,000 limit of liability that would cover certain releases of hazardous substances away from our facilities. For our
facilities, our property policy provides $25,000 in coverage for contaminant clean-up or removal and $50,000 in coverage for damages to
the premises resulting from contamination. Should we violate any regulations concerning the handling or use of hazardous materials, or
should any injuries or death result from our use or handling of hazardous materials, we could be the subject of substantial lawsuits by
governmental agencies or individuals. We may not have adequate insurance to cover all or any of such claims, if any. If we were
responsible to pay significant damages for violations or injuries, if any, we might be forced to cease operations since such payments could
deplete our available resources.
Our success is dependent in part on a few key executive officers.
Our success depends to a critical extent on the continued services of our Chief Executive Officer, James A. Joyce, and our
President, Rodney S. Kenley. If one or both of these key executive officers were to leave us, we would be forced to expend significant time
and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion
of limited working capital. The unique knowledge and expertise of these individuals would be difficult to replace within the biotechnology
field. We can give you no assurances that we can find satisfactory replacements for these key executive officers at all, or on terms that are
not unduly expensive or burdensome to us. Although Mr. Joyce has signed an employment agreement providing for his continued service to
us, that agreement will not preclude him from leaving us should we be unable to compete with offers for employment he may receive from
other companies. We do not currently carry key man life insurance policies on any of our key executive officers which would assist us in
recouping our costs in the event of the loss of those officers. If either of our key officers were to leave us, it could make it impossible, if not
cause substantial delays and costs, to implement our long-term business objectives and growth.
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Our inability to attract and retain qualified personnel could impede our ability to achieve our business objectives.
We have seven full-time employees consisting of our Chief Executive Officer, our President, our Chief Financial Officer, three
research scientists and an executive assistant. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
Although we believe that these employees and consultants will be able to handle most of our additional administrative, research
and development and business development in the near term, we will nevertheless be required over the longer-term to hire highly skilled
managerial, scientific and administrative personnel to fully implement our business plan and growth strategies, including to mitigate the
material weakness in our internal control over financial reporting described above. Due to the specialized scientific nature of our business,
we are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. Competition for these
individuals, especially in San Diego, California, where many biotechnology companies are located, is intense and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the future. We cannot assure you that we will be able to engage the
services of such qualified personnel at competitive prices or at all, particularly given the risks of employment attributable to our limited
financial resources and lack of an established track record. Also, if we are required to attract personnel from other parts of the U.S. or
abroad, we may have significant difficulty doing so due to the high cost of living in the Southern California area and due to the costs
incurred with transferring personnel to the area. If we cannot attract and retain qualified staff and executives, we will be unable to develop
our products and achieve regulatory clearance, and our business could fail.
We plan to grow rapidly which will strain our resources; our inability to manage our growth could delay or derail implementation of
our business objectives.
We will need to significantly expand our operations to implement our longer-term business plan and growth strategies. We will
also be required to manage multiple relationships with various strategic partners, technology licensors, customers, manufacturers and
suppliers, consultants and other third parties. This expansion and these expanded relationships will require us to significantly improve or
replace our existing managerial, operational and financial systems, procedures and controls; to improve the coordination between our
various corporate functions; and to manage, train, motivate and maintain a growing employee base. The time and costs to effectuate these
steps may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial
resources and skilled employees that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all,
the improvements to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated
increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base. If we cannot manage our growth initiatives, we will be unable to commercialize our
products on a large-scale in a timely manner, if at all, and our business could fail.
As a public company with limited financial resources undertaking the launch of new medical technologies, we may have difficulty
attracting and retaining executive management and directors.
The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal
exposure to lawsuits and stockholder claims, as well as governmental and creditor claims which may be made against them, particularly in
view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors. Due to these
perceived risks, directors and management are also becoming increasingly concerned with the availability of directors’ and officers’
liability insurance to pay on a timely basis the costs incurred in defending such claims. While we currently carry directors’ and officers’
liability insurance, such insurance is expensive and difficult to obtain. If we are unable to continue or provide directors’ and officers’
liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to
serve on our Board of Directors. We may lose potential independent board members and management candidates to other companies in the
biotechnology field that have greater directors’ and officers’ liability insurance to insure them from liability or to biotechnology companies
that have revenues or have received greater funding to date which can offer greater compensation packages. The fees of directors are also
rising in response to their increased duties, obligations and liabilities. In addition, our products could potentially be harmful to users, and we
are exposed to claims of product liability including for injury or death. We have limited insurance and may not be able to afford robust
coverage even as our products are introduced into the market. As a company with limited resources and potential exposures to management,
we will have a more difficult time attracting and retaining management and outside independent directors than a more established public or
private company due to these enhanced duties, obligations and potential liabilities.
15
If we fail to comply with extensive regulations of U.S. and foreign regulatory agencies, the commercialization of our products could be
delayed or prevented entirely.
Our Hemopurifier products are subject to extensive government regulations related to development, testing, manufacturing and
commercialization in the U.S. and other countries. The determination of when and whether a product is ready for large-scale purchase and
potential use will be made by the U.S. Government through consultation with a number of governmental agencies, including the FDA, the
National Institutes of Health, the Centers for Disease Control and Prevention and the Department of Homeland Security. Our product
candidates are in the pre-clinical and clinical stages of development and have not received required regulatory approval from the FDA, or
any foreign regulatory agencies, to be commercially marketed and sold. The process of obtaining and complying with FDA and other
governmental regulatory approvals and regulations in the U.S. and in foreign countries is costly, time consuming, uncertain and subject to
unanticipated delays. Obtaining such regulatory approvals, if any, can take several years. Despite the time and expense exerted, regulatory
approval is never guaranteed. We also are subject to the following risks and obligations, among others:
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the FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied;
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; and
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.
Delays in successfully completing our planned clinical trials could jeopardize our ability to obtain regulatory approval.
Our business prospects will depend on our ability to complete studies, clinical trials, obtain satisfactory results, obtain required
regulatory approvals and successfully commercialize our Hemopurifier product candidates. Completion of our clinical trials, announcement
of results of the trials and our ability to obtain regulatory approvals could be delayed for a variety of reasons, including:
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serious adverse events related to our medical device candidates;
unsatisfactory results of any clinical trial;
the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules; and
different interpretations of our pre-clinical and clinical data, which could initially lead to inconclusive results.
16
Our development costs will increase if we have material delays in any clinical trial or if we need to perform more or larger clinical
trials than planned. If the delays are significant, or if any of our product candidates do not prove to be safe or effective or do not receive
required regulatory approvals, our financial results and the commercial prospects for our product candidates will be harmed. Furthermore,
our inability to complete our clinical trials in a timely manner could jeopardize our ability to obtain regulatory approval.
If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated
problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval
clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections
by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers may be required to comply
with the FDA’s Quality System Regulation, or QSR. These FDA regulations cover the methods and documentation of the design, testing,
production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable
regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our
manufacturers, fail to adhere to QSR requirements in the U.S., this could delay production of our products and lead to fines, difficulties in
obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which
could, in turn, have a material adverse effect on our financial condition or results of operations.
In addition, the FDA assesses compliance with the QSR through periodic announced and unannounced inspections of
manufacturing and other facilities. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered
by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result
in any of the following enforcement actions:
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
unanticipated expenditures to address or defend such actions;
customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
operating restrictions or partial suspension or total shutdown of production;
refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
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· withdrawing 510(k) clearances or premarket approvals that have already been granted;
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refusal to grant export approval for our products; or
criminal prosecution.
Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial
condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable
regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.
If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device
reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information
that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or
contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these
events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event
involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action,
such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a
lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation
and financial results.
17
Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA
or another governmental authority, including a third-country authority, or the discovery of serious safety issues with our products,
could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the
event of material deficiencies or defects in design or manufacture. In this case, the FDA, the authority to require a recall must be based on
an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental
bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture.
Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that
certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or
voluntary recall by us or one of our international distributors could occur as a result of an unacceptable risk to health, component failures,
malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert
managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could
impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be
subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our
ability to generate profits. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or
another third-country competent authority. We may initiate voluntary recalls involving our products in the future that we determine do not
require notification of the FDA or another third-country competent authority. If the FDA disagrees with our determinations, they could
require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect
our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were.
We are also required to follow detailed recordkeeping requirements for all firm-initiated medical device corrections and removals.
In addition, in December of 2012, the FDA issued a draft guidance intended to assist the FDA and industry in distinguishing medical device
recalls from product enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the Federal
Food, Drug, and Cosmetic Act, that change would generally constitute a medical device recall and require submission of a recall report to
the FDA.
We outsource almost all of our operational and development activities, and if any party to which we have outsourced certain essential
functions fails to perform its obligations under agreements with us, the development and commercialization of our lead product
candidate and any future product candidates that we may develop could be delayed or terminated.
We generally rely on third-party consultants or other vendors to manage and implement the day-to-day conduct of our operations,
including conducting clinical trials and manufacturing our current product candidates and any future product candidates that we may
develop. Accordingly, we are and will continue to be dependent on the timeliness and effectiveness of their efforts. Our dependence on
third parties includes key suppliers and third-party service providers supporting the development, manufacture and regulatory approval of
our products as well as support for our information technology systems and other infrastructure. While our management team oversees
these vendors, failure of any of these third parties to meet their contractual, regulatory and other obligations or the development of factors
that materially disrupt the performance of these third parties could have a material adverse effect on our business. For example, all of the
key oversight responsibilities for the development and manufacture of our lead product candidate are conducted by our management team
but all activities are the responsibility of third-party vendors.
If a clinical research organization that we utilize is unable to allocate sufficient qualified personnel to our studies in a timely
manner or if the work performed by it does not fully satisfy the requirements of the FDA or other regulatory agencies, we may encounter
substantial delays and increased costs in completing our development efforts. Any manufacturer that we select may encounter difficulties in
the manufacture of new products in commercial quantities, including problems involving product yields, product stability or shelf life,
quality control, adequacy of control procedures and policies, compliance with FDA regulations and the need for further FDA approval of
any new manufacturing processes and facilities. If any of these occur, the development and commercialization of our product candidates
could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such
development and commercialization on our own. If we rely on only one source for the manufacture of the clinical or commercial supplies
of any of our product candidates or products, any production problems or supply constraints with that manufacturer could adversely impact
the development or commercialization of that product candidate or product.
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If we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to
regulatory actions, which could affect our ability to develop, market and sell our product candidates and any other or future product
candidates that we may develop and may harm our reputation.
If we or our manufacturers or other third-party contractors fail to comply with applicable federal, state or foreign laws or
regulations, we could be subject to regulatory actions, which could affect our ability to develop, market and sell our current product
candidates or any future product candidates under development successfully and could harm our reputation and lead to reduced or non-
acceptance of our proposed product candidates by the market. Even technical recommendations or evidence by the FDA through letters,
site visits, and overall recommendations to academia or biotechnology companies may make the manufacturing of a clinical product
extremely labor intensive or expensive, making the product candidate no longer viable to manufacture in a cost-efficient manner. The mode
of administration may make the product candidate not commercially viable. The required testing of the product candidate may make that
candidate no longer commercially viable. The conduct of clinical trials may be critiqued by the FDA, or a clinical trial site’s Institutional
Review Board or Institutional Biosafety Committee, which may delay or make impossible clinical testing of a product candidate. The
Institutional Review Board for a clinical trial may stop a trial or deem a product candidate unsafe to continue testing. This may have a
material adverse effect on the value of the product candidate and our business prospects.
We will need to outsource and rely on third parties for the clinical development and manufacture, sales and marketing of our current
product candidates or any future product candidates that we may develop, and our future success will be dependent on the timeliness
and effectiveness of the efforts of these third parties.
We do not have the required financial and human resources to carry out on our own all the pre-clinical and clinical development
for our current product candidates or any other or future product candidates that we may develop, and do not have the capability and
resources to manufacture, market or sell our current product candidates or any future product candidates that we may develop. Our
business model calls for the partial or full outsourcing of the clinical and other development and manufacturing, sales and marketing of our
product candidates in order to reduce our capital and infrastructure costs as a means of potentially improving our financial position. Our
success will depend on the performance of these outsourced providers. If such providers fail to perform adequately, our development of
product candidates may be delayed and any delay in the development of our product candidates would have a material and adverse effect
on our business prospects.
We are and will be exposed to product liability risks, and clinical and preclinical liability risks, which could place a substantial financial
burden upon us should we be sued.
Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and
marketing of medical devices. We cannot be sure that claims will not be asserted against us. A successful liability claim or series of claims
brought against us could have a material adverse effect on our business, financial condition and results of operations.
We cannot give assurances that we will be able to continue to obtain or maintain adequate product liability insurance on
acceptable terms, if at all, or that such insurance will provide adequate coverage against potential liabilities. Claims or losses in excess of
any product liability insurance coverage that we may obtain could have a material adverse effect on our business, financial condition and
results of operations.
Our Hemopurifier products may be used in connection with medical procedures in which it is important that those products
function with precision and accuracy. If our products do not function as designed, or are designed improperly, we may be forced by
regulatory agencies to withdraw such products from the market. In addition, if medical personnel or their patients suffer injury as a result of
any failure of our products to function as designed, or our products are designed inappropriately, we may be subject to lawsuits seeking
significant compensatory and punitive damages. The risk of product liability claims, product recalls and associated adverse publicity is
inherent in the testing, manufacturing, marketing and sale of medical products. We have recently obtained general clinical trial liability
insurance coverage. We cannot give assurances that our insurance coverage will to be adequate or available. We may not be able to secure
product liability insurance coverage on acceptable terms or at reasonable costs when needed. Any product recall or lawsuit seeking
significant monetary damages may have a material effect on our business and financial condition. Any liability for mandatory damages
could exceed the amount of our coverage. Moreover, a product recall could generate substantial negative publicity about our products and
business and inhibit or prevent commercialization of other future product candidates.
19
We have not received, and may never receive, approval from the FDA to market a medical device in the United States.
Before a new medical device can be marketed in the U.S., it must first receive either premarket approval, or a PMA, or 510(k)
clearance from the FDA, unless an exemption exists. A PMA submission, which is a higher standard than a 501(k) clearance, is used to
demonstrate to the FDA that a new or modified device is safe and effective. The 510(k) is used to demonstrate that a device is “substantially
equivalent” to a predicate device (one that has been cleared by the FDA). We expect that any product we seek regulatory approval for will
require a PMA. The FDA approval process involves, among other things, successfully completing clinical trials and filing for and obtaining
a PMA. The PMA process requires us to prove the safety and effectiveness of our products to the FDA’s satisfaction. This process, which
includes preclinical studies and clinical trials, can take many years and requires the expenditure of substantial resources and may include
post-marketing surveillance to establish the safety and efficacy of the product. Notwithstanding the effort and expense incurred, the
process may never result in the FDA granting a PMA. Data obtained from preclinical studies and clinical trials are subject to varying
interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in
governmental policies for medical devices during the period of product development. The FDA can delay, limit or deny approval of a PMA
application for many reasons, including:
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our inability to demonstrate safety or effectiveness to the FDA’s satisfaction;
insufficient data from our preclinical studies and clinical trials to support approval;
failure of the facilities of our third-party manufacturer or suppliers to meet applicable requirements;
inadequate compliance with preclinical, clinical or other regulations;
our failure to meet the FDA’s statistical requirements for approval; and
changes in the FDA’s approval policies, or the adoption of new regulations that require additional data or additional clinical
studies.
Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some
modifications made to products cleared through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually takes
from three to 12 months, but may last longer. The process of obtaining a PMA is much costlier and uncertain than the 510(k) clearance
process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until an approval
is obtained. Any of our products considered to be a class III device, which are considered to pose the greatest risk and the approval of which
is governed by the strictest guidelines, will require the submission and approval of a PMA in order for us to market it in the U.S. We also
may design new products in the future that could require the clearance of a 510(k).
Although we have received approval to proceed with clinical trials in the U.S. under the investigational device exemption, we
cannot assure you that the current approval from the FDA to proceed will not be revoked, that the study will be successful, or that the FDA
PMA approval will eventually be obtained and not revoked. Even if we obtain approval, the FDA or other regulatory authorities may
require expensive or burdensome post-market testing or controls. Any delay in, or failure to receive or maintain, clearance or approval for
our future products could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and
other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could
dissuade some physicians from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
The approval requirements for medical products used to fight bioterrorism are still evolving, and we cannot be certain any products we
develop for such uses would meet these requirements.
We are advancing product candidates under governmental policies that regulate the development and commercialization of
medical treatment countermeasures against bioterror and pandemic threats. While we intend to pursue FDA market clearance to treat
infectious bioterror and pandemic threats, it is often not feasible to conduct human studies against these deadly high threat pathogens. Thus,
we may not be able to demonstrate the effectiveness of our treatment countermeasures through controlled human efficacy studies.
Additionally, a change in government policies could impair our ability to obtain regulatory approval and there is no assurance that the FDA
will approve any of our product candidates.
The Hemopurifier was used to treat one patient suffering from Ebola, and we have received a supplement to our investigational device
exemption to establish protocols to treat Ebola patients in the U.S.; however, you should not construe these events as demonstrating that
the device is effective in treating Ebola.
In October 2014, physicians at the Frankfurt University Hospital in Frankfurt, Germany administered Hemopurifier therapy in a
6.5-hour treatment session to a patient infected with Ebola. This treatment was made on an emergency basis. The patient was administered
Hemopurifier therapy through special approval from The Federal Institute for Drugs and Medical Devices (Bundesinstitut fur Arzneimittel
und Medizinprodukte, BfArM), an independent federal higher authority within the portfolio of the Federal Ministry of Health of Germany.
While we believe the results of the treatment of the Ebola patient in Germany to be positive with respect to the usage of the Hemopurifier to
combat Ebola, no medical organization or regulatory organization, inside or outside the U.S., has cleared the use of the device for Ebola
treatment on a commercial basis.
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In addition, although the FDA approved a supplement to our investigational device exemption to establish a protocol for the
treatment of Ebola patients in the U.S., this approval is very limited and the results of such protocol and potential treatments, if any, cannot
be predicted. The usefulness of the Hemopurifier in treating Ebola is still unproven in any clinical or regulatory process in the U.S. or
elsewhere. Even if we enroll patients in the Ebola protocol, the results of such treatments may not demonstrate the safety and efficacy of
the device, may be equivocal or may otherwise not be sufficient to obtain approval of the Hemopurifier for any uses associated with Ebola.
In addition, the approval of the supplement to our investigational device exemption does not in any way ensure clearance or approval of the
Hemopurifier device for any purpose. In April 2015, we submitted a Humanitarian Use Devise submission to the FDA to support market
clearance of the Hemopurifier as a treatment for Ebola virus. If the application is designated by the FDA, we then may submit a
Humanitarian Device Exemption marketing application to the Center for Devices and Radiological Health for marketing review. We
cannot assure you that the Hemopurifier will be proven to be useful in the treatment of Ebola or that it will ever be approved by U.S. or
foreign regulatory agencies for such use, or if approved, successfully commercialized by us for such use. We may never commercialize the
Hemopurifier specifically for use in treating Ebola.
The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.
Any research and development, pre-clinical testing and clinical trial activities involving any products that we are or may develop
will be subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. In the future, we may
conduct clinical trials to support approval of new products. Clinical studies must be conducted in compliance with FDA regulations or the
FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support market clearance for
these products. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product
candidate claims or that the FDA will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials
does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials
and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed
indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our
clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and
generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of
the product candidate’s profile.
U.S. legislative or FDA regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product
candidates and to manufacture, market and distribute our products after approval is obtained.
From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions
governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA
regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products.
Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future
products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect
our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or
interpretations changed, and what the impact of such changes, if any, may be.
Should our products be approved for commercialization, lack of third-party coverage and reimbursement for our devices could delay or
limit their adoption.
In both the U.S. and international markets, the use of medical devices is dependent in part on the availability of reimbursement
from third-party payors, such as government and private insurance plans. Healthcare providers that use medical devices generally rely on
third-party payors to pay for all or part of the costs and fees associated with the medical procedures being performed or to compensate them
for their patient care services. Should our products be approved for commercialization by the FDA, we cannot assure you that our future
products will be considered cost-effective, that reimbursement will be available in other sites or in other countries, including the U.S., if
approved, or that reimbursement will be sufficient to allow sales of our future products on a profitable basis. The coverage decisions of
third-party payors will be significantly influenced by the assessment of our future products by health technology assessment bodies. Such
assessments are outside our control and we cannot assure you that such evaluations will be conducted or that they will have a favorable
outcome.
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If approved for use in the U.S., we expect that any products that we develop will be purchased primarily by medical institutions,
which will in turn bill various third-party payors for the health care services provided to patients at their facility. Payors may include the
Centers for Medicare & Medicaid Services, or CMS, which administers the Medicare program and works in partnership with state
governments to administer Medicaid, other government programs and private insurance plans. The process involved in applying for
coverage and incremental reimbursement from CMS is lengthy and expensive. Further, Medicare coverage is based on our ability to
demonstrate the treatment is “reasonable and necessary” for Medicare beneficiaries. Even if products utilizing our Aethlon Hemopurifier
technology receive FDA and other regulatory clearance or approval, they may not be granted coverage and reimbursement by any payor,
including by CMS. For some governmental programs, such as Medicaid, coverage and reimbursement differ from state to state and some
state Medicaid programs may not pay adequate amounts for the procedure necessary to utilize products utilizing our technology system, or
any payment at all. Moreover, many private payors use coverage decisions and payment amounts determined by CMS as guidelines in
setting their coverage and reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement
payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.
Should our products be approved for commercialization, adverse changes in reimbursement policies and procedures by payors may
impact our ability to market and sell our products.
Healthcare costs have risen significantly over the past decade, and there have been and continue to be proposals by legislators,
regulators and third-party payors to decrease costs. Third-party payors are increasingly challenging the prices charged for medical products
and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services.
For example, in the U.S., the Patient Protection and Affordable Care Act, as amended by the Health Care and Education
Reconciliation Act of 2010, or collectively, PPACA, among other things, reduced and/or limited Medicare reimbursement to certain
providers. The Budget Control Act of 2011, as amended by subsequent legislation, further reduces Medicare’s payments to providers by 2
percent through fiscal year 2024. These reductions may reduce providers’ revenues or profits, which could affect their ability to purchase
new technologies. Furthermore, the healthcare industry in the U.S. has experienced a trend toward cost containment as government and
private insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service
providers. Legislation could be adopted in the future that limits payments for our products from governmental payors. In addition,
commercial payors such as insurance companies, could adopt similar policies that limit reimbursement for medical device manufacturers’
products. Therefore, we cannot be certain that our product or the procedures or patient care performed using our product will be reimbursed
at a cost-effective level. We face similar risks relating to adverse changes in reimbursement procedures and policies in other countries
where we may market our products. Reimbursement and healthcare payment systems vary significantly among international markets. Our
inability to obtain international reimbursement approval, or any adverse changes in the reimbursement policies of foreign payors, could
negatively affect our ability to sell our products and have a material adverse effect on our business and financial condition.
Should our products be approved for commercialization, our financial performance may be adversely affected by medical device tax
provisions in the healthcare reform laws.
PPACA currently imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices
offered for sale in the U.S. Under these provisions, the Congressional Research Service predicts that the total cost to the medical device
industry may be up to $20 billion over the next decade. The Internal Revenue Service issued final regulations implementing the tax in
December 2012, which requires, among other things, bi-monthly payments and quarterly reporting.
The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on Dec. 18, 2015, includes a two-year moratorium
on the medical device excise tax imposed by Internal Revenue Code section 4191. Thus, the medical device excise tax does not apply to the
sale of a taxable medical device by the manufacturer, producer, or importer of the device during the period beginning on January 1, 2016,
and ending on December 31, 2017.
Once we market products, if this regulation is not repealed, we will be subject to this or any future excise tax on our sales of
certain medical devices in the U.S. We anticipate that primarily all of our sales, once commenced, of medical devices in the U.S. will be
subject to this 2.3% excise tax following December 31, 2017.
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Risks Related to Our Intellectual Property and Related Litigation
We rely upon licenses and patent rights from third parties which are subject to termination or expiration.
We rely upon third-party licenses and ownership rights assigned from third parties for the development of specific uses for our
Hemopurifier devices. For example, we are researching, developing and testing cancer-related applications for our devices under patents
assigned from the London Health Science Center Research, Inc. Should any of our licenses be prematurely terminated for any reason, or if
the patents and intellectual property assigned to us or owned by such entities that we have licensed should be challenged or defeated by
third parties, our research efforts could be materially and adversely affected. We cannot assure you that any of our licenses or patents
assigned to us will continue in force for as long as we require for our research, development and testing of cancer treatments. We cannot
assure you that, should our licenses terminate, should the underlying patents and intellectual property be challenged or defeated, or should
patents and intellectual property assigned to us be challenged or defeated, suitable replacements can be obtained or developed on terms
acceptable to us, if at all. There is also the related risk that we may not be able to make the required payments under any patent license or
assignment agreement, in which case we may lose to ability to use one or more of the licensed or assigned patents.
We could become subject to intellectual property litigation that could be costly, result in the diversion of management’s time and efforts,
require us to pay damages, prevent us from selling our commercially available products and/or reduce the margins we may realize from
our products.
The medical devices industry is characterized by extensive litigation and administrative proceedings over patent and other
intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, and the determination is often
uncertain. There may be existing patents of which we are unaware that our products under development may inadvertently infringe. The
likelihood that patent infringement claims may be brought against us increases as the number of participants in the infectious market
increases and as we achieve more visibility in the market place and introduce products to market.
Any infringement claim against us, even if without merit, may cause us to incur substantial costs, and would place a significant
strain on our financial resources, divert the attention of management from our core business, and harm our reputation. In some cases,
litigation may be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product revenues
and against whom our patents may provide little or no deterrence. If we were found to infringe any patents, we could be required to pay
substantial damages, including triple damages if an infringement is found to be willful. We also could be required to pay royalties and could
be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. We may not be
able to obtain a license enabling us to sell our products on reasonable terms, or at all, and we cannot assure you that we would be able to
redesign our products in a way that would not infringe those patents. If we fail to obtain any required licenses or make any necessary
changes to our technologies or the products that incorporate them, we may be unable to commercialize one or more of our products or may
have to withdraw products from the market, all of which would have a material adverse effect on our business, financial condition and
results of operations.
If the combination of patents, trade secrets and contractual provisions upon which we rely to protect our intellectual property is
inadequate, our ability to commercialize our products successfully will be harmed.
Our success depends significantly on our ability to protect our proprietary rights to the technologies incorporated in our products.
We currently have four issued U.S. patents and seven pending U.S. patent applications. We also have eighteen issued foreign patents and
have applied for eight additional international patents. Our issued patents begin to expire in 2019, with the last of these patents expiring in
2029, although terminal disclaimers, patent term extension or patent term adjustment can shorten or lengthen the patent term. We rely on a
combination of patent protection, trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our
proprietary technology. However, these may not adequately protect our rights or permit us to gain or keep any competitive advantage.
The issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our
issued patents can be challenged in litigation or proceedings before the U.S. Patent and Trademark Office or foreign patent offices where
our applications are pending. The U.S. Patent and Trademark Office or foreign offices may deny or require significant narrowing of claims
in our pending patent applications. Patents issued as a result of the pending patent applications, if any, may not provide us with significant
commercial protection or be issued in a form that is advantageous to us. Proceedings before the U.S. Patent and Trademark Office or
foreign offices could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued
patents. The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S., if at
all. Some of our patents may expire before we receive FDA approval to market our products in the U.S. or we receive approval to market
our products in a foreign country. Although we believe that certain patent applications and/or other patents issued more recently will help
protect the proprietary nature of the Hemopurifier treatment technology, we cannot assure you that this protection will be sufficient to
protect us during the development of that technology.
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Our competitors may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that
may issue in the future, which could prevent or limit our ability to market our products and could limit our ability to stop competitors from
marketing products that are substantially equivalent to ours. In addition, competitors may be able to design around our patents or develop
products that provide outcomes that are comparable to our products but that are not covered by our patents.
We have also entered into confidentiality and assignment of intellectual property agreements with all of our employees,
consultants and advisors directly involved in the development of our technology as one of the ways we seek to protect our intellectual
property and other proprietary technology. However, these agreements may not be enforceable or may not provide meaningful protection
for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.
In the event a competitor infringes upon any of our patents or other intellectual property rights, enforcing our rights may be
difficult, time consuming and expensive, and would divert management’s attention from managing our business. We cannot assure you that
we will be successful on the merits in any enforcement effort. In addition, we may not have sufficient resources to litigate, enforce or
defend our intellectual property rights.
We may rely on licenses for new technology, which may affect our continued operations with respect thereto.
As we develop our technology, we may need to license additional technologies to optimize the performance of our products. We
may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate
any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development
and testing until alternative technologies can be identified, licensed and integrated. The inability to obtain any necessary third-party
licenses could cause us to abandon a particular development path, which could seriously harm our business, financial position and results
of our operations.
New technology may lead to our competitors developing superior products which would reduce demand for our products.
Research into technologies similar to ours is proceeding at a rapid pace, and many private and public companies and research
institutions are actively engaged in the development of products similar to ours. These new technologies may, if successfully developed,
offer significant performance or price advantages when compared with our technologies. There is no assurance that our existing patents or
our pending and proposed patent applications will offer meaningful protection if a competitor develops a novel product based on a new
technology.
If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors
which could materially adversely impact our ability to remain in business.
Our ability to successfully commercialize our products will depend on our ability to protect those products and our technology
with domestic and foreign patents. We will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as
to its validity or as to the enforceable scope of the claims of the patent. The patent positions of technology companies, including us, are
uncertain and involve complex legal and factual issues. We cannot assure you that our patents will prevent other companies from
developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be
issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products.
From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop,
manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to
commercially exploit such products may be inhibited or prevented. Additionally, we cannot assure investors that any of our products or
technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those
patents. Furthermore, we cannot assure investors that our pending patent applications will result in issued patents, that patent protection
will be secured for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful
protection.
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If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, such litigation could be very
costly and the results of such litigation may not be satisfactory.
Although we have entered into invention assignment agreements with our employees and with certain advisors, and we routinely
enter into confidentiality agreements with our contract partners, if those employees, advisors or contract partners develop inventions or
processes independently that may relate to products or technology under development by us, disputes may arise about the ownership of
those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights
under these agreements. In addition, we may be required to commence litigation to enforce such agreements if they are violated, and it is
certainly possible that we will not have adequate remedies for breaches of our confidentiality agreements as monetary damages may not be
sufficient to compensate us. In addition, we may be unable to fund the costs of such litigation to a satisfactory conclusion, which could
leave us without recourse to enforce contracts that protect our intellectual property rights.
Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal
proceedings against us which could be time-consuming and expensive and could result in our being prohibited from developing,
marketing, selling or distributing our products.
Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, we cannot assure
you that our products or technology will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties
may claim that our products or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we
cease development or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent
infringement litigation, which will divert the attention of management away from the development of new products and the operation of our
business. We cannot assure investors that we would prevail in any such litigation. If we are found to have infringed on a third-party’s
intellectual property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be
precluded from manufacturing particular products or using particular technology.
Other parties may challenge certain of our foreign patent applications. If such parties are successful in opposing our foreign patent
applications, we may not gain the protection afforded by those patent applications in particular jurisdictions and may face additional
proceedings with respect to similar patents in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction
may influence our ability to maintain patent protection for the same technology in other jurisdictions.
Risks Related to U.S. Government Contracts
We may not obtain additional U.S. Government contracts to further develop our technology.
We can give no assurances that we will be successful in obtaining additional government grants or contracts. The process of
obtaining government contracts is lengthy with the uncertainty that we will be successful in obtaining announced grants or contracts for
therapeutics as a medical device technology. Accordingly, we cannot be certain that we will be awarded any additional U.S. Government
grants or contracts utilizing our Hemopurifier platform technology.
U.S. Government agencies have special contracting requirements including a right to audit us which create additional risks; a negative
audit would be detrimental to us.
Our business plan to utilize the Aethlon Hemopurifier technology is likely to continue to involve contracts with the U.S.
Government. Such contracts typically contain unfavorable termination provisions and are subject to audit and modification by the
government at its sole discretion, which subjects us to additional risks. These risks include the ability of the U.S. Government to
unilaterally:
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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.
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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.
As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.
Government contractors must comply with specific procurement regulations and other requirements. These requirements, although
customary in government contracts, impact our performance and compliance costs. In addition, current U.S. Government budgetary
constraints could lead to changes in the procurement environment, including the Department of Defense’s recent initiative focused on
efficiencies, affordability and cost growth and other changes to its procurement practices. If and to the extent such changes occur, they
could impact our results of operations and liquidity, and could affect whether and, if so, how we pursue certain opportunities and the terms
under which we are able to do so.
In addition, failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract
modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and
financial condition. Our failure to comply with these regulations and requirements could also lead to suspension or debarment, for cause,
from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes,
including those related to procurement integrity, export control, government security regulations, employment practices, protection of the
environment, accuracy of records and the recording of costs, and foreign corruption. The termination of our government contract as a result
of any of these acts could have a negative impact on our results of operations and financial condition and could have a negative impact on
our reputation and ability to procure other government contracts in the future.
Risks Relating to Our Common Stock and Our Corporate Governance
Historically we have not paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable
future.
We have never paid cash dividends on our common stock. We intend to retain our future earnings, if any, to fund operational and
capital expenditure needs of our business, and do not anticipate paying any cash dividends in the foreseeable future. Furthermore, future
financing instruments may do the same. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our
common stockholders in the foreseeable future.
Our stock price is speculative, and there is a risk of litigation.
The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors
such as the following:
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revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment
community;
reduced investor confidence in equity markets, due in part to corporate collapses in recent years;
speculation in the press or analyst community;
· wide fluctuations in stock prices, particularly with respect to the stock prices for other medical device companies;
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announcements of technological innovations by us or our competitors;
new products or the acquisition of significant customers by us or our competitors;
changes in interest rates;
changes in investors’ beliefs as to the appropriate price-earnings ratios for us and our competitors;
changes in recommendations or financial estimates by securities analysts who track our common stock or the stock of other
medical device companies;
changes in management;
sales of common stock by directors and executive officers;
rumors or dissemination of false or misleading information, particularly through Internet chat rooms, instant messaging, and
other rapid-dissemination methods;
conditions and trends in the medical device industry generally;
the announcement of acquisitions or other significant transactions by us or our competitors;
adoption of new accounting standards affecting our industry;
general market conditions;
domestic or international terrorism and other factors; and
the other factors described in this section.
Fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. Although no such
lawsuits are currently pending against us and we are not aware that any such lawsuit is threatened to be filed in the future, there is no
assurance that we will not be sued based on fluctuations in the price of our common stock. Defending against such suits could result in
substantial cost and divert management’s attention and resources. In addition, any settlement or adverse determination of such lawsuits
could subject us to significant liability.
If at any time our common stock is subject to the Securities and Exchange Commission’s penny stock rules, broker-dealers
may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
If at any time our common stock is not listed on a national securities exchange or we have net tangible assets of $5,000,000 or less
and our common stock has a market price per share of less than $5.00, transactions in our common stock will be subject to the Securities
and Exchange Commission’s, or SEC’s, “penny stock” rules. If our common stock is subject to the “penny stock” rules promulgated under
the Exchange Act, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be
adversely affected. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and
the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of
the penny stock to be purchased.
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In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
· make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient
knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Securities
and Exchange Commission relating to the penny stock market, which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it
more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and
about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Our common stock has had an unpredictable trading volume which means you may not be able to sell our shares at or near trading
prices or at all.
Trading in our common shares historically has been volatile and often has been thin, meaning that the number of persons
interested in purchasing our common shares at or near trading prices at any given time may be relatively small or non-existent. This
situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that
even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as
ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares is minimal, as compared to a seasoned issuer which has a
large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot
give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that
current trading levels will be sustained.
The market price for our common stock is volatile; you may not be able to sell our common stock at or above the price you have paid for
them, which may result in losses to you.
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we
expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In fact, during the 52-week
period ended March 31, 2017, the high and low closing sale prices of a share of our common stock were $7.70 and $3.19, respectively. The
volatility in our share price is attributable to a number of factors. First, as noted above, trading in our common shares often has been thin.
As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a
large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could
better absorb those sales without adverse impact on its share price. Secondly, we are a speculative investment due to our limited operating
history, limited amount of revenue, lack of profit to date, and the uncertainty of future market acceptance for our potential products. As a
consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of
negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be
the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or
anticipated variations in our quarterly or annual operating results; acceptance of our proprietary technology as a viable method of
augmenting the immune response of clearing viruses and toxins from human blood; government regulations, announcements of significant
acquisitions, strategic partnerships or joint ventures; our capital commitments and additions or departures of our key personnel. Many of
these factors are beyond our control and may decrease the market price of our common shares regardless of our operating performance. We
cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to
whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability of common
shares for sale at any time will have on the prevailing market price.
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We cannot assure you that we will be able to comply with the continued listing standards of the NASDAQ Capital Market.
We cannot assure you that we will be able to comply with the listing standards that we are required to meet in order to maintain a
listing of our common stock on the NASDAQ Capital Market. Our failure to meet those requirements may result in our common stock
being delisted from the NASDAQ Capital Market.
On February 1, 2017, we received a written notification from the Nasdaq Stock Market LLC that we had not met the minimum of
$35,000,000 in Market Value of Listed Securities (“MVLS”) for the last 30 consecutive business days (from December 15, 2016 - January
31, 2017) as set forth in Listing Rule 5550(b)(2). We were provided with a 180 calendar day period (by July 31, 2017) in which to gain
compliance by closing with an MVLS of at least $35,000,000 for any 10 consecutive business days during that period, and this matter
would then be automatically closed. There is no assurance that we will be able to meet this requirement or in the alternative meet the
requirement for the Nasdaq Capital Market of $2.5 million in stockholders’ equity.
Franklyn S. Barry., Jr, formerly one of our directors as well as a member of our Audit Committee, for health reasons declined to
stand for re-election at the Annual Meeting of Shareholders held on March 30, 2017. As a result, we have two independent directors and
members of our Audit Committee and thus no longer comply with Nasdaq’s independent director and audit committee requirements as set
forth in Listing Rule 5605. We received a notification letter from Nasdaq on April 3, 2017 regarding this noncompliance.
Under Listing Rules 5605(b)(1)(A) and 5605(c)(4), Nasdaq shall provide us with time to regain compliance either until the earlier
of our next annual meeting or March 30, 2018; or if the next annual meeting is before September 26, 2017, until September 26, 2017.
In order to regain compliance, the Company must submit to Nasdaq documentation, including biographies of any new directors,
evidencing compliance with the rules no later than the applicable date set forth above. We are currently evaluating new candidates to join
our board of directors; however, if this does not occur within the time periods proscribed we could be delisted.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from
regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock is listed on the NASDAQ
Capital Market, we believe such securities will be covered securities. Although the states would be preempted from regulating the sale of
our securities, in that event, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a
finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if our common
stock is no longer listed on the NASDAQ Capital Market, our securities would not be covered securities, and we would be subject to
regulation in each state in which we offer our securities.
The Depository Trust Company imposed restrictions upon electronic trading of our common stock, which negatively affected liquidity of
the stock and our ability to raise capital.
In September 2011, The Depository Trust Company placed a "chill" on the electronic clearing of trades in our shares which led to
some brokerage firms being unwilling to accept certificates and/or electronic deposits of our stock. We have since been successful in lifting
the restrictions and our shares now clear electronically making more brokers willing to trade in our common stock. We cannot assure you
that The Depository Trust Company will not again place a chill on our common stock. A chill, if placed on our common stock, would affect
the liquidity of our shares which may make it difficult to purchase or sell shares in the open market. It may also have an adverse effect on
our ability to raise capital since investors may be unable to resell shares into the market. Our inability to raise capital on terms acceptable to
us, if at all, could have a material and adverse effect on our business and operations.
Our directors and officers own or control approximately 10.6% of our outstanding common shares which may limit your ability to
propose new management or influence the overall direction of the business; this concentration of control may also discourage potential
takeovers that could otherwise provide a premium to you.
As of June 28, 2017, our officers and directors beneficially own or control approximately 10.6% of our outstanding common
shares (assuming the exercise of all outstanding options, restricted stock units and warrants held by our officers and directors). These
persons will have the ability to substantially influence all matters submitted to our stockholders for approval and to control our
management and affairs, including extraordinary transactions such as mergers and other changes of corporate control, and going private
transactions.
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A large number of our common shares are issuable upon exercise of outstanding convertible securities which, if exercised or converted,
would be dilutive to your holdings.
As of March 31, 2017, there are outstanding purchase options and warrants entitling the holders to purchase 3,036,142 common
shares at a weighted average exercise price of $4.68 per share. This includes 26,105 warrants that are conditional upon the exercise of other
warrants. As of March 31, 2017, there are 324,650 shares underlying promissory notes convertible into common stock at a weighted
average exercise price of $4.00. Additionally, as of March 31, 2017, we had reserved 553,500 shares of common stock for issuance under
our restricted stock unit program.
The exercise price for all of our outstanding options and warrants, or the conversion price of our convertible notes, may be less
than your cost to acquire our common shares. In the event of the exercise or conversion of these securities, you could suffer substantial
dilution of your investment in terms of your percentage ownership in us as well as the book value of your common shares. In addition, the
holders of the convertible notes, common share purchase options or warrants may sell common shares in tandem with their exercise or
conversion of those securities to finance that exercise or conversion, or may resell the shares purchased in order to cover any income tax
liabilities that may arise from their exercise of the options or warrants or conversion of the notes.
Our issuance of additional common shares, or convertible securities, would be dilutive to your holdings.
We are entitled under our Articles of Incorporation to issue up to 30,000,000 shares of common stock. We have reserved for
issuance 3,908,292 shares of common stock for existing restricted stock units, options, warrants and convertible notes. As of March 31,
2017, we have issued and outstanding 8,797,086 shares of common stock. As a result, as of March 31, 2017 we had 17,294,622 common
shares available for issuance to new investors or for use to satisfy indebtedness or pay service providers.
Our Board of Directors may generally issue shares of common stock, restricted stock units or options or warrants to purchase those
shares, without further approval by our stockholders based upon such factors as our Board of Directors may deem relevant at that time. It is
likely that we will be required to issue a large amount of additional securities to raise capital to further our development. It is also likely that
we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants
in connection with their services, both in the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we
will not issue additional shares of common stock, or options or warrants to purchase those shares, under circumstances we may deem
appropriate at the time.
Our issuance of additional shares of common stock in satisfaction of services, or to repay indebtedness, would be dilutive to your
holdings.
Our Board of Directors may generally issue shares of common stock to pay for debt or services, without further approval by our
stockholders based upon such factors that our Board of Directors may deem relevant at that time. For the past four fiscal years (ending
March 31, 2017), we issued a total of 1,193,300 shares for debt to reduce our obligations. In the fiscal year ended March 31, 2017 we
issued 33,091 shares of common stock at an average price discount of 13% weighted by the number of shares issued for debt in that period.
We did not issue any shares as payment for services in the fiscal year ended March 31, 2016.
While we did not issue any shares as payment for services in the fiscal years ended March 31, 2017 and 2016, it is likely that we
will issue additional securities to pay for services and to reduce debt in the future. We cannot give you any assurance that we will not issue
additional shares of common stock at various discounts under circumstances we may deem appropriate at the time.
Our officers and directors are entitled to indemnification from us for liabilities under our articles of incorporation, which could be
costly to us and may discourage the exercise of stockholder rights.
Our Articles of Incorporation contains provisions which eliminate the liability of our directors for monetary damages to our
company and stockholders. Our by-laws also require us to indemnify our officers and directors. We may also have contractual
indemnification obligations under our agreements with our directors, officers and employees. The foregoing indemnification obligations
could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers
and employees that we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a
lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative
litigation by our stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit
our company and stockholders.
30
Our by-laws and Nevada law may discourage, delay or prevent a change of control of our company or changes in our management,
would have the result of depressing the trading price of our common stock.
Provisions of Nevada anti-takeover law (NRS 78.378 et seq.) could have the effect of delaying or preventing a third-party from
acquiring us, even if the acquisition arguably could benefit our stockholders. Various provisions of our by-laws may delay, defer or prevent
a tender offer or takeover attempt of us that a stockholder might consider in his or her best interest. Our by-laws may be adopted, amended
or repealed by the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the
election of directors, and except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal the by-
laws by a vote of not less than a majority of our directors. The interests of these stockholders and directors may not be consistent with your
interests, and they may make changes to the by-laws that are not in line with your concerns.
Our authorized but unissued shares of common stock are available for our Board or Directors to issue without stockholder
approval. We may use these additional shares for a variety of corporate purposes, however, faced with an attempt to obtain control of us by
means of a proxy context, tender offer, merger or other transaction our Board of Directors acting alone and without approval of our
stockholders can issue large amounts of capital stock as part of a defense to a take-over challenge.
The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be
willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the
likelihood that you could receive a premium for your common stock in an acquisition.
We incur substantial costs as a result of being a public company and our management expects to devote substantial time to public
company compliance programs.
As a public company, we incur significant legal, insurance, accounting and other expenses, including costs associated with public
company reporting. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result
in increased general and administrative expenses and may divert management’s time and attention from product development and
commercialization activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and
our business may be harmed. These laws and regulations could make it more difficult and costly for us to obtain director and officer
liability insurance for our directors and officers, and we may be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified
members of our Board of Directors, particularly to serve on our audit and compensation committees. In addition, if we are unable to
continue to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain the
quotation of our common stock on the Nasdaq Capital Market or on any other senior market to which we may apply for listing, which
would likely have a material adverse effect on the trading price of our common stock.
If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us or our business. Our research coverage by industry and financial analysts is currently limited. Even if our analyst coverage
increases, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these
analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in
turn could cause our stock price or trading volume to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
We currently lease approximately 2,576 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego,
California 92123 under a 39-month gross plus utilities lease that commenced on December 1, 2014 with an initial rental rate of $6,054 per
month. Such lease expires in March 2018. We believe this leased facility will be satisfactory for our office needs over the term of the lease.
31
We also lease approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego,
California 92121 at the rate of $4,168 per month on a one-year lease that expires in November 2017. We presently intend to renew this
lease as we believe this leased facility will be satisfactory for our laboratory needs over the near term.
Our Exosome Sciences, Inc. subsidiary previously rented approximately 2,055 square feet of office and laboratory space at 11
Deer Park Drive, South Brunswick, New Jersey at the rate of $3,917 per month on a one-year lease that expired in October 2015. In
October 2015, Exosome Sciences, Inc. relocated to a different suite at the same office complex. Exosome Sciences leased that suite,
comprised of approximately 541 square feet of office and laboratory space located at 9 Deer Park Drive, South Brunswick, New Jersey, at
the rate of $1,352 per month on a month-to-month lease basis. In January 2016, we exercised our 30-day notice to terminate the Exosome
Sciences’ lease in New Jersey prior to consolidating our laboratory operations in San Diego.
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 our business operations. We are currently not involved in any litigation or any pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
We have no disclosure applicable to this item.
32
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the Nasdaq Capital Market under the trading symbol "AEMD." Trading in our common stock
historically has been volatile and often has been thin. On July 7, 2015, The NASDAQ Stock Market LLC approved our application for
listing our common stock on the Nasdaq Capital Market under the symbol “AEMD,” and we commenced trading on the Nasdaq Capital
Market on July 13, 2015. Previously, our common stock was quoted on the OTCQB Marketplace under the trading symbol “AEMD.”
The following table sets forth for the calendar periods indicated the quarterly high and low closing or bid, as applicable, prices for
our common stock as reported by the Nasdaq Capital Market and/or the OTCQB Marketplace. The prices represent quotations between
dealers, without adjustment for retail markup, mark down or commission, and do not necessarily represent actual transactions.
PERIOD
Calendar 2017:
First Quarter
Calendar 2016:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Calendar 2015:
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
CLOSING/BID PRICE
HIGH
LOW
$
4.75 $
5.14
7.70
6.14
7.01
8.20
11.38
14.00
19.50
3.19
4.11
4.77
4.70
4.34
6.17
6.58
6.51
8.50
There were approximately 84 record holders of our common stock at June 28, 2017. The number of registered stockholders
includes any beneficial owners of common shares held in street name.
The transfer agent and registrar for our common stock is Computershare Investor Services, located at 350 Indiana Street, Suite
800, Golden, Colorado 80401.
We have not paid any dividends on our common stock to date and do not anticipate that we will pay dividends in the foreseeable
future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available,
our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the board of directors may think are
relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the
development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable
future.
Recent Sales of Unregistered Securities
We have sold or issued the following equity securities not registered under the Securities Act of 1933, or Securities Act, in reliance
upon the exemption from registration pursuant to Section 4(a)(2) of the Securities Act or Regulation D of the Securities Act during the
fiscal year ended March 31, 2017 and subsequent thereto through the date of filing this report. Except as stated below, no underwriting
discounts or commissions were payable with respect to any of the following transactions.
33
Aethlon Medical, Inc. Equity Transactions in the Fiscal Year Ended March 31, 2017.
Common Stock Sales Agreement with H.C. Wainwright
On June 28, 2016, we entered into a Common Stock Sales Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“H.C.
Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock from
time to time as set forth in the Agreement. The Agreement provides for the sale of shares of our common stock having an aggregate
offering price of up to $12,500,000 (the “Shares”).
Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent
with its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C.
Wainwright with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three
percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in
connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon
the sale of all of the Shares under the Agreement unless terminated earlier by either party as permitted under the Agreement.
Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in
Rule 415 under the Securities Act, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital
Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time,
we may suspend offers under the Agreement or terminate the Agreement.
In July 2016, we commenced sales of common stock under our Common Stock Sales Agreement with H.C. Wainwright. In the fiscal year
ended March 31, 2017, we raised aggregate net proceeds of $955,206 (net of $29,831 in commissions to H.C. Wainwright and $9,432 in
other offering expenses) under this agreement through the sale of 216,078 shares at an average price of $4.42 per share of net proceeds.
Warrant Issuances in July 2016
In July 2016, we issued an aggregate of 2,660 shares of common stock to three investors upon the exercise of previously issued warrants.
The warrants were exercised on a cashless or “net” basis. Accordingly, we did not receive any proceeds from such exercises. The cashless
exercise of such warrants resulted in the cancellation of previously issued warrants to purchase an aggregate of 19,563 shares of common
stock.
Restricted Stock Unit Grants to Directors and Executive Officers
During the fiscal year ended March 31, 2017, 149,864 Restricted Stock Units (“RSUs”) held by our outside directors and executive officers
were exchanged into the same number of shares of our common stock (see Stock-Based Compensation below).
Amendment of Warrants Issued in Conjunction with the November 2014 10% Convertible Notes
Under the Second Amendment and Extension of the November 2014 10% Convertible Notes dated June 27, 2016 (See Note 4), we reduced
the purchase price of 47,125 Warrants from $8.40 per share to $5.00 per share.
We also issued to the investors new warrants to purchase an aggregate of 30,000 shares of common stock with a purchase price of $5.00 per
share of common stock. We issued the new warrants in substantially the same form as the prior Warrants, and the new warrants will expire
on November 6, 2019, the same date on which the prior warrants will expire (See Note 4).
Amendment of December 2014 Warrants
On June 27, 2016, we and certain investors (the “Unit Investors”) entered into Consent and Waiver and Amendment agreements (the
“CWAs”), relating to an aggregate of 264,000 Warrants to Purchase Common Stock (the “Unit Warrants”) we had issued to the Unit
Investors on December 2, 2014 pursuant to a Securities Purchase Agreement dated November 26, 2014 (the “2014 SPA”). In the CWAs,
each of the Unit Investors provided its consent under certain restrictive provisions, and waived certain rights, including a right to participate
in certain offerings made by us, under the 2014 SPA in order to facilitate the at-the-market equity program described above. Pursuant to the
CWAs, we reduced the Exercise Price (as defined in the Unit Warrants) from $15.00 per share of common stock to $5.00 per share of
common stock. At any time that the shares of common stock underlying the Unit Warrants are covered by an effective registration
statement that permits the public resale of the shares, if the Unit Investors exercise the Unit Warrants, they must do so by a cash exercise,
which could yield up to $1,320,000 in proceeds to us.
34
On June 27, 2016, each of the Unit Investors also entered into a Consent and Waiver providing its consent under certain provisions, and
waiving certain rights, including a right to participate in certain offerings made by us, under the 2015 SPA in order to facilitate the at-the-
market equity program described above.
In accordance with applicable generally accepted accounting principles in the United States of America (GAAP) for warrant modifications,
we measured the change in fair value that arose from the reduction in exercise price and recognized an expense of $345,841, which is
included in other (income) expenses in the accompanying condensed consolidated statements of operations.
Warrants Issued in Conjunction with the December 2016 10% Convertible Notes
On December 30, 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited
investors (collectively, the “Holders”), pursuant to which the Purchasers purchased an aggregate of $680,400 principal amount of Notes
(inclusive of due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400)
for an aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the
“Warrants”) (See Note 4).
The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of $4.50, subject
to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a cashless basis. In the
event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the Warrants is subject to
customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has contractually agreed to
restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder and its affiliates after such
exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.
The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized as
additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative fair value of
these Warrants.
March 2017 Registered Direct Offering
On March 22, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the
“Investors”) for the sale of 575,000 shares (the “Common Shares”) of our common stock, par value $0.001 per share (the “Common
Stock”), at a purchase price of $3.50 per share, in a registered direct offering. Concurrently with the sale of the Common Shares, pursuant
to the Purchase Agreement, we also sold in a private placement warrants to purchase 575,000 shares of Common Stock (the “Warrants”).
The aggregate gross proceeds for the sale of the Common Shares and Warrants will be approximately $2 million. Subject to certain
ownership limitations, the Warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to
$3.95 per share of Common Stock, subject to adjustments as provided under the terms of the Warrants. The Warrants will be exercisable
for five years from the initial exercise date.
The net proceeds to us from the transactions, after deducting the placement agent’s fees and expenses (not including the Wainwright
Warrants, as defined below), our estimated offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants, were
$1,804,250. We intend to use the net proceeds from the transactions for general corporate purposes.
The Common Shares (but not the Warrants or shares issuable upon exercise of the Warrant) were sold by us pursuant to an effective shelf
registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on May 5, 2016 and
subsequently declared effective on May 12, 2016 (File No. 333-211151) (the “Registration Statement”), and the base prospectus dated as of
May 12, 2016 contained therein. We filed a prospectus supplement and the accompanying prospectus with the SEC in connection with this
sale of the Common Shares.
The purchase agreement also covered the exchange of 264,000 warrants issued to the purchasers thereunder in December 2014 for 198,000
shares of our common stock. Further, in exchange for certain waivers given by the purchasers and certain other investors in a private
placement of the Company in June 2015, the warrants issued in such private placement were amended to (i) reduce the exercise price to
$3.95 per share, (ii) make the warrants non-exercisable for a period of six months from the date of amendment, and (iii) extend the term of
those warrants by six months.
35
The Warrants and the shares issuable upon exercise of the Warrants were sold and issued without registration under the Securities Act of
1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving a
public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar exemptions
under applicable state laws.
We also entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC
(“Rodman”), pursuant to which Rodman agreed to serve as exclusive placement agent for the issuance and sale of the Common Shares and
Warrants. We paid Rodman an aggregate fee equal to 6% of the gross proceeds received by us from the sale of the securities in the
transactions. Pursuant to the Engagement Letter, we also agreed to grant to Rodman or its designees warrants to purchase up to 3% of the
aggregate number of shares sold in the transaction (the “Rodman Warrants”). The Engagement Letter has a nine-month tail and right of
first offer periods, indemnity and other customary provisions for transactions of this nature. The Rodman Warrants have substantially the
same terms as the Warrants, except that the exercise price is 125% of $3.50. We also paid Rodman a reimbursement for non-accountable
expenses in the amount of $50,000.
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
Equity Compensation Plans
Summary equity compensation plan data
The following table sets forth information, as of March 31, 2017, about 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
(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 (3)(5)
787,296 $
–
2,212,704
Equity compensation plans not approved by security holders (1)(3)
(4)
Totals
432,047 $
1,219,343 $
10.98
10.98
28,845
2,241,549
_____________
(1) The description of the material terms of non-plan issuances of equity instruments is discussed in Note 5 to the accompanying
consolidated financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
(3) Includes restricted 787,296 restricted stock unit grants to our officers and directors in August 2016.
(4) On March 31, 2017 we had 2,241,549 shares available under our 2010 Stock Incentive Plan.
(5) 3,000,000 share increase to the 2010 Stock Incentive Plan approved by shareholders.
36
2000 Stock Option Plan
Our 2000 Stock Option Plan provides for the grant of incentive stock options to our full-time employees (who may also be
directors) and nonstatutory stock options to non-employee directors, consultants, customers, vendors or providers of significant services.
The exercise price of any incentive stock option may not be less than the fair market value of the common stock on the date of grant or, in
the case of an optionee who owns more than 10% of the total combined voting power of all classes of our outstanding stock, not be less
than 110% of the fair market value on the date of grant. The exercise price, in the case of any nonstatutory stock option, must not be less
than 75% of the fair market value of the common stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is
10,000 options.
At March 31, 2017, all of the grants previously made under the 2000 Stock Option Plan had expired and 200 common shares had
been issued under the plan, with 9,800 available for future issuance.
2010 Stock Incentive Plan
In August 2010, we adopted the 2010 Stock Incentive Plan, which provides incentives to attract, retain and motivate employees
and directors whose present and potential contributions are important to our success by offering them an opportunity to participate in our
future performance through awards of options, the right to purchase common stock, stock bonuses and stock appreciation rights and other
awards. We initially reserved a total of 70,000 common shares for issuance under the 2010 Stock Incentive Plan.
In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 70,000 common shares issuable under
this plan under the Securities Act, and in July 2012, we filed a registration statement on Form S-8 for the purpose of registering 100,000
common shares issuable under this plan under the Securities Act.
On January 26, 2016, our Board of Directors approved an amendment to the 2010 Stock Incentive Plan to increase the total
number of shares of common stock reserved for issuance under the plan to 3,170,000 shares, subject to amendment of our Articles of
Incorporation to increase our authorized common stock. On March 29, 2016, we held an annual stockholders meeting, at which our
stockholders approved the Amended 2010 Stock Incentive Plan and an amendment of our Articles of Incorporation to increase our
authorized common stock to 30,000,000 shares. On March 31, 2016, we filed a Certificate of Amendment to our Articles of Incorporation
to effect the increase in our authorized common stock. As a result of such amendment, the Amended 2010 Stock Incentive Plan became
effective on March 31, 2016.
At March 31, 2017, we had 2,241,549 shares available under this plan.
2012 Directors Compensation Program
In July 2012, our Board of Directors approved a board compensation program that modified and superseded the 2005 Directors
Compensation Program, which was previously in effect. Under the 2012 program, in which only non-employee directors may participate,
an eligible director will receive a grant of $35,000 worth of ten-year options to acquire shares of common stock, with such grant being
valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first
day of the fiscal year. In addition, under this program, eligible directors will receive cash compensation equal to $500 for each committee
meeting attended and $1,000 for each formal board meeting attended.
At March 31, 2017, we had issued 26,757 options under the 2005 program to outside directors and 79,309 options to employee-
directors, 21,756 outside directors’ options had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-
directors’ options had been forfeited and no options under the 2005 program remained outstanding. There were no issuances of stock
options to our outside directors in the fiscal years ended March 31, 2016 and 2017.
On June 6, 2014, our Board of Directors approved certain changes to the 2012 program. Under this modified program, a new
eligible director will receive an initial grant of $50,000 worth of options to acquire shares of common stock, with such grant being valued at
the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the
fiscal year. These options will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the
date of grant. In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program
also will receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary of the date
of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The modified 2012 program
also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Nominating
Committee Chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000, Nominating Committee
member $4,000 and lead independent director - $15,000.
37
On August 9, 2016, the Board approved further modifications to the program. Under the modified 2012 Program, in which only
non-employee directors may participate, a new eligible director will receive an initial grant of $50,000 worth of RSUs or, at the discretion
of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued based on the average of the
closing prices of the Common Stock for the five trading days preceding and including the date of grant and will vest at a rate determined by
the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of
the closing prices of the Common Stock for the five trading days preceding and including the date of grant. Such options will have a term
of ten years and will vest at a rate determined by the Board in its discretion.
At the beginning of each fiscal year, each existing director eligible to participate in the 2012 Program will receive a grant of
$35,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision
will be valued based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first
day of the fiscal year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year) and will vest
at a rate determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be
based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal
year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year). Such options will have a
term of ten years and will vest at a rate determined by the Board in its discretion.
The RSU grants and the changes to the 2012 Program were approved and recommended by our Compensation Committee prior to
approval by the Board.
Stand-alone grants
From time to time our Board of Directors grants common 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. There were no stock option grants to either employees or directors during
the fiscal years ended March 31, 2017 and March 31, 2016.
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 Annual Report.
Overview
We are a medical device company focused on creating innovative devices that address unmet medical needs in global health and
biodefense. The Aethlon Hemopurifier® is a clinical-stage therapeutic device that eliminates life-threatening viruses from the circulatory
system of infected individuals.
In June 2013, the U.S. Food and Drug Administration, or FDA, approved our investigational device exemption application to
initiate a ten-patient human clinical trial in one location in the U.S. to treat dialysis patients who are infected with the Hepatitis C virus.
Successful outcomes of that human trial as well as at least one follow-on human trial will be required by the FDA in order to commercialize
our products in the U.S. The regulatory agencies of certain foreign countries where we intend to sell this device will also require one or
more human clinical trials.
Some of our patents may expire before we receive FDA approval to market our products in the U.S. or we receive approval to
market our products in a foreign country. However, we believe that certain patent applications and/or other patents issued more recently
will help protect the proprietary nature of the Hemopurifier treatment technology.
Through our majority-owned subsidiary, Exosome Sciences, Inc., or Exosome, we are also studying potential diagnostic
techniques for identifying and monitoring neurological conditions and cancer. We consolidate Exosome’s activities in our consolidated
financial statements.
38
Fiscal Years Ended March 31, 2017 and 2016
Results of Operations
Revenues
We recorded government contract revenue in the fiscal years ended March 31, 2017 and 2016. This revenue arose from work
performed under our government contract with the Defense Advanced Research Projects Agency, or DARPA, and our subcontract with
Battelle Memorial Institute, or Battelle (both of which are now completed), as follows:
DARPA contract
Battelle subcontract
Total government contract revenue
DARPA Contract
Fiscal Year
Ended
3/31/17
Fiscal year
Ended
3/31/16
Change in
Dollars
$
$
387,438 $
4,635
392,073 $
863,011 $
23,561
886,572 $
(475,573)
(18,926)
(494,499)
We entered into a contract with DARPA on September 30, 2011. Under the DARPA award, we were engaged to develop a
therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers.
The award from DARPA was a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years. Fixed
price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract.
Under the terms of the contract, we performed certain incremental work towards the achievement of specific milestones against which we
invoiced the government for fixed payment amounts.
Originally, only the base year (year one of the contract) was effective for the parties; however, DARPA subsequently exercised its
option on the remaining years of the contract. The milestones were comprised of planning, engineering and clinical targets, the
achievement of which in some cases required the participation and contribution of third-party participants under the contract. We
commenced work under the contract in October 2011 and completed the contract in September 2016.
In February 2014, DARPA reduced the scope of our contract in years three through five of the contract. The reduction in scope
focused our research on exosomes, viruses and blood processing instrumentation. This scope reduction reduced the possible payments under
the contract by $858,469 over years three through five.
In the fiscal year ended March 31, 2017, we invoiced the U.S. Government for the final two milestones under our DARPA
contract in the aggregate amount of $387,438. In the fiscal year ended March 31, 2016, we invoiced the U.S. Government for four
milestones under our DARPA contract in the amount of $863,011.
Battelle Subcontract
We entered into a subcontract agreement with Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor
on the systems integration portion of the original DARPA contract, and we are one of several subcontractors on that systems integration
project. The Battelle subcontract is under a time and materials basis and we began generating revenues under the subcontract in the three
months ended September 30, 2013. That contract has now concluded. The Battelle subcontract was our first cost-reimbursable contract.
Our revenue under this contract was a function of cost reimbursement plus an overhead mark-up for hours devoted to the project
by specific employees (with specific hourly rates for those employees), for travel expenses related to the project, for any equipment
purchased for the project and for the cost of any consultants hired by us to perform work on the project. Each payment required approval by
the program manager at Battelle.
Operating Expenses
Consolidated operating expenses were $6,490,430 for the fiscal year ended March 31, 2017 compared to $5,271,406 in the fiscal
year ended March 31, 2016, an increase of $1,219,024. The net increase of $1,219,024 was due to increases in payroll and related expenses
of $1,396,050, which was partially offset by a decrease in professional fees of $97,504 and a decrease in general and administrative expense
of $79,522.
39
The $1,396,050 increase in payroll and related expenses was principally driven by a $1,983,465 increase in our stock-based
compensation due to the vesting of restricted stock units granted during the fiscal year, which was partially offset by a $371,041 decrease in
cash payroll and related expenses of Aethlon Medical due primarily to reductions in headcount and in bonus payments and by a $216,374
decrease in the payroll and related expenses of Exosome due to headcount reductions.
The $97,504 decrease in our professional fees arose from a $97,316 decrease in DARPA-related professional fees coupled with a
decrease in our non-DARPA-related professional fees of $6,230, which were partially offset by an increase in Exosome’s professional fees
of $6,042. The primary factor in our $97,316 decrease in our DARPA-related professional fees was the completion of our DARPA contract
in September 2016.
The $79,522 decrease in general and administrative expenses primarily arose from a decrease in the general and administrative
expenses at Exosome of $68,036 and a decrease in our non-DARPA-related activities of $29,823. Those decreases were partially offset by
an increase in the general and administrative expenses in our DARPA-related activities of $ 18,337.
Other Expense
In the fiscal year ended March 31, 2017, we recognized other expenses of $1,208,369 compared to $573,782 of other expense in
the fiscal year ended March 31, 2016. The following table breaks out the various components of our other expense over the fiscal years
ended March 31, 2017 and 2016:
Components of Other Expense
in Fiscal Year Ended
March 31,
2016
March 31,
2017
Change
Loss on debt extinguishment
$
558,198 $
– $
558,198
Interest and other debt expenses
Warrant repricing expense
Total other expense
Loss on Debt Extinguishment
304,330
345,841
573,782
(269,452)
–
345,841
$
1,208,369 $
573,782 $
634,587
Our aggregate loss on debt extinguishment for the fiscal year ended March 31, 2017 arose from a $616,889 loss associated with
the June 2016 amendments to our November 2014 convertible notes coupled with a gain on debt extinguishment of $58,691, which netted
to an overall loss on debt extinguishment of $558,198 - see below.
June 2016 Amendments - This loss on debt extinguishment arose from the Amendments (the “Amendments”) to our November
2014 convertible notes The Amendments provided that the maturity date of the notes was extended from June 1, 2016 to July 1, 2017 and
that the conversion price was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In addition, we reduced
the purchase price of warrants issued in connection with the notes from $8.40 per share to $5.00 per share. In connection with these
modifications, each of the Investors signed a consent and waiver providing its consent under certain restrictive provisions, and waiving
certain rights, including a right to participate in certain offerings made by us, under a securities purchase agreement dated June 23, 2015,
(the “2015 SPA”) to which we, the Investors and certain other investors are parties, in order to facilitate an at-the-market equity program
described in the liquidity and capital resources section of this report below. This loss also included an $80,000 fee to extend the November
2014 convertible notes from June 1, 2016 to July 1, 2017. The $80,000 amount was not a cash payment but rather was added to the
principal of the notes.
December 2016 Financing - In connection with the issuance of the December 2016 10% Convertible Notes, the conversion price
of the November 2014 10% Convertible Notes was reduced from $5.00 to $4.00 per share and the expiration date of the November 2014
10% Convertible Notes was extended from July 1, 2017 to July 1, 2018.
40
The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40,
“Debt Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially
different, and the transaction qualified for extinguishment accounting. As a result, we recorded a gain on debt extinguishment of $58,691,
which is included in other (income) expenses in the accompanying condensed consolidated statements of operations. The recording of the
modified Notes resulted in a beneficial conversion of $233,748 which is the result of the effective conversion price of the new Notes being
less than the market price of the underlying common stock on the date of modification.
Loss on Warrant Repricing
On June 27, 2016, we and certain investors (the “Unit Investors”) entered into Consent and Waiver and Amendment agreements
(the “CWAs”), relating to an aggregate of 264,000 Warrants to Purchase Common Stock (the “Unit Warrants”) we had issued to the Unit
Investors on December 2, 2014 pursuant to a Securities Purchase Agreement dated November 26, 2014 (the “2014 SPA”). In the CWAs,
each of the Unit Investors provided its consent under certain restrictive provisions, and waived certain rights, including a right to participate
in certain offerings made by us, under the 2014 SPA in order to facilitate the at-the-market equity program described in the notes to the
Financial Statements. Pursuant to the CWAs, we reduced the Exercise Price (as defined in the Unit Warrants) from $15.00 per share of
common stock to $5.00 per share of common stock.
On June 27, 2016, each of the Unit Investors also entered into a Consent and Waiver providing its consent under certain
provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under the 2015 SPA in order to
facilitate the at-the-market equity program described in the notes to the Financial Statements.
We measured the change in fair value that arose from the reduction in exercise price from $15.00 to $5.00 and recorded a charge of
$345,841 to our other expense to reflect this change.
There was no comparable loss on debt extinguishment in the fiscal year ended March 31, 2016.
Interest and other debt expenses
Our interest and other debt expense decreased by $269,452 from the fiscal year ended March 31, 2016 to the fiscal year ended
March 31, 2017. The following table breaks out the various components of our interest expense over the fiscal years ended March 31, 2017
and 2016:
Components of Interest Expense and Other Debt
Expenses in Fiscal Year Ended
March 31,
2016
March 31,
2017
Change
Interest expense
$
83,891 $
56,549 $
27,342
Amortization of deferred financing costs
27,641
144,683
(117,042)
Amortization of note discounts
192,798
372,550
(179,752)
Total interest and other debt expenses
$
304,330 $
573,782 $
(269,452)
As noted in the above table, the primary factors in the $269,452 overall decrease in interest and other debt expenses was a
$179,752 decrease in the amortization of note discounts and a $117,042 decrease in the amortization of deferred financing costs.
As a result of the above factors, our net loss before noncontrolling interests increased from $4,958,616 for the fiscal year ended
March 31, 2016 to $7,306,726 for the fiscal year ended March 31, 2017.
Liquidity and Capital Resources
At March 31, 2017, we had a cash balance of $1,559,701 and working capital of $985,496. This compares to a cash balance of
$2,123,737 and working capital of $1,849,891 at March 31, 2016. Significant additional financing must be obtained in order to provide a
sufficient source of operating capital and to allow us to continue to operate as a going concern. In addition, we will need to raise capital to
complete anticipated future human clinical trials in the U.S. We anticipate the primary source of this additional financing will be from
proceeds of the Company’s at-the-market offering program and other forms equity placements.
41
We raised $2,759,355 in net proceeds from sales of common stock under our S-3 registration statement during the fiscal year
ended March 31, 2017. However, we will require significant additional financing to finalize the current and expected additional future
clinical trials in the U.S., as well as fund all of our continued research and development activities for the Hemopurifier and other future
products through the remainder of the fiscal year ending March 31, 2018. In addition, as we expand our activities, our overhead costs to
support personnel, laboratory materials and infrastructure will increase. Should the financing we require to sustain our working capital
needs be unavailable to us on reasonable terms, if at all, when we require it, we may be unable to support our research and FDA clearance
activities including our planned clinical trials. The failure to implement our research and clearance activities would have a material adverse
effect on our ability to commercialize our products.
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.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern,
which contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We have
incurred continuing losses from operations and at March 31, 2017 had an accumulated deficit of approximately $93,778,000. These factors,
among other matters, raise substantial doubt about our ability to continue as a going concern. A significant amount of additional capital will
be necessary to advance the development of our products to the point at which they may become commercially viable. We intend to fund
operations, working capital and other cash requirements for the fiscal year ending March 31, 2018 through debt and/or equity financing
arrangements.
We are currently addressing our liquidity issue by seeking additional investment capital through issuances of common stock under
our existing S-3 registration statement 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 debt and equity financing arrangements will be sufficient to
meet our liquidity needs for fiscal 2018. 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 we be unable to continue as a
going concern.
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
42
(In thousands)
For the year ended
March 31,
2017
March 31,
2016
$
$
(3,506) $
(16)
2,958
(564) $
(4,329)
(9
5,607
1,269
Net Cash from Operating Activities.
We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was approximately
$3,506,000 in fiscal 2017 compared to net cash used in operating activities of approximately $4,329,000 in fiscal 2016, a decrease of
approximately $823,000. The $823,000 decrease was primarily due to the combination of the change in collection of accounts receivable of
approximately $206,000, an increase in our accounts payable and other current liabilities of approximately $369,000, and a decrease in
fiscal 2017 in the cash used in operations before changes in operating assets and liabilities of approximately $236,000.
Net Cash from Investing Activities.
During the fiscal year ended March 31, 2017, we purchased approximately $16,000 of equipment while in March 31, 2016, we
purchased approximately $9,000 of equipment, an increase of approximately $7,000 in our investing activities.
Net Cash from Financing Activities.
Net cash generated from financing activities decreased from approximately $5,607,000 in the fiscal year ended March 31, 2016 to
approximately $3,506,000 in the fiscal year ended March 31, 2017. In fiscal 2017, we raised approximately $2,759,000 from the issuance
of common stock and approximately $577,000 from the issuance of convertible notes. That source of cash from our financing activities was
partially offset by the use of approximately $379,000 to pay for the tax withholding on restricted stock units. The net cash provided by
financing activities in fiscal 2016 was all from the issuance of common stock.
At the date of this filing, we plan to invest significantly into purchases of our raw materials and into our contract manufacturing
arrangement.
Current Events
In April 2017, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993
warrants.
In April 2017, we issued 15,000 shares of restricted common stock at a price of $2.24 per share in payment for digital
communications consulting services valued at $33,600 based on the value of the services provided.
In April 2017, 46,125 RSUs held by our executives were exchanged into the same number of shares of our common stock. As our
executives elected to return a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share
issuance, 23,655 of the RSUs were cancelled and we issued a net 22,470 shares to our executives.
In April 2014, we terminated a previously recorded but unissued share award of 68,000 shares under a restricted stock grant to our
CEO and issued to him 32,674 shares as a net settlement of shares and the Company paid the withholding taxes associated with that share
issuance in return for the cancellation of 35,326 shares. The compensation cost of that restricted stock grant had been fully recorded over
prior fiscal years, therefore no expense was recorded regarding this net issuance.
In the period since March 31, 2017, sold 1,000 shares of common stock under our Common Stock Sales Agreement with H.C.
Wainwright. We raised aggregate net proceeds of $1,903 (net of $63 in commissions to H.C. Wainwright and $133 in other offering
expenses) under this agreement at an average price of $1.90 per share of net proceeds.
In June 2017, we issued options to four of our employees to purchase 34,500 shares of common stock at a price of $1.68 per share,
the closing price on the date of the approval of the option grants by our compensation committee.
In June 2017, we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted
shares in exchange for the cancellation of 77,125 warrants held by those investors. Additionally, we agreed with those investors that they
would extend the expiration dates of convertible notes held by those investors from July 1, 2018 to July 1, 2019 in exchange for the
reduction of the conversion price of those notes from $4.00 per share to $3.00 per share.
43
Critical Accounting Policies
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America (“GAAP”) requires us to make a number of estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect
the reported amounts of expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the
circumstances; however, actual results may differ from these estimates under different future conditions. We believe that the estimates and
assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require the most
difficult, subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical
accounting estimates relate to revenue recognition, stock purchase warrants issued with notes payable, beneficial conversion feature of
convertible notes payable, impairment of intangible assets and long lived assets, stock compensation, deferred tax asset valuation
allowance, and contingencies.
Fair Value Measurements
We measure the fair value of applicable financial and non-financial instruments based on the following fair value hierarchy:
·
·
·
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available,
when determining fair value.
The fair value of derivative liabilities was determined based on unobservable inputs that are not corroborated by market data,
which is a Level 3 classification. We recorded derivative liabilities on our balance sheet at fair value with changes in fair value recorded in
our consolidated statements of operations. At March 31, 2017, we had no derivative liabilities.
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, 2017 and 2016 of $387,438 and $863,011, respectively, under such contract. We adopted the Milestone
method of revenue recognition for the DARPA contract under Financial Accounting Standards Board’s Accounting Standards Codification
(“ASC”) 605-28 “Revenue Recognition – Milestone Method” and we believe we meet the requirements under ASC 605-28 for reporting
contract revenue under the Milestone Method for the fiscal years ended March 31, 2017 and 2016.
We also recognize revenue for a secondary smaller contract under a time and materials non-fixed price basis where we recognize
revenue as the services are performed.
Stock Purchase Warrants
We grant warrants in connection with the issuance of certain notes payable and other financing transactions. When such warrants
are classified as equity, we measure the relative estimated fair value of such warrants which represents a discount from the face amount of
the notes payable. Such discounts are amortized to interest expense over the term of the notes. We analyze such warrants for classification
as either equity or derivative liabilities and value them based on binomial lattice models.
Beneficial Conversion Feature of Notes Payable
The convertible feature of certain notes payable provides for a rate of conversion that is below market value. Such feature is
normally characterized as a "beneficial conversion feature” of which we measure the estimated fair value in circumstances in which the
conversion feature is not required to be separated from the host instrument and accounted for separately, and record that value in the
consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the
term of the notes.
44
Share-based Compensation
We account for share-based compensation awards using the fair-value method and record such expense based on the grant date
fair value in the consolidated financial statements over the requisite service period.
Derivative Instruments
We evaluate free-standing derivative instruments (or embedded derivatives) to properly classify such instruments within equity or
as liabilities in our financial statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed at each reporting date. If the classification changes as a result of events
during a reporting period, the instrument is reclassified as of the date of the event that caused the reclassification. There is no limit on the
number of times a contract may be reclassified.
Instruments classified as derivative liabilities are remeasured each reporting period (or upon reclassification) and the change in fair
value is recorded on our consolidated statement of operations in other expense (income). We had no derivative instruments at March 31,
2017 and at March 31, 2016.
Income Taxes
Deferred tax assets are recognized for the future tax consequences attributable to the difference between the consolidated
financial statements and their respective tax basis. Deferred income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. We record a valuation allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in
the foreseeable future, it is more likely than not that some portion of the deferred tax assets may not be realized.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect
on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that is material to investors.
Convertible Notes Payable and Warrants
DECEMBER 2016 10% CONVERTIBLE NOTES
In December 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited
investors (collectively, the “Holders”), pursuant to which the Holders purchased an aggregate of $680,400 principal amount of Notes
(inclusive of due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400)
for an aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the
“Warrants”).
The Notes bear interest at the rate of 10% per annum, and the principal amount and all accrued and unpaid interest thereon is
convertible into shares of our common stock at a $4.00 per share conversion price, which is subject to customary adjustment provisions for
stock splits, dividends, recapitalizations and the like. The Notes mature on July 1, 2018 and are subject to customary and usual terms for
events of default and the like. Each Holder has contractually agreed to restrict its ability to convert its Note such that the number of shares
of the Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding
shares of Common Stock.
The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of
$4.50, subject to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a
cashless basis. In the event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the
Warrants is subject to customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has
contractually agreed to restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder
and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.
45
The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is being
amortized as additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative
fair value of these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying
common stock on the date of issuance, we recorded an additional debt discount of $262,718 related to the beneficial conversion feature.
We also recorded deferred financing costs of $102,940, which was composed of an 8% original issue discount of $50,400, a $30,000 due
diligence fee (which was paid in the form of a note), $22,500 in legal fees, and a $40 bank charge. The combination of the above items led
to a combined discount against the convertible notes of $598,376.
NOVEMBER 2014 10% CONVERTIBLE NOTES
In November 2014, we entered into a subscription agreement with two accredited investors providing for the issuance and sale of
(i) convertible promissory notes in the aggregate principal amount of $527,780 (the “Notes”) and (ii) five year warrants to purchase up to
47,125 shares of common stock at a fixed exercise price of $8.40 per share (the “Warrants”). These Notes bear interest at the annual rate of
10% and originally matured on April 1, 2016.
The aggregate gross cash proceeds to us were $415,000 after subtracting legal fees of $35,000, a $27,780 due diligence fee and an
original issuance discount of $50,000. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence fee and
original issuance discount and will amortize those costs over the life of the Notes using the effective interest method.
These Notes are convertible at the option of the holders into shares of our common stock at a fixed price of $5.60 per share, for up
to an aggregate of 94,246 shares of common stock. There are no registration requirements with respect to the shares of common stock
underlying the Notes or the Warrants.
The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized
as additional interest expense over the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value
of these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on
the date of issuance, we recorded an additional debt discount of $287,647 related to the beneficial conversion feature.
Initial Amendment of the November 2014 10% Convertible Note Terms
On November 12, 2015, we entered into an amendment of terms (“Amendment of Terms”) with the two investors that participated
in the November 2014 10% Convertible Notes. The Amendment of Terms modified the terms of the subscription agreement, Notes and
Warrants held by those investors to, among other things, extended the maturity date of the Notes from April 1, 2016 to June 1, 2016,
temporarily reduced the number of shares that we must reserve with respect to conversion of the Notes, and temporarily suspended the time
period during which one of the investors may exercise its Warrants. In exchange for the investors’ agreements in the Amendment of Terms,
we paid one of the investors a cash fee of $90,000, which we recorded as deferred financing costs and amortized over the remaining term of
the notes.
Second Amendment and Extension of the November 2014 10% Convertible Notes
On June 27, 2016, we and certain investors entered into further Amendments (the “Amendments”) to the Notes and the Warrants.
The Amendments provide that the Maturity Date (as defined in the Notes) was extended from June 1, 2016 to July 1, 2017 and that the
conversion price per share of the Notes was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In
addition, we reduced the purchase price (as defined in the Warrants) from $8.40 per share to $5.00 per share of common stock. In
connection with these modifications, each of the investors signed a Consent and Waiver providing its consent under certain restrictive
provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a Securities Purchase
Agreement dated June 23, 2015, (the “2015 SPA”) to which we, the investors and certain other investors are parties, in order to facilitate an
at-the-market equity program (see Note 6).
The Amendments also increase the principal amount of the Notes to $692,811 (in the aggregate) to (i) include accrued and unpaid
interest through June 15, 2016, and (ii) increase the principal amount by $80,000 (in the aggregate) as an extension fee for the extended
maturity date of the Notes. With respect to each Note, we entered into an Allonge to Convertible Promissory Note (each, an “Allonge”)
reflecting the changes in the principal amount, Maturity Date and conversion price of the Note.
46
We also issued to the investors new warrants (the “New Warrants”) to purchase an aggregate of 30,000 shares of common stock
with a Purchase Price (as defined in the New Warrants) of $5.00 per share of common stock. We issued the New Warrants in substantially
the same form as the prior Warrants, and the New Warrants will expire on November 6, 2019, the same date on which the prior Warrants
will expire.
The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40,
“Debt Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially
different, and the transaction qualified for extinguishment accounting. As a result, we recorded a loss on debt extinguishment of $536,889
and recognized an extension fee expense of $80,000, which are included in other (income) expenses in the accompanying condensed
consolidated statements of operations. The debt extinguishment is comprised from the fair value of prior warrants issued in connection with
the Notes of $287,676, as well as $325,206 related to beneficial conversion feature and offset by debt discount of $75,993. The beneficial
conversion feature is a result of the effective conversion price of the new Notes being less than the market price of the underlying common
stock on the date of modification.
Third Amendment and Extension of the November 2014 10% Convertible Notes
In connection with the issuance of the December 2016 10% Convertible Notes, the conversion price of the November 2014 10%
Convertible Notes was reduced from $5.00 to $4.00 per share and the expiration date of the November 2014 10% Convertible Notes was
extended from July 1, 2017 to July 1, 2018.
The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40,
“Debt Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially
different, and the transaction qualified for extinguishment accounting. As a result, we recorded a gain on debt extinguishment of $58,691,
which is included in other (income) expenses in the accompanying condensed consolidated statements of operations. The recording of the
modified Notes resulted in a beneficial conversion of $233,748 which is the result of the effective conversion price of the new Notes being
less than the market price of the underlying common stock on the date of modification.
March 2017 Registered Direct Offering
On March 22, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional
investors (the “Investors”) for the sale of 575,000 shares (the “Common Shares”) of our common stock, par value $0.001 per share (the
“Common Stock”), at a purchase price of $3.50 per share, in a registered direct offering. Concurrently with the sale of the Common Shares,
pursuant to the Purchase Agreement, we also sold in a private placement warrants to purchase 575,000 shares of Common Stock (the
“Warrants”). The aggregate gross proceeds for the sale of the Common Shares and Warrants will be approximately $2 million. Subject to
certain ownership limitations, the Warrants will be initially exercisable commencing six months from the issuance date at an exercise price
equal to $3.95 per share of Common Stock, subject to adjustments as provided under the terms of the Warrants. The Warrants will be
exercisable for five years from the initial exercise date.
The net proceeds to us from the transactions, after deducting the placement agent’s fees and expenses (not including the
Wainwright Warrants, as defined below), our estimated offering expenses, and excluding the proceeds, if any, from the exercise of the
Warrants, were $1,804,250. We intend to use the net proceeds from the transactions for general corporate purposes.
The Common Shares (but not the Warrants or shares issuable upon exercise of the Warrant) were sold by us pursuant to an
effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on May 5,
2016 and subsequently declared effective on May 12, 2016 (File No. 333-211151) (the “Registration Statement”), and the base prospectus
dated as of May 12, 2016 contained therein. We filed a prospectus supplement and the accompanying prospectus with the SEC in
connection with this sale of the Common Shares.
We also reduced the dollar amount of our current at the market offering to $9,532,294 as a result of this offering and prior sales
under the at the market offering.
The purchase agreement also covered the exchange of 264,000 warrants issued to the purchasers thereunder in December 2014 for
198,000 shares of our common stock. Further, in exchange for certain waivers given by the purchasers and certain other investors in a
private placement of the Company in June 2015, the warrants issued in such private placement were amended to (i) reduce the exercise
price to $3.95 per share, (ii) make the warrants non-exercisable for a period of six months from the date of amendment, and (iii) extend the
term of those warrants by six months.
47
The Warrants and the shares issuable upon exercise of the Warrants were sold and issued without registration under the Securities
Act of 1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not
involving a public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar
exemptions under applicable state laws.
We also entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, a unit of H.C. Wainwright & Co.,
LLC (“Rodman”), pursuant to which Rodman agreed to serve as exclusive placement agent for the issuance and sale of the Common Shares
and Warrants. We paid Rodman an aggregate fee equal to 6% of the gross proceeds received by us from the sale of the securities in the
transactions. Pursuant to the Engagement Letter, we also agreed to grant to Rodman or its designees warrants to purchase up to 3% of the
aggregate number of shares sold in the transaction (the “Rodman Warrants”). The Engagement Letter has a nine month tail and right of
first offer periods, indemnity and other customary provisions for transactions of this nature. The Rodman Warrants have substantially the
same terms as the Warrants, except that the exercise price is 125% of $3.50. The Rodman Warrants and the shares issuable upon exercise
of the Rodman Warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act as
transactions not involving a public offering and in reliance on similar exemptions under applicable state laws. We also paid Rodman a
reimbursement for non-accountable expenses in the amount of $50,000.
Securities Issued for Debt
Historically, we have issued securities for debt to reduce our obligations to avoid using our cash resources. In the fiscal year ended
March 31, 2017 we issued 33,091 unregistered common shares for repayment in full of notes, including accrued interest, in the aggregate
amount of $144,718. In the fiscal year ended March 31, 2016 we did not issue any securities for debt. The average price discount of the
common stock issued for debt in the fiscal year ended March 31, 2017 was approximately 13%.
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
We maintain “disclosure controls and procedures,” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)),, that are designed to ensure that information required to be disclosed, in our Exchange Act
reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including our principal executive officer and our principal financial
officer, as appropriate, to allow timely decisions regarding required disclosures.
In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we were required
to apply our judgment in evaluating the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as
of the end of the period covered by this report under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were effective.
48
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. Our internal control over financial reporting is a process 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.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief
Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2017.
According to the guidelines established by Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission, one or more material weaknesses renders a company’s internal control over financial reporting ineffective.
Based on this evaluation, we have concluded that our internal control over financial reporting was effective as of March 31, 2017.
(b) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting during the fiscal year ended March 31, 2017 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
We have no disclosure applicable to this item.
49
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 Securities and Exchange
Commission. Officers, directors, and greater than 10% beneficial owners are required by Securities and Exchange Commission 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, 2017, we believe that all filing requirements applicable to our officers, directors, and greater than
10% beneficial owners were complied with.
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of our directors and executive officers as of June 28, 2017 are listed below:
NAMES
James A. Joyce (1)
Rodney S. Kenley (2)
TITLE OR POSITION
Chairman, Chief Executive Officer and Secretary
President and Director
James B. Frakes (3)
Chief Financial Officer and Senior Vice President - Finance
Edward G. Broenniman
Director
AGE
55
67
60
80
Chetan S. Shah, MD
_______________
(1) Effective June 1, 2001, Mr. Joyce was appointed our President and Chief Executive Officer, replacing Mr. Barry, who served as a
member of the Board of Directors until March 30, 2017. Mr. Joyce resigned from the position of President upon the appointment of Mr.
Kenley to such position on October 27, 2010.
Director
48
(2) Effective October 27, 2010, Mr. Kenley was appointed as our President.
(3) Effective September 27, 2010, Mr. Frakes was appointed as our Chief Financial Officer.
Certain additional information concerning the individuals named above is set forth below. This information is based on
information furnished us by each individual noted.
James A. Joyce, Chairman, CEO and Secretary.
Mr. Joyce is the founder of Aethlon Medical, Inc. and has been the Chairman of the Board and Secretary since March 1999. On
June 1, 2001, our Board of Directors appointed Mr. Joyce to the additional role of CEO. Mr. Joyce also serves as the Executive Chairman
of Exosome Sciences, Inc. In 1992, Mr. Joyce founded and was the sole stockholder of James Joyce & Associates, an organization that
provided management consulting and corporate finance advisory services to CEOs and CFOs of publicly traded companies. Previously,
from 1989 to 1991, Mr. Joyce was Chairman and Chief Executive Officer of Mission Labs, Inc. Prior to that Mr. Joyce was a principal in
charge of U.S. operations for London Zurich Securities, Inc. Mr. Joyce is a graduate of the University of Maryland. We believe that Mr.
Joyce is qualified to serve as our director because of his role in founding our company and his prior experience, including his experience in
the extracorporeal industry and in the financial markets.
Rodney S. Kenley, President and Director
Mr. Kenley has been President and a Director since October 2010. He has 38 years of experience in healthcare, most of which
have been spent in the extracorporeal blood purification arena. Mr. Kenley held several positions at Baxter Healthcare (Travenol) from
1977 through 1990 including International Marketing Manager, Business Unit Manager for Peritoneal and Hemodialysis products, Manager
of New Business Development, Director of Worldwide Product Planning, Director of Advanced Product Development, and VP of
Electronic Drug Infusion. Mr. Kenley founded Aksys Ltd. in January 1991 to develop and commercialize his concept of a daily home
hemodialysis system which was commercially launched in 2002 as the PHD system. In 2004, Mr. Kenley initiated the development of a
second-generation home hemodialysis system in partnership with DEKA Research & Development Corporation in Manchester, New
Hampshire. In 2007, the assets of Aksys Ltd. were acquired by DEKA, where Mr. Kenley was employed prior to joining Aethlon Medical,
Inc. Mr. Kenley received his Bachelor of Arts degree in Biology and Chemistry from Wabash College, a Master’s of Science degree in
Molecular Biology from Northwestern University and a Masters of Management from the Kellogg School of Management, also at
Northwestern University. We believe that Mr. Kenley is qualified to serve as our director as a result of his experience in developing
extracorporeal blood purification products.
50
James B. Frakes, Chief Financial Officer and Senior Vice President – Finance
Mr. Frakes joined Aethlon Medical, Inc. in January 2008 and brought 16 consecutive years of financial responsibility for publicly
traded companies, as well as specific knowledge and experience in equity and debt transactions, acquisitions, public reporting and
Sarbanes-Oxley Section 404 internal control requirements. Mr. Frakes also serves as the Chief Financial Officer of Exosome Sciences, Inc.
He previously served as the CFO for Left Behind Games Inc., a start-up video game company. Prior to 2006, he served as CFO of NTN
Buzztime, Inc., an interactive entertainment company. Mr. Frakes received an MBA from the University of Southern California and
completed his BA with Honors at Stanford University.
Edward G. Broenniman, Director
Mr. Broenniman became a director of Aethlon Medical, Inc. in March 1999. He has been the Managing Director of The Piedmont
Group, LLC, a venture advisory firm, since 1978. Mr. Broenniman recently served on the Board of Directors of publicly traded QuesTech
(acquired by CACI International), and currently serves on the Boards of two privately held firms. His nonprofit Boards are the Dingman
Center for Entrepreneurship's Board of Advisors at the University of Maryland, the National Association of Corporate Directors, National
Capital Chapter and the Board of the Association for Corporate Growth, National Capital Chapter. We believe that Mr. Broenniman is
qualified to serve as our director because of his extensive management experience.
Chetan S. Shah, MD, Director
Dr. Shah became a director of Aethlon Medical, Inc. in June 2013. Dr. Shah is a board-certified Otolaryngologist. He is an
Advisory Board Member at The Bank of Princeton, and a partner and Board member of the Surgery Center at Hamilton as well as
Physician Management Systems and Princeton Eye & Ear, which he founded in 2009. Dr. Shah serves on the board of two other private
companies. He holds teaching positions and serves on multiple hospital committees in the area and is on the Audiology and Speech
Language Pathology Committee for the State of New Jersey. He also served as vice-president of the Board of Medical Examiners for the
State of New Jersey. Dr. Shah received his Bachelor’s degree and Medical Degree from Rutgers University and Robert Wood Johnson
Medical School. We believe that Dr. Shah is qualified to serve as our director because of his medical background as both a board-certified
Otolaryngologist and a member of various medical boards and hospital committees in New Jersey.
Board of Directors
Our Board of Directors has the responsibility for establishing broad corporate policies and for overseeing our overall performance.
Members of the Board of Directors are kept informed of our business activities through discussions with the CEO, President and other
officers, by reviewing analyses and reports sent to them, and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to our next annual meeting of stockholders. Our Board of Directors presently has an
Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee, on each of which Mr. Broenniman
and Dr. Shah serve. Mr. Broenniman is Chairman of the Audit Committee and the Nominating and Corporate Governance Committee, and
Dr. Shah is Chairman of the Compensation Committee.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a board compensation program that modified and superseded the 2005 Directors
Compensation Program, which was previously in effect. Under the 2012 program, in which only non-employee directors may participate,
an eligible director will receive a grant of $35,000 worth of ten-year options to acquire shares of common stock, with such grant being
valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first
day of the fiscal year. In addition, under this program, eligible directors will receive cash compensation equal to $500 for each committee
meeting attended and $1,000 for each formal board meeting attended.
At March 31, 2017, we had issued 26,757 options under the 2005 program to outside directors and 79,309 options to employee-
directors, 21,756 outside directors’ options had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-
directors’ options had been forfeited and no options under the 2005 program remained outstanding. There were no issuances of stock
options to our outside directors in the fiscal years ended March 31, 2016 and 2017.
51
On June 6, 2014, our Board of Directors approved certain changes to the 2012 program. Under this modified program, a new
eligible director will receive an initial grant of $50,000 worth of options to acquire shares of common stock, with such grant being valued at
the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the
fiscal year. These options will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the
date of grant. In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program
also will receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary of the date
of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The modified 2012 program
also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Nominating
Committee chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000, Nominating Committee
member - $4,000 and lead independent director - $15,000.
On August 9, 2016, the Board approved further modifications to the program. Under the modified 2012 Program, in which only
non-employee directors may participate, a new eligible director will receive an initial grant of $50,000 worth of RSUs or, at the discretion
of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued based on the average of the
closing prices of the Common Stock for the five trading days preceding and including the date of grant and will vest at a rate determined by
the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of
the closing prices of the Common Stock for the five trading days preceding and including the date of grant. Such options will have a term
of ten years and will vest at a rate determined by the Board in its discretion.
At the beginning of each fiscal year, each existing director eligible to participate in the 2012 Program will receive a grant of
$35,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision
will be valued based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first
day of the fiscal year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year) and will vest
at a rate determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be
based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal
year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year). Such options will have a
term of ten years and will vest at a rate determined by the Board in its discretion.
The RSU grants and the changes to the 2012 Program were approved and recommended by our Compensation Committee prior to
approval by the Board.
Family Relationships
There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to
become directors or executive officers.
There are no arrangements or understandings between any two or more of our directors or executive officers or between any of
our directors or executive officers and any other person pursuant to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether non-management stockholders will exercise their voting rights to
continue to elect the current Board of Directors. There are also no arrangements, agreements or understandings between non-management
stockholders that may directly or indirectly participate in or influence the management of our affairs.
Involvement in Legal Proceedings
To the best of our knowledge, during the past ten years, none of the following occurred with respect to a present or former director
or executive officer of our company: (1) any bankruptcy petition filed by or against such person or any business of which such person was a
general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a
criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or
banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the
Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been
reversed, suspended or vacated; and (5) being the subject of, or a party to, any federal or state judicial or administrative order, judgment,
decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or
commodities law or regulation, law or regulation respecting financial institutions or insurance companies or law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not
subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange
Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange,
association, entity or organization that has disciplinary authority over its members or associated persons.
52
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. Mr. Edward Broenniman (the Chairman of the Audit
Committee) and Dr. Chetan S. Shah serve as members of the Audit Committee. The Board of Directors has determined that Mr.
Broenniman is an "audit committee financial expert" as that term is defined by Item 407 of Regulation S-K. Mr. Broenniman and Dr. Shah
meets the NASDAQ Stock Market's independence standards for members of such audit committees.
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 years ended March 31, 2017 and March 31, 2016. The following table summarizes all compensation for fiscal years
2017 and 2016 received by our Chief Executive Officer, and our three most highly compensated executive officers who earned more than
$100,000 in fiscal year 2017.
SUMMARY COMPENSATION TABLE FOR 2017 AND 2016 FISCAL YEARS
NAMED
EXECUTIVE
OFFICER AND
PRINCIPAL
POSITION
James A. Joyce (1)
CHIEF
EXECUTIVE
OFFICER
YEAR
SALARY
($)
BONUS
($)
2017 $ 385,000 $
2016
$ 370,417
– $
$
$ 275,000
STOCK
AWARDS
($)
678,380 $
$
–
2017
$
–
2016
$ 188,000
$
$
–
–
$
$
–
–
$
$
2017
$ 235,000
$
–
2016
$ 226,429
$ 125,500
$
$
55,640
–
$
$
Richard H. Tullis,
PhD (2)
VICE
PRESIDENT
AND CHIEF
SCIENCE
OFFICER
James B. Frakes
(3)
CHIEF
FINANCIAL
OFFICER AND
SVP-FINANCE
NON-
EQUITY
INCENTIVE
PLAN
COMPEN-
SATION
($)
NON-
QUALIFIED
DEFERRED
COMPEN-
SATION
EARNINGS
($)
OPTION
AWARDS
($) (5)
ALL
OTHER
COMP.
($)
TOTAL
($)
– $
$
--
–
--
$
$
–
--
$
$
– $
$
–
–
–
$
$
–
–
$
$
– $
$
–
– $1,063,380
$ 645,417
–
–
–
$
$
–
–
$
$
–
–
–
–
$
--
$ 188,000
$ 290,640
$ 351,929
2017
$ 275,000
Rodney S. Kenley
(4)
PRESIDENT
_______________
(1) The aggregate number of stock awards and stock option awards issued to Mr. Joyce and outstanding as of March 31, 2017 is 158,500
and 210,000, respectively. In September 2015, Mr. Joyce received a $35,000 salary increase from $350,000 to $385,000.
2016 $ 268,750 $ 50,000 $
55,640
-- $
– $
– $
– $
–
–
$
–
$
$
$
–
–
$
$
$ 330,640
– $ 318,750
(2) The aggregate number of stock awards and stock option awards issued to Dr. Tullis and outstanding as of March 31, 2017 is zero and
46,000, respectively. In January 2015, we paid Dr. Tullis $93,377 in payment of accrued salary. Dr. Tullis resigned as an employee
effective February 9, 2016 and is now a consultant to the Company.
(3) Mr. Frakes was appointed as Chief Financial Officer on September 27, 2010 after previously serving as Senior Vice President-Finance
on a part-time basis. The aggregate number of stock awards and stock option awards issued to Mr. Frakes and outstanding as of March 31,
2017 is 13,000 and 25,000, respectively. In September 2015, Mr. Frakes received a $25,000 salary increase from $210,000 to $235,000.
(4) Mr. Kenley was appointed President on October 27, 2011. The aggregate number of stock awards and stock option awards issued to
Mr. Kenley and outstanding as of March 31, 2017 is 13,000 and 35,000, respectively. In September 2015, Mr. Kenley received a $15,000
salary increase from $260,000 to $275,000.
(5) See note 5 to our financial statements for the years ended March 31, 2017 and 2016 regarding the assumptions made in valuing the
restricted stock unit awards in the above table.
53
EMPLOYMENT CONTRACTS
We entered into an employment agreement with Mr. Joyce effective April 1, 1999. The agreement, which is cancelable by either
party upon sixty days’ notice, will be in effect until the Chairman retires or ceases to be employed by us. Under the terms of the agreement,
if Mr. Joyce is terminated he may become eligible to receive a salary continuation payment in the amount of at least twelve months' base
salary, which was increased to $385,000 per year in September 2015.
During the fiscal year ended March 31, 2016, Mr. Joyce earned bonuses totaling $100,000 from us, excluding a retention bonus
(see below) and bonuses totaling $75,000 from Exosome Sciences, Inc. That bonus was based upon targets established by our
compensation committee. Aethlon did not pay any bonuses during the fiscal year ended March 31, 2017. Mr. Joyce received bonuses
totaling $60,000 from Exosome during the fiscal year ended March 31, 2017.
Mr. Joyce's employment agreement provides for medical insurance and disability benefits, and one year of severance pay if his
employment is terminated by us without cause or due to change in our control before the expiration of the agreement, and allows for bonus
compensation and stock option grants as determined by our Board of Directors. The agreement also contains restrictive covenants
preventing competition with us and the use of confidential business information, except in connection with the performance of his duties
for us, for a period of two years following the termination of his employment with us.
In February 2016, we entered into a part-time consulting agreement with Tullis, who was previously our CSO (formerly with an
employment agreement with a $195,000 salary and a termination continuation payment equal to one year’s base salary). Under that
agreement, Tullis continued to provide services under the terms of a consulting agreement with us. In connection with the change in his
employment, Tullis resigned as our Vice President. Under the consulting agreement, Tullis rendered approximately twenty (20) hours per
week of such services, for which we paid him a consulting fee of $10,000 per month. The term of the consulting agreement was for an
initial sixty-day period and, unless terminated earlier by either party, shall automatically extend for additional one-month periods. Either
party to the consulting agreement may terminate it upon 30 day’s prior written notice to the other party. Concurrently with the entry into
the consulting agreement, Tullis and the Company mutually agreed to terminate his employment agreement with us.
In November 2016, the scope of the consulting agreement was amended to reduce the hours from 20 hours per week to 20 hours
per month with a reduction in monthly consulting fees from the original $10,000 per month to $4,000 per month. Then in February 2017,
the scope of the consulting agreement was further amended to reduce the hours from 20 hours per month to 10 hours per month with a
reduction in monthly consulting fees from $4,000 per month to $2,000 per month.
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 received an annual salary initially set at $180,000 and medical
insurance benefits. In June 2014, his salary was increased from $180,000 to $210,000 per year. In September 2015, Mr. Frakes received a
$25,000 salary increase from $210,000 to $235,000.
During the fiscal year ended March 31, 2016, Mr. Frakes earned bonuses totaling $75,000 from us, excluding a retention bonus
(see below). That bonus was based upon targets established by our compensation committee. Aethlon did not pay any bonuses during the
fiscal year ended March 31, 2017.
Mr. Kenley was appointed our President on October 27, 2010. Pursuant to a written offer of employment executed by us and Mr.
Kenley, he received an annual salary initially set at $240,000 and medical insurance benefits. In June 2014, his salary was increased from
$240,000 to $260,000 per year. In September 2015, Mr. Kenley received a $15,000 salary increase from $260,000 to $275,000.
During the fiscal year ended March 31, 2016, Mr. Kenley received a retention bonus (see below). Aethlon did not pay any bonuses
during the fiscal year ended March 31, 2017.
Retention Agreements
On October 16, 2015, following a recommendation of our Compensation Committee, we approved retention bonus grants to three
of our executive officers under a newly established Aethlon Senior Management Retention Program to maintain management stability
going forward. The Board approved a $100,000 retention bonus for Mr. James A. Joyce, our Chief Executive Officer, a $50,000 retention
bonus for Mr. Rodney S. Kenley, our President, and a $50,000 retention bonus for Mr. James B. Frakes, our Chief Financial Officer.
54
In connection with the bonus granted to Mr. Joyce, we entered into an amendment of Mr. Joyce’s Employment Agreement dated
April 1, 1999. Pursuant to the amendment, if within two years of the effective date of the amendment, we terminate Mr. Joyce’s
employment with us for “Cause” (as defined in his employment agreement) or Mr. Joyce terminates his employment with us other than for
“Good Reason” (as defined in his employment agreement), Mr. Joyce must repay in full the amount of the bonus received from us. In the
event of his death or disability or termination by us other than for “Cause” or termination by Mr. Joyce for “Good Reason,” Mr. Joyce will
not be required to repay any portion of the bonus received by him.
In connection with the bonus granted to Mr. Kenley, we entered into an amendment of Mr. Kenley’s Offer Letter dated October
27, 2010. Pursuant to the amendment, if within two years of the effective date of the amendment, we terminate Mr. Kenley’s employment
with us for “Cause” (as defined in the amendment) or Mr. Kenley terminates his employment with us other than for “Good Reason” (as
defined in the amendment), Mr. Kenley must repay in full the amount of the bonus received from us. In the event of his death or disability
or termination by us other than for “Cause” or termination by Mr. Kenley for “Good Reason,” Mr. Kenley will not be required to repay any
portion of the bonus received by him.
In connection with the bonus granted to Mr. Frakes, we entered into a Retention Bonus Agreement with Mr. Frakes. Pursuant to
the agreement, if within two years of the effective date of the agreement, we terminate Mr. Frakes’ employment with us for “Cause” (as
defined in the agreement) or Mr. Frakes terminates his employment with us other than for “Good Reason” (as defined in the agreement),
Mr. Frakes must repay in full the amount of the bonus received from us. In the event of his death or disability or termination by us other
than for “Cause” or termination by Mr. Frakes for “Good Reason,” Mr. Frakes will not be required to repay any portion of the bonus
received by him.
Outstanding Equity Awards at 2017 Fiscal Year-End
The following table sets forth certain information concerning stock option awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2017 FISCAL YEAR END
NAME
James A. Joyce
Richard H. Tullis
(former CSO)
James B. Frakes
Rodney S. Kenley
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE
(#)
50,000(1)
40,000(2)
50,000(3)
40,000(4)
30,000(7)
--
OPTIONS AWARDS
RESTRICTED
STOCK
UNITS
EXERCISED
(#)
–
–
–
–
–
158,500
RESTRICTED
STOCK UNITS
UNEXERCISABLE
(#)
–
–
–
–
–
475,500
15,000(5)
20,000(6)
10,000(4)
1,000(7)
10,000(6)
10,000(4)
5,000(7)
--
20,000(6)
10,000(4)
5,000(7)
--
–
–
–
–
–
39,000
–
–
–
39,000
–
–
–
–
–
–
–
13,000
–
–
–
13,000
55
OPTION
EXERCISE
PRICE
($)
18.00
12.50
12.50
5.00
9.50
20.50
12.50
5.00
9.50
12.50
5.00
9.50
12.50
5.00
9.50
N/A
N/A
N/A
DATE OF
OPTION
EXPIRATION
09/21/17
02/21/19
09/27/20
07/01/23
06/06/24
N/A
06/14/18
09/27/20
07/01/23
06/06/24
09/27/20
07/01/23
06/06/24
N/A
10/27/20
7/01/23
06/06/24
N/A
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Note: All our stock options are fully vested or will completely vest within 60 days of this report.
(1) This option was fully vested as of June 13, 2010.
(2) This option was fully vested as of December 15, 2010.
(3) This option was fully vested as of September 27, 2013.
(4) This option vests ratably on July 1, 2014, July 1, 2015, July 1, 2016 and July 1, 2017.
(5) This option was fully vested as of December 15, 2011.
(6) This option was fully vested as of October 27, 2014.
(7) This option was fully vested as of June 6, 2016.
Director Compensation for 2017 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, 2017.
Fees
Earned
or Paid in
Cash
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive
Plan
Compensation
($)
Nonqualified
Deferred
Compensation
Earnings
($)
All
Other
Compensation
($)
Total
($)
James A. Joyce (1)
Rodney S. Kenley (2)
Edward G. Broenniman (3)
Franklyn S. Barry, Jr. (4)
Chetan S. Shah, MD (5)
$
$
$
$
$
–
–
39,000
39,000
39,000
–
–
94,438
94,438
94,438
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
– $
– $
–
– $ 133,438
– $ 133,438
– $ 133,438
(1) All compensation received by Mr. Joyce in fiscal year 2017 is disclosed in the Summary Compensation Table above. Mr. Joyce
received no compensation as a director in fiscal year 2017.
(2) All compensation received by Mr. Kenley in fiscal year 2017 is disclosed in the Summary Compensation Table above. Mr. Kenley
received no compensation as a director in fiscal year 2017.
(3) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2017 are 16,432 and 43,431,
respectively. Mr. Broenniman received stock option grants of 3,684 shares on June 6, 2014, 8,537 shares on March 14, 2014, and 9,211
shares on July 24, 2012 for his service as an outside director. The June 2014 option vested 3,684 shares on March 31, 2015, the March
2014 option vested all 8,537 shares at grant and the 2012 option vested 3,961 at grant, with 5,250 vesting in the June 2013 quarter. In
January 2016, we paid $39,000 to Mr. Broenniman in payment of accrued Board of Directors fees for the fiscal year ended March 31, 2015
and in April 2016 we paid $38,000 to Mr. Broenniman in payment of accrued Board of Directors fees for the fiscal year ended March 31,
2016. During the fiscal year ended March 31, 2017, we paid Mr. Broenniman $29,250 in Board of Directors fees.
(4) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2017 are 16,432 and 41,431,
respectively. Mr. Barry received stock option grants of 3,684 shares on June 6, 2014, 8,537 shares on March 14, 2014 and 9,211 shares on
July 24, 2012 for his service as an outside director. The June 2014 option vested 3,684 shares on March 31, 2015, the March 2014 option
vested all 8,537 shares at grant and the 2012 option vested 3,961 at grant, with 5,250 vesting in the June 2013 quarter. In October 2015, we
paid $39,000 to Mr. Barry in payment of accrued Board of Directors fees for the fiscal year ended March 31, 2015 and in April 2016 we
paid $39,000 to Mr. Barry in payment of accrued Board of Directors fees for the fiscal year ended March 31, 2016. During the fiscal year
ended March 31, 2017, we paid Mr. Barry $29,250 in Board of Directors fees. Mr. Barry retired from our Board of Directors as of March
30, 2017.
(5) The aggregate number of stock awards and options awards issued and outstanding as of March 31, 2017 are 16,432 and 11,205,
respectively. Dr. Shah received stock option grants of 3,684 on June 6, 2014 and 7,520 shares on July 24, 2012 for his service as an outside
director. The June 2014 option vested 3,684 shares on March 31, 2015, and the 2014 option vested all 7,520 shares at grant. In October
2015 we paid $39,000 to Dr. Shah in payment of accrued Board of Directors fees for the fiscal year ended March 31, 2015 and in April
2016 we paid $39,000 to Dr. Shah in payment of accrued Board of Directors fees for the fiscal year ended March 31, 2016. During the
fiscal year ended March 31, 2017, we paid Dr. Shah $29,250 in Board of Directors fees.
56
Directors Compensation Program
We maintain a board compensation program, in which only non-employee directors may participate. Please see the “Equity
Compensation Plans – 2012 Directors Compensation Program” section of this Report for more information on the program.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth information as of June 28, 2017, 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. As of such date, we had 8,869,571 shares of our common stock issued and outstanding. The term "executive officer" is
defined as the President/Chief Executive Officer, Secretary, Chief Financial Officer/Treasurer, any vice-president in charge of a principal
business function (such as administration or finance), or any other person who performs similar policy making functions for us. We believe
that each individual or entity named has sole investment and voting power with respect to shares of common stock indicated as beneficially
owned by them, subject to community property laws where applicable, excepted where otherwise noted:
TITLE OF CLASS
NAME AND ADDRESS
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
Common Stock
James A. Joyce, Chief Executive Officer and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
Rodney S. Kenley, President and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
James B. Frakes, Chief Financial Officer
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
Franklyn S. Barry, Jr., Former Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
Edward G. Broenniman, Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
Chetan Shah, MD, Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
Empery Asset Management, LLC (12)
1 Rockefeller Plaza, Suite 1205
New York, New York 10020
Ellen R Weiner Family Revocable Trust (12)
10300 W. Charleston Blvd. #13-222
Las Vegas, NV 89135
Alpha Capital Anstalt (12)
Lettstrasse 32, FL-9490 Vaduz,
Furstentums, Liechtenstein
Sachs Investment Group, LLC (12)
1346 S. Third St., Louisville, KY 40208
All Current Directors and Executive Officers as a Group (7
members)
57
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP (1)(2)
PERCENT OF
BENEFICIAL
OWNERSHIP
386,939 shares (3)
4.3%
47,262 shares (4)
35,726 shares (5)
54,233 shares (6)
59,755 shares (7)
*
*
*
*
405,628 shares (8)
4.5%
439,655 shares (9)
4.99%
708,335 shares (10)
439,655 shares (11)
1,344,305 shares
989,542 shares
7.8%
4.99%
15.3%
10.7%
________________________
* Less than 1%
(1) Based on 8,869,571 shares of common stock outstanding on our transfer records as of June 28, 2017.
(2) Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934. Under Rule 13d-3(d)(1), shares not outstanding that
are subject to options, warrants, rights or conversion privileges exercisable by a person within 60 days are deemed outstanding for the
purpose of calculating the number and percentage owned by such person but not deemed outstanding for the purpose of calculating the
percentage owned by each other person listed. Except where otherwise noted, we believe that each individual or entity named has sole
investment and voting power with respect to the shares of common stock indicated as beneficially owned by such person, subject to
community property laws, where applicable.
(3) Includes 50,000 stock options exercisable at $18.00 per share, 90,000 stock options exercisable at $12.50 per share, 40,000 stock
options exercisable at $5.00 per share and 30,000 stock options exercisable at $9.50 per share. Also includes shares underlying 19,079
restricted stock units that will vest and issue on July 31, 2017.
(4) Includes 20,000 stock options exercisable at $12.50 per share, 10,000 stock options exercisable at $5.00 per share and 5,000 stock
options exercisable at $9.50 per share. Also includes shares underlying 1,797 restricted stock units that will vest and issue on July 31, 2017.
(5) Includes 10,000 stock options exercisable at $12.50 per share, 10,000 stock options exercisable at $5.00 per share and 5,000 stock
options exercisable at $9.50 per share. Also includes shares underlying 1,594 restricted stock units that will vest and issue on July 31, 2017.
(6) Includes 10,000 stock options exercisable at $20.50 per share, 10,000 stock options exercisable at $12.50 per share, 9,211 stock options
exercisable at $3.80 per share, 8,537 stock options exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(7) Includes 10,000 stock options exercisable at $20.50 per share, 12,000 stock options exercisable at $12.50 per share, 9,211 stock options
exercisable at $3.80 per share, 8,537 stock options exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(8) Includes warrants to purchase 109,322 shares of common stock at exercise prices ranging from $4.65 per share to $6.60 per share, and
7,521 stock options exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(9) Includes warrants for Empery Asset management, LP (“Empery”) to purchase 813,096 shares of common stock at an exercise price of
$3.95 per share. Empery’s beneficial ownership is limited contractually to the extent that exercise of such warrants would cause the
aggregate number of shares of common stock beneficially owned by Empery to exceed 4.99% of our outstanding shares. Accordingly,
beneficial ownership for Empery does not reflect 1,146,441 shares underlying such warrants.
(10) Includes common stock issuable upon exercise of warrants held by the Ellen R. Weiner Family Revocable Trust. The trust owns
235,934 warrants to purchase common shares at prices ranging from $2.10 to $5.40 per share.
(11) Includes certain shares issuable upon the conversion of convertible notes and exercise of warrants held by Alpha Capital Anstalt
(“Alpha”). Alpha owns two convertible notes in the aggregate principal amount of $979,603 convertible into 244,901 shares of common
stock at $4.00 and warrants to purchase 448,432 shares of common stock at prices ranging from $3.95 to $5.00 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 254,537 shares underlying such notes and warrants.
(12) More-than-5% stockholder.
58
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The following describes all transactions since April 1, 2015, and all proposed transactions, in which we were or are to be a
participant and the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year-end for the last
two completed fiscal years, and in which any related person had or will have a direct or indirect material interest.
In June 2015, Mr. James Joyce, our Chief Executive Officer, Mr. James Frakes, our Chief Financial Officer and Dr. Chetan Shah,
a director of our company, agreed to waive their rights to acquire an aggregate of 402,318 shares of common stock underlying certain stock
options and warrants held by them. Those waivers were required in order to make a sufficient number of shares of common stock available
for issuance upon the exercise of the warrants issued in our June 2015 financing. Those waivers expired when we amended our Articles of
Incorporation on March 31, 2016, to increase sufficiently the number of authorized shares of common stock available for issuance
following approval of that measure at our annual stockholders’ meeting on March 29, 2016.
In September 2015, the Compensation Committee approved and we paid bonuses of $100,000 and $75,000 to Mr. Joyce and Mr.
Frakes, respectively, for achieving an agreed milestone event of achieving a Nasdaq listing.
Retention Agreements
On October 16, 2015, following a recommendation of our Compensation Committee, we approved retention bonus grants to three
of our executive officers under a newly established Aethlon Senior Management Retention Program to maintain management stability
going forward. The Board approved a $100,000 retention bonus for Mr. James A. Joyce, our Chief Executive Officer, a $50,000 retention
bonus for Mr. Rodney S. Kenley, our President, and a $50,000 retention bonus for Mr. James B. Frakes, our Chief Financial Officer.
In connection with the bonus granted to Mr. Joyce, we entered into an amendment of Mr. Joyce’s Employment Agreement dated
April 1, 1999. Pursuant to the amendment, if within two years of the effective date of the amendment, we terminate Mr. Joyce’s
employment with us for “Cause” (as defined in his employment agreement) or Mr. Joyce terminates his employment with us other than for
“Good Reason” (as defined in his employment agreement), Mr. Joyce must repay in full the amount of the bonus received from us. In the
event of his death or disability or termination by us other than for “Cause” or termination by Mr. Joyce for “Good Reason,” Mr. Joyce will
not be required to repay any portion of the bonus received by him.
In connection with the bonus granted to Mr. Kenley, we entered into an amendment of Mr. Kenley’s Offer Letter dated October
27, 2010. Pursuant to the amendment, if within two years of the effective date of the amendment, we terminate Mr. Kenley’s employment
with us for “Cause” (as defined in the amendment) or Mr. Kenley terminates his employment with us other than for “Good Reason” (as
defined in the amendment), Mr. Kenley must repay in full the amount of the bonus received from us. In the event of his death or disability
or termination by us other than for “Cause” or termination by Mr. Kenley for “Good Reason,” Mr. Kenley will not be required to repay any
portion of the bonus received by him.
In connection with the bonus granted to Mr. Frakes, we entered into a Retention Bonus Agreement with Mr. Frakes. Pursuant to
the agreement, if within two years of the effective date of the agreement, we terminate Mr. Frakes’ employment with us for “Cause” (as
defined in the agreement) or Mr. Frakes terminates his employment with us other than for “Good Reason” (as defined in the agreement),
Mr. Frakes must repay in full the amount of the bonus received from us. In the event of his death or disability or termination by us other
than for “Cause” or termination by Mr. Frakes for “Good Reason,” Mr. Frakes will not be required to repay any portion of the bonus
received by him.
Other Transactions
Mr. Joyce received aggregate bonus payments of $60,000 from Exosome throughout the fiscal years ended March 31, 2017 and
March 31, 2016 per targets set by the Compensation Committee.
Director Independence
Mr. Broenniman and Dr. Shah are independent directors as that term is defined by NASDAQ Stock Market Rule 5605(a)(2). We
currently have a compensation committee, a nominating and corporate governance committee and an audit committee. Of the members of
our Board of Directors, Mr. Broenniman and Dr. Shah both meet the NASDAQ Stock Market's independence standards for members of
such committees.
59
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table presents fees for professional services billed by Squar Milner LLP ("Squar Milner") during the fiscal years
ended March 31, 2017 and 2016:
Audit Fees (1)
Audit Related Fees (2)
Tax Fees (3)
All Other Fees (4)
Fiscal Year
2017
Fiscal Year
2016
$
$
110,946 $
30,500
7,265
–
148,711 $
97,000
21,000
6,325
–
124,325
(1) Audit Fees include fees and expenses for professional services rendered in connection with the audit of our financial statements for
fiscal 2017 and 2016 and for reviews of the financial statements included in each of our quarterly reports on Form 10-Q during fiscal 2017
and 2016.
(2) Audit Related Fees consist of fees billed for assurance and 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 2017 and 2016 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 2017 and 2016 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 for fiscal 2017 or 2016.
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.
60
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, 2017 and 2016:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Exhibits
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. (formerly, Bishop Equities, Inc.) and Aethlon, Inc.
dated March 10, 1999 (1)
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. (formerly, Bishop Equities, Inc.) and Hemex, Inc. dated
March 10, 1999 (1)
Articles of Incorporation of Aethlon Medical, Inc., as amended (2)
Bylaws of Aethlon Medical, Inc., as amended (35)
Form of Common Stock Certificate (3)
Form of Amended and Restated Warrant dated June 14, 2010 (12)
Form of Amended and Restated Warrant dated June 14, 2010 (QB) (12)
Form of Common Stock Purchase Warrant dated March 29, 2012 and April 15, 2012 (14)
Form of Common Stock Purchase Warrant dated June 19, 2012 (15)
Form of Common Stock Purchase Warrant dated August 29, 2012 (16)
Form of Common Stock Purchase Warrant dated October, November and December 2012 (17)
Form of Common Stock Purchase Warrant dated June 14, 2013 (18)
Form of Common Stock Purchase Warrant October 30, 2013 (19)
Form of Common Stock Purchase Warrant November 12, 2013 (20)
Form of Common Stock Purchase Warrant December 10, 2013 (21)
Form of Common Stock Purchase Warrant December 30, 2013 (22)
Form of Amendment to Notes and Warrants dated March 31, 2014 (23)
Form of Common Stock Purchase Warrant dated June 24, 2014 (24)
61
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
Form of Common Stock Purchase Warrant dated July 8, 2014 (25)
Form of Common Stock Purchase Warrant dated July 24, 2014 (26)
Form of Common Stock Purchase Warrant issued August and September 2014 (27)
Form of Class A Common Stock Purchase Warrant dated November 6, 2014 (27)
Form of Convertible Promissory Note dated November 6, 2014 (27)
Form of Common Stock Purchase Warrant issued December 2, 2014 (29)
Form of Purchase Agent Warrant dated December 2, 2014 (30)
Form of Warrant to Purchase Common Stock issued June 25, 2015 (32)
Form of Purchase Agent Warrant issued June 25, 2015 (33)
Form of Amendment to Notes and Warrants dated June 27, 2016 (40)
Form of Allonge to Convertible Promissory Note dated June 27, 2016 (40)
Form of Class A Common Stock Purchase Warrant issued June 27, 2016 (40)
Form of Consent and Waiver and Amendment dated June 27, 2016 (40)
Form of Warrant Agreement issued March 22, 2017 (43)
2000 Stock Option Plan (34)++
Amended 2010 Stock Incentive Plan (4)
2005 Directors Compensation Program (34)++
2012 Directors Compensation Program, as amended on June 6, 2014 (34)++
Employment Agreement between Aethlon Medical, Inc. and James A. Joyce dated April 1, 1999 (5)++
Patent License Agreement by and amongst Aethlon Medical, Inc., Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O.
Scamurra (6)
Employment Agreement by and between Aethlon Medical, Inc. and Dr. Richard H. Tullis dated January 10, 2000 (6)++
Stock Option Agreement by and between Aethlon Medical, Inc. and James A Joyce dated February 23, 2005 (7)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated February 23, 2005 (7)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry, Jr. dated February 23, 2005 (7)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Ed Broenniman dated February 23, 2005 (7)++
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated September 9, 2005 (8)++
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated June 13, 2007 (9)++
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated December 15, 2008 (10)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry dated December 15, 2008 (10)++
62
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
Stock Option Agreement by and between Aethlon Medical, Inc. and Edward G. Broenniman dated December 15, 2008 (10)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard H. Tullis dated December 15, 2008 (10)++
Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc. dated September 28,
2009 (11)
Offer of Employment by and between Aethlon Medical, Inc. and Rodney S. Kenley dated October 27, 2010 (13)++
Stock Option Agreement of Rodney S. Kenley dated October 27, 2010 (13)++
Unit Subscription Agreement dated March 29, 2012 and April 5, 2012 (14)
Unit Subscription Agreement dated June 19, 2012 (15)
Unit Subscription Agreement dated August 29, 2012 (16)
Unit Subscription Agreement dated October, November and December 2012 (17)
Unit Subscription Agreement dated June 14, 2013 (18)
Form of Unit Purchase Agreement dated October 30, 2013 (19)
Form of Subscription Agreement October 30, 2013 (19)
Form of Unit Purchase Agreement dated November 12, 2013 (20)
Form of Subscription Agreement November 12, 2013 (20)
Form of Unit Purchase Agreement dated December 10, 2013 (21)
Form of Subscription Agreement December 10, 2013 (21)
Form of Unit Purchase Agreement dated December 30, 2013 (22)
Form of Subscription Agreement December 30, 2013 (22)
Form of Restructuring Agreement dated June 24, 2014 (24)
Form of Restructuring Agreement dated June 24, 2014 (24)
Form of Restructuring Agreement dated July 8, 2014 (25)
Second Amendment to Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc.
dated October 10, 2014 (3)
Form of Subscription Agreement dated November 6, 2014 (27)
Office Lease between T-C Stonecrest LLC and Aethlon Medical, Inc. dated November 13, 2014 (28)
Securities Purchase Agreement dated November 26, 2014 (29)
Registration Rights Agreement dated November 26, 2014 (29)
DARPA Contract dated September 30, 2011 (3) (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
63
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
10.58
10.59
10.60
10.61
10.62
10.63
10.64
10.65
10.66
DARPA Contract Extension dated August 8, 2012 (3)
DARPA Contract Extension dated September 15, 2013 (3)
DARPA Contract Extension dated September 29, 2014 (3)
DARPA Contract Modification dated March 12, 2015 (34) (Portions of this exhibit have been omitted pursuant to a request for
confidential treatment.)
UCI Clinical Trial Agreement signed April 9, 2015 (31)
Protocol for UCI Clinical Trial (31)
Budget for UCI Clinical Trial (31)
DaVita Master Services Agreement (35)
First Amendment to DaVita Master Services Agreement (35)
Work Order #1 under DaVita Master Services Agreement (35) (Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.)
Securities Purchase Agreement dated June 23, 2015 (32)
Registration Rights Agreement dated June 23, 2015 (32)
DARPA Contract Extension dated September 25, 2015 (36)
Amendment No. 1 to Joyce Employment Agreement dated October 16, 2015 (37)++
Amendment No. 1 to Kenley Offer Letter dated October 16, 2015 (37)++
Retention Bonus Agreement dated October 16, 2015 (37)++
Third Amendment to Standard Industrial Net Lease dated October 21, 2015 (38)
Amendment of Terms dated November 12, 2015 (38)
Consulting Agreement dated February 9, 2016 (39)
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated September 27, 2010 (44)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated July 1, 2013 (44)++
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated June 6, 2014 (44)++
Amendment No. 1 to Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated December 15,
2008 (44)++
Amendment No. 1 to Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated September 27,
2010 (44)++
64
10.67
10.68
10.69
10.70
10.71
10.72
10.73
10.74
10.75
10.76
10.77
10.78
10.79
10.80
Amendment No. 1 to Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated July 1, 2013
(44)++
Amendment No. 1 to Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated June 6, 2014
(44)++
Common Stock Sales Agreement dated June 28, 2016 between Aethlon Medical, Inc. and H.C. Wainwright & Co., LLC (40)
Form of Consent and Waiver dated June 27, 2016 (40)
Aethlon Medical, Inc. 2012 Non-Employee Directors Compensation Program, as Modified on August 9, 2016 (41) ++
DARPA Contract dated September 30, 2011 (42)
2012 Non-Employee Directors Compensation Program, as amended August 9, 2016*++
Stock Unit Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated August 29, 2016 *++
Stock Unit Agreement by and between Aethlon Medical, Inc. and Rodney S. Kenley dated August 29, 2016 *++
Stock Unit Agreement by and between Aethlon Medical, Inc. and James B. Frakes dated August 29, 2016 *++
Stock Unit Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry, Jr. dated August 29, 2016 *++
Stock Unit Agreement by and between Aethlon Medical, Inc. and Edward G. Broenniman dated August 29, 2016 *++
Stock Unit Agreement by and between Aethlon Medical, Inc. and Chetan S. Shah, MD dated August 29, 2016 *++
Fourth Amendment to Standard Industrial Net Lease by and between AGP Sorrento Business Complex, L.P. and Aethlon
Medical, Inc. dated October 5, 2016*
10.81
Form of Securities Purchase Agreement, dated March 22, 2017 (43)
10.82
10.83
14
21.1
23.1
31.1
31.2
32.1
32.2
Form of Engagement Letter, dated March 15, 2017 (43)
Form of Exchange Agreement *
Code of Ethics*
List of subsidiaries (3)
Consent of Independent Registered Public Accounting Firm (Squar Milner LLP) *
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.*
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.*
Statement of our Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)*
Statement of our Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)*
65
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/A dated March 26, 1999 and incorporated by reference.
(2) Filed with the Company's Registration Statement on Form S-3 (File No. 333-211151) filed on May 5, 2016 and incorporated by
reference.
(3) Filed with the Company’s Registration Statement on Form S-1 (File No. 333-201334) filed on December 31, 2014 and incorporated by
reference.
(4) Filed with the Company’s Current Report on Form 8-K dated March 30, 2016 and incorporated by reference.
(5) Filed with the Company's Annual Report on Form 10-KSB filed on July 15, 1999 for the year ended March 31, 1999 and incorporated
by reference.
(6) Filed with the Company's Annual Report on Form 10-KSB/A filed on September 10, 2004 for the year ended March 31, 2004 and
incorporated by reference.
(7) Filed with the Company's Annual Report on Form 10-KSB filed on July 14, 2005 for the year ended March 31, 2005 and incorporated
by reference.
(8) Filed with the Company's Current Report on Form 8-K filed on September 12, 2005 and incorporated by reference.
(9) Filed with the Company’s Registration Statement on Form S-8 (File No. 333-168483) filed on August 2, 2010 and incorporated by
reference.
(10) Filed with the Company's Current Report on Form 8-K dated December 19, 2008 and incorporated by reference.
(11) Filed with the Company’s Quarterly Report on Form 10-Q filed on November 16, 2009 for the period ended September 30, 2009 and
incorporated by reference.
(12) Filed with the Company’s Annual Report on Form 10-K filed on July 2, 2010 for the year ended March 31, 2010 and incorporated by
reference.
(13) Filed with the Company’s Current Report on Form 8-K dated November 1, 2010 and incorporated by reference.
(14) Filed with the Company’s Current Report on Form 8-K dated April 6, 2012 and incorporated by reference.
(15) Filed with the Company’s Current Report on Form 8-K dated June 27, 2012 and incorporated by reference.
(16) Filed with the Company’s Current Report on Form 8-K dated September 6, 2012 and incorporated by reference.
(17) Filed with the Company’s Quarterly Report on Form 10-Q filed on February 12, 2013 for the period ended December 31, 2012 and
incorporated by reference.
66
(18) Filed with the Company’s Quarterly Report on Form 10-Q filed on August 13, 2013 for the period ended June 30, 2013 and
incorporated by reference.
(19) Filed with the Company’s Current Report on Form 8-K dated November 6, 2013 and incorporated by reference.
(20) Filed with the Company’s Current Report on Form 8-K dated November 20, 2013 and incorporated by reference.
(21) Filed with the Company’s Current Report on Form 8-K dated December 16, 2013 and incorporated by reference.
(22) Filed with the Company’s Current Report on Form 8-K dated January 7, 2014 and incorporated by reference.
(23) Filed with the Company’s Current Report on Form 8-K dated April 4, 2014 and incorporated by reference.
(24) Filed with the Company’s Current Report on Form 8-K dated June 30, 2014 and incorporated by reference.
(25) Filed with the Company’s Current Report on Form 8-K dated July 10, 2014 and incorporated by reference.
(26) Filed with the Company’s Current Report on Form 8-K dated July 28, 2014 and incorporated by reference.
(27) Filed with the Company’s Quarterly Report on Form 10-Q filed on November 10, 2014 for the period ended September 30, 2014 and
incorporated by reference.
(28) Filed with the Company’s Current Report on Form 8-K/A dated November 19, 2014 and incorporated by reference.
(29) Filed with the Company’s Current Report on Form 8-K dated November 28, 2014 and incorporated by reference.
(30) Filed with the Company’s Current Report on Form 8-K dated December 3, 2014 and incorporated by reference.
(31) Filed with the Company’s Current Report on Form 8-K dated April 15, 2015 and incorporated by reference.
(32) Filed with the Company’s Current Report on Form 8-K dated June 24, 2015 and incorporated by reference.
(33) Filed with the Company’s Current Report on Form 8-K dated June 26, 2015 and incorporated by reference.
(34) Filed with the Company's Registration Statement on Form S-1 (File No. 333-203487) filed on April 17, 2015 and incorporated by
reference.
(35) Filed with the Company’s Annual Report on Form 10-K filed on June 26, 2015 for the year ended March 31, 2015 and incorporated
by reference.
(36) Filed with the Company’s Current Report on Form 8-K dated September 28, 2015 and incorporated by reference.
(37) Filed with the Company’s Current Report on Form 8-K dated October 22, 2015 and incorporated by reference.
(38) Filed with the Company’s Quarterly Report on Form 10-Q filed on November 16, 2015 for the period ended September 30, 2015 and
incorporated by reference.
(39) Filed with the Company’s Current Report on Form 8-K dated February 16, 2016 and incorporated by reference.
(40) Filed with the Company’s Current Report on Form 8-K dated June 28, 2016 and incorporated by reference.
(41) Filed with the Company’s Current Report on Form 8-K dated August 10, 2016 and incorporated by reference.
(42) Filed with the Company’s Quarterly Report for the quarter ended September 30, 2016 dated November 10, 2016 and incorporated by
reference.
(43) Filed with the Company’s Current Report on Form 8-K dated March 22, 2017 and incorporated by reference.
(44) Filed with the Company’s Annual Report for the year ended March 31, 2016, dated June 29, 2016
67
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 28th day of June, 2017.
SIGNATURES
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.
By:
/s/ JAMES A. JOYCE
James A. Joyce
Chairman, Chief Executive Officer
Signature
Title
/s/ JAMES A. JOYCE
James A. Joyce
/s/ JAMES B. FRAKES
James B. Frakes
/s/ EDWARD G. BROENNIMAN
Edward G. Broenniman
/s/ RODNEY S. KENLEY
Rodney S. Kenley
/s/ CHETAN S. SHAH
Chetan S. Shah
Chairman of the Board, Chief Executive Officer
and Principal Executive Officer
Chief Financial Officer and Principal Accounting
Officer
Director
Director
Director
68
Date
June 28, 2017
June 28, 2017
June 28, 2017
June 28, 2017
June 28, 2017
AETHLON MEDICAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of March 31, 2017 and 2016
Consolidated Statements of Operations for the Years Ended March 31, 2017 and 2016
Consolidated Statements of Equity for the Years Ended March 31, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended March 31, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
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,
2017 and 2016 and the related consolidated statements of operations, equity, and cash flows for the years then ended. 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 the 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 financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of March 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in
Note 1 to the financial statements, during the fiscal year ended March 31, 2017 the Company incurred a net loss and generated negative
cash flows from operating activity and as of March 31, 2017 had an accumulated deficit of approximately $93,778,000. These factors 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 consolidated financial statements do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ SQUAR MILNER LLP
SAN DIEGO, CALIFORNIA
JUNE 28, 2017
F-2
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
Cash
Accounts receivable
Prepaid expenses and other current assets
TOTAL CURRENT ASSETS
Property and equipment, net
Patents, net
Deposits
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable
Due to related parties
Other current liabilities
TOTAL CURRENT LIABILITIES
Convertible notes payable, net
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS’ EQUITY
Common stock, $0.001 par value, 30,000,000 shares authorized at March 31, 2017 and
2016; 8,797,086 and 7,622,393 issued and outstanding at March 31, 2017 and 2016,
respectively
Additional paid-in capital
Accumulated deficit
TOTAL AETHLON MEDICAL, INC. STOCKHOLDERS’ EQUITY BEFORE
NONCONTROLLING INTERESTS
NONCONTROLLING INTERESTS
TOTAL STOCKHOLDERS’ EQUITY
March 31, 2017 March 31, 2016
$
1,559,701 $
–
37,551
2,123,737
199,471
53,294
1,597,252
2,376,502
29,223
84,996
14,897
36,038
94,161
22,415
$
1,726,368 $
2,529,116
$
484,423 $
57,866
69,467
611,756
519,200
244,804
145,112
136,695
526,611
500,139
1,130,956
1,026,750
8,796
94,445,739
(93,778,156)
7,621
88,047,142
(86,502,043)
676,379
1,552,720
(80,967)
(50,354)
595,412
1,502,366
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
1,726,368 $
2,529,116
See accompanying notes to the consolidated financial statements.
F-3
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
2017
2016
$
392,073 $
392,073
886,572
886,572
2,161,592
3,479,347
849,491
6,490,430
2,259,096
2,083,297
929,013
5,271,406
(6,098,357)
(4,384,834)
558,198
345,841
304,330
1,208,369
–
–
573,782
573,782
REVENUES:
Government contract revenue
Total revenues
OPERATING EXPENSES
Professional fees
Payroll and related expenses
General and administrative
Total operating expenses
OPERATING LOSS
OTHER EXPENSE
Loss on debt extinguishment
Warrant repricing expense
Interest and other expenses
Total other expense
NET LOSS BEFORE NONCONTROLLING INTERESTS
(7,306,726)
(4,958,616)
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS
(30,613)
(86,287)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic and diluted net loss per share available to common stockholders
$
$
(7,276,113) $
(4,872,329)
(0.94) $
(0.66)
Weighted average number of common shares outstanding - basic and diluted
7,764,237
7,393,695
See accompanying notes to the consolidated financial statements.
F-4
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED MARCH 31, 2017 AND 2016
ATTRIBUTABLE TO AETHLON MEDICAL, INC.
ADDITIONAL
BALANCE - MARCH 31, 2015
COMMON STOCK
SHARES AMOUNT
6,657,046 $
6,657 $
PAID IN ACCUMULATED
CAPITAL
DEFICIT
82,238,507 $
(81,629,714) $
Issuances of common stock for cash
959,140
958
5,605,797
Issuance of common stock under cashless warrant exercises
5,292
5
(5)
Issuance of common stock due to rounding up from reverse
split
915
1
(1)
Stock-based compensation expense
Net loss
–
–
–
202,844
–
–
(4,872,329)
(86,287)
(4,958,616)
BALANCE - MARCH 31, 2016
7,622,393 $
7,621 $
88,047,142 $
(86,502,043) $
(50,354) $ 1,502,366
Issuances of common stock for cash under at the market
program
216,078
216
954,889
Issuances of common stock and warrants under registered
direct financing
773,000
773
1,803,477
Issuances of common stock under conversions of
convertible notes and related accrued interest
33,091
33
144,686
Warrant repricing expense
Loss on debt extinguishment
Debt discount on convertible notes payable
–
–
–
–
345,841
–
558,198
–
783,868
Repurchase of restricted stock units
149,864
150
(378,668)
Exercise of cashless warrants
2,660
3
(3)
Stock-based compensation expense
Net loss
–
–
–
2,186,309
–
–
(7,276,113)
(30,613)
(7,306,726)
BALANCE - MARCH 31, 2017
8,797,086 $
8,796 $
94,445,739 $
(93,778,156) $
(80,967) $
595,412
See accompanying notes to the consolidated financial statements.
F-5
NON-
CONTROLLING
TOTAL
INTERESTS EQUITY
651,383
35,933 $
–
–
–
–
–
5,606,755
–
–
–
–
–
202,844
–
–
–
–
–
–
–
–
–
–
955,105
–
1,804,250
–
144,719
–
345,841
–
558,198
–
783,868
–
(378,518)
–
–
–
2,186,309
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2017 AND 2016
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Warrant repricing expense
Loss on debt extinguishment
Stock based compensation
Amortization of debt discount and deferred financing costs
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other current assets
Other assets
Accounts payable and other current 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
Cash flows from financing activities:
Cash paid for repurchase of restricted stock units
Proceeds from the issuance of convertible notes payable
Net proceeds from the issuance of common stock and warrants
Net cash provided by financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
Supplemental information of non-cash investing and financing activities:
Conversion of debt, accrued liabilities and accrued interest to common stock
Reclassification of accrued interest to convertible notes payable
Issuance of shares for warrants
Issuance of shares under vested restricted stock units
Issuance of shares under cashless warrant exercises
Debt discount on convertible notes payable
2017
2016
$
(7,306,726) $
(4,958,616)
32,413
345,841
558,198
2,186,309
220,439
199,471
15,743
7,518
322,140
(87,246)
(3,505,900)
38,524
–
–
202,844
517,233
(6,130)
19,841
(95,638)
(46,365)
(1,000)
(4,329,307)
(16,433)
(16,433)
(9,307)
(9,307)
(378,518)
577,460
2,759,355
2,958,297
–
–
5,606,755
5,606,755
(564,036)
1,268,141
2,123,737
855,596
$
1,559,701 $
2,123,737
$
$
$
$
$
$
144,719 $
85,031 $
198 $
150 $
3 $
783,868 $
–
–
–
–
5
–
See accompanying notes to the consolidated financial statements.
F-6
Aethlon Medical, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. ORGANIZATION, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
We create medical technologies to address unmet needs in global health and biodefense. The Aethlon Hemopurifier® is a clinical-stage
therapeutic device that eliminates life-threatening viruses from the circulatory system of infected individuals. We believe the Aethlon
Hemopurifier® can achieve the broad-spectrum countermeasure goal set forth by the U.S. Department of Health and Human Services
(HHS). The device has been validated to capture Ebola, Zika, Lassa, MERS-CoV, HIV, Hepatitis C, Cytomegalovirus, Epstein-Barr,
Herpes Simplex, Chikungunya, Dengue, West Nile, Smallpox related viruses, H1N1 Swine Flu, H5N1 Bird Flu, and the reconstructed
Spanish flu virus of 1918. At present, the Hemopurifier® is being advanced under an FDA approved clinical study. Aethlon is also the
majority owner of Exosome Sciences, Inc., a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-
threatening diseases.
Aethlon Medical, Inc. and subsidiary (“Aethlon”, the “Company”, “we” or “us”) is a medical device company focused on creating
innovative devices that address unmet medical needs in in global health and biodefense. The Aethlon Hemopurifier® is a clinical-stage
therapeutic device that eliminates life-threatening viruses from the circulatory system of infected individuals. 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 U.S. We ended the treatment phase of the study after treating eight end-stage renal
disease patients who were 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 U.S.
Successful outcomes of human trials will also be required by the regulatory agencies of certain foreign countries where we intend to sell
this device. Some of our patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe
that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R)
treatment technology.
In October 2013, our subsidiary, Exosome Sciences, Inc. (“ESI”), commenced operations with a focus on advancing exosome-based
strategies to diagnose and monitor the progression of cancer, infectious disease and other life-threatening conditions.
Our common stock is quoted on the Nasdaq Capital Market under the symbol “AEMD.”
REVERSE STOCK SPLIT
On April 14, 2015, the Company completed a 1-for-50 reverse stock split. Accordingly, authorized common stock was reduced from
500,000,000 shares to 10,000,000 shares, and each 50 shares of outstanding common stock held by stockholders were combined into one
share of common stock. The accompanying consolidated financial statements and accompanying notes have been retroactively revised to
reflect such reverse stock split as if it had occurred on April 1, 2014. All shares and per share amounts have been revised accordingly.
LIQUIDITY AND GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which
contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. We have
incurred continuing losses from operations and at March 31, 2017 had an accumulated deficit of approximately $93,778,000. These factors,
among other matters, raise substantial doubt about our ability to continue as a going concern. A significant amount of additional capital will
be necessary to advance the development of our products to the point at which they may become commercially viable. We intend to fund
operations, working capital and other cash requirements for the fiscal year ending March 31, 2018 through debt and/or equity financing
arrangements.
F-7
We are currently addressing our liquidity issue by seeking additional investment capital through issuances of common stock under our
existing S-3 registration statement 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 debt and equity financing arrangements will be sufficient to meet
our liquidity needs for fiscal 2018. However, no assurance can be given that we will receive any funds in addition to the funds we have
received to date.
If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our current
shareholders could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional
financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms,
we may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict
our operations. We are continuing to pursue external financing alternatives to improve our working capital position. If we are unable to
obtain the necessary capital, we may have to cease operations.
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.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned (80%
ownership) and controlled subsidiary, Exosome Sciences, Inc. (ESI). All significant intercompany balances and transactions have been
eliminated in consolidation. The Company has classified the (20% ownership) noncontrolling interests in ESI as part of consolidated net
loss in the fiscal years ended March 31, 2017 and 2016 and includes the accumulated amount of noncontrolling interests as part of equity.
The losses at ESI during the fiscal year ended March 31, 2017 reduced the noncontrolling interests on our consolidated balance sheet by
$30,613 from $(50,354) at March 31, 2016 to $(80,967) at March 31, 2017.
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 accounting principles generally accepted in the United States of
America (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of
revenues and expenses during the reporting periods. Significant estimates made by management include, among others, realization of long-
lived assets, valuation of derivative liabilities, estimating fair value associated with debt and equity transactions and valuation of deferred
tax assets. Actual results, whether in the near, medium or long-term future, 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, 2017 and 2016, we had no assets that were classified as cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our cash, accounts receivable, accounts payable, and other current liabilities approximates their estimated fair
values due to the short-term maturities of those financial instruments. The carrying amount of the notes payable approximates their fair
value due to the short maturity of the notes and since the interest rates approximate current market interest rates for similar instruments.
F-8
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 follow Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 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.
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, 2017 and
2016, and did not have any assets or liabilities that were measured at fair value on a nonrecurring basis.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at one financial institution in checking accounts and related cash management accounts. Accounts at this institution are
secured by the Federal Deposit Insurance Corporation up to $250,000. Our March 31, 2017 cash balances were approximately $1,308,000
over such insured amount. We do not believe that the Company is exposed to any significant risk with respect to its cash.
All of our accounts receivable at March 31, 2017 and 2016 and all of our revenue in the fiscal years ended March 31, 2017 and 2016 were
directly from the U.S. Department of Defense or from a subcontract under Battelle, which is a prime contractor with the U.S. Department of
Defense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the
related assets, which range from two to five years. Repairs and maintenance are charged to expense as incurred while improvements are
capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated
depreciation with any gain or loss included in the consolidated statements of operations.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the consolidated
financial statements and their respective tax basis. Deferred income taxes reflect the net tax effects of (a) temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. We record a valuation allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in
the foreseeable future, it is more likely than not that some portion of the deferred tax assets may not be realized.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an
impairment loss is recognized. We believe no impairment charges were necessary during the fiscal years ended March 31, 2017 and 2016.
F-9
LOSS PER SHARE
Basic loss per share is computed by dividing net income available to common stockholders by the weighted average number of common
shares outstanding during the period of computation. Diluted loss per share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common shares that would have been outstanding if potential common shares
had been issued, if such additional common shares were dilutive. Since we had net losses for all periods presented, basic and diluted loss
per share are the same, and additional potential common shares have been excluded as their effect would be antidilutive.
As of March 31, 2017 and 2016, a total of 3,908,292 and 2,710,107 potential common shares, consisting of shares underlying outstanding
stock options, restricted stock units, warrants and convertible notes payable were excluded as their inclusion would be antidilutive.
SEGMENTS
Historically, we operated in one segment that was based on our development of therapeutic devices. However, in the December 2013
quarter, we initiated the operations of ESI to develop diagnostic tests. As a result, we now operate in two segments, Aethlon for therapeutic
applications and ESI for diagnostic applications (See Note 10).
We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating results in order to make
decisions about resources to be allocated to the ESI segment and to assess its performance.
DEFERRED FINANCING COSTS
Costs related to the issuance of debt are capitalized as a deduction to our convertible notes based on the new accounting standard on
imputation of interest, 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 financing costs of $27,641 and $144,683 during the fiscal years ended March 31, 2017 and
2016, respectively.
REVENUE RECOGNITION
DARPA Contract -- We entered into a government contract with DARPA and have recognized revenue of $387,438 and $863,011 under
that contract during the fiscal years ended March 31, 2017 and 2016, respectively. We adopted the Milestone method of revenue
recognition for the DARPA contract under ASC 605-28 “Revenue Recognition – Milestone Method” (“ASC 605-28”) 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,
2017 and 2016.
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.
F-10
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.
Battelle Subcontract -- We entered into a subcontract agreement with Battelle Memorial Institute (“Battelle”) in March 2013. Battelle was
chosen by DARPA to be the prime contractor on the systems integration portion of the original DARPA contract and we are one of several
subcontractors on that systems integration project. The Battelle subcontract is cost-reimbursable under a time and materials basis. We began
generating revenues under the subcontract during the three months ended September 30, 2013 and for the fiscal years ended March 31,
2017 and 2016, we recorded revenue of $4,635 and $23,561, respectively, under the Battelle subcontract.
Our revenue under this contract was a function of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific
employees (with specific hourly rates for those employees). Battelle engaged us as needed. Each payment required approval by the program
manager at Battelle.
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation plans are accounted for under the fair value method.
Accordingly, share-based compensation is measured when all granting activities have been completed, generally the grant date, based on
the fair value of the award. The exercise price of options is generally equal to the market price of the Company's common stock (defined as
the closing price as quoted on the Nasdaq Capital Market or 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 March 31, 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 5).
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, 2017 and 2016:
Vesting of Stock Options and Restricted Stock Units
Total Stock-Based Compensation Expense
Fiscal Years Ended
March 31, 2017 March 31, 2016
202,844
$
202,844
$
2,186,309 $
2,186,309 $
Weighted average number of common shares outstanding – basic and diluted
7,764,237
7,393,695
Basic and diluted loss per common share
$
(0.28) $
(0.03)
F-11
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, 2007 is recognized in the
period the forfeiture estimate is changed. The effect of forfeiture adjustments for the fiscal year ended March 31, 2017 was insignificant.
PATENTS
Patents include both foreign and domestic patents. We capitalize the cost of patents, 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
are subject to our review for impairment under our long-lived asset policy above.
STOCK PURCHASE WARRANTS
We grant warrants in connection with the issuance of convertible notes payable and the issuance of common stock for cash. When such
warrants are classified as equity and issued in connection with debt, we measure the relative estimated fair value of such warrants and
record it as a discount from the face amount of the convertible notes payable. Such discounts are amortized to interest expense over the
term of the notes using the effective interest method. Warrants issued in connection with common stock for cash, if classified as equity, are
considered issued in connection with equity transactions and the warrant fair value is recorded to additional paid-in-capital.
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. We had no derivative liabilities at either March 31, 2017
or March 31, 2016.
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-12
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development costs are expensed as incurred. We incurred approximately $673,000 and $782,000 of research and
development expenses for the years ended March 31, 2017 and 2016, 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
During the fiscal year ended March 31, 2017, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) 2015-03, the new accounting standard on imputation of interest, simplifying the presentation of debt issuance costs. As a result of
the adoption of that pronouncement, our deferred financing costs at March 31, 2016 were reclassified from current assets to an offset
against our convertible notes. We did not have any unamortized deferred financing costs at March 31, 2017.
During the fiscal year ended March 31, 2017, we also adopted FASB ASU 2015-01, the new accounting standard on income statement -
extraordinary and unusual items (Subtopic 225-20): simplifying income statement presentation by eliminating the concept of extraordinary
items and FASB ASU 2014-15, the new accounting standard on the presentation of financial statements - going concern (Subtopic 205-40):
disclosure of uncertainties about an entity's ability to continue as a going concern.
The adoption of FASB ASU 2015-01 did not have a material impact on our consolidated financial statements for the fiscal years ended
March 31, 2016 and 2017 as we did not have any extraordinary or unusual items in those fiscal years and we believe this accounting
pronouncement will not have a significant impact on the our consolidated financial statements in the future.
The adoption of FASB ASU 2014-15 did not have a material impact on our consolidated financial statements for the fiscal years ended
March 31, 2016 and 2017 as our management had determined that a going concern qualification for both of those years was appropriate.
We have evaluated the new going concern considerations in this ASU and have determined that it is appropriate to provide additional
disclosure to our consolidated financial statements (see Note 1).
Management is evaluating significant recent accounting pronouncements that are not yet effective for us, including the new accounting
standard on improvements to employee share based payment accounting, ASU 2016-09 (Topic 718), the new accounting standard related
to leases, ASU 2016-02 (Topic 842), the new accounting standard for recognition and measurement of financial assets and financial
liabilities, and the new accounting standard on revenue recognition, ASU 2014-09 (Topic 606), and have not yet concluded whether any
such pronouncements will have a significant effect on our 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, 2017 March 31, 2016
394,395
$
(358,357)
36,038
352,085 $
(322,862)
29,223 $
$
Depreciation expense for the years ended March 31, 2017 and 2016 approximated $23,000 and $29,000, respectively.
3. PATENTS
Patents consist of the following:
Patents
Accumulated amortization
March 31, 2017 March 31, 2016
211,645
$
(117,484)
94,161
211,645 $
(126,649)
84,996 $
$
Amortization expense for patents for the years ended March 31, 2017 and 2016 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 4.0 years.
F-13
4. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable, Net consisted of the following at March 31, 2017:
Convertible Notes Payable, Net – Non-Current Portion:
November 2014 10% Convertible Notes
December 2016 10% Convertible Notes
Total Convertible Notes Payable, Net
Principal
Unamortized
Discount
Net
Amount
Accrued
Interest
$
$
612,811 $
680,400
1,293,211 $
(275,363) $
(498,648)
(774,011) $
337,448 $
181,752
519,200 $
2,555
2,836
5,391
During the fiscal year ended March 31, 2017, we recorded interest expense of $81,102 related to the contractual interest rates of our
convertible notes, interest expense of $27,641 related to the amortization of deferred financing costs and interest expense of $192,798
related to the amortization of the note discount for a total interest expense of $301,541 related to our convertible notes in the fiscal year
ended March 31, 2017. All of the unamortized discount at December 31, 2016 related to the note discount established upon the second
amendment to the November 2014 10% Convertible Notes and to the December 2016 10% Convertible Notes (see below). Accrued interest
is included in other current liabilities (see Note 7).
Convertible Notes Payable, Net consisted of the following at March 31, 2016:
Convertible Notes Payable, Net– Non-Current Portion:
November 2014 10% Convertible Notes
Total Convertible Notes Payable, Net
Principal
Unamortized
Discount
Net
Amount
Accrued
Interest
$
$
527,780 $
527,780 $
(27,641) $
(27,641) $
500,139 $
500,139 $
74,036
74,036
The above table shows the retroactive application of $27,641 in note discounts representing the deferred financing costs of that same
amount on March 31, 2016 due to the application of related to the application of the new accounting standard ASU 2015-03. All of the
unamortized discount at March 31, 2016 related to the deferred financing costs noted above.
During the fiscal year ended March 31, 2016, we recorded interest expense of $52,778 related to the contractual interest rates of our
convertible notes, interest expense of $372,550 related to the amortization of debt discounts on the convertible notes and interest expense of
$144,683 related to the amortization of deferred financing costs for a total of $570,011. Accrued interest is included in other current
liabilities (see Note 7).
NOVEMBER 2014 10% CONVERTIBLE NOTES
In November 2014, we entered into a subscription agreement with two accredited investors providing for the issuance and sale of (i)
convertible promissory notes in the aggregate principal amount of $527,780 (the “Notes”) and (ii) five year warrants to purchase up to
47,125 shares of common stock at a fixed exercise price of $8.40 per share (the “Warrants”). These Notes bear interest at the annual rate of
10% and originally matured on April 1, 2016.
The aggregate gross cash proceeds to us were $415,000 after subtracting legal fees of $35,000, a $27,780 due diligence fee and an original
issuance discount of $50,000. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence fee and original
issuance discount and will amortize those costs over the life of the Notes using the effective interest method.
These Notes are convertible at the option of the holders into shares of our common stock at a fixed price of $5.60 per share, for up to an
aggregate of 94,246 shares of common stock. There are no registration requirements with respect to the shares of common stock underlying
the Notes or the Warrants.
The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized as
additional interest expense over the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value of
these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on
the date of issuance, we recorded an additional debt discount of $287,647 related to the beneficial conversion feature.
F-14
Initial Amendment of the November 2014 10% Convertible Note Terms
On November 12, 2015, we entered into an amendment of terms (“Amendment of Terms”) with the two investors that participated in the
November 2014 10% Convertible Notes. The Amendment of Terms modified the terms of the subscription agreement, Notes and Warrants
held by those investors to, among other things, extended the maturity date of the Notes from April 1, 2016 to June 1, 2016, temporarily
reduced the number of shares that we must reserve with respect to conversion of the Notes, and temporarily suspended the time period
during which one of the investors may exercise its Warrants. In exchange for the investors’ agreements in the Amendment of Terms, we
paid one of the investors a cash fee of $90,000, which we recorded as deferred financing costs and amortized over the remaining term of the
notes.
Second Amendment and Extension of the November 2014 10% Convertible Notes
On June 27, 2016, we and certain investors entered into further Amendments (the “Amendments”) to the Notes and the Warrants. The
Amendments provide that the Maturity Date (as defined in the Notes) was extended from June 1, 2016 to July 1, 2017 and that the
conversion price per share of the Notes was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In
addition, we reduced the purchase price (as defined in the Warrants) from $8.40 per share to $5.00 per share of common stock. In
connection with these modifications, each of the investors signed a Consent and Waiver providing its consent under certain restrictive
provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a Securities Purchase
Agreement dated June 23, 2015, (the “2015 SPA”) to which we, the investors and certain other investors are parties, in order to facilitate an
at-the-market equity program (see Note 6).
The Amendments also increase the principal amount of the Notes to $692,811 (in the aggregate) to (i) include accrued and unpaid interest
through June 15, 2016, and (ii) increase the principal amount by $80,000 (in the aggregate) as an extension fee for the extended maturity
date of the Notes. With respect to each Note, we entered into an Allonge to Convertible Promissory Note (each, an “Allonge”) reflecting
the changes in the principal amount, Maturity Date and conversion price of the Note.
We also issued to the investors new warrants (the “New Warrants”) to purchase an aggregate of 30,000 shares of common stock with a
Purchase Price (as defined in the New Warrants) of $5.00 per share of common stock. We issued the New Warrants in substantially the
same form as the prior Warrants, and the New Warrants will expire on November 6, 2019, the same date on which the prior Warrants will
expire.
The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40, “Debt
Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially different,
and the transaction qualified for extinguishment accounting. As a result, we recorded a loss on debt extinguishment of $536,889 and
recognized an extension fee expense of $80,000, which are included in other (income) expenses in the accompanying condensed
consolidated statements of operations. The debt extinguishment is comprised from the fair value of prior warrants issued in connection with
the Notes of $287,676, as well as $325,206 related to beneficial conversion feature and offset by debt discount of $75,993. The beneficial
conversion feature is a result of the effective conversion price of the new Notes being less than the market price of the underlying common
stock on the date of modification.
Third Amendment and Extension of the November 2014 10% Convertible Notes
In connection with the issuance of the December 2016 10% Convertible Notes, the conversion price of the November 2014 10%
Convertible Notes was reduced from $5.00 to $4.00 per share and the expiration date of the November 2014 10% Convertible Notes was
extended from July 1, 2017 to July 1, 2018.
The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40, “Debt
Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially different,
and the transaction qualified for extinguishment accounting. As a result, we recorded a gain on debt extinguishment of $58,691, which is
included in other (income) expenses in the accompanying condensed consolidated statements of operations. The recording of the modified
Notes resulted in a beneficial conversion of $233,748 which is the result of the effective conversion price of the new Notes being less than
the market price of the underlying common stock on the date of modification.
F-15
In June 2017, we agreed with the holders of the November 2014 10% Convertible Notes to an extension of the expiration dates of the notes
from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per
share (See Note 11).
The following table shows the changes to the principal balance of the November 2014 10% Convertible Notes:
Activity in the November 2014 10% Convertible Notes
Initial principal balance
Increase in principal balance under the second amendment (see above)
Conversions during the fiscal year ended March 31, 2017
Balance as of March 31, 2017
DECEMBER 2016 10% CONVERTIBLE NOTES
$
$
527,780
165,031
(80,000)
612,811
In December 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited investors
(collectively, the “Holders”), pursuant to which the Holders purchased an aggregate of $680,400 principal amount of Notes (inclusive of
due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400) for an
aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the
“Warrants”).
The Notes bear interest at the rate of 10% per annum, and the principal amount and all accrued and unpaid interest thereon is convertible
into shares of our common stock at a $4.00 per share conversion price, which is subject to customary adjustment provisions for stock splits,
dividends, recapitalizations and the like. The Notes mature on July 1, 2018 and are subject to customary and usual terms for events of
default and the like. Each Holder has contractually agreed to restrict its ability to convert its Note such that the number of shares of the
Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of
Common Stock.
The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of $4.50, subject
to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a cashless basis. In the
event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the Warrants is subject to
customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has contractually agreed to
restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder and its affiliates after such
exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.
The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is being amortized as
additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative fair value of
these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on
the date of issuance, we recorded an additional debt discount of $262,718 related to the beneficial conversion feature. We also recorded
deferred financing costs of $102,940, which was composed of an 8% original issue discount of $50,400, a $30,000 due diligence fee (which
was paid in the form of a note), $22,500 in legal fees, and a $40 bank charge. The combination of the above items led to a combined
discount against the convertible notes of $598,376.
In June 2017, we agreed with the holders of the December 2016 10% Convertible Notes to an extension of the expiration dates of the notes
from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per
share (See Note 11).
There were no conversions of principal on the December 2016 10% Convertible Notes during the fiscal year ended March 31, 2017.
F-16
5. EQUITY TRANSACTIONS
ISSUANCES OF COMMON STOCK AND WARRANTS
Equity Transactions in the Fiscal Year Ended March 31, 2017.
Common Stock Sales Agreement with H.C. Wainwright
On June 28, 2016, we entered into a Common Stock Sales Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“H.C.
Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock from
time to time as set forth in the Agreement. The Agreement provides for the sale of shares of our common stock having an aggregate
offering price of up to $12,500,000 (the “Shares”).
Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent
with its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C.
Wainwright with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three
percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in
connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon
the sale of all of the Shares under the Agreement unless terminated earlier by either party as permitted under the Agreement.
Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in
Rule 415 under the Securities Act, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital
Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time,
we may suspend offers under the Agreement or terminate the Agreement.
In July 2016, we commenced sales of common stock under our Common Stock Sales Agreement with H.C. Wainwright. In the fiscal year
ended March 31, 2017, we raised aggregate net proceeds of $955,206 (net of $29,831 in commissions to H.C. Wainwright and $9,432 in
other offering expenses) under this agreement through the sale of 216,078 shares at an average price of $4.42 per share of net proceeds.
Warrant Issuances in July 2016
In July 2016, we issued an aggregate of 2,660 shares of common stock to three investors upon the exercise of previously issued warrants.
The warrants were exercised on a cashless or “net” basis. Accordingly, we did not receive any proceeds from such exercises. The cashless
exercise of such warrants resulted in the cancellation of previously issued warrants to purchase an aggregate of 19,563 shares of common
stock.
Restricted Stock Unit Grants to Directors and Executive Officers
During the fiscal year ended March 31, 2017, 149,864 Restricted Stock Units (“RSUs”) held by our outside directors and executive officers
were exchanged into the same number of shares of our common stock (see Stock-Based Compensation below).
Amendment of Warrants Issued in Conjunction with the November 2014 10% Convertible Notes
Under the Second Amendment and Extension of the November 2014 10% Convertible Notes dated June 27, 2016 (See Note 4), we reduced
the purchase price of 47,125 Warrants from $8.40 per share to $5.00 per share.
We also issued to the investors new warrants to purchase an aggregate of 30,000 shares of common stock with a purchase price of $5.00 per
share of common stock. We issued the new warrants in substantially the same form as the prior Warrants, and the new warrants will expire
on November 6, 2019, the same date on which the prior warrants will expire (See Note 4).
F-17
Amendment of December 2014 Warrants
On June 27, 2016, we and certain investors (the “Unit Investors”) entered into Consent and Waiver and Amendment agreements (the
“CWAs”), relating to an aggregate of 264,000 Warrants to Purchase Common Stock (the “Unit Warrants”) we had issued to the Unit
Investors on December 2, 2014 pursuant to a Securities Purchase Agreement dated November 26, 2014 (the “2014 SPA”). In the CWAs,
each of the Unit Investors provided its consent under certain restrictive provisions, and waived certain rights, including a right to participate
in certain offerings made by us, under the 2014 SPA in order to facilitate the at-the-market equity program described above. Pursuant to the
CWAs, we reduced the Exercise Price (as defined in the Unit Warrants) from $15.00 per share of common stock to $5.00 per share of
common stock. At any time that the shares of common stock underlying the Unit Warrants are covered by an effective registration
statement that permits the public resale of the shares, if the Unit Investors exercise the Unit Warrants, they must do so by a cash exercise,
which could yield up to $1,320,000 in proceeds to us.
On June 27, 2016, each of the Unit Investors also entered into a Consent and Waiver providing its consent under certain provisions, and
waiving certain rights, including a right to participate in certain offerings made by us, under the 2015 SPA in order to facilitate the at-the-
market equity program described above.
In accordance with applicable GAAP for warrant modifications, we measured the change in fair value that arose from the reduction in
exercise price and recognized an expense of $345,841, which is included in other (income) expenses in the accompanying condensed
consolidated statements of operations.
Warrants Issued in Conjunction with the December 2016 10% Convertible Notes
On December 30, 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited
investors (collectively, the “Holders”), pursuant to which the Purchasers purchased an aggregate of $680,400 principal amount of Notes
(inclusive of due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400)
for an aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the
“Warrants”) (See Note 4).
The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of $4.50, subject
to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a cashless basis. In the
event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the Warrants is subject to
customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has contractually agreed to
restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder and its affiliates after such
exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.
The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized as
additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative fair value of
these Warrants.
MARCH 2017 EQUITY FINANCING
On March 22, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the
“Investors”) for the sale of 575,000 shares (the “Common Shares”) of our common stock, par value $0.001 per share (the “Common
Stock”), at a purchase price of $3.50 per share, in a registered direct offering. Concurrently with the sale of the Common Shares, pursuant
to the Purchase Agreement, we also sold in a private placement warrants to purchase 575,000 shares of Common Stock (the “Warrants”).
The aggregate gross proceeds for the sale of the Common Shares and Warrants will be approximately $2 million. Subject to certain
ownership limitations, the Warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to
$3.95 per share of Common Stock, subject to adjustments as provided under the terms of the Warrants. The Warrants will be exercisable
for five years from the initial exercise date.
The net proceeds to us from the transactions, after deducting the placement agent’s fees and expenses (not including the Wainwright
Warrants, as defined below), our estimated offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants, were
$1,804,250. We intend to use the net proceeds from the transactions for general corporate purposes.
F-18
The Common Shares (but not the Warrants or shares issuable upon exercise of the Warrant) were sold by us pursuant to an effective shelf
registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on May 5, 2016 and
subsequently declared effective on May 12, 2016 (File No. 333-211151) (the “Registration Statement”), and the base prospectus dated as of
May 12, 2016 contained therein. We filed a prospectus supplement and the accompanying prospectus with the SEC in connection with this
sale of the Common Shares.
The purchase agreement also covered the exchange of 264,000 warrants issued to the purchasers thereunder in December 2014 for 198,000
shares of our common stock. Further, in exchange for certain waivers given by the purchasers and certain other investors in a private
placement of the Company in June 2015, the warrants issued in such private placement were amended to (i) reduce the exercise price to
$3.95 per share, (ii) make the warrants non-exercisable for a period of six months from the date of amendment, and (iii) extend the term of
those warrants by six months. As all of these warrant-related elements were integral to the March 2017 Equity Financing, we accounted for
all of these elements as adjustments to additional paid-in capital.
The Warrants and the shares issuable upon exercise of the Warrants were sold and issued without registration under the Securities Act of
1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving a
public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar exemptions
under applicable state laws.
We also entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC
(“Rodman”), pursuant to which Rodman agreed to serve as exclusive placement agent for the issuance and sale of the Common Shares and
Warrants. We paid Rodman an aggregate fee equal to 6% of the gross proceeds received by us from the sale of the securities in the
transactions. Pursuant to the Engagement Letter, we also agreed to grant to Rodman or its designees warrants to purchase up to 3% of the
aggregate number of shares sold in the transaction (the “Rodman Warrants”). The Engagement Letter has a nine month tail and right of
first offer periods, indemnity and other customary provisions for transactions of this nature. The Rodman Warrants have substantially the
same terms as the Warrants, except that the exercise price is 125% of $3.50. We also paid Rodman a reimbursement for non-accountable
expenses in the amount of $50,000.
Equity Transactions in the Fiscal Year Ended March 31, 2016.
REVERSE STOCK SPLIT
On April 14, 2015, we completed a 1-for-50 reverse stock split. Accordingly, authorized common stock was reduced from 500,000,000
shares to 10,000,000 shares, and each 50 shares of outstanding common stock held by stockholders were combined into one share of
common stock. The accompanying condensed consolidated financial statements and accompanying notes have been retroactively revised to
reflect such reverse stock split as if it had occurred on April 1, 2014. All share and per share amounts have been revised accordingly.
INCREASE IN AUTHORIZED SHARES
On March 31, 2016, we filed a Certificate of Amendment to our Articles of Incorporation to increase our authorized common stock from
10,000,000 to 30,000,000 shares. Our stockholders approved the amendment at our annual meeting of stockholders held on March 29,
2016.
On April 28, 2015, we issued 915 shares of common stock as the result of rounding up of fractional shares that arose due to our reverse
stock split.
On June 25, 2015, we sold $6,000,000 of units, comprised of common stock and warrants, to 18 accredited investors at a price of $6.30 per
unit. Each unit consisted of one share of common stock and 0.75 of a five-year warrant to purchase one share of common stock at an
exercise price of $6.30 per share. Accordingly, we issued a total of 952,383 shares of unregistered common stock and warrants to purchase
714,285 shares of common stock. For its services as sole placement agent for the financing, we paid Roth Capital Partners, LLC (“Roth”) a
cash fee of $285,512 and expense reimbursement of $75,000 and we issued them a five-year warrant to purchase 32,371 shares of common
stock at an exercise price of $6.30 per share. We received $5,591,988 in net proceeds from this financing. The warrant fair value, which
was valued using a binomial lattice model, was recorded to additional paid-in-capital.
F-19
In connection with the financing, Mr. James Joyce, our Chief Executive Officer, Mr. James Frakes, our Chief Financial Officer and Dr.
Chetan Shah, a director of our company, each agreed to waive their right to exercise certain stock options and warrants held by them
representing the right to acquire 402,318 shares of common stock in the aggregate (the “Waivers”). The Waivers were required in order to
make a sufficient number of shares of common stock available for issuance and the Waivers expired when we amended our Articles of
Incorporation on March 31, 2016.
During the three months ended September 30, 2015, we issued an aggregate of 5,292 shares of common stock to an accredited investor
upon the exercise of previously issued warrants. The warrants were exercised on a cashless or “net” basis. Accordingly, we did not receive
any proceeds from such exercises. The cashless exercise of such warrants resulted in the cancellation of previously issued warrants to
purchase an aggregate of 1,744 shares of common stock.
During the three months ended December 31, 2015, we issued an aggregate of 6,757 unregistered shares of common stock to two investors
upon the exercise of previously issued warrants. The warrants were exercised for cash and we received cash proceeds of $14,766 for an
average purchase price of $2.19 per share per the terms of the warrants.
WARRANTS:
During the fiscal year ended March 31, 2017, we issued warrants in connection with three financing arrangements. The first warrant
issuance during the fiscal year was the issuance of 30,000 warrants with an exercise price of $5.00 per share in June 2016. Those 30,000
warrants were issued in connection with the Amendment of November 2014 Investment Documents (see Note 4).
The second warrant issuance was the issuance of 127,575 warrants with an exercise price of $4.50 per share in December 2016. Those
127,575 warrants were issued in connection with the issuance of our December 2016 10% Convertible Notes (see Note 4).
The third warrant issuance during the fiscal year was our March 22, 2017 equity financing with certain institutional investors (the
“Investors”) for the sale of 575,000 shares (the “Common Shares”) of our common stock, par value $0.001 per share (the “Common
Stock”), at a purchase price of $3.50 per share, in a registered direct offering. Concurrently with the sale of the Common Shares, pursuant
to the Purchase Agreement, we also sold in a private placement warrants to purchase 575,000 shares of Common Stock (the “Warrants”).
Subject to certain ownership limitations, the Warrants will be initially exercisable commencing six months from the issuance date at an
exercise price equal to $3.95 per share of Common Stock, subject to adjustments as provided under the terms of the Warrants. The
Warrants will be exercisable for five years from the initial exercise date.
The purchase agreement also covered the exchange of 264,000 warrants issued to the purchasers thereunder in December 2014 for 198,000
shares of our common stock. Further, in exchange for certain waivers given by the purchasers and certain other investors in a private
placement of the Company in June 2015, the warrants issued in such private placement were amended to (i) reduce the exercise price to
$3.95 per share, (ii) make the warrants non-exercisable for a period of six months from the date of amendment, and (iii) extend the term of
those warrants by six months.
We also entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC
(“Rodman”), pursuant to which Rodman agreed to serve as exclusive placement agent for the issuance and sale of the Common Shares and
Warrants. In addition to a cash placement fee equal to 6% of the gross proceeds received by us from the sale of the securities in the
transaction, we also agreed to grant to Rodman or its designees warrants to purchase up to 3% of the aggregate number of shares sold in the
transaction (the “Rodman Warrants”). The Rodman Warrants have substantially the same terms as the Warrants, except that the exercise
price is 125% of $3.50.
Based on the above assumptions, we valued the warrants issued during the fiscal year ended March 31, 2017 as follows:
•
•
•
•
The 30,000 warrants issued in June 2016 were valued at $111,900 and we classified that fair value as equity.
The 127,575 warrants issued in December 2016 were valued at $380,174 and we classified $232,718 of that fair value as debt
discount and the remainder as equity.
The 575,000 warrants issued in March 2017 were valued at $1,493,390 and we classified that fair value as equity.
In connection with our March 2017 financing, we agreed to reduce the exercise price on 547,620 warrants from $6.30 to $3.44. We
valued the change in fair value due to the change in exercise price at $219,048 and classified that fair value as equity.
• Also in connection with our March 2017 financing, we agreed with the investor in that financing to exchange 198,000 shares for the
return and cancellation of 264,000 warrants. We calculated the fair value of those 264,000 warrants at $528,000 and classified the
impact of this share for warrant exchange as equity due to the integral connection with the March 2017 financing.
F-20
A summary of the aggregate warrant activity for the years ended March 31, 2017 and 2016 is presented below:
Fiscal Year Ended March 31,
2017
Weighted
Average
Warrants
Exercise Price Warrants
Outstanding, beginning of year
Granted
Exercised
Cancelled/Forfeited
Outstanding, end of year
Exercisable, end of year
Weighted average estimated fair value of warrants granted
2,164,094 $
749,825 $
(2,660) $
(307,163) $
2,604,096 $
2,604,096 $
$
6.68
4.10
6.25
5.18
3.64
3.64
2.65
2016
Weighted
Average
Exercise Price
6.84
6.30
2.15
2.10
6.68
6.68
5.11
1,430,738 $
746,657 $
(12,049) $
(1,252) $
2,164,094 $
2,164,094 $
$
The following outlines the significant weighted average assumptions used to estimate the fair value of warrants granted utilizing the
Binomial Lattice option pricing model:
Risk free interest rate
Average expected life
Expected volatility
Expected dividends
Year Ended March 31,
2017
0.7% - 1.93%
3.42 – 5.5 years
88.2% - 96.0%
None
2016
1.70%
5 years
98.6%
None
The expected volatility was based on the historic volatility. The expected life of options granted was based on the "simplified method" as
described in the SEC's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical
grants.
The detail of the warrants outstanding and exercisable as of March 31, 2017 is as follows:
Warrants Outstanding
Warrants Exercisable
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise Price
Number
Outstanding
Weighted
Average
Exercise Price
3.78 $
2.77 $
2.37 $
3.67
6.47
12.32
1,860,101 $
705,067 $
32,928 $
2,604,096
3.67
6.47
12.32
Range of
Exercise Prices
$5.00 or Below
$5.20 - $9.00
$9.65 - $15.00
Number
Outstanding
1,860,101
711,067
32,928
2,604,096
STOCK-BASED COMPENSATION:
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan provides for the grant of incentive stock options to our full-time employees (who may also be directors) and
nonstatutory stock options to non-employee directors, consultants, customers, vendors or providers of significant services. The exercise
price of any incentive stock option may not be less than the fair market value of the common stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all classes of our outstanding stock, not be less than 110% of the
fair market value on the date of grant. The exercise price, in the case of any nonstatutory stock option, must not be less than 75% of the fair
market value of the common stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is 10,000 options.
F-21
At March 31, 2016, all of the grants previously made under the 2000 Stock Option Plan had expired and 200 unregistered shares had been
issued under the plan, with 9,800 available for future issuance.
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan, which provides incentives to attract, retain and motivate employees and
directors whose present and potential contributions are important to our success by offering them an opportunity to participate in our future
performance through awards of options, the right to purchase common stock, stock bonuses and stock appreciation rights and other awards.
A total of 70,000 common shares were initially reserved for issuance under the 2010 Stock Incentive Plan.
In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 70,000 common shares issuable under this plan
under the Securities Act, and in July 2012, we filed a registration statement on Form S-8 for the purpose of registering 100,000 common
shares issuable under this plan under the Securities Act.
On January 26, 2016, our Board of Directors approved an amendment to the 2010 Stock Incentive Plan to increase the total number of
shares of common stock reserved for issuance under the plan to 3,170,000 shares, subject to amendment of our Articles of Incorporation to
increase our authorized common stock. On March 29, 2016, we held an annual stockholders meeting, at which our stockholders approved
the Amended 2010 Stock Incentive Plan and an amendment of our Articles of Incorporation to increase our authorized common stock to
30,000,000 shares.
At March 31, 2017, we had 2,241,549 shares available under this plan.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a board compensation program that modifies and supersedes the 2005 Directors
Compensation Program, which was previously in effect. Under the 2012 program, in which only non-employee directors may participate,
an eligible director will receive a grant of $35,000 worth of ten-year options to acquire shares of common stock, with such grant being
valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first
day of the fiscal year. In addition, under this program, eligible directors will receive cash compensation equal to $500 for each committee
meeting attended and $1,000 for each formal board meeting attended.
At March 31, 2017, we had issued 26,757 options under the 2005 program to outside directors and 79,309 options to employee-directors,
21,756 outside directors’ options had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-directors’
options had been forfeited and no options under the 2005 program remained outstanding.
On June 6, 2014, our Board of Directors approved certain changes to the 2012 program. Under this modified program, a new eligible
director will receive an initial grant of $50,000 worth of options to acquire shares of common stock, with such grant being valued at the
exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the
fiscal year. These options will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the
date of grant. In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program
also will receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary of the date
of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The modified 2012 program
also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Audit
Committee member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.
RESTRICTED STOCK UNIT GRANTS TO DIRECTORS AND EXECUTIVE OFFICERS
On August 9, 2016, our Board of Directors (the “Board”) granted RSUs to certain of our officers and directors as set forth below. The
RSUs represent the right to be issued on a future date shares of our common stock for vested RSUs. Our Compensation Committee
recommended the grants based on a compensation assessment provided by a third-party compensation consulting firm engaged by us that
developed a peer group of companies for market assessment and analyzed compensation at such companies.
F-22
The consultant recommended beneficial ownership targets, which we previously disclosed in our Proxy Statement filed on February 23,
2016, in connection with our Annual Meeting of Stockholders held on March 29, 2016. In connection with the Annual Meeting, our
stockholders approved our Amended 2010 Stock Incentive Plan, which included an increase in the number of shares available for grant
under the plan in part to accommodate equity awards recommended by the Compensation Committee, and our stockholders approved our
executive compensation as disclosed in the Proxy Statement pursuant to Item 402 paragraphs (m) through (q) of Regulation S-K as shown
below:
To Mr. James A. Joyce, an aggregate of 634,000 RSUs valued at $6.28 per share, based on the August 9, 2016 closing price of the common
stock. 158,500 of the RSUs are deemed vested upon grant and an additional 39,625 RSUs will vest each quarter beginning on January 1,
2017. This grant is intended to increase Mr. Joyce’s beneficial ownership of our common stock to 9.0%, which target was recommended in
2015 and in June 2016 by the compensation consultant engaged by us. Previously, in 2004, the Board had approved a beneficial ownership
target of 15% for Mr. Joyce. However, Mr. Joyce has agreed to the modified target of 9.0%.
To Mr. Rodney S. Kenley, an aggregate of 52,000 RSUs valued at $6.28 per share, based on the August 9, 2016 closing price of the
common stock. 13,000 of the RSUs are deemed vested upon grant and an additional 3,250 RSUs will vest each quarter beginning on
January 1, 2017.
To Mr. James B. Frakes, an aggregate of 52,000 RSUs valued at $6.28 per share, based on the August 9, 2016 closing price of the common
stock. 13,000 of the RSUs are deemed vested upon grant and an additional 3,250 RSUs will vest each quarter beginning on January 1,
2017.
To each of our non-employee directors, Mr. Franklyn S. Barry, Jr., Mr. Edward G. Broenniman and Dr. Chetan S. Shah, 16,432 RSUs
valued at an aggregate of $105,000, based on the average of the closing prices of the common stock for the five trading days preceding and
including August 9, 2016. These grants represent (a) $70,000 worth of RSUs representing two years of grants under the amended 2012
Non-Employee Directors Compensation Program (the “2012 Program”) because more than two years have elapsed since Messrs. Barry and
Broenniman and Dr. Shah received grants under the program, all of which RSUs are deemed vested upon grant and (b) $35,000 worth of
RSUs representing the grant covering the fiscal year ending March 31, 2017, of which one-quarter were deemed vested upon grant and the
remaining portion vested ratably at September 30, 2016, at December 31, 2016 and at March 31, 2017.
The RSUs were granted under our Amended 2010 Stock Incentive Plan and we recorded expense of $2,076,535 in the fiscal year ended
March 31, 2017 related to the RSU grants.
CHANGES TO 2012 NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM
In July 2012, the Board approved the 2012 Program, which modified and superseded the 2005 Directors Compensation Program that had
been in effect previously. On June 6, 2014, the Board approved certain changes to the 2012 Program, and on August 9, 2016, the Board
approved further modifications to the program. Under the modified 2012 Program, in which only non-employee directors may participate, a
new eligible director will receive an initial grant of $50,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of
Common Stock. RSUs granted under this provision will be valued based on the average of the closing prices of the Common Stock for the
five trading days preceding and including the date of grant and will vest at a rate determined by the Board in its discretion. Options granted
under this provision will be valued at the exercise price, which will be based on the average of the closing prices of the Common Stock for
the five trading days preceding and including the date of grant. Such options will have a term of ten years and will vest at a rate determined
by the Board in its discretion.
At the beginning of each fiscal year, each existing director eligible to participate in the 2012 Program will receive a grant of $35,000 worth
of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued
based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal
year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year) and will vest at a rate
determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on
the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal year (or
preceding and including the date of grant, if such grant is not made on the first day of the fiscal year). Such options will have a term of ten
years and will vest at a rate determined by the Board in its discretion.
In lieu of per meeting fees, under the 2012 Program eligible directors will receive an annual Board retainer fee of $30,000. The modified
2012 Program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair -
$5,000, Nominating Committee Chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and Lead
independent director (currently an open position) - $15,000.
F-23
The RSU grants and the changes to the 2012 Program were approved and recommended by our Compensation Committee prior to approval
by the Board.
RSUs outstanding that have vested and are expected to vest as of March 31, 2017 are as follows:
Vested
Expected to vest
Total
Number of RSUs
46,125
507,375
553,500
During the fiscal year ended March 31, 2017, 36,150 RSUs held by our outside directors were exchanged into the same number of shares
of our common stock. As two of our three outside directors elected to return 40% of their RSU’s in exchange for cash in order to pay their
withholding taxes on the share issuances, 13,146 of the RSUs were cancelled and we paid a total of $75,550 in cash to those two outside
directors.
Also during the fiscal year ended March 31, 2017, 184,500 RSUs held by our executives were exchanged into the same number of shares
of our common stock. Upon vesting, the RSUs held by our executives were net share-settled to cover the required withholding tax and the
remaining amount is converted into an equivalent number of shares of common stock. Total payments for the employees’ tax obligations to
the taxing authorities are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements
had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been
issued as a result of the vesting and did not represent an expense to the Company. As a result of the net share-settlements, 70,786 of the
RSUs were cancelled and we issued a net 113,714 shares to our executives.
STAND-ALONE GRANTS
From time to time our Board of Directors grants common 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.
STOCK OPTION ACTIVITY
There were no stock option grants during the fiscal years ended March 31, 2017 and March 31, 2016. There was no stock option activity
during the fiscal year ended March 31, 2017 other than the expiration of 6,500 stock options during the period.
The following is a summary of the stock options outstanding at March 31, 2017 and 2016 and the changes during the 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
Fiscal Year Ended March 31,
2017
2016
Options
438,547 $
–
–
(6,500) $
432,047 $
414,547 $
Weighted
Average
Exercise Price
10.94
N/A
N/A
7.96
10.98
11.24
Options
501,690 $
– $
– $
(63,143) $
438,547 $
388,414 $
Weighted
Average
Exercise Price
11.00
N/A
N/A
11.45
10.94
11.53
N/A
$
N/A
F-24
The detail of the options outstanding and exercisable as of March 31, 2017 is as follows:
Exercise Prices
$3.80 - $9.50
$12.50
$18.00 - $20.50
Number
Outstanding
184,047
163,000
85,000
432,047
Options Outstanding
Weighted
Average
Remaining
Life (Years)
Weighted
Average
Exercise
Price
6.70 years $
3.39 years $
1.02 years $
6.82
12.50
19.03
Options Exercisable
Weighted
Average
Exercise
Price
6.86
12.50
19.03
Number
Outstanding
166,547 $
163,000 $
85,000 $
414,547
We recorded stock-based compensation expense related to share issuances and to options granted totaling $2,186,309 and $202,844 for the
fiscal years ended March 31, 2017 and 2016, 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, 2017 and 2016.
Our total stock-based compensation for fiscal years ended March 31, 2017 and 2016 included the following:
Vesting of stock options
Total Stock-Based Compensation
Fiscal Year Ended
March 31, 2017 March 31, 2016
202,844
$
202,844
$
2,186,309 $
2,186,309 $
We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual
forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the
forfeiture estimate is changed. The effect of forfeiture adjustments for the fiscal year ended March 31, 2017 was insignificant.
As of March 31, 2017, we had $3,203,208 of remaining unrecognized stock-based compensation expense, which is expected to be
recognized over a weighted average remaining vesting period of 2.62 years.
On March 31, 2017, our stock options had a negative intrinsic value since the closing price on that date of $3.27 per share was below the
weighted average exercise price of our stock options.
6. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Historically, 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. There were no such related party transactions during the fiscal year ended March 31, 2017
except that we had accrued unpaid Board fees of $28,250 owed to our outside directors as of March 31, 2017.
7. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
Accrued interest
Other accrued liabilities
Total other current liabilities
F-25
March 31, 2017 March 31, 2016
74,038
5,391 $
$
62,657
64,076
136,695
69,467 $
$
8. INCOME TAXES
For the years ended March 31, 2017 and 2016, we had no income tax expense due to our net operating losses and 100% deferred tax asset
valuation allowance.
At March 31, 2017 and 2016, we had net deferred tax assets as detailed below. These deferred tax assets are primarily composed of
capitalized research and development costs and tax net operating loss carryforwards. Due to uncertainties surrounding our ability to
generate future taxable income to realize these assets, a 100% valuation has been established to offset the net deferred tax assets.
Significant components of our net deferred tax assets at March 31, 2017 and 2016 are shown below:
Deferred tax assets:
Capitalized research and development
Net operating loss carryforwards
Stock compensation
Total deferred tax assets
Total deferred tax liabilities
Net deferred tax assets
Valuation allowance for deferred tax assets
Net deferred tax assets
YEAR ENDED MARCH 31,
2016
2017
$
3,442,000 $
22,060,000
318,000
25,820,000
3,442,000
20,126,000
–
23,568,000
–
–
25,820,000
(25,820,000)
23,568,000
(23,568,000)
$
– $
–
At March 31, 2017, we had tax net operating loss carryforwards for federal and state purposes approximating $57 million and $45 million,
which begin to expire in the year 2023.
The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate for the years ended March 31,
2017 and 2016 due to the following:
Income taxes (benefit) at federal statutory rate of 34%
State income tax, net of federal benefit
Tax effect on non-deductible expenses and credits
Change in valuation allowance1
2017
2016
$
$
(2,484,000) $
(438,000)
382,000
2,540,000
– $
(1,686,000)
(298,000)
69,000
1,915,000
–
______________
(1) Pursuant to Internal Revenue Code Sections 382, use of our tax net operating loss carryforwards may be limited.
ASC 740, “Income Taxes”, clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements, and
prescribes recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Under ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position
will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosure and transition. Our practice is to recognize interest and/or
penalties related to income tax matters in income tax expense. During the years ended March 31, 2017 and 2016, we did not recognize any
interest or penalties relating to tax matters.
F-26
At and for the years ended March 31, 2017 and 2016, management does not believe the Company has any uncertain tax positions.
Accordingly, there are no unrecognized tax benefits at March 31, 2017 or March 31, 2016.
Our tax returns remain open for examination by the applicable authorities, generally 3 years for federal and 4 years for state. We are
currently not under examination by any taxing authorities.
9. DARPA CONTRACT AND RELATED REVENUE RECOGNITION
As discussed in Note 1, we entered into a contract with DARPA on September 30, 2011. Under the DARPA award, we have been engaged
to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-
injured soldiers. The award from DARPA was a fixed-price contract with potential total payments to us of $6,794,389 over the course of
five years. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of
the contract. Under the terms of the contract, we performed certain incremental work towards the achievement of specific milestones
against which we invoiced the government for fixed payment amounts.
Originally, only the base year (year one of the contract) was effective for the parties; however, DARPA subsequently exercised its option
on the remaining years of the contract. The milestones were comprised of planning, engineering and clinical targets, the achievement of
which in some cases required the participation and contribution of third-party participants under the contract. We commenced work under
the contract in October 2011 and completed the contract in September 2016.
In February 2014, DARPA reduced the scope of our contract in years three through five of the contract. The reduction in scope focused our
research on exosomes, viruses and blood processing instrumentation. This scope reduction reduced the possible payments under the contract
by $858,469 over years three through five.
In the fiscal year ended March 31, 2017, we invoiced the U.S. Government for the final two milestones under our DARPA contract in the
aggregate amount of $387,438. In the fiscal year ended March 31, 2016, we invoiced the U.S. Government for four milestones under our
DARPA contract in the amount of $863,011.
Fiscal Year Ended March 31, 2017
In the fiscal year ended March 31, 2017, we invoiced the U.S. Government for the final two milestones under our DARPA contract in the
aggregate amount of $387,438.
The details of those milestones were as follows:
Milestone 2.6.1.3 - Quantify the degree to which the MERS virus can be extracted from circulation in vitro using miniature Hemopurifiers.
The milestone payment was $193,719. 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 quantified the degree to which the MERS virus can be extracted from circulation
in vitro using miniature Hemopurifiers. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone 2.6.1.4 – Prepare and present Final Report for DARPA. The milestone payment was $193,719. 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 prepared
and presented the Final Report for DARPA. The report was accepted by the contracting officer's representative and the invoice was
submitted thereafter.
Fiscal Year Ended March 31, 2016
During the fiscal year ended March 31, 2016, we invoiced the Defense Advanced Research Projects Agency for four milestones totaling
$863,011. The details of those milestones were as follows:
Milestone M6 – Define Aethlon’s GMP manufacturing process and revise and upgrade Aethlon’s quality procedures and policies to the
current state of the art. The milestone payment was $186,164. Management considers this milestone to be substantive as it was not
dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that defined our GMP manufacturing
process and that we revised and upgraded our quality procedures and policies to the current state of the art for a company of our size. The
report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
F-27
Milestone 2.5.1.1 - Complete Aethlon’s GMP procedure and establish and maintain all GMP documentation for the company. The
milestone payment was $186,164. Management considers this milestone to be substantive as it was not dependent on the passage of time
nor was it based solely on another party's efforts. We demonstrated that we completed our GMP procedures and established and maintained
all GMP documentation for the company. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone 2.5.2.2 – Finish construction and begin delivery of 50 prototype cartridges for testing by the systems integrator. The milestone
payment was $296,964. 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 completed the construction of 50 prototype cartridges and were prepared
to deliver the cartridges to the systems integrator. The report was accepted by the contracting officer's representative and the invoice was
submitted thereafter.
Milestone 2.6.1.1 – System integrator acceptance of the hemofilter device. The milestone payment was $193,719. 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 completed this milestone by confirmation by the systems integrator that it was accepting the hemofilter device as part
of their overall system.
10. SEGMENTS
We operate our businesses principally through two reportable segments: Aethlon, which represents our therapeutic business activities, and
ESI, which represents our diagnostic business activities. Our reportable segments have been determined based on the nature of the potential
products being developed. We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating
results in order to make decisions about resources to be allocated to the ESI segment and to assess its performance.
Aethlon’s revenue is generated primarily from government contracts to date and ESI does not yet have any revenues. We have not included
any allocation of corporate overhead to the ESI segment.
The following tables set forth certain information regarding our segments:
Revenues:
Aethlon
ESI
Total Revenues
Operating Losses:
Aethlon
ESI
Total Operating Loss
Net Losses:
Aethlon
ESI
Net Loss Before Non-Controlling Interests
Cash:
Aethlon
ESI
Total Cash
Total Assets:
Aethlon
ESI
Total Assets
Capital Expenditures:
Aethlon
ESI
Capital Expenditures
Depreciation and Amortization:
Aethlon
ESI
Total Depreciation and Amortization
Interest Expense:
Fiscal Years Ended March 31,
2016
2017
392,073 $
–
392,073 $
886,572
–
886,572
(5,945,293) $
(153,064)
(6,098,357) $
(3,953,402)
(431,432)
(4,384,834)
(7,153,662) $
(153,064)
(7,306,726) $
(4,527,184)
(431,432)
(4,958,616)
1,558,667 $
1,034
1,559,701 $
1,698,249 $
28,119
1,726,368 $
16,433 $
–
16,433 $
22,370 $
10,043
32,413 $
2,114,285
9,452
2,123,737
2,475,686
53,430
2,529,116
9,307
–
9,307
18,943
19,581
38,524
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Aethlon
ESI
Total Interest Expense
$
$
304,330 $
–
304,330 $
573,782
–
573,782
F-28
11. SUBSEQUENT EVENTS
Management has evaluated events subsequent to March 31, 2017 through the date that the accompanying consolidated financial statements
were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or
disclosure in such financial statements.
In April 2017, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993 warrants.
In April 2017, we issued 15,000 shares of restricted common stock at a price of $2.24 per share in payment for digital communications
consulting services valued at $33,600 based on the value of the services provided.
In April 2014, we terminated a previously recorded but unissued share issuance of 68,000 shares under a fully vested restricted stock grant
to our CEO and issued to him 32,674 shares as a net settlement of shares and the Company paid the withholding taxes associated with that
share issuance in return for the cancellation of 35,326 shares. The compensation cost of that restricted stock grant had been fully recorded
over prior fiscal years, therefore no expense was recorded regarding this net issuance.
In April 2017, 46,125 RSUs held by our executives were exchanged into the same number of shares of our common stock. As our
executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share
issuance, 23,655 of the RSUs were cancelled and we issued a net 22,470 shares to our executives.
In the period since March 31, 2017, sold 1,000 shares of common stock under our Common Stock Sales Agreement with H.C. Wainwright.
We raised aggregate net proceeds of $1,903 (net of $63 in commissions to H.C. Wainwright and $133 in other offering expenses) under
this agreement at an average price of $1.90 per share of net proceeds.
In June 2017, we issued options to four of our employees to purchase 34,500 shares of common stock at a price of $1.68 per share, the
closing price on the date of the approval of the option grants by our compensation committee.
In June 2017, we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in
exchange for the cancellation of 77,125 warrants held by those investors. Additionally, we agreed with those investors that they would
extend the expiration dates of convertible notes held by those investors from July 1, 2018 to July 1, 2019 in exchange for the reduction of
the conversion price of those notes from $4.00 per share to $3.00 per share.
12. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
We entered into an employment agreement with our Chairman of the Board (“Chairman”) effective April 1, 1999. The agreement, which is
cancelable by either party upon sixty days’ notice, will be in effect until the Chairman retires or ceases to be employed by us. Under the
terms of the agreement, if the Chairman is terminated he may become eligible to receive a salary continuation payment in the amount of at
least twelve months' base salary, which was increased to $385,000 per year in September 2015.
We entered into an employment agreement with Dr. Richard H. Tullis, Ph. D. (“Tullis”) effective January 10, 2000 as our Chief Science
Officer ("CSO"). Under the terms of the agreement, if Tullis is terminated he may become eligible to receive a salary continuation payment
in the amount of twelve months’ base salary, which is $195,000 per year.
In February 2016, we entered into a part-time consulting agreement with Tullis. Under that agreement, Tullis continued to provide services
under the terms of a consulting agreement with us. In connection with the change in his employment, Tullis resigned as our Vice President.
Under the consulting agreement, Tullis rendered approximately twenty (20) hours per week of such services, for which we paid him a
consulting fee of $10,000 per month. The term of the consulting agreement was for an initial sixty-day period and, unless terminated earlier
by either party, shall automatically extend for additional one-month periods. Either party to the consulting agreement may terminate it upon
30 day’s prior written notice to the other party.
Concurrently with the entry into the consulting agreement, Tullis and the Company mutually agreed to terminate his employment
agreement with us.
F-29
In November 2016, the scope of the consulting agreement was amended to reduce the hours from 20 hours per week to 20 hours per month
with a reduction in monthly consulting fees from the original $10,000 per month to $4,000 per month.
Then in February 2017, the scope of the consulting agreement was further amended to reduce the hours from 20 hours per month to 10
hours per month with a reduction in monthly consulting fees from $4,000 per month to $2,000 per month.
RETENTION AGREEMENTS
On October 16, 2015, following a recommendation of our Compensation Committee, we approved retention bonus grants to three of our
executive officers under a newly established Aethlon Senior Management Retention Program to maintain management stability going
forward. The Board approved a $100,000 retention bonus for Mr. James A. Joyce, our Chief Executive Officer, a $50,000 retention bonus
for Mr. Rodney S. Kenley, our President, and a $50,000 retention bonus for Mr. James B. Frakes, our Chief Financial Officer.
In connection with the bonus granted to Mr. Joyce, we entered into an amendment of Mr. Joyce’s Employment Agreement dated April 1,
1999. Pursuant to the amendment, if within two years of the effective date of the amendment, we terminate Mr. Joyce’s employment with
us for “Cause” (as defined in his employment agreement) or Mr. Joyce terminates his employment with us other than for “Good Reason”
(as defined in his employment agreement), Mr. Joyce must repay in full the amount of the bonus received from us. In the event of his death
or disability or termination by us other than for “Cause” or termination by Mr. Joyce for “Good Reason,” Mr. Joyce will not be required to
repay any portion of the bonus received by him.
In connection with the bonus granted to Mr. Kenley, we entered into an amendment of Mr. Kenley’s Offer Letter dated October 27, 2010.
Pursuant to the amendment, if within two years of the effective date of the amendment, we terminate Mr. Kenley’s employment with us for
“Cause” (as defined in the amendment) or Mr. Kenley terminates his employment with us other than for “Good Reason” (as defined in the
amendment), Mr. Kenley must repay in full the amount of the bonus received from us. In the event of his death or disability or termination
by us other than for “Cause” or termination by Mr. Kenley for “Good Reason,” Mr. Kenley will not be required to repay any portion of the
bonus received by him.
In connection with the bonus granted to Mr. Frakes, we entered into a Retention Bonus Agreement with Mr. Frakes. Pursuant to the
agreement, if within two years of the effective date of the agreement, we terminate Mr. Frakes’ employment with us for “Cause” (as
defined in the agreement) or Mr. Frakes terminates his employment with us other than for “Good Reason” (as defined in the agreement),
Mr. Frakes must repay in full the amount of the bonus received from us. In the event of his death or disability or termination by us other
than for “Cause” or termination by Mr. Frakes for “Good Reason,” Mr. Frakes will not be required to repay any portion of the bonus
received by him.
LEASE COMMITMENTS
We currently rent approximately 2,600 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123
at the rate of $6,054 per month on a four-year lease that expires in January 2019. 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 $4,838 per month on a one-year
lease that expires in November 2016. Our current plans are to renew the lease prior to expiration or to secure alternative lab space in the
San Diego area.
Our Exosome Sciences, Inc. subsidiary previously rented approximately 2,055 square feet of office and laboratory space at 11 Deer Park
Drive, South Brunswick, NJ at the rate of $3,917 per month on a one-year lease that expired in October 2015. In October 2015, Exosome
Sciences, Inc. relocated to a different suite at the same office complex. That new suite was comprised of approximately 541 square feet of
office and laboratory space and is located at 9 Deer Park Drive, South Brunswick, NJ at the rate of $1,352 per month under a month to
month lease basis. In January 2016, we exercised our 30-day notice to terminate the Exosome Sciences’ lease in New Jersey as part of a
consolidation of our laboratory operations in San Diego.
F-30
Rent expense, which is included in general and administrative expenses, approximated $151,000 and $144,000 for the fiscal years ended
March 31, 2017 and 2016, respectively. As of March 31, 2017, our commitments under the lease agreements are as follows:
9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 office lease
$
78,156 $
21,446
11585 Sorrento Valley Road, Suite 109, San Diego, CA 92121 office lease
47,054
–
Fiscal Year Ending
2018
2019
Total Lease Commitments
LEGAL MATTERS
$
125,210 $
21,446
From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated
litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or
injunctions prohibiting us from selling one or more products or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that
period or future periods. We are not presently a party to any pending or threatened legal proceedings.
F-31
Exhibit 10.73
Aethlon Medical, Inc.
2012 Non-Employee Directors Compensation Program
as Modified on August 9, 2016
On August 9, 2016, the Compensation Committee of the Board of Directors (the “Board”) of Aethlon Medical, Inc. (the
“Company”) recommended to the Board that the Company’s 2012 Non-Employee Directors Compensation Program be modified in its
entirety as follows:
A. Restricted Stock Units/Stock Options
1. New Eligible Directors: A new eligible director will receive an initial grant of $50,000 worth of restricted stock units or, at
the discretion of the Board, options to acquire shares of common stock. Restricted stock units granted under this provision
will be valued based on the average of the closing prices of the common stock for the five trading days preceding and
including the date of grant and will vest at a rate determined by the Board in its discretion. Options granted under this
provision will be valued at the exercise price, which will be based on the average of the closing prices of the common stock
for the five trading days preceding and including the date of grant. Such options will have a term of ten years and will vest
at a rate determined by the Board in its discretion.
2. Existing Eligible Directors: At the beginning of each fiscal year, each existing eligible director will receive a grant of
$35,000 worth of restricted stock units or, at the discretion of the Board, options to acquire shares of common stock.
Restricted stock units granted under this provision will be valued based on the average of the closing prices of the common
stock for the five trading days preceding and including the first day of the fiscal year (or preceding and including the date of
grant, if such grant is not made on the first day of the fiscal year) and will vest at a rate determined by the Board in its
discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of
the closing prices of the common stock for the five trading days preceding and including the first day of the fiscal year (or
preceding and including the date of grant, if such grant is not made on the first day of the fiscal year). Such options will
have a term of ten years and will vest at a rate determined by the Board in its discretion.
B. Compensation
1. Eligible Director Annual Retainer: Eligible directors will receive an annual board retainer fee of $30,000.
2. Audit Committee Annual Retainer: Each member of the Audit Committee will receive an annual retainer fee of $4,000,
except for the Chair of the Audit Committee, who will receive an annual retainer of $5,000.
3. Compensation Committee Annual Retainer: Each member of the Compensation Committee will receive an annual retainer
fee of $4,000, except for the Chair of the Compensation Committee, who will receive an annual retainer of $5,000.
4. Lead Independent Director: The Lead Independent Director will receive an annual retainer of $15,000.
The Board unanimously approved the Compensation Committee’s recommendation with the eligible directors abstaining.
1
Aethlon Medical, Inc.
2012 Non-Employee Directors Compensation Program
as Modified on June 5, 2014
On June 5, 2014, the Compensation Committee of the Board of Directors (the “Board”) of Aethlon Medical, Inc. (the “Company”)
recommended to the Board that the Company’s 2012 Non-Employee Directors Compensation Program be modified in its entirety as
follows:
A. Stock Options
1. New Eligible Directors: A new eligible director will receive an initial grant of $50,000 worth of options to acquire shares of
common stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the
common stock for the five trading days preceding the first day of the fiscal year. These options will have a term of ten years
and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant.
2. Existing Eligible Directors: At the beginning of each fiscal year, each existing eligible director will receive a grant of
$35,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based on the
average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year
These options will have a term of ten years and will vest on the first anniversary of the date of grant.
B. Compensation
1. Eligible Director Annual Retainer: Eligible directors will receive an annual board retainer fee of $30,000.
2. Audit Committee Annual Retainer: Each member of the Audit Committee will receive an annual retainer fee of $4,000,
except for the Chair of the Audit Committee, who will receive an annual retainer of $5,000.
3. Compensation Committee Annual Retainer: Each member of the Compensation Committee will receive an annual retainer
fee of $4,000, except for the Chair of the Compensation Committee, who will receive an annual retainer of $5,000.
4. Lead Independent Director: The Lead Independent Director will receive an annual retainer of $15,000.
The Board unanimously approved the Compensation Committee’s recommendation with the eligible directors abstaining.
2
Aethlon Medical, Inc.
2012 Non-Employee Directors Compensation Program
as Adopted on July 24, 2012
On July 24, 2012, the Board of Directors (the “Board”) of Aethlon Medical, Inc. (the “Company”) adopted the Company’s 2012
Non-Employee Directors Compensation Program, which modified in its entirety the Company’s 2005 Directors Compensation Program, as
follows:
A. Stock Options
1.
Existing Eligible Directors: At the beginning of each fiscal year, each existing eligible director will receive a grant of
$35,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based
on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the
fiscal year. These options will have a term of ten years and will vest as follow: $10,000 will vest immediately upon
the date of grant and $20,000 will vest on the first anniversary of the date of grant contingent upon each eligible
director attending not less than 80% of the Board meetings conducted during the ensuing fiscal year.
B. Compensation
1. Board Meetings: Eligible directors will receive $1,000 for each Board meeting attended.
2. Committee Meetings: Eligible directors will receive $500 for each Committee meeting attended.
3
EXHIBIT 10.74
AETHLON MEDICAL, INC.
STOCK UNIT GRANT NOTICE (EXECUTIVE)
(AMENDED 2010 STOCK INCENTIVE PLAN)
Aethlon Medical, Inc. (the “Company”), pursuant to Section 9.2 of the Company's Amended 2010 Stock Incentive Plan (the “Plan”),
hereby awards to Participant Stock Units for the number of shares of the Company's Common Stock ("Stock Units" or the "Award'') set
forth below. The Award is subject to all of the terms and conditions as set forth in this grant notice (this “Stock Unit Grant Notice”) and in
the Plan and the Award Agreement (the “Stock Unit Agreement”), both of which are attached hereto and incorporated herein in their
entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event
of any conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Stock Units/Shares:
James A. Joyce
August 9, 2016
August 9, 2016
634,000 Stock Units
Vesting Schedule:
The Stock Units shall vest as follows: 158,500 of the Stock Units are deemed vested upon the Date of Grant and
the remaining 475,500 Stock Units will vest in twelve equal installments of 39,625 Stock Units on the last day of
the first month of each fiscal quarter beginning with the fiscal quarter commencing on January 1, 2017.
Issuance Schedule:
Subject to any change on an adjustment of shares pursuant to Sections 3.2 and 20.1 of the Plan, one share of
Common Stock will be issued for each Stock Unit that vests at the time set forth in Section 6 of the Award
Agreement. Notwithstanding the provisions in Section 6 of the Award Agreement, any Stock Units that vest on or
prior to December 31, 2016 shall be issued on January 31, 2017.
Change in Control
Acceleration:
See Section 2 of the Award Agreement.
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Stock Unit Grant Notice,
the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common
Stock pursuant to the Award specified above and supersedes all prior oral and written agreements on the terms of this Award.
By accepting this Award, Participant acknowledges having received and read this Stock Unit Grant Notice, the Award Agreement and the
Plan and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third
party designated by the Company.
1
AETHLON MEDICAL, INC.
PARTICIPANT
By: /s/ James B. Frakes
Signature
Title: Chief Financial Officer
Date: 8-29-16
/s/ James A. Joyce
Signature
Date: 8/29/16
ATTACHMENTS: Stock Unit Agreement and Amended 2010 Stock Incentive Plan
2
ATTACHMENT I
AETHLON MEDICAL, INC.
STOCK UNIT AGREEMENT
(AMENDED 2010 STOCK INCENTIVE PLAN)
Pursuant to the Stock Unit Grant Notice (the “Grant Notice”) and this Stock Unit Agreement (the “Agreement”), Aethlon
Medical, Inc. (the “Company”) has awarded you (“Participant”) Stock Units (“Stock Units” or the “Award”) pursuant to the Company's
Amended 2010 Stock Incentive Plan (the “Plan”) for the number of Stock Units indicated in the Grant Notice. Capitalized terms not
explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The terms of your Stock
Units, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE A WARD. This Award represents the right to be issued on a future date one (1) share of Common
Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the
Grant Notice. This Award was granted in consideration of your past or expected future services to the Company or its affiliates.
2. VESTING AND ACCELERATION.
(a) Subject to the limitations contained herein, your Stock Units will vest, if at all, in accordance with the vesting
schedule provided in the Grant Notice, provided that vesting will cease upon your Termination. Upon such Termination, the Stock Units
that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or
interest in or to the underlying shares of Common Stock subject to the forfeited Stock Units.
(b) Notwithstanding the foregoing, in the event that a successor corporation refuses to assume or substitute
Awards following a corporate transaction (as described in Section 20.1 of the Plan), the vesting of any then-unvested Stock Units shall
accelerate in full such that 100% of the then unvested Stock Units will become vested upon a corporate transaction described in Section
20.1 of the Plan.
3. NUMBER OF SHARES. The number of Stock Units/shares subject to your Award may be adjusted from time to time
pursuant to Sections 3 and 20 of the Plan. Any additional Stock Units, shares, cash or other property that becomes subject to the Award
pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on
transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award. Notwithstanding
the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this
Section 3. Fractions of a share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such
fraction of a share or will be rounded up to the nearest whole share, as determined by the Committee.
3
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares
of Common Stock underlying the Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined
that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other
applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such
receipt would not be in material compliance with such laws and regulations.
5. NON-TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not
transfer, pledge, sell or otherwise dispose of the Stock Units or the shares issuable in respect of your Stock Units, except as expressly
provided in this Section 5. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan.
The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Stock Units will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any
Common Stock or other consideration that vested but was not issued before your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer
your Stock Units or the shares of Common Stock issued upon vesting of your Stock Units pursuant to a domestic relations order or marital
settlement agreement that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the
proposed terms of any division of this Award with the Company prior to finalizing the domestic relations order or marital settlement
agreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domestic
relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulations Section
1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the withholding obligations set forth
in this Agreement, and subject to the provisions contained in the Grant Notice, in the event one or more Stock Units vests, the Company
shall issue to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment
under Section 3 above). The issuance date determined by this paragraph is referred to as the “Original Issuance Date.”
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
following business day. In addition, if:
4
(i) the Original· Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company's then-effective policy on trading in Company securities, or (2) on a date
when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market, and
either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to pay your Withholding Taxes in cash,
(ii)
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original
Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company's
Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date
occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that
complies with Treasury Regulations Section1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the
applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a "substantial risk of
forfeiture" within the meaning of Treasury Regulations Section 1.409A-1(d).
by the Company.
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock
dividend or other distribution that does not result from an adjustment of shares as described in Section 3 of the Plan.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by
which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You
further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents
to be executed in the future in connection with your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of
the shares subject to your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this
Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an affiliate;
(ii) constitute any promise or commitment by the Company or an affiliate regarding the fact or nature of future positions, future work
assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this
Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
5
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its
businesses or affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a reorganization could result
in your Termination, or the termination of affiliate status of your employer and the loss of benefits available to you under this Agreement,
including but not limited to, the termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions
contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found
implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company's right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares underlying your
Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize
any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate that arise in
connection with your Award (the “Withholding Taxes”). Additionally, the Company or any affiliate may, in its sole discretion, satisfy all
or any portion of the Withholding Taxes obligation relating to your Stock Units by any of the following means or by a combination of
such means: (i) withholding from any compensation otherwise payable to you by the Company; (ii) causing you to tender a cash payment;
(iii) permitting or requiring you to enter into a "same day sale" commitment, if applicable, with a broker-dealer that is a member of the
Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered
in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the
proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its affiliates; or (iv) withholding shares of Common
Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value
(measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes;
provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the
Company's required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section I 6(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Committee.
shall have no obligation to deliver to you any Common Stock.
(b) Unless the tax withholding obligations of the Company and/or any affiliate are satisfied, the Company
(c) In the event the Company's obligation to withhold arises prior to the delivery to you of Common Stock or it
is determined after the delivery of Common Stock to you that the amount of the Company's withholding obligation was greater than the
amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold
the proper amount.
6
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this
Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby
advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing
the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not
the Company) shall be responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated
by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you shall be considered
an unsecured creditor of the Company with respect to the Company's obligation, if any, to issue shares or other property pursuant to this
Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant
to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other
person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each of the other parties
hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or
delivery via electronic means, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually
received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such
other address(es) as a party may designate by ten (10) days' advance written notice to each of the other parties hereto:
COMPANY:
Aethlon Medical, Inc.
Attn: Stock Administrator
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any
one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by, the
Company’s successors and assigns.
7
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of
Common Stock or other securities of the Company held by you, for a period of 180 days following the effective date of a registration
statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to
facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule r regulation (the “Lock-Up
Period”). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the
underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop transfer instructions with respect to your shares of Common Stock until the end of such Lock-
Up Period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be
bound by this Section 16(c). The underwriters of the Company's stock are intended third party beneficiaries of this Section 16(c) and will
have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to
governmental agencies or national securities exchanges as may be required.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all
or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is
subject to recoupment in accordance with The Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing
regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by
applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate
employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement
with the Company.
8
18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Stock Units subject to this Agreement or the
stock underlying the Stock Units upon issuance to you shall' not be included as compensation, earnings, salaries, or other similar terms used
when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any affiliate except as such
plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee
benefit plans of the Company or any affiliate.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of
the State of California without regard to that state's conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing the information
required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt
of the Company's insider trading policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed
by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by
the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to
you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights
hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written
notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a
result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such
change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the “short-term
deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you
are a "Specified Employee" (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your "separation from
service" (within the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition thereunder), then
the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six (6) months
thereafter will not be made on i the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six (6) months
and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original
vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition
of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to
constitute a "separate payment" for purposes of Treasury Regulation Section 1.409A-2(b)(2).
This Stock Unit Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant
of the Stock Unit Grant Notice to which it is attached.
*****
9
ATTACHMENT II
2010 AMENDED STOCK INCENTIVE PLAN
10
EXHIBIT 10.75
AETHLON MEDICAL, INC.
STOCK UNIT GRANT NOTICE (EXECUTIVE)
(AMENDED 2010 STOCK INCENTIVE PLAN)
Aethlon Medical, Inc. (the “Company”), pursuant to Section 9.2 of the Company's Amended 2010 Stock Incentive Plan (the “Plan”),
hereby awards to Participant Stock Units for the number of shares of the Company's Common Stock ("Stock Units" or the "Award'') set
forth below. The Award is subject to all of the terms and conditions as set forth in this grant notice (this “Stock Unit Grant Notice”) and in
the Plan and the Award Agreement (the “Stock Unit Agreement”), both of which are attached hereto and incorporated herein in their
entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event
of any conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Stock Units/Shares:
Rodney S. Kenley
August 9, 2016
August 9, 2016
52,000 Stock Units
Vesting Schedule:
The Stock Units shall vest as follows: 13,000 of the Stock Units are deemed vested upon the Date of Grant and
the remaining 39,000 Stock Units will vest in twelve equal installments of 3,250 Stock Units on the last day of the
first month of each fiscal quarter beginning with the fiscal quarter commencing on January 1, 2017.
Issuance Schedule:
Subject to any change on an adjustment of shares pursuant to Sections 3.2 and 20.1 of the Plan, one share of
Common Stock will be issued for each Stock Unit that vests at the time set forth in Section 6 of the Award
Agreement. Notwithstanding the provisions in Section 6 of the Award Agreement, any Stock Units that vest on or
prior to December 31, 2016 shall be issued on January 31, 2017.
Change in Control
Acceleration:
See Section 2 of the Award Agreement.
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Stock Unit Grant Notice,
the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common
Stock pursuant to the Award specified above and supersedes all prior oral and written agreements on the terms of this Award.
By accepting this Award, Participant acknowledges having received and read this Stock Unit Grant Notice, the Award Agreement and the
Plan and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third
party designated by the Company.
1
AETHLON MEDICAL, INC.
PARTICIPANT
By: /s/ James B. Frakes
Signature
Title: Chief Financial Officer
Date: 8-29-16
/s/ Rodney S. Kenley
Signature
Date: 8-29-16
ATTACHMENTS: Stock Unit Agreement and Amended 2010 Stock Incentive Plan
2
ATTACHMENT I
AETHLON MEDICAL, INC.
STOCK UNIT AGREEMENT
(AMENDED 2010 STOCK INCENTIVE PLAN)
Pursuant to the Stock Unit Grant Notice (the “Grant Notice”) and this Stock Unit Agreement (the “Agreement”), Aethlon
Medical, Inc. (the “Company”) has awarded you (“Participant”) Stock Units (“Stock Units” or the “Award”) pursuant to the Company's
Amended 2010 Stock Incentive Plan (the “Plan”) for the number of Stock Units indicated in the Grant Notice. Capitalized terms not
explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The terms of your Stock
Units, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE A WARD. This Award represents the right to be issued on a future date one (1) share of Common
Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the
Grant Notice. This Award was granted in consideration of your past or expected future services to the Company or its affiliates.
2. VESTING AND ACCELERATION.
(a) Subject to the limitations contained herein, your Stock Units will vest, if at all, in accordance with the vesting
schedule provided in the Grant Notice, provided that vesting will cease upon your Termination. Upon such Termination, the Stock Units
that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or
interest in or to the underlying shares of Common Stock subject to the forfeited Stock Units.
(b) Notwithstanding the foregoing, in the event that a successor corporation refuses to assume or substitute
Awards following a corporate transaction (as described in Section 20.1 of the Plan), the vesting of any then-unvested Stock Units shall
accelerate in full such that 100% of the then unvested Stock Units will become vested upon a corporate transaction described in Section
20.1 of the Plan.
3. NUMBER OF SHARES. The number of Stock Units/shares subject to your Award may be adjusted from time to time
pursuant to Sections 3 and 20 of the Plan. Any additional Stock Units, shares, cash or other property that becomes subject to the Award
pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on
transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award. Notwithstanding
the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this
Section 3. Fractions of a share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such
fraction of a share or will be rounded up to the nearest whole share, as determined by the Committee.
3
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares
of Common Stock underlying the Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined
that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other
applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such
receipt would not be in material compliance with such laws and regulations.
5. NON-TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not
transfer, pledge, sell or otherwise dispose of the Stock Units or the shares issuable in respect of your Stock Units, except as expressly
provided in this Section 5. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan.
The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Stock Units will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any
Common Stock or other consideration that vested but was not issued before your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer
your Stock Units or the shares of Common Stock issued upon vesting of your Stock Units pursuant to a domestic relations order or marital
settlement agreement that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the
proposed terms of any division of this Award with the Company prior to finalizing the domestic relations order or marital settlement
agreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domestic
relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulations Section
1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the withholding obligations set forth
in this Agreement, and subject to the provisions contained in the Grant Notice, in the event one or more Stock Units vests, the Company
shall issue to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment
under Section 3 above). The issuance date determined by this paragraph is referred to as the “Original Issuance Date.”
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
following business day. In addition, if:
4
(i) the Original· Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company's then-effective policy on trading in Company securities, or (2) on a date
when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market, and
either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to pay your Withholding Taxes in cash,
(ii)
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original
Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company's
Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date
occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that
complies with Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the
applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a "substantial risk of
forfeiture" within the meaning of Treasury Regulations Section 1.409A-1(d).
by the Company.
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock
dividend or other distribution that does not result from an adjustment of shares as described in Section 3 of the Plan.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by
which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You
further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents
to be executed in the future in connection with your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of
the shares subject to your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this
Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an affiliate;
(ii) constitute any promise or commitment by the Company or an affiliate regarding the fact or nature of future positions, future work
assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this
Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
5
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its
businesses or affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a reorganization could result
in your Termination, or the termination of affiliate status of your employer and the loss of benefits available to you under this Agreement,
including but not limited to, the termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions
contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found
implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company's right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares underlying your
Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize
any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate that arise in
connection with your Award (the “Withholding Taxes”). Additionally, the Company or any affiliate may, in its sole discretion, satisfy all
or any portion of the Withholding Taxes obligation relating to your Stock Units by any of the following means or by a combination of
such means: (i) withholding from any compensation otherwise payable to you by the Company; (ii) causing you to tender a cash payment;
(iii) permitting or requiring you to enter into a "same day sale" commitment, if applicable, with a broker-dealer that is a member of the
Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered
in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the
proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its affiliates; or (iv) withholding shares of Common
Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value
(measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes;
provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the
Company's required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section I 6(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Committee.
shall have no obligation to deliver to you any Common Stock.
(b) Unless the tax withholding obligations of the Company and/or any affiliate are satisfied, the Company
(c) In the event the Company's obligation to withhold arises prior to the delivery to you of Common Stock or it
is determined after the delivery of Common Stock to you that the amount of the Company's withholding obligation was greater than the
amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold
the proper amount.
6
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this
Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby
advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing
the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not
the Company) shall be responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated
by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you shall be considered
an unsecured creditor of the Company with respect to the Company's obligation, if any, to issue shares or other property pursuant to this
Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant
to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other
person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each of the other parties
hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or
delivery via electronic means, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually
received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such
other address(es) as a party may designate by ten (10) days' advance written notice to each of the other parties hereto:
COMPANY:
Aethlon Medical, Inc.
Attn: Stock Administrator
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any
one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by, the
Company’s successors and assigns.
7
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of
Common Stock or other securities of the Company held by you, for a period of 180 days following the effective date of a registration
statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to
facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule r regulation (the “Lock-Up
Period”). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the
underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop transfer instructions with respect to your shares of Common Stock until the end of such Lock-
Up Period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be
bound by this Section 16(c). The underwriters of the Company's stock are intended third party beneficiaries of this Section 16(c) and will
have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to
governmental agencies or national securities exchanges as may be required.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all
or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is
subject to recoupment in accordance with The Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing
regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by
applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate
employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement
with the Company.
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18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Stock Units subject to this Agreement or the
stock underlying the Stock Units upon issuance to you shall' not be included as compensation, earnings, salaries, or other similar terms used
when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any affiliate except as such
plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee
benefit plans of the Company or any affiliate.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of
the State of California without regard to that state's conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing the information
required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt
of the Company's insider trading policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed
by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by
the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to
you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights
hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written
notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a
result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such
change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the “short-term
deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you
are a "Specified Employee" (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your "separation from
service" (within the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition thereunder), then
the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six (6) months
thereafter will not be made on i the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six (6) months
and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original
vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition
of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to
constitute a "separate payment" for purposes of Treasury Regulation Section 1.409A-2(b)(2).
This Stock Unit Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant
of the Stock Unit Grant Notice to which it is attached.
*****
9
ATTACHMENT II
2010 AMENDED STOCK INCENTIVE PLAN
10
EXHIBIT 10.76
AETHLON MEDICAL, INC.
STOCK UNIT GRANT NOTICE (EXECUTIVE)
(AMENDED 2010 STOCK INCENTIVE PLAN)
Aethlon Medical, Inc. (the “Company”), pursuant to Section 9.2 of the Company's Amended 2010 Stock Incentive Plan (the “Plan”),
hereby awards to Participant Stock Units for the number of shares of the Company's Common Stock ("Stock Units" or the "Award'') set
forth below. The Award is subject to all of the terms and conditions as set forth in this grant notice (this “Stock Unit Grant Notice”) and in
the Plan and the Award Agreement (the “Stock Unit Agreement”), both of which are attached hereto and incorporated herein in their
entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event
of any conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Stock Units/Shares:
James B. Frakes
August 9, 2016
August 9, 2016
52,000 Stock Units
Vesting Schedule:
The Stock Units shall vest as follows: 13,000 of the Stock Units are deemed vested upon the Date of Grant and
the remaining 39,000 Stock Units will vest in twelve equal installments of 3,250 Stock Units on the last day of the
first month of each fiscal quarter beginning with the fiscal quarter commencing on January 1, 2017.
Issuance Schedule:
Subject to any change on an adjustment of shares pursuant to Sections 3.2 and 20.1 of the Plan, one share of
Common Stock will be issued for each Stock Unit that vests at the time set forth in Section 6 of the Award
Agreement. Notwithstanding the provisions in Section 6 of the Award Agreement, any Stock Units that vest on or
prior to December 31, 2016 shall be issued on January 31, 2017.
Change in Control
Acceleration:
See Section 2 of the Award Agreement.
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Stock Unit Grant Notice,
the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common
Stock pursuant to the Award specified above and supersedes all prior oral and written agreements on the terms of this Award.
By accepting this Award, Participant acknowledges having received and read this Stock Unit Grant Notice, the Award Agreement and the
Plan and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third
party designated by the Company.
1
AETHLON MEDICAL, INC.
PARTICIPANT
By: /s/ James A Joyce
Signature
/s/ James B. Frakes
Signature
Title: Chairman, CEO
Date: 8/29/16
Date: 8-29-16
ATTACHMENTS: Stock Unit Agreement and Amended 2010 Stock Incentive Plan
2
ATTACHMENT I
AETHLON MEDICAL, INC.
STOCK UNIT AGREEMENT
(AMENDED 2010 STOCK INCENTIVE PLAN)
Pursuant to the Stock Unit Grant Notice (the “Grant Notice”) and this Stock Unit Agreement (the “Agreement”), Aethlon
Medical, Inc. (the “Company”) has awarded you (“Participant”) Stock Units (“Stock Units” or the “Award”) pursuant to the Company's
Amended 2010 Stock Incentive Plan (the “Plan”) for the number of Stock Units indicated in the Grant Notice. Capitalized terms not
explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The terms of your Stock
Units, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE A WARD. This Award represents the right to be issued on a future date one (1) share of Common
Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the
Grant Notice. This Award was granted in consideration of your past or expected future services to the Company or its affiliates.
2. VESTING AND ACCELERATION.
(a) Subject to the limitations contained herein, your Stock Units will vest, if at all, in accordance with the vesting
schedule provided in the Grant Notice, provided that vesting will cease upon your Termination. Upon such Termination, the Stock Units
that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or
interest in or to the underlying shares of Common Stock subject to the forfeited Stock Units.
(b) Notwithstanding the foregoing, in the event that a successor corporation refuses to assume or substitute
Awards following a corporate transaction (as described in Section 20.1 of the Plan), the vesting of any then-unvested Stock Units shall
accelerate in full such that 100% of the then unvested Stock Units will become vested upon a corporate transaction described in Section
20.1 of the Plan.
3. NUMBER OF SHARES. The number of Stock Units/shares subject to your Award may be adjusted from time to time
pursuant to Sections 3 and 20 of the Plan. Any additional Stock Units, shares, cash or other property that becomes subject to the Award
pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on
transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award. Notwithstanding
the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this
Section 3. Fractions of a share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such
fraction of a share or will be rounded up to the nearest whole share, as determined by the Committee.
3
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares
of Common Stock underlying the Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined
that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other
applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such
receipt would not be in material compliance with such laws and regulations.
5. NON-TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not
transfer, pledge, sell or otherwise dispose of the Stock Units or the shares issuable in respect of your Stock Units, except as expressly
provided in this Section 5. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan.
The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Stock Units will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any
Common Stock or other consideration that vested but was not issued before your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer
your Stock Units or the shares of Common Stock issued upon vesting of your Stock Units pursuant to a domestic relations order or marital
settlement agreement that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the
proposed terms of any division of this Award with the Company prior to finalizing the domestic relations order or marital settlement
agreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domestic
relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulations Section
1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the withholding obligations set forth
in this Agreement, and subject to the provisions contained in the Grant Notice, in the event one or more Stock Units vests, the Company
shall issue to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment
under Section 3 above). The issuance date determined by this paragraph is referred to as the “Original Issuance Date.”
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
following business day. In addition, if:
4
(i) the Original· Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company's then-effective policy on trading in Company securities, or (2) on a date
when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market, and
either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to pay your Withholding Taxes in cash,
(ii)
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original
Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company's
Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date
occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that
complies with Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the
applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a "substantial risk of
forfeiture" within the meaning of Treasury Regulations Section 1.409A-1(d).
by the Company.
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock
dividend or other distribution that does not result from an adjustment of shares as described in Section 3 of the Plan.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by
which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You
further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents
to be executed in the future in connection with your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of
the shares subject to your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this
Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an affiliate;
(ii) constitute any promise or commitment by the Company or an affiliate regarding the fact or nature of future positions, future work
assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this
Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
5
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its
businesses or affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a reorganization could result
in your Termination, or the termination of affiliate status of your employer and the loss of benefits available to you under this Agreement,
including but not limited to, the termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions
contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found
implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company's right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares underlying your
Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize
any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate that arise in
connection with your Award (the “Withholding Taxes”). Additionally, the Company or any affiliate may, in its sole discretion, satisfy all
or any portion of the Withholding Taxes obligation relating to your Stock Units by any of the following means or by a combination of
such means: (i) withholding from any compensation otherwise payable to you by the Company; (ii) causing you to tender a cash payment;
(iii) permitting or requiring you to enter into a "same day sale" commitment, if applicable, with a broker-dealer that is a member of the
Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered
in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the
proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its affiliates; or (iv) withholding shares of Common
Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value
(measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes;
provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the
Company's required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section I 6(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Committee.
shall have no obligation to deliver to you any Common Stock.
(b) Unless the tax withholding obligations of the Company and/or any affiliate are satisfied, the Company
(c) In the event the Company's obligation to withhold arises prior to the delivery to you of Common Stock or it
is determined after the delivery of Common Stock to you that the amount of the Company's withholding obligation was greater than the
amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold
the proper amount.
6
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this
Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby
advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing
the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not
the Company) shall be responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated
by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you shall be considered
an unsecured creditor of the Company with respect to the Company's obligation, if any, to issue shares or other property pursuant to this
Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant
to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other
person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each of the other parties
hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or
delivery via electronic means, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually
received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such
other address(es) as a party may designate by ten (10) days' advance written notice to each of the other parties hereto:
COMPANY:
Aethlon Medical, Inc.
Attn: Stock Administrator
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any
one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by, the
Company’s successors and assigns.
7
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of
Common Stock or other securities of the Company held by you, for a period of 180 days following the effective date of a registration
statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to
facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule r regulation (the “Lock-Up
Period”). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the
underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop transfer instructions with respect to your shares of Common Stock until the end of such Lock-
Up Period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be
bound by this Section 16(c). The underwriters of the Company's stock are intended third party beneficiaries of this Section 16(c) and will
have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to
governmental agencies or national securities exchanges as may be required.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all
or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is
subject to recoupment in accordance with The Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing
regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by
applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate
employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement
with the Company.
8
18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Stock Units subject to this Agreement or the
stock underlying the Stock Units upon issuance to you shall' not be included as compensation, earnings, salaries, or other similar terms used
when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any affiliate except as such
plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee
benefit plans of the Company or any affiliate.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of
the State of California without regard to that state's conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing the information
required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt
of the Company's insider trading policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed
by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by
the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to
you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights
hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written
notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a
result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such
change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the “short-term
deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you
are a "Specified Employee" (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your "separation from
service" (within the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition thereunder), then
the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six (6) months
thereafter will not be made on i the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six (6) months
and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original
vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition
of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to
constitute a "separate payment" for purposes of Treasury Regulation Section 1.409A-2(b)(2).
This Stock Unit Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant
of the Stock Unit Grant Notice to which it is attached.
*****
9
ATTACHMENT II
2010 AMENDED STOCK INCENTIVE PLAN
10
EXHIBIT 10.77
AETHLON MEDICAL, INC.
STOCK UNIT GRANT NOTICE (EXECUTIVE)
(AMENDED 2010 STOCK INCENTIVE PLAN)
Aethlon Medical, Inc. (the “Company”), pursuant to Section 9.2 of the Company's Amended 2010 Stock Incentive Plan (the “Plan”),
hereby awards to Participant Stock Units for the number of shares of the Company's Common Stock ("Stock Units" or the "Award'') set
forth below. The Award is subject to all of the terms and conditions as set forth in this grant notice (this “Stock Unit Grant Notice”) and in
the Plan and the Award Agreement (the “Stock Unit Agreement”), both of which are attached hereto and incorporated herein in their
entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event
of any conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Stock Units/Shares:
Franklyn S. Barry, Jr.
August 9, 2016
August 9, 2016
16,432 Stock Units
Vesting Schedule:
The Stock Units shall vest as follows: 12,328 of the Stock Units are deemed vested upon the Date of Grant and
the remaining 4,104 Stock Units will vest in three equal installments of 1,368 Stock Units on each of September
30, 2016, December 31, 2016 and March 31, 2017.
Issuance Schedule:
Subject to any change on an adjustment of shares pursuant to Sections 3.2 and 20.1 of the Plan, one share of
Common Stock will be issued for each Stock Unit that vests at the time set forth in Section 6 of the Award
Agreement.
Change in Control
Acceleration:
See Section 2 of the Award Agreement.
Election Regarding Stock Sale Arrangement: At the time of executing this Grant Notice, Participant must make an election whether to
sell to the Company a portion of the shares of Common Stock underlying the Stock Units on the applicable vesting date, as described in
11(d) of the Agreement. If one of the options below is not selected, then the Company will assume that the Participant did not elect to
participate in the stock sale arrangement described in Section 11(d) of the Agreement. Please chose one of the following options:
[_]
[X]
I DO NOT wish to participate in the stock sale arrangement described in Section 11(d) of the Agreement. (This will be
the default choice if no box is checked.)
I DO wish to participate in the stock sale arrangement described in Section 11(d) of the Agreement with respect to __
percent of the shares covered by the Award. (The default percentage if no percentage is filled in will be 40%)
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Stock Unit Grant Notice,
the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common
Stock pursuant to the Award specified above and supersedes all prior oral and written agreements on the terms of this Award.
By accepting this Award, Participant acknowledges having received and read this Stock Unit Grant Notice, the Award Agreement and the
Plan and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third
party designated by the Company.
1
AETHLON MEDICAL, INC.
PARTICIPANT
By: /s/ James B. Frakes
Signature
Title: Chief Financial Officer
Date: 8-29-16
/s/ Franklyn S. Barry, Jr.
Signature
Date: August 25, 2016
ATTACHMENTS: Stock Unit Agreement and Amended 2010 Stock Incentive Plan
2
ATTACHMENT I
AETHLON MEDICAL, INC.
STOCK UNIT AGREEMENT
(AMENDED 2010 STOCK INCENTIVE PLAN)
Pursuant to the Stock Unit Grant Notice (the “Grant Notice”) and this Stock Unit Agreement (the “Agreement”), Aethlon
Medical, Inc. (the “Company”) has awarded you (“Participant”) Stock Units (“Stock Units” or the “Award”) pursuant to the Company's
Amended 2010 Stock Incentive Plan (the “Plan”) for the number of Stock Units indicated in the Grant Notice. Capitalized terms not
explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The terms of your Stock
Units, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE A WARD. This Award represents the right to be issued on a future date one (1) share of Common
Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the
Grant Notice. This Award was granted in consideration of your past or expected future services to the Company or its affiliates.
2. VESTING AND ACCELERATION.
(a) Subject to the limitations contained herein, your Stock Units will vest, if at all, in accordance with the vesting
schedule provided in the Grant Notice, provided that vesting will cease upon your Termination. Upon such Termination, the Stock Units
that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or
interest in or to the underlying shares of Common Stock subject to the forfeited Stock Units.
(b) Notwithstanding the foregoing, in the event that a successor corporation refuses to assume or substitute
Awards following a corporate transaction (as described in Section 20.1 of the Plan), the vesting of any then-unvested Stock Units shall
accelerate in full such that 100% of the then unvested Stock Units will become vested upon a corporate transaction described in Section
20.1 of the Plan.
3. NUMBER OF SHARES. The number of Stock Units/shares subject to your Award may be adjusted from time to time
pursuant to Sections 3 and 20 of the Plan. Any additional Stock Units, shares, cash or other property that becomes subject to the Award
pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on
transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award. Notwithstanding
the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this
Section 3. Fractions of a share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such
fraction of a share or will be rounded up to the nearest whole share, as determined by the Committee.
3
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares
of Common Stock underlying the Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined
that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other
applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such
receipt would not be in material compliance with such laws and regulations.
5. NON-TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not
transfer, pledge, sell or otherwise dispose of the Stock Units or the shares issuable in respect of your Stock Units, except as expressly
provided in this Section 5. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan.
The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Stock Units will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any
Common Stock or other consideration that vested but was not issued before your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer
your Stock Units or the shares of Common Stock issued upon vesting of your Stock Units pursuant to a domestic relations order or marital
settlement agreement that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the
proposed terms of any division of this Award with the Company prior to finalizing the domestic relations order or marital settlement
agreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domestic
relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulations Section
1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the withholding obligations set forth
in this Agreement, and subject to the provisions contained in the Grant Notice, in the event one or more Stock Units vests, the Company
shall issue to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment
under Section 3 above). The issuance date determined by this paragraph is referred to as the “Original Issuance Date.”
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
following business day. In addition, if:
4
(i) the Original· Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company's then-effective policy on trading in Company securities, or (2) on a date
when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market, and
either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to pay your Withholding Taxes in cash,
(ii)
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original
Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company's
Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date
occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that
complies with Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the
applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a "substantial risk of
forfeiture" within the meaning of Treasury Regulations Section 1.409A-1(d).
by the Company.
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock
dividend or other distribution that does not result from an adjustment of shares as described in Section 3 of the Plan.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by
which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You
further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents
to be executed in the future in connection with your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of
the shares subject to your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this
Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an affiliate;
(ii) constitute any promise or commitment by the Company or an affiliate regarding the fact or nature of future positions, future work
assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this
Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
5
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its
businesses or affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a reorganization could result
in your Termination, or the termination of affiliate status of your employer and the loss of benefits available to you under this Agreement,
including but not limited to, the termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions
contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found
implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company's right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares underlying your
Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize
any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate that arise in
connection with your Award (the “Withholding Taxes”). Additionally, the Company or any affiliate may, in its sole discretion, satisfy all
or any portion of the Withholding Taxes obligation relating to your Stock Units by any of the following means or by a combination of
such means: (i) withholding from any compensation otherwise payable to you by the Company; (ii) causing you to tender a cash payment;
(iii) permitting or requiring you to enter into a "same day sale" commitment, if applicable, with a broker-dealer that is a member of the
Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered
in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the
proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its affiliates; or (iv) withholding shares of Common
Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value
(measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes;
provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the
Company's required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section I 6(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Committee.
shall have no obligation to deliver to you any Common Stock.
(b) Unless the tax withholding obligations of the Company and/or any affiliate are satisfied, the Company
(c) In the event the Company's obligation to withhold arises prior to the delivery to you of Common Stock or it
is determined after the delivery of Common Stock to you that the amount of the Company's withholding obligation was greater than the
amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold
the proper amount.
6
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this
Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby
advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing
the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not
the Company) shall be responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated
by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you shall be considered
an unsecured creditor of the Company with respect to the Company's obligation, if any, to issue shares or other property pursuant to this
Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant
to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other
person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each of the other parties
hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or
delivery via electronic means, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually
received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such
other address(es) as a party may designate by ten (10) days' advance written notice to each of the other parties hereto:
COMPANY:
Aethlon Medical, Inc.
Attn: Stock Administrator
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any
one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by, the
Company’s successors and assigns.
7
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of
Common Stock or other securities of the Company held by you, for a period of 180 days following the effective date of a registration
statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to
facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule r regulation (the “Lock-Up
Period”). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the
underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop transfer instructions with respect to your shares of Common Stock until the end of such Lock-
Up Period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be
bound by this Section 16(c). The underwriters of the Company's stock are intended third party beneficiaries of this Section 16(c) and will
have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to
governmental agencies or national securities exchanges as may be required.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all
or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is
subject to recoupment in accordance with The Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing
regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by
applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate
employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement
with the Company.
8
18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Stock Units subject to this Agreement or the
stock underlying the Stock Units upon issuance to you shall' not be included as compensation, earnings, salaries, or other similar terms used
when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any affiliate except as such
plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee
benefit plans of the Company or any affiliate.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of
the State of California without regard to that state's conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing the information
required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt
of the Company's insider trading policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed
by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by
the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to
you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights
hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written
notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a
result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such
change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the “short-term
deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you
are a "Specified Employee" (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your "separation from
service" (within the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition thereunder), then
the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six (6) months
thereafter will not be made on i the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six (6) months
and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original
vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition
of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to
constitute a "separate payment" for purposes of Treasury Regulation Section 1.409A-2(b)(2).
This Stock Unit Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant
of the Stock Unit Grant Notice to which it is attached.
*****
9
ATTACHMENT II
2010 AMENDED STOCK INCENTIVE PLAN
10
EXHIBIT 10.78
AETHLON MEDICAL, INC.
STOCK UNIT GRANT NOTICE (EXECUTIVE)
(AMENDED 2010 STOCK INCENTIVE PLAN)
Aethlon Medical, Inc. (the “Company”), pursuant to Section 9.2 of the Company's Amended 2010 Stock Incentive Plan (the “Plan”),
hereby awards to Participant Stock Units for the number of shares of the Company's Common Stock ("Stock Units" or the "Award'') set
forth below. The Award is subject to all of the terms and conditions as set forth in this grant notice (this “Stock Unit Grant Notice”) and in
the Plan and the Award Agreement (the “Stock Unit Agreement”), both of which are attached hereto and incorporated herein in their
entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event
of any conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Stock Units/Shares:
Edward G. Broenniman
August 9, 2016
August 9, 2016
16,432 Stock Units
Vesting Schedule:
The Stock Units shall vest as follows: 12,328 of the Stock Units are deemed vested upon the Date of Grant and
the remaining 4,104 Stock Units will vest in three equal installments of 1,368 Stock Units on each of September
30, 2016, December 31, 2016 and March 31, 2017.
Issuance Schedule:
Subject to any change on an adjustment of shares pursuant to Sections 3.2 and 20.1 of the Plan, one share of
Common Stock will be issued for each Stock Unit that vests at the time set forth in Section 6 of the Award
Agreement.
Change in Control
Acceleration:
See Section 2 of the Award Agreement.
Election Regarding Stock Sale Arrangement: At the time of executing this Grant Notice, Participant must make an election whether to
sell to the Company a portion of the shares of Common Stock underlying the Stock Units on the applicable vesting date, as described in
11(d) of the Agreement. If one of the options below is not selected, then the Company will assume that the Participant did not elect to
participate in the stock sale arrangement described in Section 11(d) of the Agreement. Please chose one of the following options:
[_]
[X]
I DO NOT wish to participate in the stock sale arrangement described in Section 11(d) of the Agreement. (This will be
the default choice if no box is checked.)
I DO wish to participate in the stock sale arrangement described in Section 11(d) of the Agreement with respect to __
percent of the shares covered by the Award. (The default percentage if no percentage is filled in will be 40%)
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Stock Unit Grant Notice,
the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common
Stock pursuant to the Award specified above and supersedes all prior oral and written agreements on the terms of this Award.
By accepting this Award, Participant acknowledges having received and read this Stock Unit Grant Notice, the Award Agreement and the
Plan and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third
party designated by the Company.
1
AETHLON MEDICAL, INC.
PARTICIPANT
By: /s/ James B. Frakes
Signature
Title: Chief Financial Officer
Date: 8-29-16
/s/ Edward G. Broenniman
Signature
Date: 8-27-16
ATTACHMENTS: Stock Unit Agreement and Amended 2010 Stock Incentive Plan
2
ATTACHMENT I
AETHLON MEDICAL, INC.
STOCK UNIT AGREEMENT
(AMENDED 2010 STOCK INCENTIVE PLAN)
Pursuant to the Stock Unit Grant Notice (the “Grant Notice”) and this Stock Unit Agreement (the “Agreement”), Aethlon
Medical, Inc. (the “Company”) has awarded you (“Participant”) Stock Units (“Stock Units” or the “Award”) pursuant to the Company's
Amended 2010 Stock Incentive Plan (the “Plan”) for the number of Stock Units indicated in the Grant Notice. Capitalized terms not
explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The terms of your Stock
Units, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE A WARD. This Award represents the right to be issued on a future date one (1) share of Common
Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the
Grant Notice. This Award was granted in consideration of your past or expected future services to the Company or its affiliates.
2. VESTING AND ACCELERATION.
(a) Subject to the limitations contained herein, your Stock Units will vest, if at all, in accordance with the vesting
schedule provided in the Grant Notice, provided that vesting will cease upon your Termination. Upon such Termination, the Stock Units
that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or
interest in or to the underlying shares of Common Stock subject to the forfeited Stock Units.
(b) Notwithstanding the foregoing, in the event that a successor corporation refuses to assume or substitute
Awards following a corporate transaction (as described in Section 20.1 of the Plan), the vesting of any then-unvested Stock Units shall
accelerate in full such that 100% of the then unvested Stock Units will become vested upon a corporate transaction described in Section
20.1 of the Plan.
3. NUMBER OF SHARES. The number of Stock Units/shares subject to your Award may be adjusted from time to time
pursuant to Sections 3 and 20 of the Plan. Any additional Stock Units, shares, cash or other property that becomes subject to the Award
pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on
transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award. Notwithstanding
the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this
Section 3. Fractions of a share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such
fraction of a share or will be rounded up to the nearest whole share, as determined by the Committee.
3
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares
of Common Stock underlying the Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined
that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other
applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such
receipt would not be in material compliance with such laws and regulations.
5. NON-TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not
transfer, pledge, sell or otherwise dispose of the Stock Units or the shares issuable in respect of your Stock Units, except as expressly
provided in this Section 5. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan.
The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Stock Units will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any
Common Stock or other consideration that vested but was not issued before your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer
your Stock Units or the shares of Common Stock issued upon vesting of your Stock Units pursuant to a domestic relations order or marital
settlement agreement that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the
proposed terms of any division of this Award with the Company prior to finalizing the domestic relations order or marital settlement
agreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domestic
relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulations Section
1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the withholding obligations set forth
in this Agreement, and subject to the provisions contained in the Grant Notice, in the event one or more Stock Units vests, the Company
shall issue to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment
under Section 3 above). The issuance date determined by this paragraph is referred to as the “Original Issuance Date.”
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
following business day. In addition, if:
4
(i) the Original· Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company's then-effective policy on trading in Company securities, or (2) on a date
when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market, and
either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to pay your Withholding Taxes in cash,
(ii)
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original
Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company's
Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date
occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that
complies with Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the
applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a "substantial risk of
forfeiture" within the meaning of Treasury Regulations Section 1.409A-1(d).
by the Company.
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock
dividend or other distribution that does not result from an adjustment of shares as described in Section 3 of the Plan.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by
which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You
further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents
to be executed in the future in connection with your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of
the shares subject to your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this
Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an affiliate;
(ii) constitute any promise or commitment by the Company or an affiliate regarding the fact or nature of future positions, future work
assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this
Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
5
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its
businesses or affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a reorganization could result
in your Termination, or the termination of affiliate status of your employer and the loss of benefits available to you under this Agreement,
including but not limited to, the termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions
contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found
implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company's right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares underlying your
Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize
any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate that arise in
connection with your Award (the “Withholding Taxes”). Additionally, the Company or any affiliate may, in its sole discretion, satisfy all
or any portion of the Withholding Taxes obligation relating to your Stock Units by any of the following means or by a combination of
such means: (i) withholding from any compensation otherwise payable to you by the Company; (ii) causing you to tender a cash payment;
(iii) permitting or requiring you to enter into a "same day sale" commitment, if applicable, with a broker-dealer that is a member of the
Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered
in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the
proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its affiliates; or (iv) withholding shares of Common
Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value
(measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes;
provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the
Company's required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section I 6(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Committee.
shall have no obligation to deliver to you any Common Stock.
(b) Unless the tax withholding obligations of the Company and/or any affiliate are satisfied, the Company
(c) In the event the Company's obligation to withhold arises prior to the delivery to you of Common Stock or it
is determined after the delivery of Common Stock to you that the amount of the Company's withholding obligation was greater than the
amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold
the proper amount.
6
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this
Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby
advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing
the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not
the Company) shall be responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated
by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you shall be considered
an unsecured creditor of the Company with respect to the Company's obligation, if any, to issue shares or other property pursuant to this
Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant
to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other
person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each of the other parties
hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or
delivery via electronic means, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually
received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such
other address(es) as a party may designate by ten (10) days' advance written notice to each of the other parties hereto:
COMPANY:
Aethlon Medical, Inc.
Attn: Stock Administrator
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any
one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by, the
Company’s successors and assigns.
7
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of
Common Stock or other securities of the Company held by you, for a period of 180 days following the effective date of a registration
statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to
facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule r regulation (the “Lock-Up
Period”). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the
underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop transfer instructions with respect to your shares of Common Stock until the end of such Lock-
Up Period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be
bound by this Section 16(c). The underwriters of the Company's stock are intended third party beneficiaries of this Section 16(c) and will
have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to
governmental agencies or national securities exchanges as may be required.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all
or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is
subject to recoupment in accordance with The Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing
regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by
applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate
employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement
with the Company.
8
18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Stock Units subject to this Agreement or the
stock underlying the Stock Units upon issuance to you shall' not be included as compensation, earnings, salaries, or other similar terms used
when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any affiliate except as such
plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee
benefit plans of the Company or any affiliate.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of
the State of California without regard to that state's conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing the information
required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt
of the Company's insider trading policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed
by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by
the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to
you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights
hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written
notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a
result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such
change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the “short-term
deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you
are a "Specified Employee" (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your "separation from
service" (within the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition thereunder), then
the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six (6) months
thereafter will not be made on i the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six (6) months
and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original
vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition
of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to
constitute a "separate payment" for purposes of Treasury Regulation Section 1.409A-2(b)(2).
This Stock Unit Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant
of the Stock Unit Grant Notice to which it is attached.
*****
9
ATTACHMENT II
2010 AMENDED STOCK INCENTIVE PLAN
10
EXHIBIT 10.79
AETHLON MEDICAL, INC.
STOCK UNIT GRANT NOTICE (EXECUTIVE)
(AMENDED 2010 STOCK INCENTIVE PLAN)
Aethlon Medical, Inc. (the “Company”), pursuant to Section 9.2 of the Company's Amended 2010 Stock Incentive Plan (the “Plan”),
hereby awards to Participant Stock Units for the number of shares of the Company's Common Stock ("Stock Units" or the "Award'') set
forth below. The Award is subject to all of the terms and conditions as set forth in this grant notice (this “Stock Unit Grant Notice”) and in
the Plan and the Award Agreement (the “Stock Unit Agreement”), both of which are attached hereto and incorporated herein in their
entirety. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Plan or the Award Agreement. In the event
of any conflict between the terms in the Award and the Plan, the terms of the Plan shall control.
Participant:
Date of Grant:
Vesting Commencement Date:
Number of Stock Units/Shares:
Chetan S. Shah, MD
August 9, 2016
August 9, 2016
16,432 Stock Units
Vesting Schedule:
The Stock Units shall vest as follows: 12,328 of the Stock Units are deemed vested upon the Date of Grant and
the remaining 4,104 Stock Units will vest in three equal installments of 1,368 Stock Units on each of September
30, 2016, December 31, 2016 and March 31, 2017.
Issuance Schedule:
Subject to any change on an adjustment of shares pursuant to Sections 3.2 and 20.1 of the Plan, one share of
Common Stock will be issued for each Stock Unit that vests at the time set forth in Section 6 of the Award
Agreement.
Change in Control
Acceleration:
See Section 2 of the Award Agreement.
Election Regarding Stock Sale Arrangement: At the time of executing this Grant Notice, Participant must make an election whether to
sell to the Company a portion of the shares of Common Stock underlying the Stock Units on the applicable vesting date, as described in
11(d) of the Agreement. If one of the options below is not selected, then the Company will assume that the Participant did not elect to
participate in the stock sale arrangement described in Section 11(d) of the Agreement. Please chose one of the following options:
[X]
[_]
I DO NOT wish to participate in the stock sale arrangement described in Section 11(d) of the Agreement. (This will be
the default choice if no box is checked.)
I DO wish to participate in the stock sale arrangement described in Section 11(d) of the Agreement with respect to __
percent of the shares covered by the Award. (The default percentage if no percentage is filled in will be 40%)
Additional Terms/Acknowledgements: Participant acknowledges receipt of, and understands and agrees to, this Stock Unit Grant Notice,
the Award Agreement and the Plan. Participant further acknowledges that as of the Date of Grant, this Stock Unit Grant Notice, the Award
Agreement and the Plan set forth the entire understanding between Participant and the Company regarding the acquisition of the Common
Stock pursuant to the Award specified above and supersedes all prior oral and written agreements on the terms of this Award.
By accepting this Award, Participant acknowledges having received and read this Stock Unit Grant Notice, the Award Agreement and the
Plan and agrees to all of the terms and conditions set forth in these documents. Participant consents to receive Plan documents by electronic
delivery and to participate in the Plan through an on-line or electronic system established and maintained by the Company or another third
party designated by the Company.
1
AETHLON MEDICAL, INC.
PARTICIPANT
By: /s/ James B. Frakes
Signature
Title: Chief Financial Officer
Date: 8-29-16
/s/ Chetan S. Shah
Signature
Date: 8/26/16
ATTACHMENTS: Stock Unit Agreement and Amended 2010 Stock Incentive Plan
2
ATTACHMENT I
AETHLON MEDICAL, INC.
STOCK UNIT AGREEMENT
(AMENDED 2010 STOCK INCENTIVE PLAN)
Pursuant to the Stock Unit Grant Notice (the “Grant Notice”) and this Stock Unit Agreement (the “Agreement”), Aethlon
Medical, Inc. (the “Company”) has awarded you (“Participant”) Stock Units (“Stock Units” or the “Award”) pursuant to the Company's
Amended 2010 Stock Incentive Plan (the “Plan”) for the number of Stock Units indicated in the Grant Notice. Capitalized terms not
explicitly defined in this Agreement or the Grant Notice shall have the same meanings given to them in the Plan. The terms of your Stock
Units, in addition to those set forth in the Grant Notice, are as follows.
1. GRANT OF THE A WARD. This Award represents the right to be issued on a future date one (1) share of Common
Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment under Section 3 below) as indicated in the
Grant Notice. This Award was granted in consideration of your past or expected future services to the Company or its affiliates.
2. VESTING AND ACCELERATION.
(a) Subject to the limitations contained herein, your Stock Units will vest, if at all, in accordance with the vesting
schedule provided in the Grant Notice, provided that vesting will cease upon your Termination. Upon such Termination, the Stock Units
that were not vested on the date of such termination will be forfeited at no cost to the Company and you will have no further right, title or
interest in or to the underlying shares of Common Stock subject to the forfeited Stock Units.
(b) Notwithstanding the foregoing, in the event that a successor corporation refuses to assume or substitute
Awards following a corporate transaction (as described in Section 20.1 of the Plan), the vesting of any then-unvested Stock Units shall
accelerate in full such that 100% of the then unvested Stock Units will become vested upon a corporate transaction described in Section
20.1 of the Plan.
3. NUMBER OF SHARES. The number of Stock Units/shares subject to your Award may be adjusted from time to time
pursuant to Sections 3 and 20 of the Plan. Any additional Stock Units, shares, cash or other property that becomes subject to the Award
pursuant to this Section 3, if any, shall be subject, in a manner determined by the Board, to the same forfeiture restrictions, restrictions on
transferability, and time and manner of delivery as applicable to the other Stock Units and shares covered by your Award. Notwithstanding
the provisions of this Section 3, no fractional shares or rights for fractional shares of Common Stock shall be created pursuant to this
Section 3. Fractions of a share will not be issued but will either be replaced by a cash payment equal to the Fair Market Value of such
fraction of a share or will be rounded up to the nearest whole share, as determined by the Committee.
3
4. SECURITIES LAW COMPLIANCE. You may not be issued any Common Stock under your Award unless the shares
of Common Stock underlying the Stock Units are either (i) then registered under the Securities Act, or (ii) the Company has determined
that such issuance would be exempt from the registration requirements of the Securities Act. Your Award must also comply with other
applicable laws and regulations governing the Award, and you shall not receive such Common Stock if the Company determines that such
receipt would not be in material compliance with such laws and regulations.
5. NON-TRANSFERABILITY. Prior to the time that shares of Common Stock have been delivered to you, you may not
transfer, pledge, sell or otherwise dispose of the Stock Units or the shares issuable in respect of your Stock Units, except as expressly
provided in this Section 5. For example, you may not use shares that may be issued in respect of your Stock Units as security for a loan.
The restrictions on transfer set forth herein will lapse upon delivery to you of shares in respect of your vested Stock Units.
(a) Death. Your Award is transferable by will and by the laws of descent and distribution. At your death, vesting of
your Stock Units will cease and your executor or administrator of your estate shall be entitled to receive, on behalf of your estate, any
Common Stock or other consideration that vested but was not issued before your death.
(b) Domestic Relations Orders. Upon receiving written permission from the Board or its duly authorized designee,
and provided that you and the designated transferee enter into transfer and other agreements required by the Company, you may transfer
your Stock Units or the shares of Common Stock issued upon vesting of your Stock Units pursuant to a domestic relations order or marital
settlement agreement that contains the information required by the Company to effectuate the transfer. You are encouraged to discuss the
proposed terms of any division of this Award with the Company prior to finalizing the domestic relations order or marital settlement
agreement to verify that you may make such transfer, and if so, to help ensure the required information is contained within the domestic
relations order or marital settlement agreement.
6. DATE OF ISSUANCE.
(a) The issuance of shares in respect of the Stock Units is intended to comply with Treasury Regulations Section
1.409A-1(b)(4) and will be construed and administered in such a manner. Subject to the satisfaction of the withholding obligations set forth
in this Agreement, and subject to the provisions contained in the Grant Notice, in the event one or more Stock Units vests, the Company
shall issue to you one (1) share of Common Stock for each Stock Unit that vests on the applicable vesting date(s) (subject to any adjustment
under Section 3 above). The issuance date determined by this paragraph is referred to as the “Original Issuance Date.”
(b) If the Original Issuance Date falls on a date that is not a business day, delivery shall instead occur on the next
following business day. In addition, if:
4
(i) the Original· Issuance Date does not occur (1) during an “open window period” applicable to you, as
determined by the Company in accordance with the Company's then-effective policy on trading in Company securities, or (2) on a date
when you are otherwise permitted to sell shares of Common Stock on an established stock exchange or stock market, and
either (1) Withholding Taxes do not apply, or (2) the Company decides, prior to the Original
Issuance Date, (A) not to satisfy the Withholding Taxes by withholding shares of Common Stock from the shares otherwise due, on the
Original Issuance Date, to you under this Award, and (B) not to permit you to pay your Withholding Taxes in cash,
(ii)
then the shares that would otherwise be issued to you on the Original Issuance Date will not be delivered on such Original
Issuance Date and will instead be delivered on the first business day when you are not prohibited from selling shares of the Company's
Common Stock in the open public market, but in no event later than December 31 of the calendar year in which the Original Issuance Date
occurs (that is, the last day of your taxable year in which the Original Issuance Date occurs), or, if and only if permitted in a manner that
complies with Treasury Regulations Section 1.409A-1(b)(4), no later than the date that is the 15th day of the third calendar month of the
applicable year following the year in which the shares of Common Stock under this Award are no longer subject to a "substantial risk of
forfeiture" within the meaning of Treasury Regulations Section 1.409A-1(d).
by the Company.
(c) The form of delivery (e.g., a stock certificate or electronic entry evidencing such shares) shall be determined
7. DIVIDENDS. You shall receive no benefit or adjustment to your Award with respect to any cash dividend, stock
dividend or other distribution that does not result from an adjustment of shares as described in Section 3 of the Plan.
8. RESTRICTIVE LEGENDS. The shares of Common Stock issued under your Award shall be endorsed with appropriate
legends as determined by the Company.
9. EXECUTION OF DOCUMENTS. You hereby acknowledge and agree that the manner selected by the Company by
which you indicate your consent to your Grant Notice is also deemed to be your execution of your Grant Notice and of this Agreement. You
further agree that such manner of indicating consent may be relied upon as your signature for establishing your execution of any documents
to be executed in the future in connection with your Award.
10. AWARD NOT A SERVICE CONTRACT.
(a) Nothing in this Agreement (including, but not limited to, the vesting of your Stock Units or the issuance of
the shares subject to your Stock Units), the Plan or any covenant of good faith and fair dealing that may be found implicit in this
Agreement or the Plan shall: (i) confer upon you any right to continue in the employ of, or affiliation with, the Company or an affiliate;
(ii) constitute any promise or commitment by the Company or an affiliate regarding the fact or nature of future positions, future work
assignments, future compensation or any other term or condition of employment or affiliation; (iii) confer any right or benefit under this
Agreement or the Plan unless such right or benefit has specifically accrued under the terms of this Agreement or Plan; or (iv) deprive the
Company of the right to terminate you at will and without regard to any future vesting opportunity that you may have.
5
(b) The Company has the right to reorganize, sell, spin-out or otherwise restructure one or more of its
businesses or affiliates at any time or from time to time, as it deems appropriate (a “reorganization”). Such a reorganization could result
in your Termination, or the termination of affiliate status of your employer and the loss of benefits available to you under this Agreement,
including but not limited to, the termination of the right to continue vesting in the Award. This Agreement, the Plan, the transactions
contemplated hereunder and the vesting schedule set forth herein or any covenant of good faith and fair dealing that may be found
implicit in any of them do not constitute an express or implied promise of continued engagement as an employee or consultant for the
term of this Agreement, for any period, or at all, and shall not interfere in any way with the Company's right to conduct a reorganization.
11. WITHHOLDING OBLIGATIONS.
(a) On each vesting date, and on or before the time you receive a distribution of the shares underlying your
Stock Units, and at any other time as reasonably requested by the Company in accordance with applicable tax laws, you hereby authorize
any required withholding from the Common Stock issuable to you and/or otherwise agree to make adequate provision in cash for any
sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or any affiliate that arise in
connection with your Award (the “Withholding Taxes”). Additionally, the Company or any affiliate may, in its sole discretion, satisfy all
or any portion of the Withholding Taxes obligation relating to your Stock Units by any of the following means or by a combination of
such means: (i) withholding from any compensation otherwise payable to you by the Company; (ii) causing you to tender a cash payment;
(iii) permitting or requiring you to enter into a "same day sale" commitment, if applicable, with a broker-dealer that is a member of the
Financial Industry Regulatory Authority (a “FINRA Dealer”) whereby you irrevocably elect to sell a portion of the shares to be delivered
in connection with your Stock Units to satisfy the Withholding Taxes and whereby the FINRA Dealer irrevocably commits to forward the
proceeds necessary to satisfy the Withholding Taxes directly to the Company and/or its affiliates; or (iv) withholding shares of Common
Stock from the shares of Common Stock issued or otherwise issuable to you in connection with the Award with a Fair Market Value
(measured as of the date shares of Common Stock are issued to pursuant to Section 6) equal to the amount of such Withholding Taxes;
provided, however, that the number of such shares of Common Stock so withheld will not exceed the amount necessary to satisfy the
Company's required tax withholding obligations using the minimum statutory withholding rates for federal, state, local and foreign tax
purposes, including payroll taxes, that are applicable to supplemental taxable income; and provided, further, that to the extent necessary to
qualify for an exemption from application of Section I 6(b) of the Exchange Act, if applicable, such share withholding procedure will be
subject to the express prior approval of the Committee.
shall have no obligation to deliver to you any Common Stock.
(b) Unless the tax withholding obligations of the Company and/or any affiliate are satisfied, the Company
(c) In the event the Company's obligation to withhold arises prior to the delivery to you of Common Stock or it
is determined after the delivery of Common Stock to you that the amount of the Company's withholding obligation was greater than the
amount withheld by the Company, you agree to indemnify and hold the Company harmless from any failure by the Company to withhold
the proper amount.
6
12. TAX CONSEQUENCES. The Company has no duty or obligation to minimize the tax consequences to you of this
Award and shall not be liable to you for any adverse tax consequences to you arising in connection with this Award. You are hereby
advised to consult with your own personal tax, financial and/or legal advisors regarding the tax consequences of this Award and by signing
the Grant Notice, you have agreed that you have done so or knowingly and voluntarily declined to do so. You understand that you (and not
the Company) shall be responsible for your own tax liability that may arise as a result of this investment or the transactions contemplated
by this Agreement.
13. UNSECURED OBLIGATION. Your Award is unfunded, and as a holder of vested Stock Units, you shall be considered
an unsecured creditor of the Company with respect to the Company's obligation, if any, to issue shares or other property pursuant to this
Agreement. You shall not have voting or any other rights as a stockholder of the Company with respect to the shares to be issued pursuant
to this Agreement until such shares are issued to you pursuant to Section 6 of this Agreement. Upon such issuance, you will obtain full
voting and other rights as a stockholder of the Company. Nothing contained in this Agreement, and no action taken pursuant to its
provisions, shall create or be construed to create a trust of any kind or a fiduciary relationship between you and the Company or any other
person.
14. NOTICES. Any notice or request required or permitted hereunder shall be given in writing to each of the other parties
hereto and shall be deemed effectively given on the earlier of (i) the date of personal delivery, including delivery by express courier, or
delivery via electronic means, or (ii) the date that is five (5) days after deposit in the United States Post Office (whether or not actually
received by the addressee), by registered or certified mail with postage and fees prepaid, addressed at the following addresses, or at such
other address(es) as a party may designate by ten (10) days' advance written notice to each of the other parties hereto:
COMPANY:
Aethlon Medical, Inc.
Attn: Stock Administrator
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123
PARTICIPANT:
Your address as on file with the Company
at the time notice is given
15. HEADINGS. The headings of the Sections in this Agreement are inserted for convenience only and shall not be deemed to
constitute a part of this Agreement or to affect the meaning of this Agreement.
16. MISCELLANEOUS.
(a) The rights and obligations of the Company under your Award shall be transferable by the Company to any
one or more persons or entities, and all covenants and agreements hereunder shall inure to the benefit of, and be enforceable by, the
Company’s successors and assigns.
7
determination of the Company to carry out the purposes or intent of your Award.
(b) You agree upon request to execute any further documents or instruments necessary or desirable in the sole
(c) You agree that you will not sell, dispose of, transfer, make any short sale of, grant any option for the
purchase of, or enter into any hedging or similar transaction with the same economic effect as a sale with respect to any shares of
Common Stock or other securities of the Company held by you, for a period of 180 days following the effective date of a registration
statement of the Company filed under the Securities Act or such longer period as the underwriters or the Company will request to
facilitate compliance with FINRA Rule 2711 or NYSE Member Rule 472 or any successor or similar rule r regulation (the “Lock-Up
Period”). You further agree to execute and deliver such other agreements as may be reasonably requested by the Company or the
underwriters that are consistent with the foregoing or that are necessary to give further effect thereto. In order to enforce the foregoing
covenant, the Company may impose stop transfer instructions with respect to your shares of Common Stock until the end of such Lock-
Up Period. You also agree that any transferee of any shares of Common Stock (or other securities) of the Company held by you will be
bound by this Section 16(c). The underwriters of the Company's stock are intended third party beneficiaries of this Section 16(c) and will
have the right, power and authority to enforce the provisions hereof as though they were a party hereto.
obtain the advice of counsel prior to executing and accepting your Award and fully understand all provisions of your Award.
(d) You acknowledge and agree that you have reviewed your Award in its entirety, have had an opportunity to
governmental agencies or national securities exchanges as may be required.
(e) This Agreement shall be subject to all applicable laws, rules, and regulations, and to such approvals by any
(f) All obligations of the Company under the Plan and this Agreement shall be binding on any successor to the
Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all
or substantially all of the business and/or assets of the Company.
17. GOVERNING PLAN DOCUMENT. Your Award is subject to all the provisions of the Plan, the provisions of which are
hereby made a part of your Award, and is further subject to all interpretations, amendments, rules and regulations which may from time to
time be promulgated and adopted pursuant to the Plan. Your Award (and any compensation paid or shares issued under your Award) is
subject to recoupment in accordance with The Dodd-Frank Wall Street Reform and Consumer Protection Act and any implementing
regulations thereunder, any clawback policy adopted by the Company and any compensation recovery policy otherwise required by
applicable law. No recovery of compensation under such a clawback policy will be an event giving rise to a right to voluntarily terminate
employment upon a resignation for “good reason,” or for a “constructive termination” or any similar term under any plan of or agreement
with the Company.
8
18. EFFECT ON OTHER EMPLOYEE BENEFIT PLANS. The value of the Stock Units subject to this Agreement or the
stock underlying the Stock Units upon issuance to you shall' not be included as compensation, earnings, salaries, or other similar terms used
when calculating benefits under any employee benefit plan (other than the Plan) sponsored by the Company or any affiliate except as such
plan otherwise expressly provides. The Company expressly reserves its rights to amend, modify, or terminate any or all of the employee
benefit plans of the Company or any affiliate.
19. CHOICE OF LAW. The interpretation, performance and enforcement of this Agreement shall be governed by the law of
the State of California without regard to that state's conflicts of laws rules.
20. SEVERABILITY. If all or any part of this Agreement or the Plan is declared by any court or governmental authority to be
unlawful or invalid, such unlawfulness or invalidity shall not invalidate any portion of this Agreement or the Plan not declared to be
unlawful or invalid. Any Section of this Agreement (or part of such a Section) so declared to be unlawful or invalid shall, if possible, be
construed in a manner which will give effect to the terms of such Section or part of a Section to the fullest extent possible while remaining
lawful and valid.
21. OTHER DOCUMENTS. You acknowledge receipt of and the right to receive a document providing the information
required by Rule 428(b)(1) promulgated under the Securities Act, which includes the Plan prospectus. In addition, you acknowledge receipt
of the Company's insider trading policy.
22. AMENDMENT. This Agreement may not be modified, amended or terminated except by an instrument in writing, signed
by you and by a duly authorized representative of the Company. Notwithstanding the foregoing, this Agreement may be amended solely by
the Board by a writing which specifically states that it is amending this Agreement, so long as a copy of such amendment is delivered to
you, and provided that, except as otherwise expressly provided in the Plan, no such amendment materially adversely affecting your rights
hereunder may be made without your written consent. Without limiting the foregoing, the Board reserves the right to change, by written
notice to you, the provisions of this Agreement in any way it may deem necessary or advisable to carry out the purpose of the Award as a
result of any change in applicable laws or regulations or any future law, regulation, ruling, or judicial decision, provided that any such
change shall be applicable only to rights relating to that portion of the Award which is then subject to restrictions as provided herein.
23. COMPLIANCE WITH SECTION 409A OF THE CODE. This Award is intended to comply with the “short-term
deferral” rule set forth in Treasury Regulation Section 1.409A-1(b)(4). Notwithstanding the foregoing, if it is determined that the Award
fails to satisfy the requirements of the short-term deferral rule and is otherwise deferred compensation subject to Section 409A, and if you
are a "Specified Employee" (within the meaning set forth in Section 409A(a)(2)(B)(i) of the Code) as of the date of your "separation from
service" (within the meaning of Treasury Regulation Section 1.409A-1(h) and without regard to any alternative definition thereunder), then
the issuance of any shares that would otherwise be made upon the date of the separation from service or within the first six (6) months
thereafter will not be made on i the originally scheduled date(s) and will instead be issued in a lump sum on the date that is six (6) months
and one day after the date of the separation from service, with the balance of the shares issued thereafter in accordance with the original
vesting and issuance schedule set forth above, but if and only if such delay in the issuance of the shares is necessary to avoid the imposition
of adverse taxation on you in respect of the shares under Section 409A of the Code. Each installment of shares that vests is intended to
constitute a "separate payment" for purposes of Treasury Regulation Section 1.409A-2(b)(2).
This Stock Unit Agreement shall be deemed to be signed by the Company and the Participant upon the signing by the Participant
of the Stock Unit Grant Notice to which it is attached.
*****
9
ATTACHMENT II
2010 AMENDED STOCK INCENTIVE PLAN
10
Exhibit 10.80
FOURTH AMENDMENT TO STANDARD INDUSTRIAL NET LEASE
(Sorrento Business Complex)
THIS FOURTH AMENDMENT TO STANDARD INDUSTRIAL NET LEASE (“ Fourth Amendment”) is
made and entered into as of the 5th day of October, 2016, by and between AGP SORRENTO BUSINESS
COMPLEX, L.P., a Delaware limited partnership (“ Landlord”) and AETHLON MEDICAL, INC., a Nevada
corporation (“Tenant”).
R E C I T A L S:
A. Sorrento Business Complex, a California limited partnership (“Original Landlord”) and Tenant
entered into that certain Standard Industrial Net Lease dated as of September 28, 2009 (the (“Original Lease”), as
modified by (i) that certain First Amendment to Standard Industrial Net Lease dated as of October 4, 2011 by and
between Original Landlord and Tenant (“ First Amendment”), (ii) that certain Second Amendment to Standard
Industrial Net Lease dated as of October 10, 2014 by and between Landlord and Tenant (the (“Second
Amendment”), and (iii) that certain Third Amendment to Standard Industrial Net Lease dated as of October 21, 2015
by and between Landlord and Tenant (the “ Third Amendment”), whereby Landlord leases to Tenant and Tenant
leases from Landlord certain office space commonly known as Suite 109 in that certain building located and
addressed at 11585 Sorrento Valley Road, San Diego, California 92121 (the “Building”). Landlord is the successor-
in-interest under the Lease to the Original Landlord. The Original Lease, as modified by the First Amendment, the
Second Amendment and the Third Amendment, may be referred to herein as the “Lease.”
B. By this Fourth Amendment, Landlord and Tenant desire to extend the Lease Term and otherwise
modify the Lease as provided herein.
C. Unless otherwise defined herein, capitalized terms as used herein shall have the same meanings as
given thereto in the Lease.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants contained herein,
and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
A G R E E M E N T:
l
. Remeasurement. Landlord has remeasured the Premises, the Building and the Project (the
“Remeasurement”), and according to the Remeasurement, the rentable square footage of the Premises, the Building
and the Project shall, effective as of the date of this Fourth Amendment, be (i) 1,703 rentable square feet, (ii) 21,273
rentable square feet and (iii) 127,990 rentable square feet, respectively.
2. Extension of Lease Term. The Lease Term is hereby extended such that the Lease shall terminate on
November 30, 2017 (the “Fourth Amendment Extended Expiration Date”). The period of time from December 1,
2016 through and including the Fourth Amendment Extended Expiration Date shall be referred to herein as the
“Fourth Amendment Extended Term.” Tenant shall not have any right to extend the Lease Term beyond the Fourth
Amendment Extended Expiration Date.
1
3. Minimum Monthly Rent. Notwithstanding anything to the contrary contained in the Lease, during
the Fourth Amendment Extended Term, Tenant shall pay Minimum Monthly Rent for the Premises in the amount of
Four Thousand Three Hundred Ninety-Three and 74/100 Dollars ($4,393.74).
4. Tenant's Pro Rata Share. Notwithstanding anything to the contrary contained in the Lease, effective
as of the date of this Fourth Amendment, Tenant's Pro Rata Share shall be 8.0054% for the Building and 1.3306% for
the Center (i.e., 1,703 rentable square feet in the Premises / 21,273 rentable square feet within the Building and
127,990 rentable square feet within the Center).
5. Security Deposit. Tenant has previously deposited with Landlord Three Thousand Two Hundred
Fifty and 65/100 Dollars ($3,250.65) as a Security Deposit under the Lease. Landlord shall continue to hold such
Security Deposit during the Fourth Amendment Extended Term in accordance with the terms and conditions of
Article 5 of the Original Lease.
6. Condition of Premises. Tenant hereby agrees to accept the Premises in its “as-is” condition and
Tenant hereby acknowledges that Landlord shall not be obligated to provide or pay for any improvement work or
services related to the improvement of the Premises. Tenant also acknowledges that Landlord has made no
representation or warranty regarding the condition of the Premises.
7. Authority. Each individual executing this Fourth Amendment on behalf of Tenant represents and
warrants that Tenant is a duly formed and existing entity qualified to do business in California and that Tenant has
full right and authority to deliver this Fourth Amendment and that each person signing on behalf of Tenant is
authorized to do so.
8. Brokers. Each party represents and warrants to the other that no broker, agent or finder other than
Jones Lang LaSalle ("Broker") negotiated or was instrumental in negotiating or consummating this Fourth
Amendment. Each party further agrees to defend, indemnify and hold harmless the other party from and against any
claim for commission or finder's fee by any entity other than Broker who claims or alleges that they were retained or
engaged by the first party or at the request of such party in connection with this Fourth Amendment. The terms of
this Section 8 shall survive the expiration or earlier termination of the term of the Lease, as hereby amended.
9. Disclosures and Utility Usage Information. Pursuant to Civil Code Section 1938, Landlord states
that, as of the date hereof, the Premises has not undergone inspection by a Certified Access Specialist (”CASp”) to
determine whether the Premises meet all applicable construction related accessibility standards under California Civil
Code Section 55.53. If Tenant is billed directly by a public utility with respect to Tenant's electrical usage at the
Premises, upon request, Tenant shall provide monthly electrical utility usage for the Premises to Landlord for the
period of time requested by Landlord (in electronic or paper format) or, at Landlord's option, provide any written
authorization or other documentation required for Landlord to request information regarding Tenant's electricity
usage with respect to the Premises directly from the applicable utility company.
2
10. Defaults. Tenant hereby represents and warrants to Landlord that, as of the date of this Fourth
Amendment, Tenant is in full compliance with all terms, covenants and conditions of the Lease and that there are no
breaches or defaults under the Lease by Landlord or Tenant, and that Tenant knows of no events or circumstances
which, given the passage of time, would constitute a default under the Lease by either Landlord or Tenant.
11. No Further Modification. Except as set forth in this Fourth Amendment, all of the terms and
provisions of the Lease shall remain unmodified and in full force and effect.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
3
IN WITNESS WHEREOF, this Fourth Amendment has been executed as of the day and year first above
written.
LANDLORD:
AGP SORRENTO BUSINESS COMPLEX, L.P.,
a Delaware limited partnership
By:
Parallel Capital Partners, Inc.,
a California corporation,
its authorized agent
/s/ Jim Ingebritsen
By:
Name: Jim Ingebritsen
Title: President
TENANT:
AETHLON MEDICAL, INC.,
A Nevada corporation
/s/ James A. Joyce
By:
Name: James A. Joyce
Title: Chief Executive Officer
/s/ James B. Frakes
By:
Name: James B. Frakes
Title: Chief Financial Officer
4
Exhibit 10.83
EXCHANGE AGREEMENT
This Exchange Agreement (this “Agreement”), entered into as of June 27, 2017 (the “Effective Date”), is made by and between
Aethlon Medical, Inc., a Nevada corporation (the “Company”), and the undersigned holders of warrants (collectively, the “Warrant
Holders” ) to purchase shares of the Company’s common stock, par value $.0001 per share (the “Common Stock”) and convertible notes
(the “Notes”), as detailed on Schedule A hereto.
WHEREAS, the Company issued Warrants (the “ Warrants”) to purchase shares of Company Common Stock on the dates and in
the amounts set forth on Schedule A hereto to the Warrant Holders; and
WHEREAS, the Company agreed to exchange each of the Warrants for 0.75 shares of Common Stock, as well as to make certain
amendments to the terms of the Notes.
NOW THEREFORE, in consideration of the covenants and conditions herein contained and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
ARTICLE 1.
EXCHANGE OF EXISTING WARRANTS
Effective immediately, the Warrant Holders hereby agree to exchange the Warrants to the Company in exchange for the number of
unregistered shares of Common Stock (the “Exchange Shares”) as set forth on Schedule A hereto without the payment of any additional
consideration. Upon receipt by the Warrant Holders of the Exchange Shares, the Warrants shall be deemed cancelled.
ARTICLE 2.
AMENDMENTS TO THE NOTES
The Expiration Date of the Notes is hereby extended to July 1, 2019. The Conversion Price of the Notes is hereby reduced from
$4.00 to $3.00. Each holder of a Note (each, a “Noteholder”) agrees to not request any conversions of its Notes from the date hereof until
August 1, 2017 unless if the trading price for a share of the Company’s Common Stock on such trading day is at least $4.00, then the
Noteholders may effect conversions of the Notes on that trading day only.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF THE WARRANT HOLDERS
The Warrant Holders each hereby represent and warrant to the Company as follows:
Section 3.1. The Warrant Holder represents and warrants that it has good and marketable title to the Warrants held by the Warrant
Holder free and clear of all liens, charges and encumbrances whatsoever, other than encumbrances by one or more brokers of the Warrant
Holder, which shall terminate upon cancellation, and encumbrances under federal and state securities laws.
1
Section 3.2. The Warrant Holder has the requisite power and authority to enter into this Agreement. The execution, delivery and
performance of this Agreement by the Warrant Holder and the consummation by it of the transactions contemplated hereby have been duly
authorized, and no further consent or authorization of the Warrant Holder is required. When executed and delivered by the Warrant Holder,
this Agreement shall constitute a valid and binding obligation of the Warrant Holder enforceable against the Warrant Holder in accordance
with its terms, except as the enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation,
conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by
other equitable principles of general application.
Section 3.3. The Warrant Holder is an “accredited investor” (as defined in Rule 501 of Regulation D), and the Warrant Holder has
the experience in business and financial matters that it is capable of evaluating the merits and risks of an investment in the Warrants and the
Exchange Shares.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Warrant Holders as follows:
Section 4.1. The Company is a corporation, duly incorporated, validly existing and in good standing under the laws of the State of
Nevada.
Section 4.2. The Company has the requisite power and authority to enter into this Agreement. The execution, delivery and
performance of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly
authorized by all necessary corporate or partnership action, and no further consent or authorization of the Company or its Board of
Directors, stockholders, or partners, as the case may be, is required. When executed and delivered by the Company, this Agreement shall
constitute a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except as the
enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership
or similar laws relating to, or affecting generally the enforcement of, creditor’s rights and remedies or by other equitable principles of
general application.
Section 4.3. The issuance of the Exchange Shares are duly authorized and, upon issuance in accordance with the terms of this
Agreement, the Exchange Shares shall be validly issued and free from all preemptive or similar rights, taxes, liens and charges and other
encumbrances with respect to the issue thereof and the Exchange Shares shall be fully paid and nonassessable with the holders being
entitled to all rights accorded to a holder of Common Stock.
Section 4.4. The amendments to the Notes set forth herein shall not in any way affect the holding period of the Notes or any other
securities of the Company owned by holders of the Notes.
2
ARTICLE 5
MISCELLANEOUS
Section 5.1. Governing Law. This Agreement shall be governed by, and construed and enforced in accordance with, the internal
laws of the State of New York without reference to conflicts of law provisions of any jurisdiction.
Section 5.2. Entire Agreement. This Agreement contains the entire understanding of the parties to this Agreement with respect to
the subject matter hereof and supersedes all other agreements and understandings between or among any of the parties with respect to the
subject matter hereof. Except as otherwise amended in this Agreement, the terms of the Notes and Warrants remain as originally drafted.
Section 5.3. Amendment. Any term of this Agreement may be amended or waived only with the written consent of the Company
and the Warrant Holder.
Section 5.4. Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and
their respective heirs, executors, legal representatives, successors and permitted transferees, except as may be expressly provided otherwise
herein. Neither party hereto may assign this Agreement without the prior written consent of the other party, and any purported assignment
without the consent shall be void and without effect.
Section 5.5. Invalidity of Provisions. In the event that any provision of this Agreement becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement shall continue in full force and effect without said provision, and
the parties agree to negotiate, in good faith, a legal and enforceable substitute provision which most nearly effects the parties’ intent in
entering into this Agreement.
Section 5.6. Counterparts. This Agreement may be executed in any number of counterparts, the combination of which shall be
enforceable against the parties actually executing the counterparts, and all of which together shall constitute one instrument. Delivery of an
executed counterpart signature page to this Agreement by facsimile or similar electronic transmission will be effective as delivery of a
manually executed counterpart thereof and will be deemed an original signature for all purposes.
[The remainder of this page has been intentionally left blank.]
3
IN WITNESS WHEREOF, the parties hereto have executed or caused this Exchange Agreement to be executed as of the date set
forth above.
AETHLON MEDICAL, INC.
NAME:
TITLE:
[SIGNATURE PAGES CONTINUE]
4
IN WITNESS WHEREOF, the parties hereto have executed or caused this Exchange Agreement to be executed as of the date set
forth above.
ALPHA CAPITAL ANSTALT
NAME:
TITLE:
[SIGNATURE PAGES CONTINUE]
5
IN WITNESS WHEREOF, the parties hereto have executed or caused this Exchange Agreement to be executed as of the date set
forth above.
OSHER CAPITAL PARTNERS, LLC
NAME:
TITLE:
6
SCHEDULE A
WARRANTS AND NOTES
7
Exhibit 14
CODE OF BUSINESS CONDUCT AND ETHICS
(As approved by the Aethlon Medical, Inc Board of Directors on February 23, 2005)
THIS CODE APPLIES TO EVERY DIRECTOR, OFFICER (INCLUDING THE CHIEF EXECUTIVE OFFICER, PRESIDENT
AND CHIEF FINANCIAL OFFICER), AND EMPLOYEE OF AETHLON MEDICAL, INC., (THE “COMPANY”).
To further the Company's fundamental principles of honesty, loyalty, fairness and forthrightness, the Board of Directors of the Company
(the "Board:") has established and adopted this Code of Business Conduct and Ethics (this “Code”).
This Code strives to deter wrongdoing and promote the following six objectives:
·
·
·
·
·
·
honest and ethical conduct;
avoidance of conflicts of interest;
full, fair, accurate, timely and transparent disclosure;
compliance with applicable government and self-regulatory organization laws, rules and regulations;
prompt internal reporting of Code violations; and
accountability for compliance with the Code.
Below, we discuss situations that require application of our fundamental principles and promotion of our objectives. If you believe there is
a conflict between this Code and a specific procedure, please consult the Company's Board of Directors for guidance.
Each of our directors, officers and employees is expected to:
·
·
·
·
understand the requirements of your position, including Company expectations and governmental rules and regulations that apply to
your position;
comply with this Code and all applicable laws, rules and regulations;
report any violation of this Code of which you become aware; and
be accountable for complying with this Code.
TABLE OF CONTENTS
ETHICS ADMINISTRATOR
ACCOUNTING POLICIES
AMENDMENTS AND MODIFICATIONS OF THIS CODE
ANTI-BOYCOTT AND U.S. SANCTIONS LAWS
ANTITRUST AND FAIR COMPETITION LAWS
BRIBERY
COMPLIANCE WITH LAWS, RULES AND REGULATIONS
COMPUTER AND INFORMATION SYSTEMS
CONFIDENTIAL INFORMATION BELONGING TO OTHERS
CONFIDENTIAL AND PROPRIETARY INFORMATION
CONFLICTS OF INTEREST
CORPORATE OPPORTUNITIES AND USE AND PROTECTION OF COMPANY ASSETS
DISCIPLINE FOR NONCOMPLIANCE WITH THIS CODE
DISCLOSURE POLICIES AND CONTROLS
ENVIRONMENT, HEALTH AND SAFETY
FILING OF GOVERNMENT REPORTS
FOREIGN CORRUPT PRACTICES ACT
INSIDER TRADING OR TIPPING
INTELLECTUAL PROPERTY: PATENTS, COPYRIGHTS AND TRADEMARKS
INVESTOR RELATIONS AND PUBLIC AFFAIRS
POLITICAL CONTRIBUTIONS
PROHIBITED SUBSTANCES
RECORD RETENTION
REPORTING VIOLATIONS OF THIS CODE
WAIVERS
CONCLUSION
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ETHICS ADMINISTRATOR
All matters concerning this Code shall be heard by the Board of Directors.
ACCOUNTING POLICIES
The Company will make and keep books, records and accounts, which in reasonable detail accurately and fairly present the Company’s
transactions.
All directors, officers, employees and other persons are prohibited from directly or indirectly falsifying or causing to be false or misleading
any financial or accounting book, record or account. You and others are expressly prohibited from directly or indirectly manipulating an
audit, and from destroying or tampering with any record, document or tangible object with the intent to obstruct a pending or contemplated
audit, review or federal investigation. The commission of, or participation in, one of these prohibited activities or other illegal conduct will
subject you to federal penalties, as well as to punishment, up to and including termination of employment.
No director, officer or employee of the Company may directly or indirectly make or cause to be made a materially false or misleading
statement, or omit to state, or cause another person to omit to state, any material fact necessary to make statements made not misleading, in
connection with the audit of financial statements by independent accountants, the preparation of any required reports whether by
independent or internal accountants, or any other work which involves or relates to the filing of a document with the Securities and
Exchange Commission (“SEC”).
AMENDMENTS AND MODIFICATIONS OF THIS CODE
There shall be no amendment or modification to this Code except upon approval by the Board of Directors.
In case of any amendment or modification of this Code that applies to an officer or director of the Company, the amendment or
modification shall be posted on the Company's website within two days of the board vote or shall be otherwise disclosed as required by
applicable law or the rules of any stock exchange or market on which the Company's securities are listed for trading. Notice posted on the
website shall remain there for a period of twelve months and shall be retained in the Company's files as required by law.
ANTI-BOYCOTT AND U.S. SANCTIONS LAWS
The Company must comply with anti-boycott laws of the United States, which prohibit it from participating in, and require us to report to
the authorities any request to participate in, a boycott of a country or businesses within a country. If you receive such a request, report it to
your immediate superior, our CEO, or to the chairman of the Board of Directors. We will also not engage in business with any government,
entity, organization or individual where doing so is prohibited by applicable laws.
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ANTITRUS T AND FAIR COMPETITION LAWS
The purpose of antitrust laws of the United States and most other countries is to provide a level playing field to economic competitors and
to promote fair competition. No director, officer or employee, under any circumstances or in any context, may enter into any understanding
or agreement, whether express or implied, formal or informal, written or oral, with an actual or potential competitor, which would illegally
limit or restrict in any way either party’s actions, including the offers of either party to any third party. This prohibition includes any action
relating to prices, costs, profits, products, services, terms or conditions of sale, market share or customer or supplier classification or
selection.
It is our policy to comply with all U.S. antitrust laws. This policy is not to be compromised or qualified by anyone acting for or on behalf of
our Company. You must understand and comply with the antitrust laws as they may bear upon your activities and decisions. Anti-
competitive behavior in violation of antitrust laws can result in criminal penalties, both for you and for the Company. Accordingly, any
question regarding compliance with antitrust laws or your responsibilities under this policy should be directed to our CEO or the chairman
of the Board of Directors, who may then direct you to our legal counsel. Any director, officer or employee found to have knowingly
participated in violating the antitrust laws will be subject to disciplinary action, up to and including termination of employment.
Below are some scenarios that are prohibited and scenarios that could be prohibited for antitrust reasons. These scenarios are not an
exhaustive list of all prohibited and possibly prohibited antitrust conduct.
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Proposals or agreements or understanding, express or implied, formal or informal, written or oral, with any competitor regarding
any aspect of competition between the Company and the competitor for sales to third parties;
Proposals or agreements or understandings with customers which restrict the price or other terms at which the customer may resell
or lease any product to a third party; or
Proposals or agreements or understandings with suppliers which restrict the price or other terms at which the Company may resell
or lease any product or service to a third party.
The following business arrangements could raise anti-competition or antitrust law issues. Before entering into them, you must consult with
our CEO or the chairman of the Board of Directors, who may then direct you to our legal counsel:
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Exclusive arrangements for the purchase or sale of products or services;
Bundling of goods and services; or
· Agreements to add an employee of the Company to another entity’s board of Directors.
BRIBERY
You are strictly forbidden from offering, promising or giving money, gifts, loans, rewards, favors or anything of value to any governmental
official, employee, agent or other intermediary (either inside or outside the United States) which is prohibited by law. Those paying a bribe
may subject the Company and themselves to civil and criminal penalties. When dealing with government customers or officials, no
improper payments will be tolerated. If you receive any offer of money or gifts that is intended to influence a business decision, it should be
reported to your supervisor our CEO or the chairman of the Board of Directors immediately.
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The Company prohibits improper payments in all of its activities, whether these activities are with governments or in the private sector.
COMPLIANCE WITH LAWS, RULES AND REGULATIONS
The Company's goal and intention is to comply with the laws, rules and regulations by which we are governed. In fact, we strive to comply
not only with requirements of the law but also with recognized compliance practices. All illegal activities or illegal conduct are prohibited
whether or not they are specifically set forth in this Code.
Where law does not govern a situation or where the law is unclear or conflicting, you should discuss the situation with your supervisor, our
CEO or the chairman of the Board of Directors, who may then direct you to our legal counsel. Business should always be conducted in a
fair and forthright manner. Directors, officers and employees are expected to act according to high ethical standards.
COMPUTER AND INFORMATION SYSTEMS
For business purposes, officers and employees are provided telephones and computer workstations and software, including network access
to computing systems such as the Internet and e-mail, to improve personal productivity and to efficiently manage proprietary information in
a secure and reliable manner. You must obtain the permission from your supervisor or our CEO to install any software on any Company
computer or connect any personal laptop to the Company network. As with other equipment and assets of the Company, we are each
responsible for the appropriate use of these assets. Except for limited personal use of the Company's telephones and computer/e-mail, such
equipment may be used only for business purposes. Officers and employees should not expect a right to privacy of their e-mail or Internet
use. All e-mails or Internet use on Company equipment is subject to monitoring by the Company.
CONFIDENTIAL INFORMATION BELONGING TO OTHERS
You must respect the confidentiality of information, including, but not limited to, trade secrets and other information given in confidence
by others, just as we protect our own confidential information. This includes, but is not limited to partners, suppliers, contractors,
competitors or customers. However, certain restrictions about the information of others may place an unfair burden on the Company's
future business. For that reason, directors, officers and employees should coordinate with your supervisor or the CEO to ensure appropriate
agreements are in place prior to receiving any confidential third-party information. In addition, any confidential information that you may
possess from an outside source, such as a previous employer, must not, so long as such information remains confidential, be disclosed to or
used by the Company.
Unsolicited confidential information submitted to the Company should be refused, returned to the sender where possible and deleted, if
received via the Internet.
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CONFIDENTIAL AND PROPRIETARY INFORMATION
It is the Company's policy to ensure that all operations, activities and business affairs of the Company and our business associates are kept
confidential to the greatest extent possible. Confidential information includes all non-public information that might be of use to
competitors, or that might be harmful to the Company or its customers if disclosed. Confidential and proprietary information about the
Company or its business associates belongs to the Company, must be treated with strictest confidence and is not to be disclosed or
discussed with others.
Unless otherwise agreed to in writing, confidential and proprietary information includes any and all information from which the Company
may derive an economic benefit, including, but not limited to, methods, inventions, improvements or discoveries, whether or not patentable
or copyrightable, and any other information of a similar nature disclosed to the directors, officers or employees of the Company or
otherwise made known to the Company as a consequence of or through employment or association with the Company (including
information originated by the director, officer or employee). This can include, but is not limited to, information regarding the Company's
business, products, processes, and services. It also can include information relating to research, development, inventions, trade secrets,
intellectual property of any type or description, data, business plans, marketing strategies, engineering, contract negotiations, contents of
the Company intranet and business methods or practices.
The following are examples of information that is not considered confidential:
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information that is in the public domain to the extent it is readily available;
information that becomes generally known to the public other than by disclosure by the Company or a director, officer or
employee; or
information you receive from a party that is under no legal obligation of confidentiality with the Company with respect to such
information.
We have exclusive property rights to all confidential and proprietary information regarding the Company or our business associates. The
unauthorized disclosure of this information could destroy its value to the Company and give others an unfair advantage. You are
responsible for safeguarding Company information and complying with established security controls and procedures. All documents,
records, notebooks, notes, memoranda and similar repositories of information containing information of a secret, proprietary, confidential
or generally undisclosed nature relating to the Company or our operations and activities, including any copies thereof, unless otherwise
agreed to in writing, belong to the Company and shall be held by you in trust solely for the benefit of the Company. Confidential or
proprietary information must be delivered to the Company by you on the termination of your association with us or at any other time we
request.
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CONFLICTS OF INTEREST
Conflicts of interest can arise in virtually every area of our operations. A “conflict of interest” exists whenever an individual’s private
interests interfere or conflict in any way (or even appear to interfere or conflict) with the interests of the Company. We must strive to avoid
conflicts of interest. We must each make decisions solely in the best interest of the Company. Any business, financial or other relationship
with suppliers, customers or competitors that might impair or appear to impair the exercise of our judgment solely for the benefit of the
Company is prohibited.
Here are some examples of conflicts of interest:
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Family Members—Actions of family members may create a conflict of interest. For example, gifts to family members by a
supplier of the Company are considered gifts to you and must be reported. Doing business for the Company with organizations
where your family members are employed or that are partially or fully owned by your family members or close friends may create
a conflict or the appearance of a conflict of interest. For purposes of this Code “family members” includes any child, stepchild,
grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-
law or sister-in-law, and adoptive relationships.
· Gifts, Entertainment, Loans, or Other Favors —Directors, officers and employees shall not seek or accept personal gain, directly
or indirectly, from anyone soliciting business from, or doing business with, the Company, or from any person or entity in
competition with us. Examples of such personal gains are gifts, non-business-related trips, gratuities, favors, loans, and guarantees
of loans, excessive entertainment or rewards. However, you may accept gifts of a nominal value. Other than common business
courtesies, directors, officers, employees and independent contractors must not offer or provide anything to any person or
organization for the purpose of influencing the person or organization in their business relationship with us.
Directors, officers and employees are expected to deal with advisors or suppliers who best serve the needs of the Company as to
price, quality and service in making decisions concerning the use or purchase of materials, equipment, property or services.
Directors, officers and employees who use the Company's advisors, suppliers or contractors in a personal capacity are expected to
pay market value for materials and services provided.
· Outside Employment—Officers and employees may not participate in outside employment, self-employment, or serve as officers,
directors, partners or consultants for outside organizations, if such activity:
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reduces work efficiency;
interferes with your ability to act conscientiously in our best interest; or
requires you to utilize our proprietary or confidential procedures, plans or techniques.
You must inform your supervisor or the CEO of any outside employment, including the employer’s name and expected work hours.
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You should report any actual or potential conflict of interest involving yourself or others of which you become aware to your supervisor or
our CEO. Officers and directors should report any actual or potential conflict of interest involving yourself or others of which you become
aware to the chairman of the Board of Directors.
CORPORATE OPPORTUNITIES AND USE AND PROTECTION OF COMPANY ASSETS
You are prohibited from:
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taking for yourself, personally, opportunities that are discovered through the use of Company property, information or position;
using Company property, information or position for personal gain; or
competing with the Company.
You have a duty to the Company to advance its legitimate interests when the opportunity to do so arises.
You are personally responsible and accountable for the proper expenditure of Company funds, including money spent for travel expenses
or for customer entertainment. You are also responsible for the proper use of property over which you have control, including both
Company property and funds and property that customers or others have entrusted to your custody. Company assets must be used only for
proper purposes.
Company property should not be misused. Company property may not be sold, loaned or given away regardless of condition or value,
without proper authorization. Each director, officer and employee should protect our assets and ensure their efficient use. Theft,
carelessness and waste have a direct impact on the Company's profitability. Company assets should be used only for legitimate business
purposes.
DISCIPLINE FOR NONCOMPLIANCE WITH THIS CODE
Disciplinary actions for violations of this Code can include oral or written reprimands, suspension or termination of employment or a
potential civil lawsuit against you. The violation of laws, rules or regulations, which can subject the Company to fines and other penalties,
may result in your criminal prosecution.
DISCLOSURE POLICIES AND CONTROLS
The continuing excellence of the Company's reputation depends upon our full and complete disclosure of important information about the
Company that is used in the securities marketplace. Our financial and non-financial disclosures and filings with the SEC must be
transparent, accurate and timely. We must all work together to insure that reliable, truthful and accurate information is disclosed to the
public.
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The Company must disclose to the SEC, current security holders and the investing public information that is required, and any additional
information that may be necessary to ensure the required disclosures are not misleading or inaccurate. The Company requires you to
participate in the disclosure process, which is overseen by our CEO and CFO. The disclosure process is designed to record, process,
summarize and report material information as required by all applicable laws, rules and regulations. Participation in the disclosure process
is a requirement of a public company, and full cooperation and participation by our CEO, CFO and, upon request, other employees in the
disclosure process is a requirement of this Code.
Officers and employees must fully comply with their disclosure responsibilities in an accurate and timely manner or be subject to discipline
of up to and including termination of employment.
ENVIRONMENT, HEALTH AND SAFETY
The Company is committed to managing and operating our assets in a manner that is protective of human health and safety and the
environment. It is our policy to comply, in all material respects, with applicable health, safety and environmental laws and regulations. Each
employee is also expected to comply with our policies, programs, standards and procedures.
FILING OF GOVERNMENT REPORTS
Any reports or information provided, on our behalf, to federal, state, local or foreign governments should be true, complete and accurate.
Any omission, misstatement or lack of attention to detail could result in a violation of the reporting laws, rules and regulations.
FOREIGN CORRUPT PRACTICES ACT
The United States Foreign Corrupt Practices Act prohibits giving anything of value, directly or indirectly, to foreign government officials
or foreign political candidates in order to obtain, retain or direct business. Accordingly, corporate funds, property or anything of value may
not be, directly or indirectly, offered or given by you or an agent acting on our behalf, to a foreign official, foreign political party or official
thereof or any candidate for a foreign political office for the purpose of influencing any act or decision of such foreign person or inducing
such person to use his influence or in order to assist in obtaining or retaining business for, or directing business to, any person.
You are also prohibited from offering or paying anything of value to any foreign person if it is known or there is a reason to know that all
or part of such payment will be used for the above- described prohibited actions. This provision includes situations when intermediaries,
such as affiliates, or agents, are used to channel payoffs to foreign officials.
INSIDER TRADING OR TIPPING
Directors, officers and employees who are aware of material, non-public information from or about the Company (an “ insider”), are not
permitted, directly or through family members or other persons or entities, to:
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buy or sell securities (or derivatives relating to such securities) of the Company, or
pass on, tip or disclose material, nonpublic information to others outside the Company including family and friends.
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Such buying, selling or trading of securities may be punished by discipline, up to and including termination of employment; civil actions,
resulting in penalties of up to three times the amount of profit gained or loss avoided by the inside trade or stock tip, or criminal actions,
resulting in fines and jail time.
Examples of information that may be considered material, non-public information in some circumstances are:
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undisclosed annual, quarterly or monthly financial results, a change in earnings or earnings projections, or unexpected or unusual
gains or losses in major operations;
undisclosed negotiations and agreements regarding mergers, concessions, joint ventures, acquisitions, divestitures, business
combinations or tender offers;
undisclosed major management changes;
a substantial contract award or termination that has not been publicly disclosed;
a major lawsuit or claim that has not been publicly disclosed;
the gain or loss of a significant customer or supplier that has not been publicly disclosed;
an undisclosed filing of a bankruptcy petition by the Company;
information that is considered confidential; and
any other undisclosed information that could affect our stock price.
The same policy also applies to securities issued by another company if you have acquired material, nonpublic information relating to such
company in the course of your employment or affiliation with the Company.
When material information has been publicly disclosed, each insider must continue to refrain from buying or selling the securities in
question until the third business day after the information has been publicly released to allow the markets time to absorb the information.
INTELLECTUAL PROPERTY: PATENTS, COPYRIGHTS AND TRADEMARKS
Except as otherwise agreed to in writing between the Company and an officer or employee, all intellectual property you conceive or
develop during the course of your employment shall be the sole property of the Company. The term intellectual property includes any
invention, discovery, concept, idea, or writing whether protectable or not by any United States or foreign copyright, trademark, patent, or
common law including, but not limited to, designs, materials, compositions of matter, machines, processes, improvements, data, computer
software, writings, formula, techniques, know-how, methods, as well as improvements thereof or know-how related thereto concerning any
past, present, or prospective activities of the Company. Officers and employees must promptly disclose in writing to the Company any
intellectual property developed or conceived either solely or with others during the course of your employment and must render any and all
aid and assistance, at our expense, to secure the appropriate patent, copyright, or trademark protection for such intellectual property.
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Copyright laws may protect items posted on a website. Unless a website grants permission to download the Internet content you generally
only have the legal right to view the content. If you do not have permission to download and distribute specific website content you should
contact your supervisor or our CEO, who may refer you to our legal counsel.
If you are unclear as to the application of this Intellectual Property Policy or if questions arise, please consult with your supervisor or our
CEO, who may refer you to our legal counsel.
INVESTOR RELATIONS AND PUBLIC AFFAIRS
It is very important that the information disseminated about the Company be both accurate and consistent. For this reason, all matters
relating to the Company's internal and external communications are handled by our CEO (or, if retained for such purpose, a public relations
consultant). Our CEO (or a public relations consultant retained by the Company) is solely responsible for public communications with
stockholders, analysts and other interested members of the financial community. Our CEO (or a public relations consultant retained by the
Company) is also solely responsible for our marketing and advertising activities and communication with employees, the media, local
communities and government officials. Our CEO serves as the Company's spokesperson in both routine and crisis situations.
POLITICAL CONTRIBUTIONS
You must refrain from making any use of Company, personal or other funds or resources on behalf of the Company for political or other
purposes which are improper or prohibited by the applicable federal, state, local or foreign laws, rules or regulations. Company
contributions or expenditures in connection with election campaigns will be permitted only to the extent allowed by federal, state, local or
foreign election laws, rules and regulations.
You are encouraged to participate actively in the political process. We believe that individual participation is a continuing responsibility of
those who live in a free country.
PROHIBITED SUBSTANCES
The use of alcohol, illegal drugs or other prohibited items, including legal drugs which affect the ability to perform one’s work duties, are
prohibited while on Company premises. We also prohibit the possession or use of alcoholic beverages, firearms, weapons or explosives on
our property, unless authorized by our CEO. You are also prohibited from reporting to work while under the influence of alcohol or illegal
drugs. We reserve the right to perform pre-employment and random drug testing on employees, as permitted by law.
RECORD RETENTION
The alteration, destruction or falsification of corporate documents or records may constitute a criminal act. Destroying or altering
documents with the intent to obstruct a pending or anticipated official government proceeding is a criminal act and could result in large
fines and a prison sentence of up to 20 years. Document destruction or falsification in other contexts can result in a violation of the federal
securities laws or the obstruction of justice laws.
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REPORTING VIOLATIONS OF THIS CODE
You should be alert and sensitive to situations that could result in actions that might violate federal, state, or local laws or the standards of
conduct set forth in this Code. If you believe your own conduct or that of a fellow employee may have violated any such laws or this Code,
you have an obligation to report the matter.
Generally, you should raise such matters first with an immediate supervisor. However, if you are not comfortable bringing the matter up
with your immediate supervisor, or do not believe the supervisor has dealt with the matter properly, then you should raise the matter with
our CEO who may, if a law, rule or regulation is in question, then refer you to our legal counsel. The most important point is that possible
violations should be reported and we support all means of reporting them.
Directors and officers should report any potential violations of this Code to the chairman of the Board of Directors or to our legal counsel.
We will not allow retaliation against an employee for reporting a possible violation of this Code in good faith. Retaliation for reporting a
federal offense is illegal under federal law and prohibited under this Code. Retaliation for reporting any violation of a law, rule or regulation
or a provision of this Code is prohibited. Retaliation will result in discipline, up to and including termination of employment, and may also
result in criminal prosecution. However, if a reporting individual was involved in improper activity the individual may be appropriately
disciplined even if he or she was the one who disclosed the matter to the Company. In these circumstances, we may consider the conduct
of the reporting individual in reporting the information as a mitigating factor in any disciplinary decision.
WAIVERS
There shall be no waiver of any part of this Code for any director or officer except by a vote of the Board of Directors. In case a waiver of
this Code is granted to a director or officer, the notice of such waiver shall be posted on our website within five days of the Board’s vote or
shall be otherwise disclosed as required by applicable law or the rules of any stock exchange or market on which the Company's securities
are listed for trading. Notices posted on our website shall remain there for a period of 12 months and shall be retained in our files as
required by law.
CONCLUSION
This Code is an attempt to point all of us at the Company in the right direction, but no document can achieve the level of principled
compliance that we are seeking. In reality, each of us must strive every day to maintain our awareness of these issues and to comply with
the Code’s principles to the best of our abilities. Before we take an action, we must always ask ourselves:
· Does it feel right?
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Is this action ethical in every way?
Is this action in compliance with the law?
Could my action create an appearance of impropriety?
· Am I trying to fool anyone, including myself, about the propriety of this action?
If an action would elicit the wrong answer to any of these questions, do not take it. We cannot expect perfection, but we do expect good
faith. If you act in bad faith or fail to report illegal or unethical behavior, then you will be subject to disciplinary procedures. We hope that
you agree that the best course of action is to be honest, forthright and loyal at all times.
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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), Form S-1 (File Nos.
333-201334 and 333-205832), and Form S-3 (File No. 333-211151) of our report dated June 28, 2017 relating to the audits of the
consolidated financial statements of Aethlon Medical, Inc. and Subsidiary (collectively the “Company”) as of March 31, 2017 and 2016 and
for each of the years then ended appearing in this Annual Report on Form 10-K for the year ended March 31, 2017.
/s/ Squar Milner LLP
Newport Beach, California
June 28, 2017
EXHIBIT 31.1
I, James Joyce, certify that:
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a), AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
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: June 28, 2017
/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: June 28, 2017
/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, 2017 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. 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 Annual Report on Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of Aethlon Medical, Inc.
Dated: June 28, 2017
/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 Annual Report of Aethlon Medical, Inc. (the “Registrant”) on Form 10-K for the fiscal year ended March
31, 2017 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. 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 Annual Report on Form 10-K fairly presents, in all material respects, the financial condition
and results of operations of Aethlon Medical, Inc.
Dated: June 28, 2017
/s/ JAMES B. FRAKES
James B. Frakes
Chief Financial 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.