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, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For transition period from ________ to __________
COMMISSION FILE NUMBER 000-21846
AETHLON MEDICAL, INC.
(Exact name of registrant as specified in its charter)
NEVADA 13-3632859
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8910 University Center Lane, Suite 660,
San Diego, California 92122
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (858) 459-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT:
COMMON STOCK--$.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [_] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [_] Accelerated filer [_]
Non accelerated filer [_] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company. Yes [_] No [X]
The registrant had no revenue for the fiscal year ended March 31, 2010.
The aggregate market value of the common stock held by non-affiliates of the
Registrant as of September 30, 2009 was approximately $14.9 million, computed by
reference to the closing sale price of the common stock of $0.28 per share on
the OTC Bulletin Board on September 30, 2009. 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 22, 2010 was 66,975,522.
TABLE OF CONTENTS
PAGE
----
PART I.
Item 1. Description of Business......................................... 1
Item 1A. Risk Factors ................................................... 6
Item 1B. Unresolved Staff Comments....................................... 17
Item 2. Properties...................................................... 17
Item 3. Legal Proceedings............................................... 17
Item 4. Removed and Reserved............................................ 17
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters and Issuer Purchases of Equity Securities............. 18
Item 6. Selected Financial Data......................................... 25
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 25
Item 7A Quantitative and Qualitative Disclosures about Market Risk...... 28
Item 8. Financial Statements............................................ 29
Item 9. Changes in and Disagreements with Accountants on Accounting
and Results of Operations..................................... 29
Item 9A(T). Controls and Procedures......................................... 29
Item 9B. Other Information............................................... 30
PART III.
Item 10. Directors, Executive Officers and Corporate Governance.......... 30
Item 11. Executive Compensation.......................................... 35
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................... 39
Item 13. Certain Relationships and Related Transactions
and Director Independence..................................... 41
Item 14. Principal Accountant Fees and Services.......................... 41
Item 15. Exhibits, Financial Statements.................................. 42
Signatures................................................................... 46
Certifications
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
We are a developmental stage company focused on creating medical devices
that address infectious disease and cancer. Our devices are designed to be novel
platform solutions that fill significant therapeutic voids or aid in disease
diagnosis and monitoring. We believe that our Hemopurifier(R) is the first
medical device to selectively target the removal of infectious viruses and
immunosuppressive proteins from the entire circulatory system. We have also
discovered that our Hemopurifier(R) captures tumor-secreted exosomes, known to
kill off the immune cells of those afflicted with cancer. Currently, a
therapeutic strategy to directly inhibit or reverse the immunosuppressive
destruction caused by exosomes does not exist in cancer care but we believe the
Hemopurifier can be developed for that use. By eliminating this mechanism
deployed by all cancers to survive, we believe our Hemopurifier(R) could fill an
unmet clinical need that offers the potential benefit of an immune-based therapy
without adding drug toxicity or interaction risks to established and emerging
treatment strategies. Through in vitro studies we have demonstrated that our
Hemopurifier(R) captures exosomes underlying ovarian cancer and have since
initiated collaborations with universities and research institutes to determine
if the Hemopurifier(R) has broad-spectrum capability to address exosomes
underlying other types of cancers. Upon the completion of in vitro studies, we
also hope to initiate human pilot studies to demonstrate the clinical effect of
removing exosomes from cancer patients.
In previously conducted human studies, we have documented the ability of
the Hemopurifier(R) to safely reduce viral load in both Hepatitis-C virus (HCV)
and Human Immunodeficiency Virus (HIV) infected patients without the
administration of antiviral drugs. However, our initial clinical and
commercialization focus is to establish the Hemopurifier(R) as an adjunct
therapy to enhance the benefit of both infectious disease and cancer treatment
regimens. Earlier this year, we established "good manufacturing practice" (GMP)
manufacturing of the Hemopurifier(R) in an FDA-approved facility in San Diego,
California. We now plan to initialize commercialization in India as we advance
clinical strategies in the United States and the European Union.
Our Hemopurifier(R) is a multi-patented platform technology whose
mechanism of action can be leveraged to provide therapeutic, diagnostic, and
biomarker discovery solutions. As a therapeutic candidate, the Hemopurifier(R)
is a single-use disposable cartridge designed for implementation within the
established infrastructure of dialysis machines and other blood circulatory
pumps already located in hospitals and clinics worldwide. In design, our
Hemopurifier(R) is a selective filtration device containing affinity agents that
tightly bind to high-mannose structures unique to the surface of exosomes
produced by cancer and glycoproteins residing on the envelope of viruses. These
agents are immobilized around approximately 2800 porous hollow fibers that run
the interior length of our device. The resulting design provides us the novel
ability to separate both exosome and viral targets away from blood cells so they
can then be selectively and permanently removed from the circulatory system. In
application, blood circulation is established into the Hemopurifier(R) via a
catheter or other blood access device. Once blood flow has been established,
treatment benefit is immediate as the entire circulatory system can pass through
the Hemopurifier(R) in as little as 15 minutes.
We believe our Hemopurifier(R) provides us a future pipeline into four
significant market opportunities:
1.) Cancer:
Provides a broad-spectrum cancer treatment strategy to improve patient
responsiveness to established cancer therapies by removing immunosuppressive
exosomes from circulation.
2.) Hepatitis-C Virus (HCV):
Based on clinical evidence that therapeutic filtration can improve patient cure
rates, the Hemopurifier(R) is positioned as an adjunct therapy to accelerate
viral load reduction at the outset of standard of care drug regimens.
3.) Human Immunodeficiency Virus (HIV):
Provides a potential therapeutic option for HIV-infected individuals to manage
disease progression once they become resistant to antiviral drug regimens.
4.) Bioterror and Pandemic Threats:
Based on human safety data and pre-clinical studies conducted with leading
government and non-government research institutes, the Hemopurifier(R) provides
the most advanced broad-spectrum treatment strategy against untreatable
bioterror and emerging pandemic threats.
1
Summary highlights of the Hemopurifier(R) include:
o Multi-patented first-in-class medical device that selectively capture
viruses and immunosuppressive toxins from the entire circulatory system.
o Preserves immune cells needed to combat cancer and viral infections.
o Inhibits viral replication by clearing circulating viruses prior to cell
and organ infection.
o Provides expansive treatment pipeline into both cancer and infectious
disease.
o Establishes a possible therapeutic strategy to address immunosuppressive
particles released by cancer.
o Initial safety of the device has been demonstrated in 68 human treatment
experiences conducted at research hospitals in Delhi, India.
o Significant reduction of viral load demonstrated in HCV infected patients
and also observed in our first HIV proof of principal study, which also
documented an improved immune function in a clinically defined AIDS
patient.
o Presently working to establish the commercialization opportunity in India.
o GMP manufacturing has been established.
o Treatment mechanism is being leveraged to create high-sensitivity
diagnostic and biomarker discovery products through our wholly-owned
subsidiary Exosome Sciences, Inc.
CANCER RESEARCH
We have licensed an invention and related patent rights for a method to
treat cancer under an assignment agreement with the London Health Science Center
Research, Inc. The invention provides for the "Depression of anticancer immunity
through extracorporeal removal of microvesicular particles" (including exosomes)
for which patent applications have been filed in the United States and abroad.
The agreement provides that we are responsible for paying certain patent
application and filing costs as well as a 2% royalty on any future net sales.
Under the license agreement, we will not own the patents outright, but will
continue to have the right to utilize them in our research and device
development.
Related to these patent submissions, we recently initiated in vitro
studies to document our ability to remove immunosuppressive exosomes that are
found in the blood and fluids of cancer patients. In a study led by Dr. Douglas
Taylor at the University of Louisville, it was demonstrated that the capture of
tumor secreted exosomes by the Hemopurifier(R) does result in reversing
immunosuppressive activity. Dr. Taylor is a recognized authority on the
causative effects of immune suppression in cancer patients. He is credited with
the initial characterization of exosomes and is a leading peer-reviewed author
on the subject.
In the studies, our Hemopurifier(R) removed the immunosuppressive activity
normally found in the ascites fluid of ovarian cancer patients.
Immunosuppressive activity in ovarian cancer patients is known to correlate with
disease progression and long-term survival. The studies measured the expression
of two biological markers required for T-cell activation. The markers, Jak-3
kinase and CD3-zeta chain expression are respectively required for interleukin
(cytokine) activation of cell proliferation and T-cell receptor mediated
activation. Both markers are highly expressed in T-cell lines. When cells were
subjected to ovarian cancer ascites fluid, both markers were consistently
absent. However, the circulation of the same ascites fluid through the
Hemopurifier(R) allowed the expression of both biological markers necessary to
activate the immune response.
Previously, Dr. Taylor documented that 60% of circulating exosomes were
removed from the blood of ovarian cancer patients during first pass
(approximately 10 minutes) through a small scale Hemopurifier(R). The capture
data was consistent over the course of five different studies. Exosomes, are
released by solid tumors, lymphomas, and leukemia. They induce T-cell apoptosis
(programmed cell death), and block T-cell signaling, proliferation, and cytokine
production. High concentrations of circulating exosomes correlate with reduced
T-cell production and tumor progression in cancer patients. The ability to
reduce the presence of circulating exosomes would likely reverse immune
suppression and increase patient responsiveness to both immunotherapy and
chemotherapy. For this reason, we believe the Hemopurifier(R) can address a
significant unmet medical need in cancer care.
2
We have also exercised an option to exclusively license a pending patent
entitled, "Method to Inhibit Proliferation and Growth of Metastases" from The
Trustees of Boston University. The license provides a rapid development strategy
for new cancer therapies by uniting drug agents that inhibit the spread of
cancer-related metastases, with filtration techniques already proven in the
Aethlon Hemopurifier(R). The resulting devices would inhibit tumor growth by
reducing the presence of circulating growth factors without interfering with
surgical wound healing or the recovery of tissue injured by radiation therapy.
While the market for anti-growth factor drug agents exceeds $5 billion, there
remains a significant unmet clinical need, as these drug agents may not be
indicated for use in conjunction with surgical procedures or radiation treatment
as they inhibit wound healing and tissue recovery. Depending on the
applications, if we commercialize a product based upon this license, we will pay
royalties up to a maximum of 3.5 percent of net sales.
HEPATITIS-C VIRUS (HCV) RESEARCH
In HCV care, we believe the Hemopurifier(R) can inhibit viral replication
through selective adsorption of circulating HCV and augment the immune response
by removing toxic proteins shed from HCV to kill-off immune cells. HCV
represents our initial treatment focus based on our human treatment outcomes in
India, the magnitude of the HCV market opportunity, and previous clinical
validations that HCV viral filtration can increase cure rates. Our treatment
goal in HCV is to increase patient cure rates by implementing our
Hemopurifier(R) as an adjunct treatment to enhance the benefit of the standard
of care drug therapy administered to HCV infected patients.
HUMAN IMMUNODEFICIENCY VIRUS (HIV) RESEARCH
Antiviral drug regimens provide HIV infected patients with an effective
tool to inhibit disease progression. However, many patients inevitably become
resistant to their drug therapies and are left with limited treatment options.
We believe our Hemopurifier(R) provides a device-based antiviral and
immunotherapeutic mechanism to inhibit the spread of all HIV strains, thus
providing fully drug resistant patients with a treatment strategy to inhibit
disease progression.
BIOLOGICAL WEAPONS AND PANDEMIC THREAT RESEARCH
The Hemopurifier(R) is also a broad-spectrum treatment candidate against
drug and vaccine resistant bioterror and pandemic threats. These threats include
viral pathogens known as "Category A" agents, which are considered by the
Centers for Disease Control ("CDC") to pose a threat through natural emergence
or if weaponized as an agent of bioterrorism. Pre-clinical in vitro studies have
demonstrated the ability of our Hemopurifier(R) to capture Ebola Virus, Dengue
Virus, Lassa Virus, West Nile Virus, Monkeypox Virus, H5N1 Avian Influenza
Virus, the 2009 H1N1 Swine Flu Virus, and the reconstructed H1N1 Spanish Flu of
1918 virus. In March 2007, we submitted an Investigational Device Exemption
("IDE") with the FDA related to a proposed human safety study of the
Hemopurifier(R) in the United States related to such bioterror and pandemic
threats.
CORPORATE HISTORY
On March 10, 1999, Aethlon, Inc., a California corporation ("Aethlon"),
Hemex, Inc., a Delaware corporation ("Hemex"), the accounting predecessor to the
Company and Bishop, Inc. ("Bishop"), a publicly traded "shell" company completed
an Agreement and Plan of Reorganization (the "Plan") structured to result in
Bishop's acquisition of all of the outstanding common shares of Aethlon and
Hemex (the "Reorganization"). The Reorganization was intended to qualify as a
tax-free transaction under Section 368(a)(1)(B) of the 1986 Internal Revenue
Code, as amended. Under the Plan's terms Bishop issued 733,500 and 1,350,000
shares of its common stock to the common stock shareholders of Aethlon and
Hemex, respectively, such that Bishop then owned 100% of each company. Upon
completion of the transaction, Bishop was renamed Aethlon Medical, Inc.
On January 10, 2000, we acquired all of the outstanding common stock of
Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of our common
stock in order to establish research facilities in San Diego, California, as
well as to employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a
recognized research scientist in the area of DNA synthesis and antisense. Syngen
has no significant assets, liabilities or operations and primarily served as the
entity through which Dr. Tullis performed research consulting services. As such,
the acquisition was accounted for as an acquisition of assets in the form of an
employment contract with Dr. Tullis and not as a business combination. Dr.
Tullis is presently the chief scientific officer and board member of Aethlon
Medical, Inc.
3
On April 6, 2000, we completed the acquisition of Cell Activation, Inc.
("Cell"). In accordance with the Purchase Agreement, we issued 99,152 shares of
restricted common stock and 50,148 options to purchase common stock in exchange
for all of the outstanding common shares and options to purchase common stock of
Cell. After the transaction, Cell became a wholly-owned subsidiary of the
Company. The acquisition was accounted for as a purchase. At March 31, 2001, we
determined that goodwill recorded during the acquisition of Cell was impaired
due to the permanent suspension of operations by Cell and, accordingly, treated
the related goodwill as fully impaired.
RESEARCH AND DEVELOPMENT
The cost of research and development, all of which has been charged to
operations, amounted to approximately $1,173,000 over the last two fiscal years.
PATENTS
We currently own or have license rights to a number of U.S. and foreign
patents and patent applications and endeavor to continually improve our
intellectual property position. We consider the protection of our technology,
whether owned or licensed, to the exclusion of use by others, to be vital to our
business. While we intend to focus primarily on patented or patentable
technology, we may also rely on trade secrets, unpatented property, know-how,
regulatory exclusivity, patent extensions and continuing technological
innovation to develop our competitive position.
The following table lists our issued patents and patent applications,
including their ownership status:
PATENT ISSUED IN THE UNITED STATES
--------------------------------------------------------------------------------------------------------
ISSUANCE OWNED OR
PATENT # PATENT NAME DATE LICENSED
--------------------------------------------------------------------------------------------------------
7,226,429 Method for removal of viruses from blood by lectin 01/20/04 Owned
affinity hemodialysis
6,528,057 Method for removal of HIV and other viruses from blood 03/04/03 Licensed
6,071,412 Extracorporeal device containing immobilized chelator 06/06/00 Owned
on silica substrate and use thereof
INTERNATIONAL PATENTS ISSUED
--------------------------------------------------------------------------------------------------------
ISSUANCE OWNED OR
PATENT # PATENT NAME DATE LICENSED
--------------------------------------------------------------------------------------------------------
2,353,399 Method for removal of viruses from blood by lectin affinity 01/20/04 Owned
hemodialysis
770,344 Method for removal of HIV and other viruses from blood 06/03/04 Licensed
69929986.1-08 Method for removal of HIV and other viruses from blood 02/22/06 Licensed
1,109,564 Method for removal of HIV and other viruses from blood 02/22/06 Licensed
1,109,564 Method for removal of HIV and other viruses from blood 02/22/06 Licensed
1,109,564 Method for removal of HIV and other viruses from blood 02/22/06 Licensed
1,109,564 Method for removal of HIV and other viruses from blood 02/22/06 Licensed
PATENT APPLICATIONS IN THE UNITED STATES
--------------------------------------------------------------------------------------------------------
FILING OWNED OR
APPLICATION # APPLICATION NAME DATE LICENSED
--------------------------------------------------------------------------------------------------------
11/756543 Method for removal of viruses from blood by lectin affinity 05/31/07 Owned
hemodialysis
12/600236 Device and method for purifying virally infected blood 11/13/09 Owned
60/989043 Affinity capture of circulating cancer biomarkers 12/20/08 Owned
12/282152 Extracorporeal removal of microvesicular particles 05/26/09 Licensed
(exosomes)
PCT/US2006/027746 Removal of growth factors during surgery 07/20/08 Licensed
4
INTERNATIONAL PATENT APPLICATIONS (SOME MAY MOVE TO THE US DURING NATIONAL PHASE OF APPLICATION PROCESS)
--------------------------------------------------------------------------------------------------------
FILING OWNED OR
APPLICATION # APPLICATION NAME DATE LICENSED
--------------------------------------------------------------------------------------------------------
4,703,673 Method for removal of viruses from blood by lectin affinity 01/20/04 Owned
hemodialysis
2,516,403 Method for removal of viruses from blood by lectin affinity 01/20/04 Owned
hemodialysis
Method for removal of viruses from blood by lectin affinity 01/20/04 Owned
200,480,006,996 hemodialysis
Method for removal of viruses from blood by lectin affinity 01/00/00 Owned
0 hemodialysis
Method for removal of viruses from blood by lectin affinity 01/20/04 Owned
2006-501076 hemodialysis
Method for removal of viruses from blood by lectin affinity 05/16/08 Owned
PCT/US2008/063946 hemodialysis
Method for removal of viruses from blood by lectin affinity 05/16/08 Owned
8201/DELNP/2009 hemodialysis
PCT/US2009/066626 Affinity capture of circulating cancer biomarkers 12/03/09 Owned
Method and apparatus for increasing containment clearance 12/19/08 Owned
PCT/US2008/016922 rates during extracorporeal fluid treatment
2,342,203 Method for removal of HIV and other viruses from blood 08/30/99 Licensed
PCT/US2007/006101 Extracorporeal removal of microvesicular particles 03/09/07 Licensed
(exosomes)
7,752,779 Extracorporeal removal of microvesicular particles 03/09/07 Licensed
(exosomes)
9,104,741 Extracorporeal removal of microvesicular particles 03/09/07 Licensed
(exosomes)
PCT/US2007/006101 Extracorporeal removal of microvesicular particles 08/12/08 Licensed
(exosomes)
8139/DELNP/2008 Extracorporeal removal of microvesicular particles 03/09/07 Licensed
(exosomes)
Device and method for purifying virally infected blood in
PCT/US2009/046123 combination with antiviral therapies 06/03/09 Owned
Methods and systems for reducing viral load of hepatitis
PCT/US2009/057013 C virus in hemodialysis patients 09/15/09 Owned
PCT/US2006/027746 Removal of growth factors during surgery 07/18/06 Licensed
6,787,633 Removal of growth factors during surgery 05/27/08 Licensed
PCT/US2006/027746 Removal of growth factors during surgery 07/20/08 Licensed
PCT/US2006/027746 Removal of growth factors during surgery 07/31/08 Licensed
In certain countries, medical devices are not patentable or only recently
have become patentable, and enforcement of intellectual property rights in some
countries has been limited or non-existent. Future enforcement of patents and
proprietary rights in many countries can be expected to be problematic or
unpredictable. We cannot guarantee that any patents issued or licensed to us
will provide us with competitive advantages or will not be challenged by others.
Furthermore, we cannot be certain that others will not independently develop
similar products or will not design around patents issued or licensed to us. We
cannot guarantee that patents that are issued will not be challenged,
invalidated or infringed upon or designed around by others, or that the claims
contained in such patents will not infringe the patent claims of others, or
provide us with significant protection against competitive products, or
otherwise be commercially valuable. We may need to acquire licenses under
patents belonging to others for technology potentially useful or necessary to
us. If any such licenses are required, we cannot be certain that they will be
available on terms acceptable to us, if at all. To the extent that we are unable
to obtain patent protection for our products or technology, our business may be
materially adversely affected by competitors who develop substantially
equivalent technology.
INDUSTRY
The industry for treating infectious disease and cancer is extremely
competitive, and companies developing new treatment procedures face significant
capital and regulatory challenges. Additionally, as the Hemopurifier(R) is a
first-in-class device, we have the additional challenge of establishing medical
industry support for our technology in the marketplace.
5
COMPETITION
We are advancing our Hemopurifier(R) as a treatment strategy to enhance
and prolong current drug therapies by removing the viral strains that cause drug
resistance. We are also advancing the Hemopurifier as a tool for cancer
treatment in conjunction with existing, and to be developed, cancer therapies.
The Hemopurifier(R) also may prolong life for infected patients who have become
drug resistant or have been infected with a viral pathogen for which there is no
drug or vaccine therapy. We believe our Hemopurifier(R) augments the benefit of
drug therapies and should not be considered a competitor to such treatments.
However, if the industry considered the Hemopurifier(R) to be a potential
replacement for drug therapy, or a device that limited the need or volume of
existing drug therapies, then the marketplace for the Hemopurifier(R) would be
extremely competitive. We believe our Hemopurifier(R) is the sole therapeutic
device able to selectively remove viruses and immunosuppressive proteins from
circulation. However, we are aware that Asahi Kasei Kurary Medical (Asahi) based
in Japan has created a double filtration plasmapheresis system that
indiscriminately removes particles from blood in a certain molecule range that
includes HCV. Asahi is now marketing this device in Japan as an adjunct therapy
for HCV. We may also face competition from producers of antiviral drugs and
vaccines.
LICENSING AGREEMENTS
Effective January 1, 2000, we entered into an agreement with a related
party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(R) were
assigned to us by the inventors in exchange for a royalty to be paid on future
sales of the patented product or process and shares of our common stock. On
March 4, 2003, the related patent was issued and we issued 196,078 shares of
restricted common stock.
On February 9, 2006, we entered into an option agreement with the Trustees
of Boston University which provides for the right to negotiate an exclusive
license for a Boston University patent BU05-41, "Method to Prevent Proliferation
and Growth of Metastases." On February 8, 2007 we entered into an amendment to
this agreement to extend its term until August 9, 2007. On April 22, 2008, we
entered into the actual license agreement for this patent and as the initial
payment under this license we issued shares of our common stock equivalent to
115% of $5,000.
This license agreement with the Trustees of Boston University calls for
annual license fees in the amount of $5,000 (or 115% of $5,000 if paid in our
common stock) until products utilizing the license are commercialized. In
January 2009, we issued 23,566 shares of our common stock to Boston University,
which was equivalent to 115% of the $5,000 annual license fee, for the second
year of the license.
On November 7, 2006 we entered into an assignment agreement with the
London Health Science Center Research, Inc. and Thomas Ichim under which an
invention and related patent rights for a method to treat cancer were assigned
to the Company. The invention provides for the "Extracorporeal removal of
Microvesicular Particles" for which a patent application was filed in the United
States by the licensor. The agreement provides that the Company will pay certain
patent application and filing costs as well as a 2% royalty on any future net
sales.
GOVERNMENT REGULATION
The Hemopurifier(R) is a medical device subject to extensive and rigorous
regulation by FDA, as well as other federal and state regulatory bodies in the
United States and comparable authorities in other countries. Therefore, we
cannot assure that our technology will successfully complete any regulatory
clinical trial for any of our proposed applications.
We intend to update our IDE with the FDA in order to address our primary
intended device applications of infectious disease and cancer.
6
CLINICAL TRIALS.
Clinical trials are almost always required to support an FDA premarket
application. In the United States, these trials generally require submission of
an application for an Investigational Device Exemption, or IDE, to the FDA. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results, showing that it is safe to test the device in humans
and that the testing protocol is scientifically sound. The IDE must be approved
in advance by the FDA for a specific number of patients unless the product is
deemed a non-significant risk device eligible for more abbreviated IDE
requirements. Clinical trials for significant risk devices may not begin until
the IDE application is approved by the FDA and the appropriate institutional
review boards, or IRBs, at the clinical trial sites. Our clinical trials must be
conducted under the oversight of an IRB at the relevant clinical trial sites and
in accordance with FDA regulations, including but not limited to those relating
to good clinical practices. We are also required to obtain patients' informed
consent that complies with both FDA requirements and state and federal privacy
regulations. We, the FDA or the IRB at each site at which a clinical trial is
being performed may suspend a clinical trial at any time for various reasons,
including a belief that the risks to study subjects outweigh the benefits. Even
if a trial is completed, the results of clinical testing may not demonstrate the
safety and efficacy of the device, may not be equivocal or may otherwise not be
sufficient to obtain approval of the product.
PERVASIVE AND CONTINUING U.S. REGULATION.
Should our device be cleared for market use in the United States by the
FDA, numerous regulatory requirements continue to apply. These include:
o FDA's Quality System Regulation, or QSR, which requires
manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other quality
assurance procedures during all aspects of the manufacturing
process;
o labeling regulations and FDA prohibitions against the promotion of
products for uncleared, unapproved or off-label uses;
o clearance or approval of product modifications that could
significantly affect safety or efficacy or that would constitute a
major change in intended use;
o medical device reporting, or MDR, regulations, which require that
manufacturers report to the FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way
that would likely cause or contribute to a death or serious injury
if the malfunction were to recur; and
o post-market surveillance regulations, which apply when necessary to
protect the public health or to provide additional safety and
effectiveness data for the device.
After a device receives a PMA, any modification that could significantly
affect its safety or effectiveness, or that would constitute a major change in
its intended use, will require a new clearance or approval. The FDA requires
each manufacturer to make this determination initially, but FDA can review any
such decision and can disagree with a manufacturer's determination.
The regulations also require that we report to FDA any incident in which
our product may have caused or contributed to a death or serious injury or in
which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury.
7
FRAUD AND ABUSE.
We may also directly or indirectly be subject to various federal and state
laws pertaining to healthcare fraud and abuse, including anti-kickback laws. In
particular, the federal healthcare program Anti-Kickback Statute prohibits
persons from knowingly and willfully soliciting, offering, receiving or
providing remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual, or the furnishing, arranging for or
recommending a good or service, for which payment may be made in whole or part
under federal healthcare programs, such as the Medicare and Medicaid programs.
Penalties for violations include criminal penalties and civil sanctions such as
fines, imprisonment and possible exclusion from Medicare, Medicaid and other
federal healthcare programs. The Anti-Kickback Statute is broad and prohibits
many arrangements and practices that are lawful in businesses outside of the
healthcare industry. In implementing the statute, the Office of Inspector
General ("OIG") has issued a series of regulations, known as the "safe harbors."
These safe harbors set forth provisions that, if met, will assure healthcare
providers and other parties that they will not be prosecuted under the
Anti-Kickback Statute. The failure of a transaction or arrangement to fit
precisely within one or more safe harbors does not necessarily mean that it is
illegal or that prosecution will be pursued. However, conduct and business
arrangements that do not fully satisfy each applicable element of a safe harbor
may result in increased scrutiny by government enforcement authorities, such as
the OIG.
INTERNATIONAL
International sales of medical devices are subject to foreign governmental
regulations, which vary substantially from country to country. The time required
to obtain clearance or approval by a foreign country may be longer or shorter
than that required for FDA clearance or approval, and the requirements may be
different.
With respect to our efforts in India, we have been informed that since our
device has successfully completed safety studies in India and based on current
Indian regulations on medical devices; we will be able to commercialize our
product as a medical device in India on a hospital by hospital basis with
approval of the institutional review boards of such hospitals.
If we receive such approval by one or more hospitals, we initially plan to
export Hemopurifiers(R) produced under GMP by our contract manufacturer in San
Diego, California. We will also be required to obtain an export license from the
FDA to export our products for commercial purposes. We have registered our
contract manufacturing arrangement with the FDA and are in the process of
applying for such an export license.
The primary regulatory environment in Europe is that of the European
Union, which has adopted numerous directives and has promulgated voluntary
standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential requirements of
the applicable directives and, accordingly, can be commercially distributed
throughout the member states of the European Union, and other countries that
comply with or mirror these directives. The method of assessing conformity
varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a notified body, an independent and neutral institution appointed by a
country to conduct the conformity assessment. This third-party assessment may
consist of an audit of the manufacturer's quality system and specific testing of
the manufacturer's device. Such an assessment is required in order for a
manufacturer to commercially distribute the product throughout these countries.
ISO 9001 and ISO 13845 certifications are voluntary harmonized standards.
Compliance establishes the presumption of conformity with the essential
requirements for a CE Marking.
PRODUCT LIABILITY
The risk of product liability claims, product recalls and associated
adverse publicity is inherent in the testing, manufacturing, marketing and sale
of medical products. We have limited clinical trial liability insurance
coverage. There can be no assurance that future insurance coverage will be
adequate or available. We may not be able to secure product liability insurance
coverage on acceptable terms or at reasonable costs when needed. Any liability
for mandatory damages could exceed the amount of our coverage. A successful
product liability claim against us could require us to pay a substantial
monetary award. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.
SUBSIDIARIES
We have one wholly-owned subsidiary, Exosome Sciences, Inc.
8
EMPLOYEES
At June 23, 2010, we had four full-time employees, comprised of our Chief
Executive Officer, our Chief Science Officer, a research scientist and an
executive assistant. We utilize, whenever appropriate, contract and part-time
professionals in order to conserve cash and resources. We currently contract a
Senior Vice President of Finance on a part-time basis, a Director of Business
Development and a Director of Corporate Communications on a contract basis. We
believe our employee relations are good. None of our employees are represented
by a collective bargaining unit.
ITEM 1A. RISK FACTORS
An investment in our common shares involves a high degree of risk and is
subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. In such an
event, the trading price for our common shares could decline substantially, and
you could lose all or part of your investment. In order to attain an
appreciation for these risks and uncertainties, you should read this annual
report in its entirety and consider all of the information and advisements
contained in this annual report, including the following risk factors and
uncertainties.
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR THE
FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. We have not
had any significant revenues from our principal operations. We have incurred
annual operating losses of $2,848,892 and $2,923,254, for the fiscal years ended
March 31, 2010 and 2009, respectively. At March 31, 2010 and 2009, we had an
accumulated deficit of $(42,760,510) and $(38,311,414), respectively. We have
incurred net losses of $4,573,315 and $6,084,158 for the fiscal years ended
March 31, 2010 and 2009. We have not had revenues to date. We expect that our
revenues, if any, will not be sufficient to sustain our operations for the
foreseeable future. Our profitability will require the successful
commercialization of our Hemopurifier(R) technology. No assurances can be given
when or if this will occur or that we will ever generate revenues or be
profitable.
WE HAVE RECEIVED AN EXPLANATORY PARAGRAPH FROM OUR AUDITORS REGARDING OUR
ABILITY TO CONTINUE AS A GOING CONCERN
Our independent registered public accounting firm noted in their report
accompanying our financial statements for our fiscal year ended March 31, 2010
that we had a significant deficit accumulated during the development stage, had
a working capital deficit and that a significant amount of additional capital
will be necessary to advance the development of our products to the point at
which we may become commercially viable and stated that those conditions raised
substantial doubt about our ability to continue as a going concern. Note 1 to
our financial statements for the year ended March 31, 2010 describes
management's plans to address these matters. We cannot assure you that our
business plans will be successful in addressing these issues. This explanatory
paragraph about our ability to continue as a going concern could affect our
ability to obtain additional financing at favorable terms, if at all, as it may
cause investors to lose faith in our long-term prospects. If we cannot
successfully continue as a going concern, our shareholders may lose their entire
investment in our common shares.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND WITHOUT
IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.
Should the financing we require to sustain our working capital needs be
unavailable to us on reasonable terms when we require it, the consequences could
be a material adverse effect on our business, operating results, financial
condition and prospects. If we cannot raise operating capital, we may be forced
to cease operations.
9
WE ARE RELIANT UPON LICENSES OF PATENTS AND TECHNOLOGIES FROM THIRD
PARTIES FOR THE DEVELOPMENT OF CERTAIN APPLICATIONS AND USES OF OUR DEVICES; THE
TERMINATION OF ANY SUCH LICENSE, OR A CHALLENGE TO THE PATENT AND INTELLECTUAL
PROPERTY UNDERLYING SUCH LICENSE COULD HAVE A MATERIAL AND ADVERSE EFFECT UPON
OUR ABILITY TO CONTINUE THE DEVELOPMENT OF OUR DEVICES IN CERTAIN FIELDS OF USE,
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS PROSPECTS AND THE VALUE OF YOUR
INVESTMENT IN OUR SECURITIES.
We rely upon third party licenses for the development of specific uses for
our Hemopurifer devices, including in the area of cancer treatment.
Specifically, we are researching, developing and testing cancer-related
applications for our devices under a license with Boston University and with the
London Health Science Center Research, Inc. and Mr. Thomas Ichim. Should either
of these licenses be prematurely terminated for any reason, or if the patents
and intellectual property owned by such entities that we have licensed are be
challenged or defeated by third parties, our research efforts could be
materially and adversely effected. There can be no assurances that these
licenses will continue in force for as long as we require for our research,
development and testing of cancer treatments. There can be no assurances that
should these licenses terminate, or should the underlying patents and
intellectual property be challenged or defeated, that suitable replacements can
be obtained or developed on terms acceptable to the Company, if at all.
WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.
Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(R) medical device candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases we target that:
o are more effective;
o have fewer or less severe adverse side effects;
o are better tolerated;
o are more adaptable to various modes of dosing;
o are easier to administer; or
o are less expensive than the products or product candidates we are
developing.
Even if we are successful in developing effective Hemopurifier(R)
products, and obtain FDA and other regulatory approvals necessary for
commercializing them, our products may not compete effectively with other
successful products. Researchers are continually learning more about diseases,
which may lead to new technologies for treatment. Our competitors may succeed in
developing and marketing products that are either more effective than those that
we may develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.
The Congress' passage of the Project BioShield Bill, a comprehensive
effort to develop and make available modern, effective drugs and vaccines to
protect against attack by biological and chemical weapons or other dangerous
pathogens, may encourage competitors to develop their own product candidates. We
cannot predict the decisions that will be made in the future by the various
government agencies as a result of such legislation.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies as well as universities and public and private research
institutions. Many of the organizations competing with us, have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do.
The market for medical devices is intensely competitive. Many of our
potential competitors have longer operating histories, greater name recognition,
more employees, and significantly greater financial, technical, marketing,
public relations, and distribution resources than we have. This intense
competitive environment may require us to make changes in our products, pricing,
licensing, services or marketing to develop, maintain and extend our current
technology. Price concessions or the emergence of other pricing or distribution
strategies of competitors may diminish our revenues (if any), adversely impact
our margins or lead to a reduction in our market share (if any), any of which
may harm our business.
10
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
To achieve the levels of production necessary to commercialize our
Hemopurifier(R) products, we will need to secure manufacturing agreements with
contract manufacturers which comply with good manufacturing practice standards
and other standards prescribed by various federal, state and local regulatory
agencies in the U.S. and any other country of use.
We have limited experience manufacturing products for testing purposes and
no experience manufacturing products for large scale commercial purposes. We
will likely outsource the manufacture of our Hemopurifier(R) products to third
parties operating FDA-certified facilities. To date, we have manufactured
devices on a small scale for testing purposes and have begun to utilize the
services of a contract manufacturer. There can be no assurance that
manufacturing and control problems will not arise as we attempt to commercialize
our products or that such manufacturing can be completed in a timely manner or
at a commercially reasonable cost. Any failure to address such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.
OUR HEMOPURIFIER(R) TECHNOLOGY MAY BECOME OBSOLETE.
Our Hemopurifier(R) products may be made unmarketable by new scientific or
technological developments where new treatment modalities are introduced that
are more efficacious and/or more economical than our Hemopurifier(R) products.
The Homeland Security industry is growing rapidly with many competitors trying
to develop products or vaccines to protect against infectious disease. Any one
of our competitors could develop a more effective product which would render our
technology obsolete.
OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO COMPLY
WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.
Our research and development involves the controlled use of hazardous
materials, chemicals and viruses. The primary hazardous materials include
chemicals needed to construct the Hemopurifier(R) cartridges and the infected
plasma samples used in preclinical testing of the Hemopurifier(R). All other
chemicals are fully inventoried and reported to the appropriate authorities,
such as the fire department, who inspect the facility on a regular basis. We are
subject to federal, state, local and foreign laws governing the use,
manufacture, storage, handling and disposal of such materials. Although we
believe that our safety procedures for the use, manufacture, storage, handling
and disposal of such materials comply with the standards prescribed by federal,
state, local and foreign regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials. We have had no
incidents or problems involving hazardous chemicals or biological samples. In
the event of such an accident, we could be held liable for significant damages
or fines. We currently carry a limited amount of insurance to protect us from
these damages. In addition, we may be required to incur significant costs to
comply with regulatory requirements in the future.
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EXECUTIVE OFFICERS. OUR
INABILITY TO RETAIN THOSE OFFICERS WOULD IMPEDE OUR BUSINESS PLAN AND GROWTH
STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.
Our success depends to a critical extent on the continued services of our
Chief Executive Officer, James A. Joyce and our Chief Science Officer, Richard
H. Tullis. Were we to lose one or both of these key executive officers, we would
be forced to expend significant time and money in the pursuit of a replacement,
which would result in both a delay in the implementation of our business plan
and the diversion of limited working capital. The loss of Dr. Tullis would harm
the clinical development of our products due to his unique experience with the
Hemopurifier(R) technology. The loss of Dr. Tullis and/or Mr. Joyce would be
detrimental to our growth as they possess unique knowledge of our business model
and infectious disease which would be difficult to replace within the
biotechnology field. We can give you no assurance that we can find satisfactory
replacements for these key executive officers at all, or on terms that are not
unduly expensive or burdensome to our company. Although Mr. Joyce and Mr. Tullis
have signed employment agreements providing for their continued service to our
company, these agreements will not preclude them from leaving our company. We do
not currently carry key man life insurance policies on any of our key executive
officers which would assist us in recouping our costs in the event of the loss
of those officers.
11
OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE OUR
ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS
PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS
AND COULD ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.
We currently have an extremely small staff comprised of four full time
employees consisting of our Chief Executive Officer, our Chief Science Officer,
a research scientist and an executive assistant. We also employ a Senior Vice
President - Finance, a Director of Business Development and a Director of
Corporate Communications on a contract basis. Although we believe that these
employees and consultants will be able to handle most of our additional
administrative, research and development and business development in the near
term, we will nevertheless be required over the longer-term to hire highly
skilled managerial, scientific and administrative personnel to fully implement
our business plan and growth strategies. Due to the specialized scientific
nature of our business, we are highly dependent upon our ability to attract and
retain qualified scientific, technical and managerial personal. Competition for
these individuals, especially in San Diego where many biotechnology companies
are located, is intense and we may not be able to attract, assimilate or retain
additional highly qualified personnel in the future. We cannot assure you that
we will be able to engage the services of such qualified personnel at
competitive prices or at all, particularly given the risks of employment
attributable to our limited financial resources and lack of an established track
record.
WE PLAN TO GROW RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT TEAM
AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED MANAGERIAL,
OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO TRAIN AND
MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR INABILITY TO
MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND PROFITS AND
TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE
A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We will need to significantly expand our operations to implement our
longer-term business plan and growth strategies. We will also be required to
manage multiple relationships with various strategic partners, technology
licensors, customers, manufacturers and suppliers, consultants and other third
parties. This expansion and these expanded relationships will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effectuate these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot assure you that we will
institute, in a timely manner or at all, the improvements to our managerial,
operational and financial systems, procedures and controls necessary to support
our anticipated increased levels of operations and to coordinate our various
corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND OUTSIDE
INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR CONCERNS
RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND SHAREHOLDER CLAIMS
BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD COMPANY.
The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these perceived risks, directors and management are also
becoming increasingly concerned with the availability of directors and officers
liability insurance to pay on a timely basis the costs incurred in defending
such claims. We currently do carry limited directors and officers liability
insurance. Directors and officers liability insurance is expensive and difficult
to obtain. If we are unable to continue or provide directors and officers
liability insurance at affordable rates or at all, it may become increasingly
more difficult to attract and retain qualified outside directors to serve on our
board of directors. We may lose potential independent board members and
management candidates to other companies in the biotechnology field that have
greater directors and officers liability insurance to insure them from liability
or to biotechnology companies that have revenues or have received greater
funding to date which can offer greater compensation packages. The fees of
directors are also rising in response to their increased duties, obligations and
liabilities as well as increased exposure to such risks. As a company with a
limited operating history and limited resources, we will have a more difficult
time attracting and retaining management and outside independent directors than
a more established company due to these enhanced duties, obligations and
liabilities.
12
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, INCLUDING OUR
U.S. AND INTERNATIONAL PATENTS COULD NEGATIVELY IMPACT OUR PROJECTED GROWTH AND
ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON
OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.
In the case of patents, we cannot give you any assurance that our existing
patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. We believe that certain patent applications filed
and/or other patents issued more recently will help to protect the proprietary
nature of the Hemopurifier(R) treatment technology.
The Hemopurifier(R) and related treatment approaches are protected by
three issued U.S. patents and seven issued international patents. We have also
applied for five additional U.S. patents and twenty one additional international
patents.
We also rely on proprietary designs, technologies, processes and know-how
not eligible for patent protection. We cannot give you any assurance that our
competitors will not independently develop the same or superior designs,
technologies, processes and know-how.
While we have and will continue to enter into proprietary rights
agreements with our employees and third parties giving us proprietary rights to
certain technology developed by those employees or parties while engaged by our
company, we can give you no assurance that courts of competent jurisdiction will
enforce those agreements.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS OF DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE
PREVENTED OR DELAYED.
Our pathogen filtration devices, or Hemopurifier(R) products, are subject
to extensive government regulations related to development, testing,
manufacturing and commercialization in the U.S. and other countries. The
determination of when and whether a product is ready for large-scale purchase
and potential use will be made by the U.S. government through consultation with
a number of governmental agencies, including the FDA, the National Institutes of
Health, the Centers for Disease Control and Prevention and the Department of
Homeland Security. Our product candidates are in the pre-clinical and clinical
stages of development and have not received required regulatory approval from
the FDA to be commercially marketed and sold. The process of obtaining and
complying with FDA and other governmental regulatory approvals and regulations
is costly, time consuming, uncertain and subject to unanticipated delays. Such
regulatory approval (if any) and product development requires several years.
Despite the time and expense exerted, regulatory approval is never guaranteed.
We also are subject to the following risks and obligations, among others.
o The FDA may refuse to approve an application if they believe that
applicable regulatory criteria are not satisfied.
o The FDA may require additional testing for safety and effectiveness.
o The FDA may interpret data from pre-clinical testing and clinical
trials in different ways than we interpret them.
o If regulatory approval of a product is granted, the approval may be
limited to specific indications or limited with respect to its
distribution.
o The FDA may change their approval policies and/or adopt new
regulations.
13
Failure to comply with these or other regulatory requirements of the FDA
may subject us to administrative or judicially imposed sanctions, including:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention;
o product recalls; and
o total or partial suspension of productions.
DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE OUR
ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(R) PRODUCT
CANDIDATES ON A TIMELY BASIS.
Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(R) product candidates. Completion of
our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:
o serious adverse events related to our medical device candidates;
o unsatisfactory results of any clinical trial;
o the failure of our principal third-party investigators to perform
our clinical trials on our anticipated schedules; and/or
o different interpretations of our pre-clinical and clinical data,
which could initially lead to inconclusive results.
Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our Hemopurifier(R) product
candidates do not prove to be safe or effective or do not receive required
regulatory approvals, our financial results and the commercial prospects for our
product candidates will be harmed. Furthermore, our inability to complete our
clinical trials in a timely manner could jeopardize our ability to obtain
regulatory approval.
THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.
WE MAY FAIL TO OBTAIN GOVERNMENT CONTRACTS TO DEVELOP OUR HEMOPURIFIER(R)
TECHNOLOGY FOR BIODEFENSE APPLICATIONS.
The U.S. Government has undertaken commitments to help secure improved
countermeasures against bioterrorism. To date, we have been unsuccessful in
obtaining grant income. As a result, future attempts to obtain grant income from
the Federal Government will be sought through direct communication to government
health and military agencies, and may include unsolicited proposals to provide
the Hemopurifier(R) as a treatment countermeasure.
At present, the Hemopurifier(R) has not been approved for use by any U.S.
Government agency, nor have we received any contracts to purchase the
Hemopurifier(R). Since inception, we have not generated revenues from the sale
of any product based on our Hemopurifier(R) technology platform. The process of
obtaining government contracts is lengthy with the uncertainty that we will be
successful in obtaining announced grants or contracts for therapeutics as a
medical device technology. Accordingly, we cannot be certain that we will be
awarded any U.S. Government grants or contracts utilizing our Hemopurifier(R)
platform technology.
14
U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.
Our business plan to provide biodefense product candidates may involve
contracts with the U.S. Government. U.S. Government contracts typically contain
unfavorable termination provisions and are subject to audit and modification by
the government at its sole discretion, which subjects us to additional risks.
These risks include the ability of the U.S. Government to unilaterally:
o suspend or prevent us for a period of time from receiving new
contracts or extending existing contracts based on violations
or suspected violations of laws or regulations;
o audit and object to our contract-related costs and fees,
including allocated indirect costs;
o control and potentially prohibit the export of our products;
and
o change certain terms and conditions in our contracts.
If we were to become a U.S. Government contractor, we would be required
to comply with applicable laws, regulations and standards relating to our
accounting practices and would be subject to periodic audits and reviews. As
part of any such audit or review, the U.S. Government may review the adequacy
of, and our compliance with, our internal control systems and policies,
including those relating to our purchasing, property, estimating, compensation
and management information systems. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees, including allocated
indirect costs. In addition, if an audit or review uncovers any improper or
illegal activity, we would possibly be subject to civil and criminal penalties
and administrative sanctions, including termination of our contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from
doing business with the U.S. Government. We could also suffer serious harm to
our reputation if allegations of impropriety were made against us. Although
adjustments arising from government audits and reviews have not seriously harmed
our business in the past, future audits and reviews could cause adverse effects.
In addition, under U.S. Government purchasing regulations, some of our costs,
including most financing costs, amortization of intangible assets, portions of
our research and development costs, and some marketing expenses, would possibly
not be reimbursable or allowed under such contracts. Further, as a U.S.
Government contractor, we would be subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower lawsuits and
other legal actions and liabilities to which purely private sector companies are
not.
THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT BIOTERRORISM ARE
STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE DEVELOP, IF
EFFECTIVE, WOULD MEET THESE REQUIREMENTS.
We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.
15
OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE TO
RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR MARKET
ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.
Our previously planned products have not become marketable products due in
part to our transition in 2001 from a focus on utilizing our Hemopurifier(R)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and to take
advantage of the greater sense of urgency surrounding acute and chronic
infectious diseases. Prior to initiating the development of infectious disease
Hemopurifiers(R), we successfully completed an FDA approved Phase I human safety
trial of a Hemopurifier(R) to treat aluminum and iron intoxication. Since
changing the focus to infectious disease research, we have not initiated an FDA
approved human clinical trial as the development of the technology is still
continuing and will require both significant capital and scientific resources.
Our pending products face similar challenges of obtaining successful clinical
trials in route to gaining FDA approval prior to commercialization.
Additionally, our limited financial resources hinder the speed of our product
development due to personnel constraints.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including the:
o lack of adequate quality or sufficient prevention benefit, or
unacceptable safety during pre-clinical studies or clinical trials;
o failure to receive necessary regulatory approvals;
o existence of proprietary rights of third parties; and/or
o inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.
THE PATENTS WE OWN COMPRISE A MAJORITY OF OUR ASSETS WHICH COULD LIMIT OUR
FINANCIAL VIABILITY.
The Hemopurifier(R) is protected by three issued U.S. patents and seven
issued international patents. One of the U.S. patents is covered via an
exclusive license. Our exclusive license expires March 2020 and is subject to
termination if the inventors have not received a minimum of $15,000 in any year
during the term beginning in the second year after the FDA approves the
Hemopurifier(R). These patents comprise a majority of our assets. At March 31,
2010, our intellectual property assets comprise 31% of our non-current assets,
and 22% of total assets. If our existing patents are invalidated or if they fail
to provide significant commercial benefits, it will severely hurt our financial
condition as a majority of our assets would lose their value. Further, since the
financial value of our patents is written down for accounting purposes over the
course of their term until they expire, our assets comprised of patents will
continually be written down until they lose value altogether.
LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE LIKELY
TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.
There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may potentially be new accounting pronouncements or additional
regulatory rulings which will have an impact on our future financial position
and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes
as well as proposed legislative initiatives following the Enron bankruptcy have
increased our general and administrative costs as we have incurred increased
legal and accounting fees to comply with such rule changes. Further, proposed
initiatives are expected to result in changes in certain accounting rules,
including legislative and other proposals to account for financial instruments
at fair value. These and other potential changes could materially increase the
expenses we report under accounting principles generally accepted in the United
States of America, and adversely affect our operating results.
16
OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
Our Hemopurifier(R) products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or
our products are designed inappropriately, we may be subject to lawsuits seeking
significant compensatory and punitive damages. The risk of product liability
claims, product recalls and associated adverse publicity is inherent in the
testing, manufacturing, marketing and sale of medical products. We do not have
general clinical trial liability insurance coverage. There can be no assurance
that future insurance coverage will to be adequate or available. We may not be
able to secure product liability insurance coverage on acceptable terms or at
reasonable costs when needed. Any product recall or lawsuit seeking significant
monetary damages may have a material affect on our business and financial
condition. Any liability for mandatory damages could exceed the amount of our
coverage. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR IMPAIR OUR ABILITY TO MARKET OUR
PRODUCTS.
Products developed to treat diseases caused by or to combat the threat of
bioterrorism will be subject to changing political and social environments. The
political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business. Bioterrorism has become the focus of political debates both
in terms of how to approach bioterrorism and the amount of funding the
government should provide for any programs involving homeland protection.
Government funding for products on bioterrorism could be reduced which would
hinder our ability to obtain governmental grants.
RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL BE
PAID IN THE FORESEEABLE FUTURE.
We do not anticipate paying cash dividends on our common shares in the
foreseeable future, and we cannot assure an investor that funds will be legally
available to pay dividends, or that even if the funds are legally available,
that the dividends will be paid.
THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL
THOSE SHARES.
As long as the trading price of our common shares is below $5 per share,
the open-market trading of our common shares will be subject to the "penny
stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
17
OUR COMMON SHARES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
Our common shares have historically been sporadically or "thinly-traded"
on the OTCBB, meaning that the number of persons interested in purchasing our
common shares at or near ask prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came to
the attention of such persons, they tend to be risk-averse and would be
reluctant to follow an unproven company such as ours or purchase or recommend
the purchase of our shares until such time as we became more seasoned and
viable. As a consequence, there may be periods of several days or more when
trading activity in our shares is minimal or non-existent, as compared to a
seasoned issuer which has a large and steady volume of trading activity that
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common shares will develop or be sustained, or that
current trading levels will be sustained.
THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR
STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC
FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUE WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE
PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In fact, during the 52-week period ended March 31, 2010, the high and
low closing sale prices of a share of our common stock were $0.64 and $0.20,
respectively. The volatility in our share price is attributable to a number of
factors. First, as noted above, our common shares are sporadically and/or thinly
traded. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders may disproportionately influence
the price of those shares in either direction. The price for our shares could,
for example, decline precipitously in the event that a large number of our
common shares are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky" investment due to
our limited operating history and lack of revenue or profit to date, and the
uncertainty of future market acceptance for our potential products. As a
consequence of this enhanced risk, more risk-adverse investors may, under the
fear of losing all or most of their investment in the event of negative news or
lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; acceptance of our proprietary technology as a viable method
of augmenting the immune response of clearing viruses and toxins from human
blood; government regulations, announcements of significant acquisitions,
strategic partnerships or joint ventures; our capital commitments and additions
or departures of our key personnel. Many of these factors are beyond our control
and may decrease the market price of our common shares regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as
to what effect the sale of shares or the availability of common shares for sale
at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No. 34-29093,
the market for penny stocks has suffered in recent years from patterns of fraud
and abuse. Such patterns include (1) control of the market for the security by
one or a few broker-dealers that are often related to the promoter or issuer;
(2) manipulation of prices through prearranged matching of purchases and sales
and false and misleading press releases; (3) boiler room practices involving
high-pressure sales tactics and unrealistic price projections by inexperienced
sales persons; (4) excessive and undisclosed bid-ask differential and markups by
selling broker-dealers; and (5) the wholesale dumping of the same securities by
promoters and broker-dealers after prices have been manipulated to a desired
level, along with the resulting inevitable collapse of those prices and with
consequent investor losses. Our management is aware of the abuses that have
occurred historically in the penny stock market. Although we do not expect to be
in a position to dictate the behavior of the market or of broker-dealers who
participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
18
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY 17.5%
OF OUR OUTSTANDING COMMON SHARES AS OF JUNE 24, 2010, WHICH MAY LIMIT YOUR
ABILITY OR THAT OF OTHER SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR TOGETHER,
TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR COMPANY.
ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR PREVENT A
POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN YOU RECEIVING A
PREMIUM OVER THE MARKET PRICE FOR YOUR COMMON SHARES.
As of June 24, 2010, our officers and directors beneficially own or
control approximately 17.5% of our outstanding common shares (assuming the
exercise of all outstanding options and warrants held by our officers and
directors). In addition, our Board has approved the grant of 4,000,000 shares of
restricted stock to our Chief Executive Officer, and upon such issuance in full
of such shares, the beneficial ownership of our officers and directors will
increase to 21.2%. These persons will have the ability to substantially
influence all matters submitted to our shareholders for approval and to control
our management and affairs, including extraordinary transactions such as mergers
and other changes of corporate control, and going private transactions.
A LARGE NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF OUTSTANDING
COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY NOTES. THE
EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE SUBSTANTIAL
DILUTION OF YOUR INVESTMENT IN TERMS OF YOUR PERCENTAGE OWNERSHIP IN THE COMPANY
AS WELL AS THE BOOK VALUE OF YOUR COMMON SHARES. THE SALE OF A LARGE AMOUNT OF
COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON THE PUBLIC
MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME TAXES, OR THE
PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY DEPRESS THE
PREVAILING MARKET PRICES FOR OUR SHARES.
As of March 31, 2010, there are outstanding purchase options and warrants
entitling the holders to purchase 38,776,526 common shares at a weighted average
exercise price of $0.33 per share. That figure includes 3,980,021 warrants that
are conditional upon the exercise of other warrants or conversion of certain
convertible debt instruments. There are 14,265,999 shares underlying promissory
notes convertible into common stock at a weighted average exercise price of
$0.20. The exercise price for all of the aforesaid warrants may be less than
your cost to acquire our common shares. In the event of the exercise of these
securities, you could suffer substantial dilution of your investment in terms of
your percentage ownership in the company as well as the book value of your
common shares. In addition, the holders of the common share purchase options or
warrants may sell common shares in tandem with their exercise of those options
or warrants to finance that exercise, or may resell the shares purchased in
order to cover any income tax liabilities that may arise from their exercise of
the options or warrants.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.
We are entitled under our certificate of incorporation to issue up to
250,000,000 shares of common stock. We have reserved for issuance 53,669,525
shares of common stock for existing options, warrants and convertible notes. We
have issued and outstanding, as of March 31, 2010, 61,913,508 shares of common
stock. As a result, as of March 31, 2010 we have 134,416,967 common shares
available for issuance to new investors. Our board may generally issue shares of
common stock, or options or warrants to purchase those shares, without further
approval by our shareholders based upon such factors as our board of directors
may deem relevant at that time. It is likely that we will be required to issue a
large amount of additional securities to raise capital to further our
development. It is also likely that we will be required to issue a large amount
of additional securities to directors, officers, employees and consultants as
compensatory grants in connection with their services, both in the form of
stand-alone grants or under our stock plans. We cannot give you any assurance
that we will not issue additional shares of common stock, or options or warrants
to purchase those shares, under circumstances we may deem appropriate at the
time.
19
OUR ISSUANCE OF ADDITIONAL COMMON SHARES IN EXCHANGE FOR SERVICES OR TO
REPAY DEBT, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS AND
COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
Our board may generally issue shares of common stock to pay for debt or
services, without further approval by our shareholders based upon such factors
that our board of directors may deem relevant at that time. For the past four
years, we issued a total of 12,704,767 shares for debt to reduce our
obligations. The average price discount of common stock issued for debt in this
period, weighted by the number of shares issued for debt in such period was
40.0% and 35.7% for the years ended March 31, 2010 and 2009, respectively.
For the past four fiscal years we issued a total of 5,343,758 shares as
payment for services. The average price discount of common stock issued for
services during this period, weighted by the number of shares issued was 6.0%
and 4.3% for the years ended March 31, 2010 and 2009, respectively. It is likely
that we will issue additional securities to pay for services and reduce debt in
the future. We cannot give you any assurance that we will not issue additional
shares of common stock under circumstances we may deem appropriate at the time.
THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS AND
EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.
Our certificate of incorporation contains provisions which eliminate the
liability of our directors for monetary damages to our company and shareholders.
Our bylaws also require us to indemnify our officers and directors. We may also
have contractual indemnification obligations under our agreements with our
directors, officers and employees. The foregoing indemnification obligations
could result in our company incurring substantial expenditures to cover the cost
of settlement or damage awards against directors, officers and employees, that
we may be unable to recoup. These provisions and resultant costs may also
discourage our company from bringing a lawsuit against directors, officers and
employees for breaches of their fiduciary duties, and may similarly discourage
the filing of derivative litigation by our shareholders against our directors,
officers and employees even though such actions, if successful, might otherwise
benefit our company and shareholders.
ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.
Certain provisions of the Nevada General Corporation Law have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in
acquiring us to negotiate with, and to obtain the approval of, our Board of
Directors in connection with such a transaction. However, certain of these
provisions may discourage a future acquisition of us, including an acquisition
in which the shareholders might otherwise receive a premium for their shares. As
a result, shareholders who might desire to participate in such a transaction may
not have the opportunity to do so.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a Smaller Reporting Company, we are not required to furnish information under
this Item 1B.
ITEM 2. PROPERTIES
We currently rent approximately 2,300 square feet of executive office
space at 8910 University Center Lane, Suite 660, San Diego, CA 92122 at the rate
of $6,045 per month on a four year lease that expires in September 2013. We also
rent approximately 1,700 square feet of laboratory space at 11585 Sorrento
Valley Road, Suite 109, San Diego, California 92121 at the rate of $1,667 per
month on a two year lease that expires in October 2011.
ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various claims, lawsuits, disputes
with third parties or breach of contract actions incidental to the normal course
of business operations. We are currently not involved in any such litigation or
any pending legal proceedings that we believe could have a material adverse
effect on our financial position or results of operations.
ITEM 4. REMOVED AND RESERVED
20
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Our Common Stock is quoted on the Over-The-Counter Bulletin Board
(OTCBB).Our trading symbol is "AEMD."
Our Common Stock has had a limited and sporadic trading history.
The following table sets forth for the calendar period indicated the
quarterly high and low bid prices for our Common Stock as reported by the OTCBB.
The prices represent quotations between dealers, without adjustment for retail
markup, mark down or commission, and do not necessarily represent actual
transactions.
BID PRICE
---------------------
PERIOD HIGH LOW
--------------------------------------------------------------------------------
Calendar 2010:
First Quarter $ 0.48 $ 0.29
Calendar 2009:
Fourth Quarter 0.73 0.23
Third Quarter 0.36 0.23
Second Quarter 0.36 0.19
First Quarter 0.27 0.12
Calendar 2008:
Fourth Quarter 0.45 0.19
Third Quarter 0.50 0.25
Second Quarter 0.61 0.38
First Quarter 0.75 0.45
There were approximately 144 record holders of our common stock at June
23, 2010. The number of registered shareholders includes any beneficial owners
of common shares held in street name.
We have not declared any cash dividends on our common stock since
inception and do not anticipate any in the future. Our current business plan is
to retain any future earnings to finance the expansion and development of our
business. Any future determination to pay cash dividends will be at the
discretion of our board of directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors our
board may deem relevant at that time.
The transfer agent and registrar for our common stock is Computershare
Investor Services, located at 350 Indiana Street, Suite 800, Golden, Colorado
80401; 303-262-0600.
RECENT SALES OF UNREGISTERED SECURITIES
We have sold or issued the following securities not registered under the
Securities Act in reliance upon the exemption from registration pursuant to
Section 4(2) of the Securities Act or Regulation D of the Securities Act during
the fiscal year ended March 31, 2010 Except as stated below, no underwriting
discounts or commissions were payable with respect to any of the following
transactions.
21
COMMON STOCK AND WARRANTS
In April 2009, we issued 1,688,211 shares of common stock as a result of
conversions of $263,478 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors. The range of
conversion prices was between $0.15 and $0.16 per share.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
In April 2009, we issued 490,000 shares of restricted common stock valued at the
closing price to two investor relations firms in payment for investor relations
services with an aggregate value of $108,700.
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In May 2009, holders of certain convertible notes converted $139,256 of
principal and accrued interest into 878,059 shares of our common stock pursuant
to the terms of the notes at an average conversion rate of approximately $0.16
per share.
In May 2009, we issued 40,104 shares of restricted common stock at a price of
$0.24 per share to an investment banking firm in payment for financial advisory
services valued at $9,625 based on the value of the services provided.
In June 2009, we issued 779,956 shares of common stock as a result of
conversions of $143,512 of convertible notes payable and related accrued
interest at a conversion price per share of $0.18. The shares were issued to
accredited investors.
On June 29, 2009, we committed to issue 4,000,000 shares of restricted common
stock to Mr. Joyce, our Chief Executive Officer, at a price per share of $0.24,
which shall vest in equal installments over a thirty six month period commencing
June 30, 2010.
In July 2009, we issued 518,649 shares of common stock as a result of
conversions of $100,566 of convertible notes payable and related accrued
interest at a conversion price per share of $0.19. The shares were issued to
accredited investors.
In October 2009, we issued 100,000 shares of restricted common stock as a
donation to a scientific research foundation valued at $25,000 based on the
closing price of $0.25.
In October 2009, we issued 2,511,264 shares of common stock as a result of
conversions of $481,297 of convertible notes payable and related accrued
interest at a conversion price per share of $0.19. The shares were issued to
accredited investors.
In October and November 2009, we raised $430,000 through the issuance of 10%
convertible notes to accredited investors. The notes are convertible into our
common stock at a fixed conversion price of $0.25 per share. The investors also
received 1,720,000 three year warrants to purchase shares of our common stock at
$0.25 per share. We also issued to a finder as deferred offering costs a
convertible note for $20,250 on the same terms as those received by the
investors. Three of the investors in this financing immediately converted their
notes totaling $70,000 to 280,000 shares of our common stock per the conversion
formula in the notes.
In November 2009, we issued 117,759 shares of common stock as a result of
conversions of $38,595 of notes payable and related accrued interest ($12,500 in
a 12% Note Payable at a conversion price per share of $0.43 and $10,000 in a May
& June 2009 10% Convertible Note at a conversion price per share of $0.20. The
shares were issued to accredited investors.
In December 2009, we issued 211,665 shares of common stock as a result of the
conversion of a $40,000 convertible note payable and related accrued interest at
a conversion price per share of $0.20. The shares were issued to an accredited
investor.
In January 2010, we issued 36,683 shares of restricted common stock to a patent
licensor as a patent license payment valued at $11,500 at a price per share of
$0.31.
22
In January 2010, we issued to the holders of certain convertible debentures
731,251 shares of restricted common stock and 731,251 warrants to purchase our
common stock at $0.20 per share to repay $146,250 of interest on those
debentures accrued through January 31, 2010.
In February 2010, we issued 29,878 shares of restricted common stock to a law
firm as a result of the conversion of $8,963 of accrued legal expenses based on
the value of the services provided.
In March 2010, we issued 1,444,185 shares of common stock as a result of the
conversion of a $330,000 convertible note payable and related accrued interest.
The range of conversion prices was between $0.24 and $0.25 per share. The shares
were issued to an accredited investor.
In March 2010, we issued 10,895 shares of restricted common stock at $0.34 to a
consultant in payment for investor relations services valued at $3,750 based on
the value of the services provided.
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth March 31, 2010 information on our equity
compensation plans (including the potential effect of debt instruments
convertible into common stock) in effect as of that date:
(c)
Number of securities
remaining available
for future issuance
(a) (b) under equity
Number of securities to Weighted-average compensation plans
be issued upon exercise exercise price of (excluding securities
of outstanding options, outstanding options, reflected in column
Plan category warrants and rights (1)(2) warrants and rights (a))
Equity compensation
plans approved by
security holders 32,500 $ 2.65 457,500
Equity compensation
plans not approved by
security holders (1)(3) 13,383,560 $ 0.36 N/A
-------------------------- -------------------- ---------------------
Totals 13,416,060 $ 0.37 457,500
(1) The description of the material terms of non-plan issuances of equity
instruments is discussed in Note 6 to the accompanying consolidated financial
statements.
(2) Net of equity instruments forfeited, exercised or expired.
(3) On June 8, 2009, our board of directors approved the grant to Mr. Joyce of
4,000,000 shares of restricted common stock at a price per share of $0.24, the
vesting and issuance of which will occur in equal installments over a
thirty-six-month period commencing June 30, 2010. Mr. Joyce may, from time to
time, defer acceptance of the shares. However, all shares must be issued and
accepted by Mr. Joyce by the expiration of the thirty-six-month vesting period.
23
2000 STOCK OPTION PLAN
Number of
securities to be Weighted average
issued upon exercise price Number of
exercise of of outstanding securities
outstanding options, remaining
options, warrants warrants and available for
Plan Category and rights rights future issuance
--------------------- ------------------- ------------------ ----------------
(a) (b) (c)
--------------------- ------------------- ------------------ ---------------
Equity compensation
plans approved by
security holders 32,500 $ 2.65 457,500
--------------------- ------------------- ------------------ ----------------
Equity compensation
plans not approved
by security holders -- -- --
--------------------- ------------------- ------------------ ----------------
Total 32,500 $ 2.65 457,500
--------------------- ------------------- ------------------ ----------------
Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000,
provides for the grant of incentive stock options ("ISOs") to our full-time
employees (who may also be directors) and nonstatutory stock options ("NSOs") to
non-employee directors, consultants, customers, vendors or providers of
significant services. The exercise price of any ISO may not be less than the
fair market value of the Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of the Common Stock on the date of grant.
The amount reserved under the Plan is 500,000 options.
At March 31, 2010, we had granted 32,500 options and 10,000 restricted
shares under the 2000 Stock Option Plan, with 457,500 available for future
issuance.
2003 CONSULTANT STOCK PLAN
-------------------- ------------------- ------------------ -----------------
Number of shares
of common stock Weighted average Number of common
available for price of shares shares remaining
issuance under issued under the available for
Plan Category the plan plan future issuance
-------------------- ------------------- ------------------ -----------------
(a) (b) (c)
-------------------- ------------------- ------------------ -----------------
Equity compensation
plans approved by
security holders -- -- --
-------------------- ------------------- ------------------ -----------------
Equity compensation
plans not approved
by security holders 7,500,000 $ 0.29 1,250,649
-------------------- ------------------- ------------------ -----------------
Total 7,500,000 $ 0.29 1,250,649
-------------------- ------------------- ------------------ -----------------
Our 2003 Consultant Stock Plan, as amended from time to time (the "Stock
Plan"), adopted by us in August 2003, advances our interests by helping us
obtain and retain the services of persons providing consulting services upon
whose judgment, initiative, efforts and/or services we are substantially
dependent, by offering to or providing those persons with incentives or
inducements affording such persons an opportunity to become owners of our
capital stock. Consultants or advisors are eligible to receive grants under the
plan program only if they are natural persons providing bona fide consulting
services to us, with the exception of any services they may render in connection
with the offer and sale of our securities in a capital-raising transaction, or
which may directly or indirectly promote or maintain a market for our
securities. The Stock Plan provides for the grants of common stock. No awards
may be issued after the ten-year anniversary of the date we adopted the Stock
Plan, the termination date for the plan. We have periodically amended the Stock
Plan to increase the number of shares available for issuance under the Stock
Plan with the approval of our Board of Directors.
24
On March 29, 2004, we filed with the SEC a registration statement on Form
S-8 for the purpose of registering 1,000,000 common shares issuable under the
Stock Plan under the Securities Act of 1933.
On August 29, 2005, we filed with the SEC a registration statement on Form
S-8 for the purpose of registering 2,000,000 common shares issuable under the
Stock Plan under the Securities Act of 1933.
On August 9, 2007, we filed with the SEC a registration statement on Form
S-8 for the purpose of registering 2,000,000 common shares issuable under the
Stock Plan under the Securities Act of 1933.
On July 10, 2009, we filed with the SEC a registration statement on Form
S-8 for the purpose of registering 1,000,000 common shares issuable under the
Stock Plan under the Securities Act of 1933.
On February 17, 2010, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 1,500,000 common shares issuable under
the Stock Plan under the Securities Act of 1933.
At March 31, 2010, 1,250,649 shares of common stock remain to be issued
under the 2003 Consultant Stock Plan.
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February 2005,
we adopted our 2005 Directors Compensation Program (the "Directors Compensation
Program") which advances our interests by helping us to obtain and retain the
services of outside directors upon whose judgment, initiative, efforts and/or
services we are substantially dependent, by offering to or providing those
persons with incentives or inducements affording them an opportunity to become
owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will
receive a one-time grant of a non-qualified stock option of 1.5% of the common
stock outstanding at the time of election. The options will vest one-third at
the time of election to the Board and the remaining two-thirds will vest equally
at year end over three years. Additionally, each director will also receive an
annual $25,000 non-qualified stock option retainer, $15,000 of which is to be
paid at the first of the year to all directors who are on the Board prior to the
first meeting of the year and a $10,000 retainer will be paid if a director
attends 75% of the meetings either in person, via conference call or other
electronic means. The exercise price for the options under the Directors
Compensation Program will equal the average closing of the last ten (10) trading
days prior to the date earned.
At March 31, 2010 under the 2005 Directors Compensation Program we had
issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors, 514,550 outside directors options had been forfeited,
250,000 outside directors options had been exercised and 3,671,550 options
remained outstanding.
STAND-ALONE GRANTS
From time to time our Board of Directors grants restricted stock or
common share purchase options or warrants to selected directors, officers,
employees and consultants as equity compensation to such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.
On June 8, 2009, our board of directors approved the grant to Mr. Joyce of
4,000,000 shares of restricted common stock at a price per share of $0.24, the
vesting and issuance of which will occur in equal installments over a
thirty-six-month period commencing June 30, 2010. Mr. Joyce may, from time to
time, defer acceptance of the shares. However, all shares must be issued and
accepted by Mr. Joyce by the expiration of the thirty-six-month vetsing period.
To date we have issued 12,393,158 options (of which 4,985,025 have been
exercised or cancelled) and authorized the issuance of 4,000,000 shares of
restricted stock outside of the 2005 Directors Compensation Plan, 2000 Stock
Option Plan and the 2003 Consultant Stock Plan.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to furnish information under
this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated Financial Statements and Notes thereto appearing elsewhere in
this report.
25
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this document we make a number of statements, referred to as
"FORWARD-LOOKING STATEMENTS" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), that are intended to
convey our expectations or predictions regarding the occurrence of possible
future events or the existence of trends and factors that may impact our future
plans and operating results. The safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995 does not apply
to us. We note, however, that these forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they do
develop, the pace at which they develop;
o our ability to attract and retain the qualified personnel to
implement our growth strategies;
o our ability to obtain approval from the Food and Drug Administration
for our products;
o our ability to protect the patents on our proprietary technology;
o our ability to fund our short-term and long-term operating needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in the
sections of this prospectus, including those captioned
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
Each forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our company and our
business made elsewhere in this prospectus as well as other pubic reports filed
with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.
Overview
We are a development stage medical device company focused primarily on the
advancement of our proprietary Hemopurifier(R) platform treatment technology,
which is designed to rapidly reduce the presence of infectious viruses and
toxins in human blood. Our focus is to prepare our Hemopurifier(R) to treat
chronic viral conditions, acute viral conditions and viral-based bioterror
threats in human clinical trials. Our Hemopurifier(R)is not yet approved for use
in humans, and to date we have not generated any revenues from product sales.
26
Results of Operations
Operating Expenses
Consolidated operating expenses were $2,848,892 for the fiscal year ended
March 31, 2010, versus $2,923,254 for the comparable period one year ago. The
net decrease of $74,362 was due to a decrease in payroll expense of $368,007,
which was partially offset by increases in professional fees of $238,917 and in
general and administrative expense of $54,728.
Payroll and related expenses decreased by $368,007 as compared to the
prior fiscal year. The decrease was principally driven by a decrease in stock
compensation expense of $174,887 largely because there were no new stock option
grants during the fiscal year ended March 31, 2010. Additionally, due to
headcount reductions, our general and administrative payroll decreased by
$42,153 and our research and development payroll decreased by $126,170
The $238,917 increase in our professional fees arose from a number of
factors, including $100,864 in charges by a contract manufacturer for
establishing the systems to manufacture our product under the FDA's good
manufacturing practices and also to produce both a trial product manufacturing
run and to produce our first commercial batch of products. Other factors
included a $78,824 increase in fees related to business development work, a
$89,557 increase in our investor relations-related expenses and a $20,000
increase in director's fees. The above-noted increases were partially offset by
a $5,436 decrease in our accounting and financial consulting fees and a $54,515
reduction in our scientific consulting fees. $337,328, or approximately 31%, of
our professional fees for the fiscal year ended March 31, 2010 were paid for
through issuances of our common stock.
The $54,728 increase in general and administrative expenses arose from a
number of factors, including a $25,000 stock-based contribution to a scientific
research institute, a $24,245 increase in investor relations and travel expense
which were partially offset by a $51,490 reduction in lab supplies.
Other Expenses
In the fiscal year ended March 31, 2009, we recognized $1,604,715 in
non-cash losses on extinguishment of debt. $1,380,772 of that loss arose out of
the restructuring of $715,000 in notes and the remainder related to the value of
warrants issued as part of interest payments. In the fiscal year ended March 31,
2010, we recognized $341,984 in losses on settlement of accrued interest and
damages.
Both periods include changes in the fair value of derivative liability.
For the fiscal year ended March 31, 2010, the change in the estimated fair value
of derivative liability was a gain of $178,723 and for the fiscal year ended
March 31, 2009, the change in estimated fair value was a gain of $213,903.
27
The combination of interest expenses and other expenses decreased by
$208,562. The following table breaks out the various components of our interest
expense over the fiscal years ended March 31, 2010 and 2009:
Components of Interest Expense in
Fiscal Year Ended
March 31, March 31,
2010 2009 Change
----------- ----------- ----------
ACTUAL INTEREST EXPENSE 329,038 302,679 26,359
AMORTIZATION OF DEFERRED OFFERING COSTS 61,313 110,851 (49,538)
AMORTIZATION OF NOTE DISCOUNTS 638,505 1,376,465 (737,960)
AMORTIZATION OF DISCOUNT ASSOCIATED WITH
WARRANTS ISSUED UPON CONVERSION OF DEBT 31,549 -- 31,549
FINANCE CHARGES FROM VENDORS 10,896 21,518 (10,622)
LIQUIDATED DAMAGES 493,000 (38,651) 531,651
----------- ----------- ---------
TOTAL INTEREST EXPENSE $ 1,564,301 $ 1,772,862 $ (208,561)
=========== =========== =========
As a result of the above factors, our net loss decreased from $(6,084,158) for
the fiscal year ended March 31, 2009 to $(4,573,315) for the fiscal year ended
March 31, 2010.
Liquidity and Capital Resources
At March 31, 2010, we had a cash balance of $67,950 and a working capital
deficit of $4,868,542. This compares to a cash balance of $6,157 and a working
capital deficit of $4,103,520 at March 31, 2009. Between April 1, 2010 and June
24, 2010, we raised aggregate proceeds of $358,600 through the exercise of
previously outstanding warrants and through private debt financing transactions.
Our cash at March 31, 2010 plus additional funds raised subsequent to March 31,
2010 are not sufficient to meet our funding requirements during the next twelve
months. Significant additional financing must be obtained in order to provide a
sufficient source of operating capital and to allow the Company to continue to
operate as a going concern.
We do not expect to generate revenue from operations for the foreseeable
future, and our ability to continue operations and meet our cash obligations as
they become due and payable is expected to depend for at least the next several
years on our ability to sell securities, borrow funds or a combination thereof.
Future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our
clinical programs, the time and costs involved in preparing, filing,
prosecuting, maintaining and enforcing patent claims and other proprietary
rights, the time and costs involved in obtaining regulatory approvals, competing
technological and market developments, as well as our ability to establish
collaborative arrangements, effective commercialization, marketing activities
and other arrangements. We expect to continue to incur increasing negative cash
flows and net losses for the foreseeable future.
Cash Flows
Cash flows from operating, investing and financing activities, as
reflected in the accompanying Consolidated Statements of Cash Flows, are
summarized as follows (in thousands):
(In thousands)
For the year ended
---------------------------
March 31, March 31,
2010 2009
--------- -----------
Cash (used in) provided by:
Operating activities $ (1,978) $ (1,777)
Investing activities (30) (12)
Financing activities 2,070 1,541
--------- -----------
Net (decrease) increase in cash $ 62 $ (248)
========= ===========
28
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 $1,978,000 in fiscal 2010 compared to net cash used
in operating activities of approximately $1,777,000 in fiscal 2009.
NET CASH FROM INVESTING ACTIVITIES. During the fiscal year ended March 31,
2010, Our investing activities consisted of using approximately $17,000 in cash
for purchases of equipment and $13,000 in cash in patents and patents pending.
During the fiscal year ended March 31, 2009, we used approximately $10,000 in
patents and patents pending and approximately $1,000 in purchases of equipment.
NET CASH FROM FINANCING ACTIVITIES. Net cash generated from financing
activities Increased from approximately $1,541,000 the fiscal year ended March
31, 2009 to approximately $2,070,000 in the fiscal year ended March 31, 2010.
Included in net cash provided by financing activities in fiscal 2010 were
$1,978,000 in proceeds from the issuance of convertible notes payable and
approximately $115,000 from the issuance of common stock. In fiscal 2009, we
received approximately $1,111,000 in net proceeds from the issuance of common
stock and $430,000 from the issuance of convertible notes payable.
CONVERTIBLE NOTES PAYABLE AND WARRANTS
MAY & JUNE 2009 10% CONVERTIBLE NOTES
In May and June 2009, we raised an aggregate amount of $350,000 from the sale to
accredited investors of 10% convertible notes ("May & June 2009 10% Convertible
Notes"). The May & June 2009 10% Convertible Notes mature at various dates
between November 2010 through December 2010 and are convertible into our common
stock at a fixed conversion price of $0.20 per share prior to maturity. If the
investors opt to convert their convertible debt to our common stock, then they
will receive a matching three year warrant to purchase unregistered shares of
our common stock at a price of $0.20 per share. We have measured the warrants
but did not record them given their contingent terms.
After consideration of the warrants, we recorded a discount associated with the
beneficial conversion feature of $233,735 related to the May & June 2009 10%
Convertible Notes and we are amortizing that discount over the terms of the May
& June 2009 10% Convertible Notes using the effective interest method.
During the three months ended December 31, 2009, the holders of two of the May &
June 2009 10% Convertible Notes converted a total of $50,000 in notes to 250,000
shares of our common stock under the conversion feature of the notes. Due to
these conversions, we accelerated the remaining discount of $15,928 associated
with those two converted notes and recorded that amount as interest expense in
the three months ended December 31, 2009. We also issued 250,000 warrants as a
result of those conversions, the fair value of which had been measured on the
issuance dates of the relevant convertible notes using the Binomial lattice
method at $31,550. We recorded that $31,550 amount as interest expense in the
three months ended December 31, 2009.
At March 31, 2010, $300,000 of the May & June 2009 10% Convertible Notes
remained outstanding. At March 31, 2010, interest payable on those notes totaled
$20,269.
JULY & AUGUST 2009 10% CONVERTIBLE NOTES
In July and August 2009, we raised an aggregate amount of $668,250 from the sale
to three investment funds of 10% convertible notes ("July & August 2009 10%
Convertible Notes"), of which $338,250 remain outstanding at March 31, 2010.
Each note carries a one-year term and is convertible into our common stock at
80% of market with a floor of $0.15 cents and a ceiling of $0.25 cents per
share. As additional consideration, the investors also received 1,336,500 three
year warrants to purchase our common stock at $0.50 per share, although that
exercise price is subject to change based on certain conditions. The conversion
feature may additionally be adjusted in the event of future financing by the
Company. Because the conversion feature and warrant exercise price each can be
reset based on future events, they are considered derivatives.
We commissioned a valuation study on this transaction from a third party
valuation firm and based on the results of that study, we recorded a discount
associated with the derivative liability of $475,762 associated with the
conversion feature. We commissioned a valuation of the derivative liability to
measure the fair value of the derivative liability at March 31, 2010 and based
on the results of that study, we recorded a fair value at March 31, 2010 of
$482,451. As a result of this fair value change, we recorded a loss of $6,689 in
the fiscal year ended March 31, 2010.
29
We are amortizing the discount associated with the July & August 2009 10%
Convertible Notes and associated warrants using the effective interest method.
Deferred financing costs incurred in connection with this financing totaled
$60,750, which were capitalized and are being amortized using the effective
interest method.
During the March 2010, one of the investors converted $330,000 of principal and
$22,559 of accrued interest into common stock. We accelerated the remaining
discount associated with that portion of the principal balance of the July &
August 2009 10% Convertible Notes.
At March 31, 2010, interest payable on those notes totaled $20,338.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale to accredited
investors of 10% convertible notes ("October & November 2009 10% Convertible
Notes"). The October & November 2009 10% Convertible Notes mature at various
dates between April 2011 and May 2011 and are convertible into our common stock
at a fixed conversion price of $0.25 per share prior to maturity. The investors
also received matching three year warrants to purchase 1,720,000 unregistered
shares of our common stock at a price of $0.25 per share.
We measured the fair value of the warrants and the beneficial conversion feature
of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing the discount associated with the October & November 2009 10%
Convertible Notes and associated warrants using the effective interest method.
Three of the investors immediately converted their convertible notes totaling
$70,000 into 280,000 shares of our common stock under the conversion formula. As
a result, we accelerated the discount of $70,000 associated with their notes and
recorded that amount as interest expense in the three months ended December 31,
2009.
Deferred financing costs of $20,250 incurred in connection with this financing
were issued in the form of a convertible note with warrants on the same terms as
those received by the investors. We capitalized the $20,250 of deferred
financing costs and are amortizing them over the term of the notes using the
effective interest method.
At March 31, 2010, interest payable on these notes totaled $19,013.
JANUARY 2010 10% CONVERTIBLE NOTES
In January 2010, we raised $250,000 from the sale to an accredited investor of
two 10% convertible notes. The convertible notes mature in July 2011 and are
convertible into our common stock at a fixed conversion price of $0.25 per share
prior to maturity. The investor also received matching three year warrants to
purchase 1,000,000 unregistered shares of our common stock at a price of $0.25
per share. This investment concluded our 10% convertible debt round that began
in October 2009. In aggregate, we issued $700,250 in 10% convertible notes in
that financing round.
We measured the fair value of the warrants and the beneficial conversion feature
of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing the discount associated with the January 2010 10% Convertible
Notes and associated warrants using the effective interest method.
At March 31, 2010, interest payable on these notes totaled $5,645.
FEBRUARY 2010 10% CONVERTIBLE NOTE
On February 12, 2010, we raised $280,015 in cash and received a secured
promissory note in the amount of $300,000 in exchange for the issuance by the
Company of a $660,000 principal amount 10% convertible promissory note (the
"Note") to one accredited investor. The Note included an original issue discount
of ten percent, or $60,000, and an origination fee of three percent, or $9,000.
We also paid legal fees of $10,985. The Note matures in February 2011. The Note
was issued in a private placement.
30
The conversion price per share is equal to eighty percent (80%) of the average
of the three lowest closing bid prices of our common stock as reported by
Bloomberg L.P. on the Principal Market for the ten (10) trading days preceding
the conversion date, subject to a maximum price per share of $0.30 and a minimum
price per share of $0.20. The Note is convertible into a maximum of 3,300,000
shares of our common stock at the minimum price per share of $0.20. The investor
also received 660,000 three-year warrants to purchase shares of our common stock
at $0.50 per share, although that exercise price is subject to change based on
certain conditions. The conversion feature may additionally be adjusted in the
event of future financing by the Company. Because the conversion feature and
warrant exercise price each can be reset based on future events, they are
considered derivatives and accounted for as derivative liabilities.
We commissioned a valuation study on this transaction from a third party
valuation firm and based on the results of that study, we recorded a discount
associated with the derivative liability of $478,476 associated with the
conversion feature. We commissioned a valuation of the derivative liability to
measure the fair value of the derivative liability at March 31, 2010 and based
on the results of that study, we recorded a fair value at March 31, 2010 of
$572,165. As a result of this fair value change we recorded a charge of $93,689
in the fiscal year ended March 31, 2010.
SECURITIES ISSUED FOR SERVICES
We have issued securities in payment of services to reduce our obligations
and to avoid using our cash resources. In the year ended March 31, 2010 we
issued 2,456,157 common shares for services of which 500,895 were restricted and
were for investor relations services. We also issued 8,429,748 common shares for
the retirement or conversion of notes payable and convertible notes payable,
100,000 common shares as a grant to a research institute and 36,683 for
licensing rights. Included in the 2,456,157 common shares issued for services
are 1,035,124 shares, registered under a Form S-8 registration statement, which
were issued as follows: 206,025 for regulatory consulting, 1,018,742 for
financial and scientific consulting, 444,122 for business development
consulting, 28,249 for administration and corporate communications services and
258,124 for legal expenses. The average price discount of common shares issued
for these services, weighted by the number of shares issued for services in this
period, was approximately 5.95%.
SECURITIES ISSUED FOR DEBT
We have also issued securities for debt to reduce our obligations to avoid
using our cash resources. In the fiscal year ended March 31, 2010 we issued
8,429,748 restricted common shares for repayment in full of notes, including
accrued interest, in the aggregate amount of $1,640,559. The price discount of
the common stock issued for debt was approximately 40.0%. We recorded a loss on
extinguishment of debt totaling $1,604,715 in the fiscal year ended March 31,
2009.
PROSPECTS FOR DEBT CONVERSION
We seek, where possible, to convert our debt and accounts payable to stock
and/or warrants in order to reduce our cash liabilities. Our success at
accomplishing this depends on several factors including market conditions,
investor acceptance and other factors, including our business prospects.
GOING CONCERN
Our independent registered public accounting firm has stated in their
audit report on our March 31, 2010 consolidated financial statements that our
working capital deficiency and significant deficiency accumulated during the
development stage are conditions that, among others, raise substantial doubt
about our ability to continue as a going concern.
31
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make a number of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Such estimates and
assumptions affect the reported amounts of expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions based upon historical
experience and various other factors and circumstances. Management believes the
Company's estimates and assumptions are reasonable in the circumstances;
however, actual results may differ from these estimates under different future
conditions. We believe that the estimates and assumptions that are most
important to the portrayal of our financial condition and results of operations,
in that they require the most difficult, subjective or complex judgments, form
the basis for the accounting policies deemed to be most critical to us. These
critical accounting policies relate to stock purchase warrants issued with notes
payable, beneficial conversion feature of convertible notes payable, impairment
of intangible assets and long lived assets, stock compensation, contingencies
and litigation. We believe estimates and assumptions related to these critical
accounting policies are appropriate under the circumstances; however, should
future events or occurrences result in unanticipated consequences, there could
be a material impact on our future financial conditions or results of
operations.
Fair Value Measurements
Effective April 1, 2008, we began measuring the fair value of applicable
financial and non-financial assets based on the following levels of inputs:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The hierarchy noted above requires us to minimize the use of unobservable inputs
and to use observable market data, if available, when determining fair value.
The fair value of derivative liabilities is determined based on
unobservable inputs that are corroborated by market data, which is a Level 3
classification. We record derivative liabilities on our balance sheet at fair
value with changes in fair value recorded in our consolidated statements of
operations.
The following outlines the significant weighted average assumptions used
to estimate the fair value information presented, with respect to warrants
utilizing the Binomial Lattice option pricing model:
Fiscal Year Ended March 31, 2010
--------------------------------
Risk free interest rate 1.28% - 2.58%
Average expected life 3 - 5 years
Expected volatility 78.8% - 96.3%
Expected dividends None
We did not make any changes to our valuation techniques compared to the
prior fiscal year.
We also obtained a third party valuation, which is a Level 3
classification as it was based on unobservable inputs that are not corroborated
by market data, in connection with our December 2008 note restructuring, our
July and August 2009 convertible notes and February convertible note. That
valuation firm used a binomial lattice pricing model to calculate the estimated
fair value of embedded derivatives in those transactions and a Black-Scholes
pricing model to calculate the estimated fair value of the warrants in those
transactions.
32
Long-Lived Assets
Financial Accounting Standards Board ("FASB") Accounting Standards
Codification ("ASC") 360-10 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. This accounting guidance
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated
as the difference between the cost basis of an asset and its estimated fair
value. This guidance also requires companies to separately report discontinued
operations and extends that reporting requirement to a component of an entity
that either has been disposed of (by sale, abandonment or in a distribution to
owners) or is classified as held for sale. Assets to be disposed of are
reported at the lower of the carrying amount or the estimated fair value less
costs to sell. Management noted no indicators requiring review for impairment
during the fiscal year ended March 31, 2010.
Stock Purchase Warrants Issued with Notes Payable
We granted warrants in connection with the issuance of certain notes
payable. We measure the relative estimated fair value of such warrants which
represents a discount from the face amount of the notes payable. Such discounts
are amortized to interest expense over the term of the notes.
Beneficial Conversion Feature of Notes Payable
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). We measure the estimated fair value
of the BCF and record that value in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.
Share-based Compensation
We account for share-based compensation awards using the fair-value method
and record such expense in the consolidated financial statements over the
requisite service period. For the fiscal year ended March 31, 2010, we
recognized $504,933 of share-based compensation expense.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources and would be
considered material to investors.
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.
33
ITEM 8. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO"), who is also our acting Chief
Financial Officer ("CFO"), we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the "Evaluation Date")
within 90 days prior to filing the Company's March 31, 2010 Form 10-K.
Based on such evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of such period, our disclosure controls
and procedures are not effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the
reports that we file or submit under the Exchange Act and are not effective in
ensuring that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
INTERNAL CONTROL OVER FINANCIAL REPORTING
(a) MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the registrant's annual or interim
financial statements will not be prevented or detected on a timely basis.
The Company's management, with the participation of its Chief Executive
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of March 31, 2010. In making this assessment, the Company
used the criteria set forth by the Committee of Sponsoring Organizations of The
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
that assessment under such criteria, management concluded that the Company's
internal control over financial reporting was not effective as of March 31, 2010
due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for fiscal
2010 identified a lack of sufficient segregation of duties, particularly in cash
disbursements. Specifically, this material weakness is such that the design of
controls over the area of cash disbursements relies primarily on detective
controls and could be strengthened by adding preventative controls to properly
safeguard company assets.
Management has identified a lack of sufficient personnel in the accounting
function due to the limited resources of the Company with appropriate skills,
training and experience to perform the review processes to ensure the complete
and proper application of generally accepted accounting principles, particularly
as it relates to taxes. Specifically, this material weakness led to segregation
of duties issues and resulted in audit adjustments to the annual consolidated
financial statements and revisions to related disclosures, including tax
reporting.
The Company is in the process of developing and implementing remediation
plans to address its material weaknesses.
34
Management has identified specific remedial actions to address the
material weaknesses described above:
o Improve the effectiveness of the accounting group by continuing to
augment existing Company resources with additional consultants or
employees to improve segregation procedures and to assist in the
analysis and recording of complex accounting transactions and
preparation of tax disclosures. The Company plans to mitigate the
segregation of duties issues by hiring additional personnel in the
accounting department once the Company has achieved
commercialization of its products and is generating revenue, or has
raised significant additional working capital.
o Improve segregation procedures by strengthening cross approval of
various functions including cash disbursements and quarterly
internal audit procedures where appropriate.
Due to its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal control systems,
no matter how well designed, have inherent limitations. Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the Company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to a attestation by the Company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the Company to provide only management's
report in this annual report.
(b) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no significant changes made in our internal controls over
financial reporting during the quarter ended March 31, 2010 that have materially
affected or are reasonably likely to materially affect these controls.
ITEM 9B. OTHER INFORMATION
During the period December 31, 2009 through March 31, 2010, the Company
issued restricted securities totaling 2,252,892 shares or 3.64% of the Company's
issued and outstanding Common Stock, based on the number of shares of Common
Stock outstanding and reported on the Company's Form 10-Q for the quarter ended
December 31, 2009. Such securities included shares of restricted Common Stock
issued upon the conversion of outstanding debt securities and shares issued for
cash investment, services, interest payable and professional services.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors, and persons who own more than 10% of a registered class of
our equity securities to file reports of ownership and changes in ownership with
the SEC. Officers, directors, and greater than 10% beneficial owners are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. Based solely on our review of copies of the Section 16(a)
reports filed for the fiscal year ended March 31, 2010, we believe that all
filing requirements applicable to our officers, directors, and greater than 10%
beneficial owners were complied with except that Mr. Edward G. Broenniman, one
of our directors, did not timely file one report on Form 4 pertaining to one
transaction effected by him on November 25, 2009. The relevant report was filed
on December 3, 2009.
35
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The names, ages and positions of our directors and executive officers as
of June 23, 2010 are listed below:
NAMES TITLE OR POSITION AGE
----------------------------------------------------------------------------
James A. Joyce (1) Chairman, Chief Executive 47
Officer, Principal Accounting Officer
and Secretary
Richard H. Tullis, PhD (2) Vice President, Chief Science Officer 65
and Director
Franklyn S. Barry, Jr. Director 70
Edward G. Broenniman Director 74
(1) Effective June 1, 2001, Mr. Joyce was appointed our President and
Chief Executive Officer, replacing Mr. Barry, who continues as a member of the
board of directors.
(2) Effective June 1, 2001, Dr. Tullis was appointed as our Chief Science
Officer.
Certain additional information concerning the individuals named above is
set forth below. This information is based on information furnished us by each
individual noted.
Resumes of Management:
James A. Joyce, Chairman, CEO, President, Principal Accounting Officer and
Secretary.
Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman of
the Board and Secretary since March 1999. On June 1, 2001, our Board of
Directors appointed Mr. Joyce with the additional role of CEO. During the
quarter ended December 31, 2007, our chief financial officer resigned and Mr.
Joyce assumed the role of principal accounting officer. In 1992, Mr. Joyce
founded and was the sole shareholder of James Joyce & Associates, an
organization that provided management consulting and corporate finance advisory
services to CEOs and CFOs of publicly traded companies. Previously, from 1989 to
1991, Mr. Joyce was Chairman and Chief Executive Officer of Mission Labs, Inc.
Prior to that Mr. Joyce was a principal in charge of U.S. operations for London
Zurich Securities, Inc. Mr. Joyce is a graduate of the University of Maryland.
Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
Dr. Tullis has been Vice President and a director of the Company since
January 2000 and Chief Science Officer since June 2001. Dr. Tullis has extensive
biotechnology management and research experience, and is the founder of Syngen
Research, a wholly-owned subsidiary of Aethlon Medical, Inc. Previously, Dr.
Tullis co-founded Molecular Biosystems, Inc., a former NYSE company. At
Molecular Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization,
Senior Research Scientist and Member of the Board of Directors. In research, Dr.
Tullis developed and patented the first application of oligonucleotides to
antisense antibiotics and developed new methods for the chemical synthesis of
DNA via methoxy-hosphorochloridites. Dr. Tullis also co-developed the first
applications of covalently coupled DNA-enzyme conjugates using synthetic
oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis
founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer
in custom DNA synthesis, which was sold to Molecular Biology Resources in 1991.
Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a
company that was eventually acquired by Genetic Vectors. Dr. Tullis received his
Ph.D. in Biochemistry and Cell Biology from the University of California at San
Diego, and has done extensive post-doctoral work at UCSD, USC, and the
University of Hawaii.
Franklyn S. Barry, Jr.
Mr. Barry has over 30 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and our President and CEO from March 10, 1999 to May 31,
2001. He became a director of Aethlon Medical on March 10, 1999. From 1994 to
April 1997, Mr. Barry was a private consultant. Included among his prior
experiences are tenures as President of Fisher-Price and as co-founder and CEO
of Software Distribution Services, which today operates as Ingram Micro-D, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Merchants Mutual Insurance Company.
36
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon Medical on March 10, 1999. Mr.
Broenniman has 30 years of management and executive experience with high-tech,
privately-held growth companies where he has served as a CEO, COO, or corporate
advisor, using his expertise to focus management on increasing profitability and
stockholder value. He is the Managing Director of The Piedmont Group, LLC, a
venture advisory firm. Mr. Broenniman recently served on the Board of Directors
of publicly-traded QuesTech (acquired by CACI International), and currently
serves on the Boards of four privately-held firms. His nonprofit Boards are the
Dingman Center for Entrepreneurship's Board of Advisors at the University of
Maryland, the National Association of Corporate Directors, National Capital
Chapter and the Board of the Association for Corporate Growth, National Capital
Chapter.
Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry and
Broenniman serve. Mr. Barry is Chairman of the Audit Committee, and Mr.
Broenniman is Chairman of the Compensation Committee.
Upon the recommendation of our Compensation Committee, in February 2005,
we adopted our 2005 Directors Compensation Program (the "Directors Compensation
Program") which advances our interests by helping us to obtain and retain the
services of outside directors upon whose judgment, initiative, efforts and/or
services we are substantially dependent, by offering to or providing those
persons with incentives or inducements affording them an opportunity to become
owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will
receive a one-time grant of a non-qualified stock option of 1.5% of the common
stock outstanding at the time of election. The options will vest one-third at
the time of election to the Board and the remaining two-thirds will vest equally
at year end over three years. Additionally, each director will also receive an
annual $25,000 non-qualified stock option retainer, $15,000 of which is to be
paid at the first of the year to all directors who are on the Board prior to the
first meeting of the year and a $10,000 retainer will be paid if a director
attends 75% of the meetings either in person, via conference call or other
electronic means. The exercise price for the options under the Directors
Compensation Program will equal the average closing of the last ten (10) trading
days prior to the date earned.
At March 31, 2010 under the 2005 Directors Compensation Program we had
issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors, 514,550 outside directors options had been forfeited,
250,000 outside directors options had been exercised and 3,671,550 options
remained outstanding.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors,
executive officers or persons nominated or charged by us to become directors or
executive officers.
There are no arrangements or understandings between any two or more of our
directors or executive officers. There is no arrangement or understanding
between any of our directors or executive officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether
non-management shareholders will exercise their voting rights to continue to
elect the current Board of Directors. There are also no arrangements, agreements
or understanding between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
SCIENCE ADVISORY BOARD
Each person listed below is a current member of our Science Advisory
Board. The role of the Science Advisory Board is to provide scientific guidance
related to the development of our Hemopurifier(R) technology. Unlike the members
of our Board of Directors, the Science Advisory Board members are not involved
in the management or operations of our company. Members of the Science Advisory
Board are paid $500 per day for services rendered either on-site or at a
mutually agreeable location.
37
Ken Alibek, M.D., Ph.D., D.Sc.
------------------------------
Dr. Alibek is the Executive Director of Education at the National Center
for Biodefense at George Mason University (GMU), and is a Distinguished
Professor at GMU as well. Dr. Alibek specializes in medical and scientific
research dedicated to developing new forms of protection against biological
weapons and other infectious diseases.
Formerly, Dr. Alibek was a Soviet Army Colonel, and served as First Deputy
Chief of the civilian branch of the Soviet Union's biological weapons program
until he defected to the United States in 1992 and subsequently served as a
consultant to numerous U.S. government agencies in the areas of medical
microbiology, biological weapons defense, and biological weapons
nonproliferation. Dr. Alibek has worked with the National Institutes of Health,
testified extensively before the U.S. Congress on nonproliferation of biological
weapons and is the author of Biohazard: The Chilling True Story of the Largest
Covert Biological Weapons Program in the World--Told from Inside by the Man Who
Ran It, published by Random House Books. He holds numerous patents, is widely
published in science journals, and has provided over 300 lectures and
presentations to military and civilian universities, as well as foreign
governments. The December 2003 issue of the Acumen Journal of Life Sciences
named Dr. Alibek as one of the top five biological warfare experts in the
nation.
Charles Bailey, Ph.D.
---------------------
Dr. Bailey is the former commander of the U.S. Army Medical Research
Institute of Infectious Diseases (USAMRIID). Dr. Bailey has 25 years U.S. Army
experience in R&D and management in infectious diseases and biological warfare
defense. As an officer of the Defense Intelligence Agency, Dr. Bailey wrote
extensively on foreign biological warfare capabilities. Dr. Bailey is currently
the Executive Director for Research & International Relations at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor of Biology at GMU as well. The Acumen Journal of Life Sciences named
Dr. Bailey as one of the top five biological warfare experts in the nation.
Larry Cowgill, D.V.M., Ph.D.
----------------------------
Dr. Cowgill is a Professor in the Department of Medicine and Epidemiology
at the School of Veterinary Medicine, University of California at Davis and has
nearly 30 years of experience as a clinical instructor in small animal internal
medicine, nephrology and hemodialysis. He currently Heads the Companion Animal
Hemodialysis Units at the Veterinary Medical Teaching Hospital at UC Davis and
the UC Veterinary Medical Center at San Diego. Dr. Cowgill is also Associate
Dean for Southern California Clinical Programs and is Co-Director of the
University of California Veterinary Medical Center at San Diego. Prior to his
appointment at the University of California, he was a National Institutes of
Health (NIH) Special Research Fellow at the University of Pennsylvania School of
Veterinary Medicine and at the Renal Electrolyte Section at the University of
Pennsylvania School of Medicine, where he conducted research in basic renal
physiology and clinical nephrology. Dr. Cowgill received his D.V.M. from the
University of California at Davis School of Veterinary Medicine and his Ph.D. in
Comparative Medical Sciences from the University of Pennsylvania, where he also
completed his internship and Residency training in Small Animal Internal
Medicine. He became a Diplomate of the American College of Veterinary Internal
Medicine in 1977. Dr. Cowgill has published extensively in the area of
veterinary nephrology and has established a Clinical Fellowship in Renal
Medicine and Hemodialysis, which is the first of its kind in veterinary
Medicine.
Pedro Cuatrecasas, M.D.
-----------------------
Dr. Cuatrecasas was President of the Pharmaceutical Research Division of
Parke-Davis Co., and Corporate Vice President for Warner Lambert Company from
1989 until his retirement in 1997. From 1986 to 1989, he served as SVP and
Director of Glaxo Inc. For the prior ten years, he was VP/R&D and Director, of
the Burroughs Wellcome Company. During his career in pharmaceutical research, he
was involved in the discovery, development and marketing registration of more
than 40 novel medicines. Dr. Cuatrecasas is widely recognized for the invention
and development of affinity chromatography which is a method for the selective
capture of proteins, sugars, fats and inorganic compounds. He is a member of the
National Academy of Sciences, The Institute of Medicine, and the American
Academy of Arts & Sciences, and he has authored more than 400 original
publications.
38
Nathan W. Levin, M.D.
---------------------
Dr. Levin is recognized as a leading authority within the hemodialysis
industry. He is the Medical and Research Director of the Renal Research
Institute, LLC, a joint venture between Fresenius Medical Care - North America
and Beth Israel Medical Center, New York. Dr. Levin also serves as Professor of
Clinical Medicine at the Albert Einstein College of Medicine.
Raveendran (Ravi) Pottathil, Ph.D.
----------------------------------
Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV and
HCV) and tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in
India. Currently, Dr. Pottathil is the President of AccuDx, Inc. a
pharmaceutical diagnostics company he founded in 1996.
Claudio Ronco, M.D.
-------------------
Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.
Members of the Scientific Advisory Board do not receive any monetary
compensation for service on the Board, however, on occasion, the members may be
awarded stock options.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of our knowledge, during the past ten years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against such
person or any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that
time; (2) any conviction in a criminal proceeding or being subject to a pending
criminal proceeding (excluding traffic violations and other minor offenses); (3)
being subject to any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; (4) being found by a
court of competent jurisdiction (in a civil action), the SEC or the Commodities
Futures Trading Commission to have violated a federal or state securities or
commodities law, and the judgment has not been reversed, suspended or vacated;
and (5) being the subject of, or a party to, any federal or state judicial or
administrative order, judgment, decree or finding, not subsequently reversed,
suspended or vacated, relating to an alleged violation of any federal or state
securities or commodities law or regulation, law or regulation respecting
financial institutions or insurance companies or law or regulation prohibiting
mail or wire fraud or fraud in connection with any business entity; or (6) being
the subject of, or a party to, any sanction or order, not subsequently reversed,
suspended or vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act), any registered entity (as defined in Section
1(a)(29) of the Commodity Exchange Act, or any equivalent exchange, association,
entity or organization that has disciplinary authority over its members or
associated persons.
CODE OF ETHICS.
On February 23, 2005, the Board of Directors approved a "Code of Business
Conduct and Ethics, which applies to our principal executive officer, our
principal financial officer, our principal accounting officer and persons
performing similar tasks. Our Code of Business Conduct and Ethics is available
on our company website at www.aethlonmedical.com.
39
AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT
Our Board of Directors formed an audit committee in May of 1999 (the
"Audit Committee"). Mr. Franklyn S. Barry, Jr. (the Chairman of the Committee)
and Mr. Edward Broenniman serve as members of the Committee. We believe that
each of Mr. Broenniman and Mr. Barry is an "audit committee financial expert" as
that term is defined by Item 407 of Regulation S-K.
The Audit Committee assists the Board of Directors in its oversight of the
quality and integrity of our accounting, auditing, and reporting practices. The
Audit Committee's role includes overseeing the work of our internal accounting
and financial reporting and auditing processes and discussing with management
our processes to manage business and financial risk, and for compliance with
significant applicable legal, ethical, and regulatory requirements. The Audit
Committee is responsible for the appointment, compensation, retention, and
oversight of the independent auditor engaged to prepare or issue audit reports
on our financial statements and internal control over financial reporting. The
Audit Committee relies on the expertise and knowledge of management and the
independent auditor in carrying out its oversight responsibilities. The
Committee's specific responsibilities are delineated in its charter.
COMPENSATION COMMITTEE
Our Board of Directors formed a Compensation Committee in May of 1999 (the
"Compensation Committee"). Mr. Franklyn S. Barry, Jr. and Mr. Edward Broenniman
(the Chairman of the Committee) serve as members of the Committee. Our Board of
Directors has delegated to the Compensation Committee strategic and
administrative responsibility on a broad range of issues. The Compensation
Committee's basic responsibility is to assure that the Chief Executive Officer,
other officers, and key management are compensated effectively in a manner
consistent with our compensation strategy and competitive practice. In addition,
the Compensation Committee is responsible for establishing general compensation
guidelines for non-management employees.
The Compensation Committee will be responsible for overseeing and, as
appropriate, making recommendations to the Board regarding the annual salaries
and other compensation of our executive officers, our general employee
compensation and other policies and providing assistance and recommendations
with respect to our compensation policies and practices. The Compensation
Committee is authorized to carry out these activities and other actions
reasonably related to the Compensation Committee's purposes or assigned by the
Board from time to time. The Committee's specific responsibilities are
delineated in its charter.
40
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following executive compensation disclosure reflects all compensation
awarded to, earned by or paid to the executive officers below for the fiscal
year ended March 31, 2010 and March 31, 2009. The following table summarizes all
compensation for fiscal year 2010 and 2009 received by our Chief Executive
Officer, and the Company's two most highly compensated executive officers who
earned more than $100,000 in fiscal year 2010.
SUMMARY COMPENSATION TABLE FOR 2010 AND 2009 FISCAL YEARS
NON-EQUITY NONQUALIFIED
INCENTIVE DEFERRED ALL
STOCK OPTION PLAN COMPENSATION OTHER
NAMED EXECUTIVE OFFICER AWARDS AWARDS COMPENSATION EARNINGS COMP. TOTAL
AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) ($) ($) ($) ($) ($)
James A. Joyce (1)
CHIEF EXECUTIVE OFFICER 2010 $ 290,000 $ -- $960,000(3) $ -- $ -- $ -- $ -- $1,250,000
AND PRINCIPAL ACCOUNTING 2009 290,000 -- -- 424,528(4) -- -- -- 714,528
OFFICER
Richard H. Tullis, Ph.D (2) 2010 $ 175,000 $ -- $ -- $ -- $ -- $ -- $ -- $ 175,000
VICE PRESIDENT AND CHIEF 2009 175,000 -- -- 154,025(5) -- -- -- 329,025
SCIENCE OFFICER
(1) The aggregate number of stock awards and stock option awards issued to Mr.
Joyce and outstanding as of March 31, 2010 is zero and 9,588,243.
(2) The aggregate number of stock awards and stock option awards issued to Dr.
Tullis and outstanding as of March 31, 2010 is zero and 1,897,175.
(3) This award of 4,000,000 shares of restricted common stock was valued at
the grant date price of $0.24 per share.
(4) This option award to purchase 2,000,000 shares at $0.25 per share was for
service was an officer and the fair value on the grant date of December
15, 2008 was calculated through a binomial lattice pricing model.
Significant assumptions used in determining the fair value included:
volatility of 112%, risk free interest rate of 1.02% and a ten year life.
(5) This option award to purchase 750,000 shares at $0.41 per share was for
service was an officer and the fair value on the grant date of December
15, 2008 was calculated through a binomial lattice pricing model.
Significant assumptions used in determining the fair value included:
volatility of 112%, risk free interest rate of 1.02% and a 9.5 year life.
On June 29, 2009, Mr. Joyce, our Chief Executive Officer, entered into an
Option Suspension Agreement, whereby Mr. Joyce agreed to not exercise his stock
options pending the filing of amended articles of incorporation of the Company
increasing the Company's authorized capital. Accordingly of Mr. Joyce's total
options, 2,857,143 cannot be exercised until the amended articles of
incorporation are filed, and 6,731,090 cannot be exercised until the later of
June 9, 2010 or the filing of the amended articles of incorporation. The
Agreement also provides Mr. Joyce certain protections in the event the Company
shall undergo a Change of Control Transaction while his options are suspended.
Such protections include the right to receive, in the form of cash payments, the
positive value of his options (which remain subject to suspension) at the time
of such transaction.
In addition, Mr. Joyce was granted 4,000,000 shares of restricted common
stock, at a price per share of $0.24, which shall vest in equal installments
over a thirty-six month period commencing June 30, 2010; however Mr. Joyce may,
from time to time, defer acceptance of the shares. All shares must be issued and
accepted by Mr. Joyce by the expiration of the thirty-six month vesting period.
Therefore, we will record the stock-based compensation expense associated
with this grant beginning in June 2010.
41
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Joyce effective April 1,
1999. Effective June 1, 2001, Mr. Joyce was appointed President and Chief
Executive Officer and his base annual salary was increased from $120,000 to
$180,000. Effective January 1, 2005, Mr. Joyce's salary was increased from
$180,000 to $205,000 per year. Under the terms of the agreement, his employment
continues at a salary of $205,000 per year for successive one-year periods,
unless given notice of termination 60 days prior to the anniversary of his
employment agreement. Effective April 1, 2006. Mr. Joyce's salary was increased
from $205,000 to $240,000. His salary was subsequently increased to $265,000 per
year and effective May 1, 2008, his salary was increased from $265,000 to
$290,000 per year. Effective April 1, 2010, his salary was increased from
$290,000 to $325,000 per year.
We entered into an employment agreement with Dr. Tullis effective January
10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief Science
Officer of the Company. His compensation under the agreement was modified in
June 2001 from $80,000 to $150,000 per year. Effective January 1, 2005, Dr.
Tullis' salary was increased from $150,000 to $165,000 per year. Under the terms
of the agreement, his employment continues at a salary of $165,000 per year for
successive one-year periods, unless given notice of termination 60 days prior to
the anniversary of his employment agreement. Dr. Tullis was granted 250,000
stock options to purchase our common stock in connection the completing certain
milestones, such as the initiation and completion of certain clinical trials,
the submission of proposals to the FDA and the filing of a patent application.
Effective April 1, 2006, Dr. Tullis salary was increased to $180,000 per year.
Effective April 1, 2010, his salary was increased from $180,000 to $195,000 per
year.
Both Mr. Joyce's and Dr. Tullis' agreements provide for medical insurance
and disability benefits, one year of severance pay if their employment is
terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.
OUTSTANDING EQUITY AWARDS AT 2010 FISCAL YEAR-END
The following table sets forth certain information concerning stock option
awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2010 FISCAL YEAR END
------------------------------------------------------------------------------------
OPTIONS AWARDS
---------------------------------------------------------------
EQUITY
INCENTIVE
PLAN AWARDS;
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE OPTIONS PRICE DATE
------------------- ------------ ------------- ------------ -------- ----------
(#) (#) (#) ($)
James A. Joyce 1,115,550(1) -- -- $ 0.38 06/03/10
557,775(1) -- -- $ 0.38 04/10/11
557,775(1) -- -- $ 0.38 04/09/12
2,857,143(1) -- -- $ 0.21 12/18/15
2,000,000(2) 500,000 -- $ 0.36 09/21/17
1,500,000(3) 500,000 -- $ 0.25 02/21/19
Richard H. Tullis 30,000(4) -- -- $ 2.56 12/31/10
250,000(4) -- -- $ 1.90 03/12/12
433,588(5) -- -- $ 0.38 12/31/10
433,587(5) -- -- $ 0.38 12/31/11
250,000(6) 500,000 -- $ 0.41 6/14/18
(1) This option was fully vested as of March 31, 2010 and as a result of the
Option Suspension Agreement, the expiration date was extended by 100 days.
Subsequent to March 31, 2010, the expiration date of this option was extended to
February 23, 2015 (see Item 13).
42
(2) The option vested 1,000,000 shares at grant, with 500,000 shares vesting
each annual anniversary date through June 13, 2010 and as a result of the Option
Suspension Agreement, the expiration date was extended by 100 days.
(3) The option vested 1,000,000 at grant, with 500,000 shares vesting on
December 31, 2009 and December 31, 2010 and as a result of the Option Suspension
Agreement, the expiration date was extended by 100 days.
(4) This option was fully vested as of March 31, 2010.
(5) This option was fully vested as of March 31, 2010. Subsequent to March 31,
2010, the expiration date of this option was extended to February 23, 2015 (see
Item 13).
(6) The option vests 250,000 annually at June 4, 2009, June 4 2010 and June 4,
2011.
STOCK AWARDS
----------------------------------------------------------------------------------------------
EQUITY
EQUITY INCENTIVE PLAN
INCENTIVE PLAN AWARDS: MARKET
AWARDS: NUMBER OR PAYOUT VALUE
NUMBER OF OF UNEARNED OF UNEARNED
SHARES OR MARKET VALUE OF SHARES, UNITS SHARES, UNITS
UNITS OF STOCK SHARES OR UNITS OR OTHER OR OTHER RIGHTS
THAT HAVE NOT THAT HAVE NOT RIGHTS THAT THAT HAVE NOT
NAME VESTED VESTED HAVE NOT VESTED VESTED
---------------------- -------------- --------------- ---------------- ----------------
(#) ($) (#) ($)
James A. Joyce 4,000,000(1) $ 960,000 -- $ --
Richard H. Tullis, PhD -- $ -- -- $ --
(1) On June 8, 2009, Mr. Joyce was granted 4,000,000 shares of restricted common
stock, at a price per share of $0.24, which shall vest in equal installments
over a thirty-six month period commencing June 30, 2010; however Mr. Joyce may,
from time to time, defer acceptance of the shares. All shares must be issued and
accepted by Mr. Joyce by the expiration of the thirty-six month vesting period.
DIRECTOR COMPENSATION FOR 2010 FISCAL YEAR
The following director compensation disclosure reflects all compensation
awarded to, earned by or paid to the directors below for the fiscal year ended
March 31, 2010.
Change in
Pension
Fees Value
Earned and
or Non-Equity Nonqualified
Paid Incentive Deferred All
in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
------------------------- ------ ------ ------ ------------ ------------ ------------ ------
James A. Joyce (1) -- -- -- -- -- -- --
Richard H. Tullis (2) -- -- -- -- -- -- --
Edward G. Broenniman (3) 10,000 -- -- -- -- -- 10,000
Franklyn S. Barry, Jr. (4) 10,000 -- -- -- -- -- 10,000
(1) All compensation received by Mr. Joyce in fiscal year 2010 is disclosed in
the Summary Compensation Table above. Mr. Joyce received no compensation as a
director in fiscal year 2010.
43
(2) All compensation received by Dr. Tullis in fiscal year 2010 is disclosed in
the Summary Compensation Table above. Dr. Tullis received no compensation as a
director in fiscal year 2010.
(3) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2010 are 0 and 814,225.
(4) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2010 are 0 and 766,417.
Directors Compensation Program
Upon the recommendation of our Compensation Committee, in February 2005,
we adopted our 2005 Directors Compensation Program (the "Directors Compensation
Program") which advances our interests by helping us to obtain and retain the
services of outside directors upon whose judgment, initiative, efforts and/or
services we are substantially dependent, by offering to or providing those
persons with incentives or inducements affording them an opportunity to become
owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will
receive a one-time grant of a non-qualified stock option of 1.5% of the common
stock outstanding at the time of election. The options will vest one-third at
the time of election to the Board and the remaining two-thirds will vest equally
at year end over three years. Additionally, each director will also receive an
annual $25,000 non-qualified stock option retainer, $15,000 of which is to be
paid at the first of the year to all directors who are on the Board prior to the
first meeting of the year and a $10,000 retainer will be paid if a director
attends 75% of the meetings either in person, via conference call or other
electronic means. The exercise price for the options under the Directors
Compensation Program will equal the average closing of the last ten (10) trading
days prior to the date earned.
At March 31, 2010 under the 2005 Directors Compensation Program we had
issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors, 514,550 outside directors options had been forfeited,
250,000 outside directors options had been exercised and 3,671,550 options
remained outstanding.
44
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information as of June 23, 2010, with
respect to the ownership of our common stock, by (i) each person known by us to
be the beneficial owner of more than five percent (5%) of the outstanding shares
of each class of our capital stock, (ii) each of our directors and director
nominees (if any), (iii) each of our named executive officers and (iv) all of
our executive officers and directors as a group. The term "executive officer" is
defined as the President/Chief Executive Officer, Secretary, Chief Financial
Officer/Treasurer, any vice-president in charge of a principal business function
(such as administration or finance), or any other person who performs similar
policy making functions for the Company. We believe that each individual or
entity named has sole investment and voting power with respect to shares of
common stock indicated as beneficially owned by them, subject to community
property laws where applicable, excepted where otherwise noted:
AMOUNT AND NATURE PERCENT OF
OF TITLE OF CLASS NAME BENEFICIAL OWNERSHIP(1)(2) CLASS
----------------- ------------------------------------------- -------------------------- ----------
Common Stock James A. Joyce, Chief Executive Officer 9,710,465 shares(3) 13%
and Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Common Stock Richard H. Tullis, Chief Scientific Officer 2,165,925 shares(4) 3%
and Director
8910 University Center Lane, Suite 660
San Diego, CA 92122
Common Stock Edward G. Broenniman, Director 1,096,399 shares(5) 2%
8910 University Center Lane, Suite 660
San Diego, CA 92122
Common Stock Franklyn S. Barry, Jr., Director 873,010 shares(6) 1%
8910 University Center Lane, Suite 660
San Diego, CA 92122
Common Stock Ellen R. Weiner Family Revocable Trust(7) 6,957,770 shares(8) 9.9%
10645 N. Tatum Blvd. Suite 200-166
Phoenix, Arizona 85028
Common Stock Estate of Allan S. Bird(7) 5,156,928 shares(8) 7.3%
PO Box 371179
Las Vegas, Nevada 89137
Common Stock Phillip A. Ward (7) 3,353,611 shares(9) 4.99%
P.O. Box 3322
Rancho Santa Fe, CA 92067
Common Stock Alan R. Albrecht (7) 3,498,051 shares(10) 4.99%
8910 University Center Lane, Suite 660
San Diego, CA 92122
All Current
Directors and
Executive Officers
as a Group (4 13,845,799 shares 18%
members)
* Less than 1%.
1. Based on 66,975,522 shares of Common Stock outstanding on the transfer
records as of June 23, 2010.
2. Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of
1934. Under Rule 13d-3(d)(1), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable within 60
days are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but not deemed outstanding for the
purpose of calculating the percentage owned by each other person listed.
The Company believes that each individual or entity named has sole
investment and voting power with respect to shares of Common Stock
indicated as beneficially owned by them, subject to community property
laws, where applicable, except where otherwise noted.
45
3. Includes 2,231,100 stock options exercisable at $0.38 per share, 2,857,143
stock options exercisable at $0.21 per share, 2,500,000 stock options
exercisable at $0.36 per share and 1,500,000 stock options exercisable at
$0.25 per share. An additional 500,000 stock options (exercisable at $0.25
per share) granted to Mr. Joyce are excluded from the above table as that
portion will vest after 60 days from June 23, 2010.
In addition, Mr. Joyce has been granted 4,000,000 shares of restricted
common stock, which shall vest over a 36 month period commencing June 30,
2010; however, such shares will not be issued until Mr. Joyce requests
delivery of such vested shares. The above table includes 222,222 shares,
representing two months of vesting under the 4,000,000 share grant.
4. Includes 250,000 stock options exercisable at $1.90 per share, 30,000
stock options exercisable at $2.56 per share, 867,175 stock options
exercisable at $0.38 per share and 500,000 stock options exercisable at
$0.41 per share. An additional 250,000 stock options (exercisable at $0.41
per share) granted to Dr. Tullis are excluded from the table as that
portion will vest after 60 days from June 23, 2010.
5. Includes 2,500 stock options exercisable at $3.75 per share, 3,000 stock
options exercisable at $1.78 per share, 308,725 stock options exercisable
at $0.38 per share and 500,000 stock options exercisable at $0.41 per
share.
6. Includes 1,867 stock options exercisable at $1.84 per share and 264,550
stock options exercisable at $0.38 per share and 500,000 stock options
exercisable at $0.41 per share.
7. More-than-5% shareholder.
8. Includes certain shares issuable upon conversion of a convertible note and
exercise of warrants held by the Ellen R. Weiner Family Revocable Trust
(the "Trust") and all shares issuable upon conversion of a convertible
note and exercise of warrants held by the Estate of Allan S. Bird (the
"Estate"). The Trust owns a convertible promissory note in the principal
amount of $660,000 convertible into 3,300,000 shares at $0.20 per share
and 8,769,897 warrants to purchase common shares at $0.20 per share. The
Estate owns a convertible promissory note in the principal amount of
$225,000 convertible into 1,125,000 shares at $0.20 per share and
2,698,070 warrants to purchase common shares at $0.20 per share.
Beneficial ownership by each of the Trust and the Estate is limited
contractually to the extent that such conversion or exercise would cause
the aggregate number of shares of common stock beneficially owned by
either to exceed 9.9%. Accordingly, beneficial ownership for the Trust
does not reflect 8,764,914 shares underlying the convertible notes and
warrants that would cause the number of shares beneficially owned by the
Trust to be 19.9% of our outstanding shares. Mr. Bird was Ms. Weiner's
father-in-law. The Ellen R. Weiner Family Trust disclaims any beneficial
ownership of the Estate's notes, associated warrants and underlying common
stock. The Estate of Mr. Bird disclaims any beneficial ownership of such
Trust's notes and associated warrants.
9. Includes certain shares issuable upon the exercise of warrants held by
Phillip A. Ward. Mr. Ward owns warrants to purchase 100,000 shares of
common stock at an exercise price of $0.50; warrants to purchase 100,000
shares of common stock at an exercise price of $0.17; warrants to purchase
555,556 shares of common stock at an exercise price of $0.18; warrants to
purchase 55,555 shares of common stock at an exercise price of $0.90;
warrants to purchase 90,000 shares of common stock at an exercise price of
$0.34; warrants to purchase 555,556 shares of common stock at an exercise
price of $0.18; warrants to purchase 194,118 shares of common stock at an
exercise price of $0.17; warrants to purchase 555,556 shares of common
stock at an exercise price of $0.18; and warrants to purchase 194,118
shares of common stock at an exercise price of $0.17. Mr. Ward'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 Mr. Ward to exceed 4.99% of our outstanding
shares. Accordingly, beneficial ownership for Mr. Ward does not reflect
2,169,341 shares underlying such warrants that would cause the number of
shares beneficially owned by Mr. Ward to be 8% of our outstanding shares.
46
10. Includes certain shares issuable upon the conversion of a convertible note
and exercise of warrants held by Alan R. Albrecht. Mr. Albrecht owns three
convertible promissory notes in the aggregate principal amount of $375,000
convertible into 1,500,000 shares at $0.25 per share and warrants to
purchase 5,395,000 shares of common stock at an average exercise price of
$0.26 per share. Mr. Albrecht's beneficial ownership is limited
contractually to the extent that such conversion or exercise would cause
the aggregate number of shares of common stock beneficially owned by Mr.
Albrecht to exceed 4.99% of our outstanding shares. Accordingly,
beneficial ownership for Mr. Albrecht does not reflect 3,769,299 shares
underlying such note and such warrants that would cause the number of
shares beneficially owned by Mr. Albrecht to be 9.8% of our outstanding
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The following describes all transactions since April 1, 2008, and all
proposed transactions, in which the Company was or is to be a participant and
the amount involved exceeds the lesser of $120,000 or one percent of the average
of the Company's total assets at year-end for the last two completed fiscal
years, and in which any related person had or will have a direct or indirect
material interest.
On May 21, 2010, the Board of Directors of the Company amended the
expiration terms of certain outstanding stock options such that all outstanding
stock options of the Company shall have a term that is for not less than ten
(10) years following the original date of grant. No other terms or features of
the stock options were modified or amended. Stock options held by Mr. James
Joyce, our Chief Executive Officer and Chairman of the Board of Directors, Mr.
Richard Tullis, our Chief Science Officer and member of the Board of Directors,
Mr. Franklyn Barry, a member of the Board of Directors, and Mr. Edward
Broenniman, a member of the Board of Directors, were modified accordingly. Of
the foregoing (i) options to purchase 2,231,100 shares held by Mr. Joyce were
extended to February 23, 2015; (ii) options to purchase 867,175 shares held by
Mr. Tullis were extended to February 23, 2015; (iii) options to purchase 308,725
shares held by Mr. Broenniman were extended to February 23, 2015; and (iv)
options to purchase 308,725 shares held by Mr. Barry were extended to February
23, 2015. All of the foregoing options are at an exercise price of $0.38 per
share. The foregoing represents only a portion of the total options and shares
owned by the directors and officers of the Company.
In addition, on June 8, 2009, the Board of Directors had approved the
grant of 4,000,000 shares of restricted common stock, at a price per share of
$0.24 to Mr. James Joyce, our Chief Executive Officer, with the shares vesting
on a thirty-six month period commencing June 30, 2010. On May 21, 2010, the
Board of Directors agreed that Mr. Joyce may, from time to time, defer
acceptance of the shares under the vesting schedule provided that all shares
must be issued and accepted by Mr. Joyce by the expiration of the thirty-six
month vesting period.
Director Independence
Each of Mr. Barry and Mr. Broenniman is an independent director as that term is
defined by NYSE Rule 303A.02(a). The Company currently has a compensation and
audit committee. Of the members of the Company's board of directors, each of Mr.
Barry and Mr. Broenniman meets the NYSE's independence standards for members of
such committees and Mr. Tullis and Mr. Joyce do not meet the NYSE's independence
requirements for members of such committees.
47
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services billed by
Squar, Milner, Peterson, Miranda & Williamson LLP ("Squar Milner") for the
fiscal years ended March 31, 2010 and 2009:
Fiscal Year Ended March 31,
2010 2009
----------- ---------------
Audit Fees $ 92,400 $ 98,200
Audit Related Fees 41,600 32,400
Tax Fees 27,000 43,600
All Other Fees -- --
----------- ---------------
$ 161,000 $ 174,200
=========== ===============
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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS
The following documents are filed as part of this report on Form 10-K:
1. Consolidated Financial Statements for the periods ended March 31, 2010 and
2009:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Deficit
Notes to Consolidated Financial Statements
2. Exhibits
2.1 Agreement and Plan of Reorganization Between Aethlon Medical, Inc.
and Aethlon, Inc. dated March 10, 1999 (1)
2.2 Agreement and Plan of Reorganization Between Aethlon Medical, Inc.
and Hemex, Inc. dated March 10, 1999 (1)
2.3 Agreement and Plan of Reorganization Between Aethlon Medical, Inc.
and Syngen Research, Inc. (2)
2.4 Agreement and Plan of Reorganization Between Aethlon Medical, Inc.
and Cell Activation, Inc. (3)
3.1 Articles of Incorporation of Aethlon Medical, Inc., as amended (4)
3.2 Bylaws of Aethlon Medical, Inc. (4)
10.1 Employment Agreement between Aethlon Medical, Inc. and James A.
Joyce dated April 1, 1999 (5)++
10.2 Amended and Restated 2003 Consultant Stock Plan (6)
10.3 Patent License Agreement by and amongst Aethlon Medical, Inc.,
Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra (7)
10.4 Employment Agreement by and between Aethlon Medical, Inc. and Dr.
Richard H. Tullis (7)++
10.5 Cooperative Agreement by and between Aethlon Medical, Inc. and
George Mason University (8)
10.6 Stock Option Agreement by and between Aethlon Medical, Inc. and
James A Joyce (9)++
48
10.7 Stock Option Agreement by and between Aethlon Medical, Inc. and
Richard Tullis (9)++
10.8 Stock Option Agreement by and between Aethlon Medical, Inc. and
Franklyn S. Barry, Jr. (9)++
10.9 Stock Option Agreement by and between Aethlon Medical, Inc. and Ed
Broenniman (9)++
10.10 Stock Option Agreement by and between Aethlon Medical, Inc. and
James A. Joyce(10)++
10.11 Option Agreement by and between Aethlon Medical, Inc. and Trustees
of Boston University (11)
10.12 Option Suspension Agreement dated June 29, 2009 (12)++
10.13 Letter Agreement between the Company and Mr. James A. Joyce (13)++
10.14 Letter Agreement between the Company and Mr. Richard H. Tullis
(14)++
10.15 Form of Class C Common Stock Purchase Warrant (15)
10.16 Form of 10% Convertible Note (15)
10.17 Stock Option Agreement of James A. Joyce (16)++
10.18 Stock Option Agreement of Franklyn S. Barry (16)++
10.19 Stock Option Agreement of Edward G. Broenniman (16)++
10.20 Stock Option Agreement of Richard H. Tullis (16)++
10.21 Modification and Amendment Agreement dated December 30, 2008 (17)
10.22 Form of Interest Note dated December 30, 2008 (17)
10.23 Form of Liquidated Damages Note dated December 30, 2008 (17)
10.24 Form of Common Stock Purchase Warrant (18)
10.25 Form of Unit Subscription Agreement (18)
10.26 Form of Amended and Restated 12% Convertible Note*
10.27 Form of Amended and Restated Warrant*
10.28 Form of Amended and Restated Warrant (QB)*
10.29 Form of Amended and Restated Registration Rights Agreement*
14 Code of Ethics (19)
21 List of subsidiaries*
23.1 Consent of Independent Registered Public Accounting Firm (Squar,
Milner, Peterson, Miranda & Williamson, LLP) *
31.1 Certification of our Chief Executive Officer and Chief Accounting
Officer, pursuant to Securities Exchange Act rules 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley
Act of 2002.*
32.1 Statement of our Chief Executive Officer and Chief Financial Officer
under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350)*
* Filed herewith
++ Indicates a management contract or compensatory plan or arrangement
(1) Filed with the Company's Current Report on Form 8-K dated March 26, 1999
and incorporated by reference.
(2) Filed with the Company's Current Report on Form 8-K dated January 24, 2000
and incorporated by reference.
49
(3) Filed with the Company's Current Report on Form 8-K, dated April 25, 2000
and incorporated by reference.
(4) Filed with the Company's Quarterly Report on Form 10-Q filed on November
16, 2009 for the period ended September 30, 2009 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 Registration Statement on Form S-8 (File No.
333-164939) filed on February 17, 2010 and incorporated by reference.
(7) 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.
(8) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 (File No. 333-117203) filed on October 28, 2004 and
incorporated by reference.
(9) 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.
(10) Filed with the Company's Current Report on Form 8-K filed on September
12, 2005 and incorporated by reference.
(11) Filed with the Company's Current Report on Form 8-K filed on February 23,
2006 and incorporated by reference.
(12) Filed with the Company's Annual Report on Form 10-K filed on July 2, 2009
for the year ended March 31, 2009 and incorporated by reference.
(13) Filed with the Company's Current Report on Form 8-K dated July 25, 2008
and incorporated by reference.
(14) Filed with the Company's Current Report on Form 8-K dated July 31, 2008
and incorporated by reference.
(15) Filed with the Company's Current Report on Form 8-K dated August 12, 2008
and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K dated December 19,
2008 and incorporated by reference.
(17) Filed with the Company's Current Report on Form 8-K dated January 2, 2009
and incorporated by reference.
(18) Filed with the Company's Current Report on Form 8-K dated January 20, 2009
and incorporated by reference.
(19) Filed with the Company's Annual Report on Form 10-KSB filed on July 13,
2007 for the year ended March 31, 2007 and incorporated by reference.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 2nd day of July, 2010.
BY: /S/ JAMES A. JOYCE
----------------------------------
JAMES A. JOYCE
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND ACTING CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
-------------------------- --------------------- -------------
/S/ JAMES A. JOYCE CHAIRMAN OF THE BOARD JULY 2, 2010
--------------------------
JAMES A. JOYCE
/S/ FRANKLYN S. BARRY, JR. DIRECTOR JULY 2, 2010
--------------------------
FRANKLYN S. BARRY, JR.
/S/ EDWARD G. BROENNIMAN DIRECTOR JULY 2, 2010
--------------------------
EDWARD G. BROENNIMAN
/S/ RICHARD H. TULLIS DIRECTOR JULY 2, 2010
--------------------------
RICHARD H. TULLIS
51
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows...................................... F-23
Notes to Consolidated Financial Statements................................. F-25
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2010 and 2009 and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the years in the two-year
period ended March 31, 2010 and for the period January 31, 1984 (Inception)
through March 31, 2010. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aethlon Medical,
Inc. and Subsidiaries as of March 31, 2010 and 2009 and the consolidated results
of their operations and their consolidated cash flows for each of the years in
the two-year period ended March 31, 2010 and for the period January 31, 1984
(Inception) through March 31, 2010, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1, the accompanying consolidated financial statements have
been prepared assuming that the Company will continue as a going concern. The
Company has incurred continuing losses from operations, is in default on certain
debt agreements, has negative working capital of approximately $4,869,000 and a
deficit accumulated during the development stage of approximately $42,761,000 at
March 31, 2010. As discussed in Note 1 to the consolidated financial statements,
a significant amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become
commercially viable. These conditions, among others, raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 1. The accompanying
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note 1 to the accompanying consolidated financial statements,
effective April 1, 2009, the Company adopted new accounting guidance as codified
within ASC 815-40, "Derivatives and Hedging Instruments - Contracts in Entities'
Own Equity" relating to determining whether an instrument or embedded feature is
indexed to a company's own stock.
/S/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
NEWPORT BEACH, CALIFORNIA
JUNE 30, 2010
F-2
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
March 31, 2010 March 31, 2009
------------- --------------
CURRENT ASSETS
Cash $ 67,950 $ 6,157
Deferred financing costs 99,672 --
Interest receivable 1,932 --
Prepaid expenses 10,139 37,011
-------------- --------------
TOTAL CURRENT ASSETS 179,693 43,168
NON-CURRENT ASSETS
Note receivable 300,000 --
Property and equipment, net 15,182 2,603
Patents, net 142,340 138,417
Deposits 8,786 13,200
-------------- --------------
TOTAL ASSETS $ 646,001 197,388
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 232,313 $ 460,074
Due to related parties 579,267 634,896
Notes payable 290,000 302,500
Convertible notes payable, net of discounts 1,631,999 2,069,720
Derivative liabilities 1,054,716 --
Accrued liquidated damages 493,000 --
Other current liabilities 766,940 679,498
-------------- --------------
TOTAL CURRENT LIABILITIES 5,048,235 4,146,688
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS' DEFICIT
Common stock, par value of $0.001; 250,000,000 shares
authorized; 61,913,508 and 49,454,131 issued and
outstanding at March 31, 2010 and 2009, respectively 61,914 49,455
Additional paid-in capital 38,296,362 34,312,659
Deficit accumulated during the development stage (42,760,510) (38,311,414)
-------------- --------------
TOTAL STOCKHOLDERS' DEFICIT (4,402,234) (3,949,300)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 646,001 $ 197,388
============== ==============
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
JANUARY 31, 1984
(INCEPTION) THROUGH
2010 2009 MARCH 31, 2010
----------------------------------------------------
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
----------------------------------------------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 1,087,707 848,790 8,880,166
Payroll and related 1,258,572 1,626,579 12,384,298
General and administrative 502,613 447,885 6,400,695
Impairment -- -- 1,313,253
----------------------------------------------------
2,848,892 2,923,254 28,978,412
----------------------------------------------------
OPERATING LOSS (2,848,892) (2,923,254) (27,444,844)
OTHER (INCOME) EXPENSE
Loss on extinguishment of debt 341,984 1,604,715 3,710,566
Change in fair value of derivative liabilities (178,723) (213,903) 1,318,676
Interest expense 1,564,301 1,772,863 9,919,071
Interest income (3,139) (2,771) (23,325)
Other -- -- 390,678
----------------------------------------------------
1,724,423 3,160,904 15,315,666
----------------------------------------------------
NET LOSS $ (4,573,315) $ (6,084,158) $ (42,760,510)
====================================================
Basic and diluted net loss per share $ (0.08) $ (0.14)
=============================
Weighted average number of common
shares outstanding - basic and diluted 56,618,667 42,948,049
=============================
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- --------- --------- ----------- -------------
Balance, January 31, 1984 (Inception) -- $ -- $ -- $ -- $ -- $ --
Common stock issued for cash at $1
per share 22,000 22 26,502 -- -- 26,524
Common stock issued for cash at $23
per share 1,100 1 24,999 -- -- 25,000
Common stock issued for cash at $86
per share 700 1 59,999 -- -- 60,000
Common stock issued for cash at $94
per share 160 1 14,999 -- -- 15,000
Common stock issued for cash at $74
per share 540 1 39,999 -- -- 40,000
Common stock issued for cash at $250
per share 4,678 5 1,169,495 -- -- 1,169,500
Capital contributions -- -- 521,439 -- -- 521,439
Common stock issued for compensation
at $103 per share 2,600 3 267,403 -- -- 267,406
Conversion of due to related parties
to common stock at $101 per share 1,120 1 113,574 -- -- 113,575
Conversion of due to related parties
to common stock at $250 per share 1,741 2 435,092 -- -- 435,094
Effect of reorganization 2,560,361 2,558 (2,558) -- -- --
Common stock issued in connection with
employment contract at $8 per share 65,000 65 519,935 -- -- 520,000
Common stock issued in connection with
the acquisition of patents at $8 per
share 12,500 13 99,987 -- -- 100,000
Warrants issued to note holders in
connection with notes payable -- -- 734,826 -- -- 734,826
Warrants issued for services -- -- 5,000 -- -- 5,000
Net loss -- -- -- -- (4,746,416) (4,746,416)
---------- ------ ---------- ---------- ----------- -------------
BALANCE, MARCH 31, 2000 2,672,500 2,673 4,030,691 -- (4 ,746,416) (713,052)
Common stock and options issued
in connection with acquisition
of Cell Activation, Inc.
at $7.20 per share 99,152 99 1,067,768 -- -- 1,067,867
Warrants issued to note holders in
connection with notes payable -- -- 218,779 -- -- 218,779
Warrants issued to promoter in
connection with notes payable -- -- 298,319 -- -- 298,319
Beneficial conversion feature of
convertible notes payable -- -- 150,000 -- -- 150,000
Warrants issued to promoter in
connection with convertible notes
payable -- -- 299,106 -- -- 299,106
Options issued to directors for
services as board members -- -- 14,163 -- -- 14,163
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-5
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- ------- ----------- ---------- ------------ -------------
Options and warrants issued for
services -- -- 505,400 -- -- 505,400
Common stock issued for services at
$3 per share 5,500 5 16,495 -- -- 16,500
Common stock issued for cash at $1
per share 100,000 100 99,900 -- -- 100,000
Net loss -- -- -- -- (4,423,073) (4,423,073)
------------ ------- ----------- ---------- ------------ -------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ -- $ (9,169,489) $ (2,465,991)
Common stock, warrants and options
issued for accounts payable and
accrued liabilities 21,750 22 243,353 -- -- 243,375
Common stock issued for services at
$2.65 per share 6,038 6 15,994 -- -- 16,000
Common stock issued for cash at $1.00
per share, net of issuance costs of
$41,540 paid to a related party 730,804 731 688,533 -- -- 689,264
Common stock issued for services at
$2.75 per share 10,000 10 27,490 -- -- 27,500
Common stock issued in connection with
license agreement at $3.00 per share 6,000 6 17,994 -- -- 18,000
Common stock issued to holder of
convertible notes payable at $3.00
per share 70,586 71 211,687 -- -- 211,758
Options issued to directors for
services as board members -- -- 7,459 -- -- 7,459
Common stock issued for cash at $1.50
per share, net of issuance costs
of $2,500 16,667 17 22,483 -- -- 22,500
Beneficial conversion feature of
convertible notes payable -- -- 185,000 -- -- 185,000
Common stock issued for conversion of
convertible notes payable and accrued
interest at an average price of
$1.24 per share 134,165 134 166,352 -- -- 166,486
Common stock issued for services at
$2.72 per share 9,651 10 26,240 -- -- 26,250
Options issued to consultant for
services -- -- 562,000 -- -- 562,000
Common stock and warrants for services
at $1.95 per share 62,327 62 161,475 -- -- 161,537
Common stock issued for services at
$1.90 per share 9,198 9 17,491 -- -- 17,500
Stock options exercised for cash 400,000 400 199,600 -- -- 200,000
Warrants issued to note holders for
90-day forebearance -- -- 118,000 -- -- 118,000
Common stock and warrants issued to
note holders and vendors in the
debt-to-equity conversion program at
$1.25 per share 816,359 816 1,623,635 -- -- 1,624,451
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-6
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------ PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
--------- ------- ------------ ---------- ------------ -------------
Other warrant transactions -- -- (32,715) -- -- (32,715)
Net loss -- -- -- -- (3,995,910) (3,995,910)
---------- -------- ----------- -------- ---------- - ------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $ -- $(13,165,399) $ (2,197,536)
Proceeds from the issuance of common
stock at $0.50 per share in connection
with the exercise of options 200,000 200 99,800 -- -- 100,000
Interest expense related to beneficial
conversion feature -- -- 150,000 -- -- 150,000
Pro-rata value assigned to warrants
issued in connection with conversion of
accounts payable -- -- 71,000 -- -- 71,000
Pro-rata value assigned to warrants
issued in connection with note payable -- -- 30,000 -- -- 30,000
Issuance of common stock at $1.25 per
share in connection with the conversion
of accounts payable 150,124 150 187,505 -- -- 187,655
Issuance of common stock at $1.25 per
share in connection with the conversion
of notes payable 420,000 420 104,580 -- -- 105,000
Estimated fair market value of options
issued for services -- -- 114,000 -- -- 114,000
Issuance of common stock at $0.25 per
share for cash 461,600 462 114,938 -- -- 115,400
Issuance of common stock at $0.26 per
share for cash 19,230 19 4,981 -- -- 5,000
Issuance of common stock at $1.25 per
share for cash 8,000 8 9,992 -- -- 10,000
Issuance of common stock at $0.65 per
share for services 69,231 69 44,931 -- -- 45,000
Issuance of common stock at $0.51 per
share for services 196,078 196 99,804 -- -- 100,000
Adjustment booked -- -- (100,000) -- 100,000 --
Net loss -- -- -- -- (2,461,116) (2,461,116)
--------- ------- ------------ ---------- ------------ -------------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,894,223 $ -- $(15,526,515) $ (3,625,597)
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-7
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- -------- ------------ ---------- ------------ -------------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,894,223 $ -- $(15,526,515) $ (3,625,597)
Proceeds from the issuance of
common stock at $0.25 per share
in connection with the exercise
of warrants 540,000 540 134,460 -- -- 135,000
Issuance of common stock at $0.25
per share in connection with the
conversion of notes payable,
including interest of $15,099 300,397 300 74,799 -- -- 75,099
Issuance of common stock at $0.35
per share in connection with the
conversion of notes payable,
including interest of $59,827 813,790 814 284,013 -- -- 284,827
Issuance of common stock at $0.50
per share in connection with the
conversion of notes payable,
including interest of $509 11,017 11 5,498 -- -- 5,509
Issuance of common stock at $0.42
per share in connection with the
conversion of notes payable,
including interest of $696 13,725 14 5,682 -- -- 5,696
Issuance of common stock at $0.65
per share in connection with the
conversion of notes payable,
including interest of $5,088 27,059 27 17,561 -- -- 17,588
Issuance of common stock at $0.25
per share in connection with the
conversion of notes payable,
including interest of $15,416 461,667 462 114,954 -- -- 115,416
Issuance of common stock at $0.25
per share for cash 1,226,000 1,226 305,274 -- -- 306,500
Issuance of common stock at $0.30
per share for cash 180,000 180 53,820 -- -- 54,000
Issuance of common stock at $0.525
per share for cash 40,000 40 20,960 -- -- 21,000
Issuance of common stock at $1.125
per share for cash 5,000 5 5,620 -- -- 5,625
Issuance of common stock at $0.25
per share for services 10,000 10 2,490 -- -- 2,500
Issuance of common stock at $0.34
per share for services 73,529 73 24,927 -- -- 25,000
Issuance of common stock at $0.40
per share for services 62,000 62 24,763 -- -- 24,825
Issuance of common stock at $0.45
per share for services 185,185 185 83,148 -- -- 83,333
Issuance of common stock at $0.50
per share for services 5,000 5 2,495 -- -- 2,500
Interest expense related to beneficial
conversion feature -- -- 324,800 -- -- 324,800
Net loss -- -- -- -- (1,518,798) (1,518,798)
---------- -------- ------------ ---------- ------------ -------------
BALANCE - MARCH 31, 2004 10,649,329 $ 10,649 $ 13,379,487 $ -- $(17,045,313) $ (3,655,177)
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-8
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------ -------------
BALANCE - MARCH 31, 2004 10,649,329 $ 10,649 $ 13,379,487 $ -- $ (17,045,313) $ (3,655,177)
Proceeds from the issuance of common
stock at $0.25 per share in connection
with the exercise of warrants 1,126,564 1,127 280,515 -- -- 281,642
Issuance of common stock at $0.44 per
share for cash 1,415,909 1,416 621,584 -- -- 623,000
Issuance of common stock at $0.25 per
share for cash 40,233 40 9,960 -- -- 10,000
Issuance of common stock at $0.28 per
share for cash 35,947 36 9,964 -- -- 10,000
Issuance of common stock at $0.29 per
share for cash 69,431 69 19,931 -- -- 20,000
Issuance of common stock at $0.32 per
share for cash 94,449 94 29,906 -- -- 30,000
Issuance of common stock at $0.33 per
share for cash 60,620 61 19,939 -- -- 20,000
Issuance of common stock at $0.35 per
share for cash 172,824 173 59,826 -- -- 59,999
Issuance of common stock at $0.36 per
share for cash 223,756 224 79,776 -- -- 80,000
Issuance of common stock at $0.37 per
share for cash 108,079 108 39,892 -- -- 40,000
Issuance of common stock at $0.38 per
share for cash 26,549 27 9,973 -- -- 10,000
Issuance of common stock at $0.39 per
share for cash 51,748 52 19,948 -- -- 20,000
Issuance of common stock at $0.40 per
share for cash 25,233 25 9,975 -- -- 10,000
Issuance of common stock at $0.42 per
share for cash 143,885 144 59,857 -- -- 60,001
Issuance of common stock at $0.43 per
share for cash 70,467 70 29,930 -- -- 30,001
Issuance of common stock at $0.45 per
share for cash 22,455 22 9,978 -- -- 10,000
Issuance of common stock at $0.46 per
share for cash 43,944 44 19,956 -- -- 20,000
Issuance of common stock at $0.47 per
share for cash 128,836 129 59,872 -- -- 60,001
Issuance of common stock at $0.52 per
share for cash 95,502 96 49,904 -- -- 49,999
Issuance of common stock with warrants
at $0.36 per unit for cash 55,556 56 19,944 -- -- 20,000
Issuance of common stock at $0.27 per
share for cash 90,000 90 24,210 -- -- 24,300
Issuance of common stock at $0.50 per
share for cash 3,000 3 1,497 -- -- 1,500
Issuance of common stock to Fusion
Capital for "commitment" shares 50,000 50 (50) -- -- --
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-9
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------ PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------- ------ ---------- ---------- ----------- -------------
Issuance of common stock to Fusion
Capital for fees 418,604 419 (419) -- -- --
Issuance of common stock at $0.34 per share
in connection with the conversion of notes
payable, including interest of $38,371 479,513 480 162,891 -- -- 163,371
Issuance of common stock at $0.44 per
share in connection with the conversion
of notes payable 113,636 114 49,886 -- -- 50,000
Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable 80,000 80 19,920 -- -- 20,000
Issuance of common stock at $0.49 per
share in connection with the conversion
of notes payable 174,606 175 85,382 -- -- 85,557
Issuance of common stock at $1.75 per
share for services 17,143 17 29,983 -- -- 30,000
Issuance of common stock at $0.44 per
share for services 265,273 265 116,455 -- -- 116,720
Issuance of common stock at $0.70 per
share for services 10,715 11 7,489 -- -- 7,500
Issuance of common stock at $0.73 per
share for services 6,850 7 4,993 -- -- 5,000
Issuance of common stock at $0.55 per
share for services 46,364 46 25,454 -- -- 25,500
Issuance of common stock at $0.25 per
share for services 165,492 165 41,208 -- -- 41,373
Issuance of common stock at $0.45 per
share for services 28,377 28 12,741 -- -- 12,769
Issuance of common stock at $0.50 per
share for services for deferred
consulting services 60,000 60 29,940 (30,000) -- --
Issuance of common stock at $0.49 per
share for services 25,087 25 12,318 -- -- 12,343
Issuance of common stock at $0.45 per
share for services for deferred
consulting services 66,666 67 29,933 (30,000) -- --
Issuance of common stock at $0.37 per
share for services 13,369 13 4,987 -- -- 5,000
Issuance of common stock at $0.42 per
share for services 19,231 19 7,981 -- -- 8,000
Issuance of common stock at $0.39 per
share for services 18,042 18 6,982 -- -- 7,000
Issuance of common stock at $0.32 per
share for services 162,678 163 52,382 -- -- 52,545
Issuance of common stock at $0.31 per
share for services 16,234 16 4,984 -- -- 5,000
Issuance of common stock at $0.39 per
share for employee bonus 22,500 22 8,754 -- -- 8,776
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-10
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2109 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ------------ ------------
Debt discount on debt issued with
detachable warrants -- -- 84,000 -- -- 84,000
Amortization of deferred consulting fees -- -- -- 30,000 -- 30,000
Intrinsic value of options issued to
directors -- -- 424,262 -- -- 424,262
Net loss -- -- -- -- (2,096,951) (2,096,951)
---------- -------- ------------ ---------- ------------- -------------
BALANCE - MARCH 31, 2005 17,014,696 $ 17,015 $ 16,088,280 $ (30,000) $ (19,142,264) $ (3,066,969)
Issuance of common stock at $0.28 per
share for cash 35,947 36 9,964 -- -- 10,000
Issuance of common stock at $0.26 per
share for cash 38,256 38 9,962 -- -- 10,000
Issuance of common stock at $0.26 per
share for cash 38,401 38 9,962 -- -- 10,000
Issuance of common stock at $0.25 per
share for cash 201,165 201 49,799 -- -- 50,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.18 per
share for cash 100,000 100 17,500 -- -- 17,600
Issuance of common stock at $0.25 per
Share for cash 301,744 302 74,698 -- -- 75,000
Issuance of common stock at varied
prices for cash 2,485,249 2,485 767,512 -- -- 769,997
Issuance of common stock at $0.76 per
share for cash 568,181 568 431,249 -- -- 431,818
Issuance of common stock at $0.25 per
share in connection with the
conversion of notes payable,
including interest
of $4,564 140,000 140 34,860 -- -- 35,000
Issuance of common stock at $0.20
per share in connection with the
conversion of convertible notes
payable, including
interest of $4,943 174,716 175 34,768 -- -- 34,943
Issuance of common stock at $0.31 per
share for services 9,740 10 2,990 -- -- 3,000
Issuance of common stock at $0.30 per
share for services 25,134 25 7,475 -- -- 7,500
Issuance of common stock at $0.25 per
share for services 31,424 31 7,869 -- -- 7,900
Issuance of common stock at $0.26 per
share for services 19,084 19 4,981 -- -- 5,000
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-11
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
----------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------- ------ ---------- ---------- ----------- -------------
Issuance of common stock at $0.25 per
share for services 33,228 33 8,407 -- -- 8,440
Issuance of common stock at $0.25 per
share for services 24,000 24 5,976 -- -- 6,000
Issuance of common stock at $0.26 per
share for services 11,450 11 2,989 -- -- 3,000
Issuance of common stock at $0.26 per
share for services 19,084 19 4,981 -- -- 5,000
Issuance of common stock at $0.26 per
share for services 34,352 34 8,966 -- -- 9,000
Issuance of common stock at $0.26 per
share for services 11,450 11 2,989 -- -- 3,000
Loss on settlement of accrued legal
liabilities -- -- 142,245 -- -- 142,245
Issuance of common stock at $0.24 per
share for services 12,605 13 2,987 -- -- 3,000
Issuance of common stock at $0.24 per
share for services 21,008 21 4,979 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 21,739 22 4,978 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 21,740 22 4,978 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 2,155 2 498 -- -- 500
Issuance of common stock at $0.23 per
share for services 91,739 92 21,008 -- -- 21,100
Issuance of common stock at $0.21 per
share for services 175,755 176 37,084 -- -- 37,260
Issuance of common stock at $0.23 per
share for services 37,863 38 8,519 -- -- 8,557
Issuance of common stock at $0.23 per
share for services 21,368 21 4,979 -- -- 5,000
Issuance of common stock at $0.21 per
share for services 27,852 28 5,710 -- -- 5,738
Issuance of common stock at $0.24 per
share for services 21,186 21 4,979 -- -- 5,000
Issuance of common stock at $0.22 per
share for services 35,278 35 7,585 -- -- 7,620
Issuance of common stock at $0.38 per
share for services 13,298 13 4,987 -- -- 5,000
Issuance of common stock at $0.38 per
share for services 19,948 20 7,640 -- -- 7,660
Issuance of common stock at $0.37 per
share for services 97,662 98 36,037 -- -- 36,135
Issuance of common stock at $0.25 per
share for services 371,847 372 91,137 -- -- 91,509
Issuance of common stock at $0.25 per
share for services 73,964 74 18,128 -- -- 18,202
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-12
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
--------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------- ------ ---------- ---------- ----------- -------------
Issuance of common stock at $0.29 per
share for services 13,333 13 3,827 -- -- 3,840
Issuance of common stock at $0.33 per
share for services 15,060 15 4,985 -- -- 5,000
Issuance of common stock at $0.24 per
share for services 579,813 580 138,575 -- -- 139,155
Issuance of common stock at $0.28 and
$0.33 per share for services 66,017 66 19,934 -- -- 20,000
Issuance of common stock at $0.36 per
share for services 13,889 14 4,986 -- -- 5,000
Issuance of common stock at $0.33 per
share for services 9,091 9 2,989 -- -- 2,999
Issuance of common stock at $0.28 per
share for services 10,563 11 2,991 -- -- 3,001
Issuance of common stock at $0.33 per
share for services 150,000 150 48,850 (49,000) -- --
Issuance of common stock at $0.28 per
share for services 35,714 36 9,964 -- -- 10,000
Issuance of common stock at $0.33 per
share for services 15,152 15 4,985 -- -- 5,000
Issuance of common stock at $0.28 per
per share for services 17,730 18 4,982 -- -- 5,000
Issuance of common stock at $0.20 and
$0.37 per share for services 79,255 79 19,894 -- -- 19,974
Issuance of common stock at $0.33 per
share for services 33,333 33 9,967 -- -- 10,000
Issuance of common stock at $0.39 per
share for services 220,080 220 85,171 -- -- 85,391
Issuance of common stock at $0.49 per
share for services 7,275 7 3,543 -- -- 3,550
Issuance of common stock at $0.34 per
share for services 27,284 27 9,170 -- -- 9,197
Issuance of common stock at $0.33 per
share for services 158,046 158 51,997 -- -- 52,155
Issuance of common stock at $0.20 per
share for services 836,730 837 166,509 -- -- 167,346
Issuance of cashless warrants 389,168 389 (389) -- -- --
Conversion of accrued salaries to
employee stock options -- -- 300,000 -- -- 300,000
Debt discount on debt issued with
detachable warrants -- -- 119,610 -- -- 119,610
Interest expense related to beneficial
conversion feature -- -- 222,375 -- -- 222,375
Professional fees related to registration
statement -- -- (76,732) -- -- (76,732)
Amortization of deferred consulting
fees -- -- -- 34,083 -- 34,083
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-13
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- -------- ------------ ---------- ------------- -------------
Reclassification of derivative
liabilities upon registration of
shares underlying
warrants -- -- 1,090,000 -- -- 1,090,000
Net loss -- -- -- -- (2,920,183) (2,920,183)
---------- -------- ------------ ---------- ------------- -------------
BALANCE - MARCH 31, 2006 25,383,705 $ 25,380 $ 20,322,498 $ (44,917) $ (22,062,447) $ (1,759,484)
---------- -------- ------------ ---------- ------------- -------------
Issuance of common stock at varied
prices for cash 2,649,773 2,650 794,097 -- -- 796,747
Issuance of common stock at $0.18 per
share for cash 555,556 556 99,444 -- -- 100,000
Issuance of common stock at $0.30 per
share for cash 1,333,333 1,333 398,667 -- -- 400,000
Issuance of common stock at $0.24
per share in connection with the
conversion of notes payable,
including interest
of $18,750 107,759 108 43,642 -- -- 43,750
Issuance of common stock at $0.24 per
share for services 33,058 33 7,967 -- -- 8,000
Issuance of common stock at $0.25 per
share for services 126,065 127 31,858 -- -- 31,985
Issuance of common stock at $0.26 per
share for services 156,485 156 40,349 -- -- 40,505
Issuance of common stock at $0.27 per
share for services 30,075 30 7,970 -- -- 8,000
Issuance of common stock at $0.28 per
share for services 43,819 44 12,256 -- -- 12,300
Issuance of common stock at $0.29 per
share for services 14,563 15 4,150 -- -- 4,165
Issuance of common stock at $0.30 per
share for services 18,454 19 5,531 -- -- 5,550
Issuance of common stock at $0.31 per
share for services 32,984 33 10,467 -- -- 10,500
Issuance of common stock at $0.32 per
share for services 52,722 53 17,947 -- -- 18,000
Issuance of common stock at $0.34 per
share for services 29,965 30 9,470 -- -- 9,500
Issuance of common stock at $0.37 per
share for services 132,765 133 48,725 -- -- 48,858
Issuance of common stock at $0.40 per
share for services 7,813 8 2,492 -- -- 2,500
Issuance of common stock at $0.45 per
share for services 3,363 3 1,497 -- -- 1,500
Issuance of common stock at $0.47 per
share for services 14,535 15 4,985 -- -- 5,000
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-14
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
--------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- -------- ------------ ---------- ------------- -------------
Issuance of common stock at $0.50 per
share for services 35,601 36 17,765 -- -- 17,801
Issuance of common stock at $0.51 per
share for services 21,078 21 10,728 -- -- 10,749
Issuance of common stock at $0.53 per
share for services 20,127 20 8,980 -- -- 9,000
Issuance of common stock at $0.55 per
share for services 4,545 5 2,495 -- -- 2,500
Issuance of common stock at $0.58 per
share for services 17,332 17 9,983 -- -- 10,000
Issuance of common stock at $0.59 per
share for services 8,532 9 4,991 -- -- 5,000
Issuance of common stock at $0.61 per
share for services 4,934 5 2,995 -- -- 3,000
Issuance of common stock at $0.79 per
share for services 10,095 9 7,990 -- -- 8,000
Issuance of common stock at $0.81 per
share for services 3,086 3 2,497 -- -- 2,500
Adjustment for issuance of
cashless warrants (144,099) (140) 140 -- -- --
Issuance of commitment shares 1,050,000 1,050 (1,050) -- -- --
Interest expense related to beneficial
conversion feature -- -- 50,000 -- -- 50,000
Amortization of deferred consulting fees -- -- -- 44,917 -- 44,917
Issuance of common stock for option
to obtain licensing rights
to cancer patent 40,000 40 10,760 -- -- 10,800
Stock compensation expense -- -- 38,132 -- -- 38,132
Issuance of common stock at $0.20 per
Share in settlement of
accrued liabilities 114,130 114 22,997 -- -- 23,111
Reclassification of derivative liabilities
upon registration of shares underlying
warrants -- -- (1,090,000) -- -- (1,090,000)
Net loss -- -- -- -- (6,024,545) (6,024,545)
---------- -------- ------------ --------- ------------- -------------
BALANCE - MARCH 31, 2007 31,912,153 $ 31,914 $ 20,963,419 $ -- $ (28,086,992) $ (7,091,660)
============ ======== ============ ========= ============= =============
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-15
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- -------- ------------ ---------- ------------- -------------
BALANCE - MARCH 31, 2007 31,912,153 $ 31,914 $ 20,963,419 $ -- $ (28,086,992) $ (7,091,660)
---------- -------- ------------ ---------- ------------- -------------
Issuance of common stock at $0.50 per
share for cash 2,560,000 2,560 1,187,840 -- -- 1,190,400
Issuance of common stock at $1.00 per
share for cash 100,000 100 99,900 -- -- 100,000
Issuance of common stock at $0.24 per
share for services 71,045 71 16,980 -- -- 17,051
Issuance of common stock at $0.48 per
share for services 41,999 42 19,958 -- -- 20,000
Issuance of common stock at $0.49 per
share for services 13,017 13 6,399 -- -- 6,413
Issuance of common stock at $0.50 per
share for services 45,380 45 22,645 -- -- 22,690
Issuance of common stock at $0.53 per
share for services 75,000 75 39,675 -- -- 39,750
Issuance of common stock at $0.57 per
share for services 7,895 8 4,492 -- -- 4,500
Issuance of common stock at $0.58 per
share for services 36,487 36 21,164 -- -- 21,200
Issuance of common stock at $0.60 per
share for services 120,033 120 71,490 -- -- 71,610
Issuance of common stock at $0.61 per
share for services 103,106 103 62,791 -- -- 62,894
Issuance of common stock at $0.63 per
share for services 10,174 10 6,440 -- -- 6,450
Issuance of common stock at $0.65 per
share for services 4,601 5 2,995 -- -- 3,000
Issuance of common stock at $0.68 per
share for services 17,127 17 11,583 -- -- 11,600
Issuance of common stock at $0.69 per
share for services 7,246 7 4,993 -- -- 5,000
Issuance of common stock at $0.76 per
share for services 17,061 17 12,983 -- -- 13,000
Issuance of common stock at $0.78 per
share for services 19,179 19 14,981 -- -- 15,000
Exercise of cashless warrants 49,414 49 (49) -- -- --
Issuance of common stock for
option exercises by director 250,000 250 94,750 -- -- 95,000
Common stock units issued under
renegotiation of
convertible notes 2,149,582 2,150 5,390,514 -- -- 5,392,664
Beneficial conversion feature on
convertible debt -- -- 38,197 -- -- 38,197
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-16
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- -------- ------------ ---------- ------------- -------------
Issuance of common stock in exchange
for licensing rights 15,152 15 4,985 -- -- 5,000
Stock compensation expense -- -- 487,093 -- -- 487,093
Issuance of common stock in connection
with the conversion of notes payable 1,365,500 1,366 279,782 -- -- 281,148
Net loss -- -- -- -- (4,140,264) (4,140,264)
---------- -------- ------------ ---------- ------------- -------------
BALANCE - MARCH 31, 2008 38,991,151 $ 38,992 $ 28,866,000 $ -- $ (32,227,256) $ (3,322,264)
---------- -------- ------------ ---------- ------------- -------------
Issuance of common stock at $0.59 per
share for services 10,170 10 5,990 -- -- 6,000
Issuance of common stock under
licensing agreement 10,849 11 5,739 -- -- 5,750
Issuance of common stock at $0.45 per
share for services 6,667 7 2,993 -- -- 3,000
Issuance of common stock at $0.50 per
share for cash 1,000,000 1,000 499,000 -- -- 500,000
Issuance of common stock in connection
with the conversion of notes payable 232,033 232 39,093 -- -- 39,325
Issuance of common stock at $0.41 per
share for services 25,610 26 10,474 -- -- 10,500
Issuance of common stock in connection
with the conversion of accounts
payable due to related parties 1,015,050 1,015 331,264 -- -- 332,279
Issuance of common stock in connection
with the payment of interest and
damages to convertible noteholders 966,750 967 472,741 -- -- 473,708
Issuance of common stock at $0.45 per
share for legal services 110,138 110 49,452 -- -- 49,562
Issuance of common stock at $0.40 per
share for services 38,150 38 15,222 -- -- 15,260
Issuance of common stock at $0.50 per
Share under warrant exercises 770,000 770 191,730 -- -- 192,500
Issuance of common stock at $0.50 per
share under warrant exercises 200,000 200 49,800 -- -- 50,000
Issuance of common stock at $0.19 per
share for legal services 98,684 99 18,651 -- -- 18,750
Issuance of common stock at $0.28 per
share for legal services 59,950 60 16,546 -- -- 16,606
Issuance of common stock at $0.25 per
share for cash 700,000 700 165,550 -- -- 166,250
Issuance of common stock at $0.25 per
share for legal services 338,099 338 83,950 -- -- 84,288
Record warrant expense on the issuance
of units for accrued interest -- -- 425,680 -- -- 425,680
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-17
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- -------- ------------ ---------- ------------- -------------
Record warrants and discount on
Convertible notes -- -- 163,402 -- -- 163,402
Issuance of common stock at $0.25 per
share for services 23,636 24 5,976 -- -- 6,000
Issuance of common stock at $0.26 per
share for services 77,192 77 19,993 -- -- 20,070
Issuance of common stock at $0.26 per
share for services 35,000 35 8,365 -- -- 8,400
Issuance of common stock at $0.33 per
share for services 15,337 15 4,985 -- -- 5,000
Reclass remainder of derivative
liability to additional paid-in
capital due to registration of warrants -- -- 419,192 -- -- 419,192
Estimated value of equity instruments
granted in debt restructuring -- -- 711,541 -- -- 711,541
Issuance of common stock at $0.15 per
share for cash 1,320,000 1,320 200,610 -- -- 201,930
Issuance of common stock at $0.21 per
share for services 38,810 39 8,111 -- -- 8,150
Issuance of common stock at $0.17 per
share for services 67,059 67 11,333 -- -- 11,400
Issuance of common stock under
licensing agreement 23,566 24 5,726 -- -- 5,750
Issuances of common stock under
conversions of notes payable 2,569,727 2,570 680,212 -- -- 682,782
Issuance of common stock at $0.19 per
share for services 28,947 27 5,471 -- -- 5,498
Issuance of common stock at $0.17 per
share for services 78,743 79 13,701 -- -- 13,780
Issuance of common stock at $0.17 per
share for services 53,706 54 9,076 -- -- 9,130
Issuance of common stock in
connection with the payment of
interest to convertible
noteholders 168,750 169 30,206 -- -- 30,375
Issuance of common stock at $0.17 per
share for services 50,000 50 8,450 -- -- 8,500
Issuance of common stock at $0.17 per
share for services 33,333 33 5,467 -- -- 5,500
Issuance of common stock at $0.20 per
share for legal services 63,369 63 12,412 -- -- 12,475
Issuance of common stock at $0.19 per
share for services 28,947 29 5,471 -- -- 5,500
Stock-based compensation expense 204,708 205 733,084 -- -- 733,289
Net loss -- -- -- -- (6,084,158) (6,084,158)
---------- -------- ------------ ---------- ------------- -------------
BALANCE - MARCH 31, 2009 49,454,131 $ 49,455 $ 34,312,659 $ -- $ (38,311,414) $ (3,949,300)
---------- -------- ------------ ---------- ------------- --------------
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-18
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
----------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
--------- ------- ---------- ---------- ----------- ------------
Issuance of common stock at $0.17 per
Share for services 71,519 72 12,086 -- -- 12,158
Issuances of common stock under
conversions of notes payable 1,688,211 1,688 261,790 -- -- 263,478
Issuance of common stock at $0.18 per
share under warrant exercise 555,556 556 99,444 -- -- 100,000
Issuance of common stock per share at
$0.22 per share for investor
relations services 490,000 490 108,210 -- -- 108,700
Issuance of common stock at $0.22 per
share for services 25,000 25 5,475 -- -- 5,500
Issuance of common stock at $0.23 per
share for services 32,935 33 7,542 -- -- 7,575
Issuance of common stock at $0.22 per
share for services 12,372 12 2,648 -- -- 2,660
Issuance of common stock at $0.19 per
share for cash 80,000 80 15,120 -- -- 15,200
Issuance of common stock at $0.18 per
share for services 43,021 43 7,701 -- -- 7,744
Issuance of common stock at $0.20 per
share for services 70,870 71 14,429 -- -- 14,500
Issuance of common stock at $0.24 per
share for services 22,817 23 5,477 -- -- 5,500
Issuances of common stock under
conversions of notes payable 878,059 878 138,378 -- -- 139,256
Issuance of common stock at $0.23 per
share for services 13,043 13 2,987 -- -- 3,000
Issuance of common stock at $0.28 per
share for services 10,714 11 2,989 -- -- 3,000
Issuance of common stock at $0.19 per
share for services 51,118 51 9,662 -- -- 9,713
Issuance of common stock at $0.25 per
share for services 22,000 22 5,478 -- -- 5,500
Issuance of common stock at $0.22 per
share for services 34,602 35 7,578 -- -- 7,613
Issuance of common stock at $0.24 per
share for services 40,104 40 9,585 -- -- 9,625
Issuance of common stock at $0.24 per
share for services 22,917 23 5,477 -- -- 5,500
Issuance of common stock at $0.24 per
share for services 20,500 21 4,899 -- -- 4,920
Issuance of common stock at $0.22 per
share for services 57,055 57 12,495 -- -- 12,552
Issuance of common stock at $0.24 per
share for services 22,917 23 5,477 -- -- 5,500
Issuance of common stock at $0.23 per
share for services 23,000 23 5,267 -- -- 5,290
Issuance of common stock at $0.22 per
share for services 48,106 48 10,535 -- -- 10,583
Issuance of common stock at $0.34 per
share for services 16,176 16 5,484 -- -- 5,500
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-19
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------ PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
--------- --------- ----------- ---------- ------------- ------------
Issuances of common stock under
conversions of notes payable 779,956 780 142,732 -- -- 143,512
Issuances of common stock under
conversions of notes payable 518,649 519 100,047 -- -- 100,566
Issuance of common stock at $0.30 per
share for services 18,333 18 5,482 -- -- 5,500
Issuance of common stock at $0.28 per
share for services 51,971 52 14,448 -- -- 14,500
Issuance of common stock at $0.34 per
share for services 11,647 12 3,948 -- -- 3,960
Issuance of common stock at $0.28 per
share for services 19,643 20 5,480 -- -- 5,500
Issuance of common stock at $0.26 per
share for services 21,154 21 5,479 -- -- 5,500
Issuance of common stock at $0.28 per
share for services 14,143 14 3,946 -- -- 3,960
Issuance of common stock at $0.24 per
share for services 22,917 23 5,477 -- -- 5,500
Issuance of common stock at $0.22 per
share for services 36,094 36 7,905 -- -- 7,941
Issuance of common stock at $0.27 per
share for services 20,370 20 5,480 -- -- 5,500
Issuance of common stock at $0.24 per
share for services 16,000 16 3,824 -- -- 3,840
Issuance of common stock at $0.28 per
share for services 19,784 20 5,480 -- -- 5,500
Issuance of common stock at $0.25 per
share for services 12,000 12 2,988 -- -- 3,000
Issuance of common stock at $0.25 per
share as grant to research institute 100,000 100 24,900 -- -- 25,000
Issuance of common stock at $0.22 per
share for services 319,033 319 69,868 -- -- 70,187
Issuance of common stock at $0.25 per
share for services 22,088 22 5,478 -- -- 5,500
Issuance of common stock at $0.22 per
share for services 37,585 38 8,231 -- -- 8,269
Issuances of common stock under
conversions of notes payable 2,511,264 2,511 478,786 -- -- 481,297
Issuance of common stock at $0.26 per
share for services 15,231 15 3,945 -- -- 3,960
Issuance of common stock at $0.47 per
share for services 11,702 12 5,488 -- -- 5,500
Issuances of common stock under
conversions of notes payable 117,759 117 38,478 -- -- 38,595
Issuance of common stock at $0.39 per
share for services 14,103 14 5,486 -- -- 5,500
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-20
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ----------- ---------- ----------- ------------
Issuance of common stock at $0.36 per
share for services 89,397 89 32,362 -- -- 32,451
Issuance of common stock at $0.35 per
share for services 19,688 20 6,871 -- -- 6,891
Issuance of common stock at $0.37 per
share for services 15,068 15 5,485 -- -- 5,500
Issuance of common stock at $0.40 per
share for services 9,900 10 3,950 -- -- 3,960
Issuance of common stock at $0.30 per
share for services 50,313 50 15,044 -- -- 15,094
Issuance of common stock at $0.30 per
share for services 114,066 114 34,106 -- -- 34,220
Issuance of common stock at $0.32 per
share for services 17,188 17 5,483 -- -- 5,500
Issuance of common stock at $0.35 per
share for services 11,314 11 3,949 -- -- 3,960
Issuance of common stock at $0.30 per
share for services 18,333 18 5,482 -- -- 5,500
Issuances of common stock under
conversions of notes payable 280,000 280 69,720 -- -- 70,000
Issuances of common stock under
conversions of notes payable 211,665 212 42,121 -- -- 42,333
Issuance of common stock under licensing
agreement at $0.31 per share 36,683 37 11,463 -- -- 11,500
Issuance of common stock at $0.38 per
share for services 14,474 14 5,486 -- -- 5,500
Issuance of common stock in
connection with the payment of
interest to convertible
noteholders 731,251 731 487,504 -- -- 488,235
Issuance of common stock at $0.30 per
share for services 13,200 13 3,947 -- -- 3,960
Issuance of common stock at $0.35 per
share for services 15,714 16 5,484 -- -- 5,500
Issuance of common stock at $0.32 per
share for services 45,886 46 14,454 -- -- 14,500
Issuance of common stock at $0.32 per
share for services 17,188 17 5,483 -- -- 5,500
Issuances of common stock under
conversions of accrued expenses 29,878 30 8,933 -- -- 8,963
Issuance of common stock at $0.35 per
share for services 11,314 11 3,949 -- -- 3,960
Issuance of common stock at $0.33 per
share for services 16,667 17 5,483 -- -- 5,500
Issuance of common stock at $0.32 per
share for services 9,059 9 2,908 -- -- 2,917
Issuances of common stock under
conversions of notes payable 1,444,185 1,445 351,114 -- -- 352,559
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-21
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
---------- --------- ------------ ----------- ----------- -------------
Issuance of common stock at $0.40 per
share for services 82,678 83 32,988 -- -- 33,071
Issuance of common stock at $0.42 per
share for services 13,095 13 5,487 -- -- 5,500
Issuance of common stock at $0.35 per
share for services 11,065 11 3,906 -- -- 3,917
Issuance of common stock at $0.34 per
share for services 11,647 12 3,948 -- -- 3,960
Issuance of common stock at $0.37 per
share for services 20,929 21 7,723 -- -- 7,744
Issuance of common stock at $0.38 per
share for services 14,474 14 5,486 -- -- 5,500
Issuance of common stock at $0.36 per
share for services 8,125 8 2,909 -- -- 2,917
Issuance of common stock at $0.34 per
share for services 10,895 11 3,739 -- -- 3,750
Issuance of warrants and recording
discount on convertible notes -- -- 933,985 -- -- 933,985
Issuance of warrants upon conversion
of debt into common stock -- -- 31,549 -- -- 31,549
Stock-based compensation expense -- -- 504,933 -- -- 504,933
Cumulative effect of change in
accounting principle -- -- (403,320) -- 124,219 (279,101)
Net loss -- -- -- -- (4,573,315) (4,573,315)
---------- -------- ------------ --------- ------------- -------------
BALANCE - MARCH 31, 2010 61,913,508 $ 61,914 $ 38,296,362 $ -- $(42,760,510) $ (4,402,234)
---------- -------- ------------ --------- ------------- -------------
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-22
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010
--------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2010 2009 March 31, 2010
------------------------------------------------
Cash flows from operating activities:
Net loss $ (4,573,315) $ (6,084,158) $(42,760,510)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 13,653 16,281 1,058,877
Amortization of deferred consulting fees -- -- 109,000
Gain on settlement of debt -- -- (131,175)
Loss on debt extinguishment and on issuance of
units for accrued interest and damages 341,984 1,604,715 3,710,566
Loss on settlement of accrued legal liabilities -- -- 142,245
Gain on sale of property and equipment -- -- (13,065)
Change in estimated fair value of derivative liabilities (178,723) (213,903) 1,318,676
Fair market value of warrants issued in connection
with accounts payable and debt related costs -- -- 2,715,736
Fair market value of equity instruments issued for
services, grants and accrued interest 665,771 334,870 4,812,714
Amortization of discount associated with warrants
issued upon conversion of debt 31,549 -- 31,549
Stock based compensation 504,933 733,289 2,187,709
Amortization of debt discount and deferred
financing costs 627,060 1,517,132 4,625,842
Impairment of patents and patents pending -- -- 416,026
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses 26,872 (3,452) 181,357
Other assets 2,483 -- (10,718)
Accounts payable and accrued liabilities 615,845 309,695 3,115,011
Due to related parties (55,629) 8,143 1,230,078
------------------------------------------------
Net cash used in operating activities (1,977,517) (1,777,388) (16,145,631)
------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (17,068) (1,407) (289,918)
Patents and patents pending (13,087) (10,419) (400,430)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------------------------------------------
Net cash used in investing activities (30,155) (11,826) (662,555)
------------------------------------------------
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-23
--------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2010 AND 2009 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2010 (CONTINUED)
--------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2010 2009 March 31, 2010
----------------------------------------------
Cash flows from financing activities:
Net proceeds from the issuance of notes payable -- -- 2,350,000
Principal repayments of notes payable (24,000) -- (376,500)
Proceeds from the issuance of convertible notes payable 1,978,265 430,000 4,546,265
Net proceeds from the issuance of common stock 115,200 1,110,680 10,433,102
Professional fees related to registration statements -- -- (76,731)
------------ ------------ ----------------
Net cash provided by financing activities 2,069,465 1,540,680 16,876,136
------------ ------------ ----------------
Net increase (decrease) in cash 61,793 (248,534) 67,950
Cash at beginning of period 6,157 254,691 --
------------ ------------ ----------------
Cash at end of period $ 67,950 $ 6,157 $ 67,950
============ ============ ================
Supplemental disclosure of cash flow information
- Cash paid during the period for:
Interest $ -- $ -- $ 266,975
============ ============ ================
Income taxes $ -- $ -- $ 13,346
============ ============ ================
Supplement schedule of noncash investing and
financing activities:
Conversion of debt, accrued liabilities and
accrued interest to common stock $ 1,640,559 $ 722,106 $ 5,159,751
============ ============ ================
Stock option exercise by director for accrued expenses $ -- $ -- $ 95,000
============ ============ ================
Conversion of amounts due to officers and
directors into common stock $ -- $ 332,279 $ 332,279
============ ============ ================
Debt discount on notes payable associated with
detachable warrants $ 1,867,973 $ 150,095 $ 3,172,928
============ ============ ================
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related
parties $ -- $ -- $ 1,003,273
============ ============ ================
Reclassification of derivative liability to
additional paid-in capital $ -- $ 419,192 $ 419,192
============ ============ ================
Additional convertible debt issued in connection with
debt restructuring $ -- $ 573,211 $ 573,211
============ ============ ================
Issuance of common stock in connection with license
agreements $ -- $ -- $ 18,000
============ ============ ================
Issuance of note receivable in connection with
convertible debt financing $ 300,000 $ -- $ 300,000
============ ============ ================
Net assets of entities acquired in exchange for equity
securities $ -- $ -- $ 1,597,867
============ ============ ================
Debt placement fees paid by issuance of warrants $ -- $ 13,307 $ 856,845
============ ============ ================
Patent pending acquired for 12,500 shares of common stock $ -- $ -- $ 100,000
============ ============ ================
Common stock issued for prepaid expenses $ -- $ -- $ 161,537
============ ============ ================
Licensing rights acquired with common stock issuance $ 11,500 $ 11,500 $ 38,800
============ ============ ================
--------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-24
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. ("Aethlon", the "Company", "we" or "us") engages in the
research and development of a medical device known as the Hemopurifier(R) that
removes harmful substances from the blood. Aethlon is in the development stage
on the Hemopurifier(R) and significant research and testing are still needed to
reach commercial viability. Any resulting medical device or process will require
approval by the U.S. Food and Drug Administration ("FDA") or the regulatory
agency of any foreign country where it intends to sell its device. Aethlon has
submitted an Investigational Device Exemption ("IDE") to the FDA. Some of our
patents may expire before FDA approval or approval in a foreign country, if any,
is obtained. However, the Company believes that certain patent applications
and/or other patents issued more recently will help protect the proprietary
nature of the Hemopurifier(R) treatment technology.
Aethlon is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its planned principal operations.
Aethlon's common stock is quoted on the Over-the-Counter Bulletin Board
administered by the Financial Industry Regulatory Authority ("OTCBB") under the
symbol "AEMD.OB."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its wholly-owned subsidiaries Aethlon, Inc., Hemex,
Inc., Syngen Research, Inc., Cell Activation, Inc. and Exosome Sciences, Inc.
(collectively hereinafter referred to as the "Company" or "Aethlon").
Hemex, Inc. is dormant and Aethlon, Inc., Syngen Research, Inc. and Cell
Activation, Inc. were dormant and were dissolved effective November 25, 2009. In
December 2009, we formed Exosome Sciences, Inc. to conduct our future
cancer-related activities. Intercompany balances have been eliminated in
consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has incurred continuing losses from
operations, is in default on certain debt agreements, has negative working
capital of approximately $4,869,000, recurring losses from operations and a
deficit accumulated during the development stage of approximately $42,761,000 at
March 31, 2010, which among other matters, raises substantial doubt about its
ability to continue as a going concern. A significant amount of additional
capital will be necessary to advance the development of the Company's products
to the point at which they may become commercially viable. The Company intends
to fund operations, working capital and other cash requirements (consisting of
accounts payable, accrued liabilities, amounts due to related parties and
amounts due under various notes payable) for the fiscal year ending March 31,
2011 through debt and/or equity financing arrangements.
The Company is currently addressing its liquidity issue by continually seeking
investment capital through private placements of common stock and debt. The
Company believes that its cash on hand and funds expected to be received from
additional private investment will be sufficient to meet its liquidity needs for
fiscal 2011. However, no assurance can be given that the Company will receive
any funds in addition to the funds it has received to date.
The successful outcome of future activities cannot be determined at this time
and there is no assurance that, if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results.
The consolidated financial statements do not include any adjustments related to
this uncertainty and as to the recoverability and classification of asset
carrying amounts or the amount and classification of liabilities that might
result should the Company be unable to continue as a going concern.
RISKS AND UNCERTAINTIES
The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.
F-25
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
USE OF ESTIMATES
We prepare our consolidated financial statements in conformity with GAAP, which
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting periods. Significant estimates made
by management include, among others, realization of long-lived assets, valuation
of derivative liabilities, estimating fair value associated with debt and equity
transactions and valuation of deferred tax assets. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Accounting standards define "cash and cash equivalents" as any short-term,
highly liquid investment that is both readily convertible to known amounts of
cash and so near their maturity that they present insignificant risk of changes
in value because of changes in interest rates. For the purpose of financial
statement presentation, we consider all highly liquid investment instruments
with original maturities of three months or less when purchased, or any
investment redeemable without penalty or loss of interest to be cash
equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our cash, accounts payable and accrued liabilities
approximates their estimated fair values due to the short-term maturities of
those financial instruments. The carrying amount of the note receivable
approximates its fair value due to the short maturity of the note and as the
interest rate approximates current market interest rates for similar
instruments. Derivative liabilities recorded in connection with the embedded
conversion feature of certain convertible notes payable (See Note 5) are
reported at their estimated fair value, with changes in fair value being
reported in results of operations.
Management has concluded that it is not practical to determine the estimated
fair value of amounts due to related parties because the transactions cannot be
assumed to have been consummated at arm's length, the terms are not deemed to be
market terms, there are no quoted values available for these instruments, and an
independent valuation would not be practicable due to the lack of data regarding
similar instruments, if any, and the associated potential costs.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at two financial institutions in checking accounts and
related cash management accounts. In October 2008, the Federal Deposit Insurance
Corporation ("FDIC") increased the maximum level of deposit insurance at
financial institutions from $100,000 to $250,000. Our cash balances were below
such insured amounts at both March 31, 2010 and 2009.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from two to five years. Repairs and maintenance are charged to
expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation with any gain or loss included in the
consolidated statements of operations.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the difference between the consolidated financial
statements and their respective tax basis. Deferred income taxes reflect the net
tax effects of (a) temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts reported for
income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable
income (if any) in the foreseeable future, it is more likely than not that some
portion of the deferred tax assets may not be realized.
F-26
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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, 2010 and 2009.
LOSS PER SHARE
Basic loss per share is computed by dividing net income available to common
stockholders by the weighted average number of common shares assumed to be
outstanding during the period of computation. Diluted loss per share is computed
similar to basic loss per share except that the denominator is increased to
include the number of additional common shares that would have been outstanding
if the potential common shares had been issued, and if the additional common
shares were dilutive. As we had net losses for all periods presented, basic and
diluted loss per share are the same, and additional common stock equivalents
have been excluded as their effect would be antidilutive.
The potentially dilutive common shares outstanding for the fiscal years ended
March 31, 2010 and 2009, which include shares underlying outstanding stock
options, warrants and convertible debentures were 53,669,525 and 45,827,651,
respectively.
SEGMENTS
We currently operate in one segment, and accordingly, no additional segment
related disclosures are required.
F-27
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock participation
plans are accounted for under the fair value method. Accordingly, share-based
compensation is measured when all granting activities have been completed,
generally the grant date, based on the fair value of the award. The exercise
price of options is generally equal to the market price of the Company's common
stock (defined as the closing price as quoted on the OTCBB on the date of grant.
Compensation cost recognized by the Company includes (a) compensation cost for
all equity incentive awards granted prior to, but not yet vested as of April 1,
2006, based on the grant-date fair value estimated in accordance with the
original provisions of the then current accounting standards, and (b)
compensation cost for all equity incentive awards granted subsequent to April 1,
2006, based on the grant-date fair value estimated in accordance with the
provisions of subsequent accounting standards. We use a Binomial Lattice option
pricing model for estimating fair value of options granted.
The following table summarizes share-based compensation expenses relating to
shares and options granted and the effect on basic and diluted loss per common
share during the years ended March 31, 2010 and 2009:
March 31, 2010 March 31, 2009
-------------- --------------
Stock Option Expense $ 504,933 $ 679,924
Direct Stock Grants -- 53,365
-------------- --------------
Total Stock-Based Compensation Expense $ 504,933 $ 733,289
============== ==============
Basic and diluted loss per common share $ (0.01) $ (0.02)
============== ==============
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.
F-28
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION, CONTINUED
c) For any transactions not meeting the criteria in (a) or (b) above, we
re-measure the consideration at each reporting date based on its then current
stock value.
We review share-based compensation on a quarterly basis for changes to the
estimate of expected award forfeitures based on actual forfeiture experience.
The effect of adjusting the forfeiture rate for all expense amortization after
March 31, 2006 is recognized in the period the forfeiture estimate is changed.
The effect of forfeiture adjustments for the fiscal year ended March 31, 2010
was insignificant.
PATENTS
Patents include both foreign and domestic patents. There were several patents
pending at March 31, 2010. We capitalize the cost of patents and patents
pending, some of which were acquired, and amortize such costs over the shorter
of the remaining legal life or their estimated economic life, upon issuance of
the patent. The unamortized costs of patents and patents pending is written off
when we determine there is no future benefit to those assets.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
We granted warrants in connection with the issuance of certain notes payable.
The relative estimated fair value of such warrants represents a discount from
the face amount of the notes payable. Accordingly, the relative estimated fair
value of the warrants in those certain transactions where the warrants qualified
for equity classification has been recorded in the consolidated financial
statements as a discount from the face amount of the notes. The discount is
amortized using the effective interest method over the respective term of the
related notes payable.
DERIVATIVE LIABILITIES AND CLASSIFICATION
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.
On April 1, 2009 we adopted guidance issued by the FASB that requires us to
apply a two-step model in determining whether a financial instrument or an
embedded conversion feature is indexed to our own stock and thus enables it to
qualify for equity classification. We have identified several convertible debt
agreements in which the embedded conversion feature contains certain provisions
that may result in an adjustment of the conversion price, which results in the
failure of the embedded conversion feature to be considered to be indexed to our
stock. As a result of the adoption of this guidance, the estimated fair value of
the embedded conversion feature (See SIGNIFICANT RECENT ACCOUNTING
PRONOUNCEMENTS section) was recorded as a derivative liability (at the date of
issuance), and a cumulative effect adjustment was recorded to our accumulated
deficit. In addition, we have re-measured the fair value of such derivative
liability quarterly and as of March 31, 2009 and 2010 and have recorded the
change in the fair value for the fiscal years ended March 31, 2009 and 2010 in
other expense (income) in the accompanying consolidated statement of operations.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable (see Note 5) provides for a
rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). The estimated
intrinsic fair value of the BCF is recorded in the consolidated financial
statements as a discount from the face amount of the notes. Such discounts are
accreted to interest expense over the term of the notes using the effective
interest method.
F-29
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
REGISTRATION PAYMENT ARRANGEMENTS
We have registration payment arrangements associated with convertible notes
related to the registration of warrants and the common stock underlying the
convertible notes. These warrants have lives extending through 2016. The terms
of certain of the arrangements do not provide for a maximum potential amount of
consideration.
We account for contingent obligations to make future payments or otherwise
transfer consideration under a registration payment arrangement separately from
any related financing transaction agreements, and any such contingent
obligations are recognized only when it is determined that it is probable that
the Company will become obligated for future payments and the amount, or range
of amounts, of such future payments can be reasonably estimated. On October 7,
2008, the SEC declared effective a registration statement that covered all of
the shares and warrants that had previously been generating liquidated damages
pursuant to registration rights agreements and as a result, we ceased recording
such liquidated damages at that time.
However, the above referenced registration statement ceased being effective in
July 2009. As a result, as of March 31, 2010, we have accrued estimated
liquidated damages in the aggregate amount of $493,400, which represents amounts
owed through March 31, 2010, plus the additional estimated amounts that will be
owed through August 2010, at which time we expect to have an effective
registration statement back on file with the Securities and Exchange Commission
("SEC"). The actual amount of liquidated damages owed may differ from our
estimates. We also intend to negotiate the amount of liquidated damages due and,
as such, the ultimate amounts we may actually pay may be less than the amount
currently accrued.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred approximately $525,000 and $648,000 of research and development
expenses for the years ended March 31, 2010 and 2009, respectively, which are
included in various operating expenses in the accompanying consolidated
statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have or are
reasonably likely to have a current or future material effect on our consolidate
financial statements.
CUMULATIVE CHANGE IN ACCOUNTING PRINCIPLE
Effective April 1, 2009, the Company adopted new accounting guidance as codified
within Accounting Standards Codification ("ASC") 815-40, "Derivatives and
Hedging Instruments - Contracts in Entities' Own Equity" relating to determining
whether an instrument or embedded feature is indexed to a company's own stock.
The adoption of this new accounting guidance standard's requirements can affect
the accounting for warrants or convertible debt that contain provisions that
protect holders from a decline in the stock price (or "down-round" protection).
For example, warrants with such provisions will no longer be recorded in equity.
Down-round protection provisions reduce the exercise price of a warrant or
convertible instrument if a company either issues equity shares for a price that
is lower than the exercise price of those instruments or issues new warrants or
convertible instruments that have a lower exercise or conversion price. We
evaluated whether convertible debt or warrants to acquire stock of the Company
contain provisions that protect holders from declines in the stock price or
otherwise could result in modification of the exercise or conversion price
and/or shares to be issued under the respective agreements based on a variable
that is not an input to the fair value of a "fixed-for-fixed" option. We
determined that our warrants do not contain such protective features. However,
we determined that we have several convertible debt agreements in which the
terms provide for a possible adjustment to the conversion price, and as such,
the embedded conversion feature fails to be indexed solely to our stock under
this new accounting guidance. As a result of the adoption of this standard, we
classified the estimated fair value of the embedded conversion feature of the
convertible debt agreement described above, which was determined to be $279,101,
as a derivative liability on April 1, 2009 and recorded a cumulative effect
adjustment to retained earnings (accumulated deficit) of $124,219 based on the
difference between amounts recognized at the date of issuance and April 1, 2009.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board ("FASB") issued a new
accounting standard which provides guidance related to the FASB ASC and the
Hierarchy of Generally Accepted Accounting Principles. The new accounting
standard stipulates the FASB Accounting Standards Codification is the source of
authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental
entities. The new accounting standard is effective for financial statements
issued for interim and annual periods ending after September 15, 2009. The
implementation of this standard during the quarter ended September 30, 2009 did
not have a material impact on our statements of operations or financial
position.
F-30
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In May 2008, the FASB issued a new accounting standard which provides guidance
relating to accounting for convertible debt instruments that may be settled in
cash upon conversion (including partial cash settlement). This new standard
requires recognition of both the liability and equity components of convertible
debt instruments with cash settlement features. The debt component is required
to be recognized at the fair value of a similar instrument that does not have an
associated equity component. The equity component is recognized as the
difference between the proceeds from the issuance of the note and the fair value
of the liability. The standard also requires an accretion of the resulting debt
discount over the expected life of the debt. Retrospective application to all
periods presented is required and a cumulative-effect adjustment is recognized
as of the beginning of the first period presented. This standard was effective
for us in the first quarter of fiscal year 2010. The adoption of this standard
did not have a material impact on our financial statements.
In April 2009, the FASB issued an amendment to an existing standard which
provides guidance relating to interim disclosures about fair value of financial
instruments. This new standard requires the disclosure of the carrying amount
and the fair value of all financial instruments for interim reporting periods
and annual financial statements of publicly traded companies (even if the
financial instrument is not recognized in the balance sheet), including the
methods and significant assumptions used to estimate the fair values and any
changes in such methods and assumptions. This new standard is effective for
interim reporting periods ending after June 15, 2009. We adopted this
pronouncement during the quarter ended June 30, 2009 without material impact to
our financial statements.
In May 2009, the FASB issued a new accounting standard related to subsequent
events, which provides guidance on events that occur after the balance sheet
date but prior to the issuance of the financial statements. The new accounting
standard distinguishes events requiring recognition in the financial statements
and those that may require disclosure in the financial statements. The new
accounting standard is effective for interim and annual periods after June 15,
2009. We adopted the new accounting standard for the quarter ended June 30,
2009.
The Sarbanes-Oxley Act of 2002 ("the Act") introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements of the
Act is for management to annually assess and report on the effectiveness of its
internal control over financial reporting under Section 404(a) and for its
registered public accountant to attest to this report under Section 404(b). The
SEC has modified the effective date and adoption requirements of Section 404(a)
and Section 404(b) implementation for non-accelerated filers multiple times,
such that we were only required to issue our management report on internal
control over financial reporting in our annual report on Form 10-K for the
fiscal year ended March 31, 2009. Based on current SEC requirements, we will be
required to have our independent registered public accounting firm attest to the
effectiveness of internal controls over financial reporting for our fiscal year
ending March 31, 2011.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," which was subsequently codified
within ASC 825, ("ASC 825"). ASC 825 expands the scope of specific types of
assets and liabilities that an entity may carry at fair value on its statement
of financial position, and offers an irrevocable option to record the vast
majority of financial assets and liabilities at fair value, with changes in fair
value recorded in earnings. ASC 825 is effective for fiscal years beginning
after November 15, 2007. We have not yet elected to use the fair value option,
and as such, our adoption of ASC 825 as of April 1, 2008 did not have a material
impact on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
F-31
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES" in connection
with financial assets and liabilities measured at fair value on a recurring
basis subsequent to initial recognition. The guidance applies to our derivative
liabilities.
FASB 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.
Fair Value Measurements at Reporting Date Using
---------------------------------------------------------
Quoted Prices Significant
in Other
Active Markets for Observable Significant
March 31, Identical Assets Inputs Unobservable
Description 2010 (Level 1) (Level 2) Inputs (Level 3)
------------------------- ------------- ------------------- ---------------- ----------------
Derivative Liabilities $ -- $ -- $ -- $ 1,054,716
------------- ------------------- ---------------- ----------------
Total Assets $ -- $ -- $ -- $ 1,054,716
============= =================== ================ ================
We had no derivative liabilities at March 31, 2009.
The fair value of our derivative liabilities is determined based on observable
market based inputs or unobservable inputs that are corroborated by market data,
which is a Level 3 classification.
The following outlines the significant weighted average assumptions we used to
estimate the fair value information presented, with respect to derivative
liabilities utilizing the Binomial Lattice option pricing model:
Fiscal Year Ended March 31, 2010
-----------------------------------
Risk free interest rate 1.28% - 2.58%
Average expected life 3 - 5 years
Expected volatility 78.8% - 96.3%
Expected dividends None
We did not make any changes to our valuation techniques compared to the prior
fiscal year.
F-32
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
We also obtained a third party valuation in connection with our December 2008
note restructuring, our July and August 2009 convertible notes and February 2010
convertible note (see Note 5). The third party valuation firm used level 3
inputs in its measurement techniques. That valuation firm used a binomial
lattice pricing model to calculate the estimated fair value of embedded
derivatives in those transactions.
The table below sets forth a summary of changes in the fair value of our Level 3
financial instruments for the year ended March 31, 2010.
Change in
estimated fair
Recorded value recognized
April 1, New Derivative in results March 31,
2009 Liabilities of operations 2010
----------- ----------- ------------- ---------
Derivative liabilities $ -- $ 1,233,439 ($ 178,723) $1,054,716
The table below sets forth a summary of changes in the fair value of our Level 3
financial instruments for the year ended March 31, 2009.
Change in
estimated fair
Transfers value recognized
April 1, into Equity in results March 31,
2008 (See Note 6) of operations 2009
----------- --------- ------------ ---------
Derivative
Liabilities(1) $ 633,095 ($ 419,192) ($ 213,903) $ --
F-33
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment, net consist of the following:
March 31, 2010 March 31, 2009
-------------- --------------
Furniture and office equipment at cost $ 284,755 $ 267,687
Accumulated depreciation (269,573) (265,084)
-------------- --------------
$ 15,182 $ 2,603
============== ==============
Depreciation expense for the years ended March 31, 2010 and 2009 approximated
$4,000 and $7,000, respectively.
3. PATENTS
Patents consist of the following:
March 31, 2010 March 31, 2009
-------------- --------------
Patents $ 157,442 $ 157,442
Patents pending and trademarks 47,397 34,310
Accumulated amortization (62,499) (53,335)
-------------- --------------
$ 142,340 $ 138,417
============== ==============
Patents represented 22% and 70% of our total assets at March 31, 2010 and 2009,
respectively. Amortization of patents for the years ended March 31, 2010 and
2009 approximated $9,000. Amortization expense on patents is estimated to be
approximately $9,000 per year based on the estimated life of the patents.
4. NOTES PAYABLE
Notes payable consist of the following:
March 31, March 31,
2010 2009
----------- ------------
12% Notes payable, all past due $ 285,000 $ 297,500
10% Note payable, all past due 5,000 5,000
----------- ------------
Total Notes Payable $ 290,000 $ 302,500
=========== ============
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings
(the "12% Notes"). On November 4, 2009, a holder of $12,500 of the 12% Notes
converted his principal balance and $15,625 of accrued interest to common stock
at the then current market price of $0.43 per share. At March 31, 2010, 12%
Notes with a principal balance of $285,000 are outstanding, all of which are
past due, in default, and bearing interest at the default rate of 15%. At March
31, 2010, interest payable on the 12% Notes totaled $314,112.
F-34
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
4. NOTES PAYABLE (continued)
10% NOTES
From time to time, we issued notes payable ("10% Notes") to various investors,
bearing interest at 10% per annum, with principal and interest due six months
from the date of issuance. The 10% Notes required no payment of principal or
interest during the term. The total amount of the original notes issued was
$275,000. One 10% Note in the amount of $5,000, which is past due and in
default, remains outstanding at March 31, 2010. At March 31, 2010, interest
payable on this note totaled $4,375.
Management's plans to satisfy the remaining outstanding balance on these 12% and
10% Notes include, among other alternatives, converting the notes to common
stock at market value or repayment with available funds.
5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consist of the following at March 31, 2010:
Net
Principal Discount Amount
------------ ------------- ------------
Amended Series A 10% Convertible Notes, past due $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes, past due 45,000 -- 45,000
December 2006 10% Convertible Notes, past due 17,000 -- 17,000
May & June 2009 10% Convertible Notes 300,000 (120,649) 179,351
July & August 2009 10% Convertible Notes 338,250 (98,458) 239,792
October & November 2009 10% Convertible Notes 380,250 (380,203) 47
January 2010 10% Convertible Notes 250,000 (249,993) 7
February 2010 10% Convertible Note 660,000 (409,198) 250,802
------------ ------------- ------------
Total - Convertible Notes $ 2,890,500 $ (1,258,501) $ 1,631,999
============ ============= ============
All of the Convertible Notes Payable in the above table are presently past due
or will be due within one year of the March 31, 2010 balance sheet date. As a
result, we expect to amortize all of the remaining discounts during the fiscal
year ending March 31, 2011.
Our interest costs recognized for the fiscal year ended March 31, 2010 relating
to both contractual interest coupon and amortization of the discount on
convertible notes payable component were as follows:
During the fiscal year ended March 31, 2010, we recorded interest expense of
$241,320 related to the contractual coupons of our convertible notes and
interest expense of $565,747 related to the amortization of debt discounts on
the convertible notes for a total of $807,067.
F-35
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
Convertible Notes Payable consist of the following at March 31, 2009:
Net
Principal Discount Amount
------------ ------------ -----------
Amended Series A 10% Convertible Notes $ 900,000 $ -- $ 900,000
2008 10% Convertible Notes 45,000 (8,683) 36,317
December 2006 10% Convertible Notes 17,000 -- 17,000
Restructured December 2008 10% Convertible
Notes and Related Convertible Notes 1,116,403 -- 1,116,403
------------ ------------ -----------
Total - Convertible Notes $ 2,078,403 $ (8,683) $ 2,069,720
============ ============ ===========
Our interest costs recognized for the fiscal year ended March 31, 2009 relating
to both contractual interest coupon and amortization of the discount on the
convertible notes payable component were as follows:
During the fiscal year ended March 31, 2009, we recorded interest expense of
$233,316 related to the contractual coupons of our convertible notes and
interest expense of $803,776 related to the amortization of debt discounts on
the conertible notes for a total of $1,037,092.
FEBRUARY 2010 10% CONVERTIBLE NOTE
On February 12, 2010, we raised $280,015 in cash and received a secured
promissory note in the amount of $300,000 (see Note 12) in exchange for the
issuance by the Company of a $660,000 principal amount 10% convertible
promissory note (the "Note") to one accredited investor. The Note included an
original issue discount of ten percent, or $60,000, and an origination fee of
three percent, or $9,000. We also paid legal fees of $10,985. The Note matures
in February 2011. The Note was issued in a private placement.
The conversion price per share is equal to eighty percent (80%) of the average
of the three lowest closing bid prices of our common stock as reported by
Bloomberg L.P. on the Principal Market for the ten (10) trading days preceding
the conversion date, subject to a maximum price per share of $0.30 and a minimum
price per share of $0.20. The Note is convertible into a maximum of 3,300,000
shares of our common stock at the minimum price per share of $0.20. The investor
also received 660,000 three-year warrants to purchase shares of our common stock
at $0.50 per share, although that exercise price is subject to change based on
certain conditions. The conversion feature may additionally be adjusted in the
event of future financing by the Company. Because the conversion feature and
warrant exercise price each can be reset based on future events, they have been
classified as derivative liabilities.
F-36
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
We commissioned a valuation study on this transaction from a third party
valuation firm and based on the results of that study, we recorded a discount
associated with the derivative liability of $478,476 associated with the
conversion feature. We commissioned a valuation of the derivative liability to
measure the fair value of the derivative liability at March 31, 2010 and based
on the results of that study, we recorded a fair value at March 31, 2010 of
$572,165. As a result of this fair value change we recorded a charge of $93,689
in the fiscal year ended March 31, 2010.
JANUARY 2010 10% CONVERTIBLE NOTES
In January 2010, we raised $250,000 from the sale to an accredited investor of
two 10% convertible notes. The convertible notes mature in July 2011 and are
convertible into our common stock at a fixed conversion price of $0.25 per share
prior to maturity. The investor also received matching three year warrants to
purchase 1,000,000 unregistered shares of our common stock at a price of $0.25
per share. This investment concluded our 10% convertible debt round that began
in October 2009. In aggregate, we issued $700,250 in 10% convertible notes in
that financing round.
We measured the fair value of the warrants and the beneficial conversion feature
of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing the discount associated with the January 2010 10% Convertible
Notes and associated warrants using the effective interest method.
At March 31, 2010, interest payable on these notes totaled $5,645.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale to accredited
investors of 10% convertible notes ("October & November 2009 10% Convertible
Notes"). The October & November 2009 10% Convertible Notes mature at various
dates between April 2011 and May 2011 and are convertible into our common stock
at a fixed conversion price of $0.25 per share prior to maturity. The investors
also received matching three year warrants to purchase 1,720,000 unregistered
shares of our common stock at a price of $0.25 per share.
We measured the fair value of the warrants and the beneficial conversion feature
of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing the discount associated with the October & November 2009 10%
Convertible Notes and associated warrants using the effective interest method.
Three of the investors immediately converted their convertible notes totaling
$70,000 into 280,000 shares of our common stock under the conversion formula. As
a result, we accelerated the discount of $70,000 associated with their notes and
recorded that amount as interest expense in the three months ended December 31,
2009.
Deferred financing costs of $20,250 incurred in connection with this financing
were issued in the form of a convertible note with warrants on the same terms as
those received by the investors. We capitalized the $20,250 of deferred
financing costs and are amortizing them over the term of the notes using the
effective interest method.
At March 31, 2010, interest payable on these notes totaled $19,013.
F-37
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
JULY & AUGUST 2009 10% CONVERTIBLE NOTES
In July and August 2009, we raised an aggregate amount of $668,250 from the sale
to three investment funds of 10% convertible notes ("July & August 2009 10%
Convertible Notes"), of which $338,250 remain outstanding at March 31, 2010.
Each note carries a one-year term and is convertible into our common stock at
80% of market with a floor of $0.15 cents and a ceiling of $0.25 cents per
share. As additional consideration, the investors also received 1,336,500 three
year warrants to purchase our common stock at $0.50 per share, although that
exercise price is subject to change based on certain conditions. The conversion
feature may additionally be adjusted in the event of future financing by the
Company. Because the conversion feature and warrant exercise price each can be
reset based on future events, they are considered derivatives.
We commissioned a valuation study on this transaction from a third party
valuation firm and based on the results of that study, we recorded a discount
associated with the derivative liability of $475,762 associated with the
conversion feature. We commissioned a valuation of the derivative liability to
measure the fair value of the derivative liability at March 31, 2010 and based
on the results of that study, we recorded a fair value at March 31, 2010 of
$482,451. As a result of this fair value change we recorded a charge of $6,689
in the fiscal year ended March 31, 2010.
We are amortizing the discount associated with the July & August 2009 10%
Convertible Notes and associated warrants using the effective interest method.
Deferred financing costs incurred in connection with this financing totaled
$60,750, which were capitalized and are being amortized using the effective
interest method.
During the March 2010, one of the investors converted $330,000 of principal and
$22,559 of accrued interest into common stock. We accelerated and recorded as
interest expense the remaining discount associated with that portion of the
principal balance of the July & August 2009 10% Convertible Notes.
At March 31, 2010, interest payable on those notes totaled $20,338.
MAY & JUNE 2009 10% CONVERTIBLE NOTES
In May and June 2009, we raised an aggregate amount of $350,000 from the sale to
accredited investors of 10% convertible notes ("May & June 2009 10% Convertible
Notes"). The May & June 2009 10% Convertible Notes mature at various dates
between November 2010 through December 2010 and are convertible into our common
stock at a fixed conversion price of $0.20 per share prior to maturity. If the
investors opt to convert their convertible debt to our common stock, then they
will receive a matching three year warrant to purchase unregistered shares of
our common stock at a price of $0.20 per share. We have measured the warrants
but have not recorded them given their contingent terms.
After consideration of the warrants, we recorded a discount associated with the
beneficial conversion feature of $233,735 related to the May & June 2009 10%
Convertible Notes and we are amortizing that discount over the terms of the May
& June 2009 10% Convertible Notes using the effective interest method.
During fiscal year ended March 31, 2010, the holders of two of the May & June
2009 10% Convertible Notes converted a total of $50,000 in notes to 250,000
shares of our common stock under the conversion feature of the notes. Due to
these conversions, we accelerated the remaining discount of $15,928 associated
with those two converted notes and recorded that amount as interest expense in
the three months ended December 31, 2009. We also issued 250,000 warrants as a
result of those conversions, the fair value of which had been measured on the
issuance dates of the relevant convertible notes using the Binomial lattice
method at $31,549, which we recorded as interest expense during the fiscal year
ended March 31, 2010.
At March 31, 2010, $300,000 of the May & June 2009 10% Convertible Notes remain
outstanding. At March 31, 2010, interest payable on these notes totaled $20,269.
F-38
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
RESTRUCTURED DECEMBER 2008 10% CONVERTIBLE NOTES AND RELATED CONVERTIBLE NOTES
None of the Restructured December 2008 10% Convertible Notes and Related
Convertible Notes remained outstanding at March 31, 2010. All of the $1,116,403
amount outstanding at March 31, 2009 was converted into common stock at varying
conversion prices between $0.15 per share and $0.19 per share during the fiscal
year ended March 31, 2010.
2008 10% CONVERTIBLE NOTES
During the year ended March 31, 2009, we raised an aggregate amount of $430,000
from the sale to accredited investors of 10% convertible notes and warrants
("2008 10% Convertible Notes"). The 2008 10% Convertible Notes matured at
various dates between January 2010 through March 2010 and are convertible into
our common stock at a fixed conversion price of $0.50 per share prior to
maturity and the warrants are exercisable at $0.50 per share for a period of
three years ending between July and September 2011. In connection with this
financing, we agreed to pay to the investment banking firm that arranged this
sale a cash commission of seven percent of the proceeds and warrants equal to
seven percent of the gross capital raised which we accounted for as deferred
financing costs and which are being amortized over the terms of convertible
notes using the effective interest method.
The warrants issued as part of the 2008 10% Convertible Notes can be settled in
unregistered shares of our common stock. The warrants have been valued using a
Binomial Lattice option pricing model and an associated discount of $150,095,
the relative fair value measured at the commitment date, was recorded and
presented net against the face amount of the 2008 10% Convertible Notes. The
discount associated with the warrants is amortized over the term of the notes
using the effective interest method. The convertible feature of the 2008 10%
Convertible Notes does not have a beneficial conversion.
During the three months ended March 31, 2009, a holder of $385,000 of the 2008
10% Convertible Notes converted his principal and $19,250 of accrued interest to
common stock at $0.50 per share per the terms of the 2008 10% Convertible Notes.
2008 10% Convertible Notes in the aggregate amount of $45,000 remain outstanding
at March 31, 2010. These notes matured in January and February, 2010. At March
31, 2010, interest payable on these notes totaled $7,478.
F-39
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
AMENDED SERIES A 10% CONVERTIBLE NOTES
On November 2007, we entered into Amended and Restated 10% Series A Convertible
Promissory Notes (the "Amended Notes" or " Amended Series A Convertible Notes")
with the holders of certain promissory notes that we previously issued (the
"Prior Notes"), and all amendments to the Prior Notes.
The Amended Notes, in the principal amount of $1,000,000, are convertible into
an aggregate of 5,000,000 shares of our Common Stock and matured on February 15,
2009. The Amended Notes provided for the payment of accrued and default interest
through December 31, 2007 in the aggregate amount of $295,248 paid in units
("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of one share
of our Common Stock and one Class A Common Stock Purchase Warrant (the "Class A
Warrant") to purchase one share of our Common Stock at a fixed exercise price of
$0.20 per share. If the Holders exercise the Class A Warrants on or before
February 15, 2010, we will issue them one Class B Common Stock Purchase Warrant
(the "Class B Warrant") for every two Class A Warrants exercised. The Class B
Warrants will have a fixed exercise price of $0.60 per share.
In addition, the Amended Notes provided for the issuance of Class A Principal
Common Stock Purchase Warrants (the "Class A Principal Warrant") to purchase an
aggregate of 5,000,000 shares of our Common Stock on the same terms as the Class
A Warrants.
In January 2008, one of the holders of the Amended Series A Convertible Notes
converted $100,000 of their notes into 500,000 shares of common stock at the
agreed conversion rate of $0.20 per share.
To satisfy the accrued interest and damages through September 30, 2008, on
September 19, 2008, we issued 966,750 shares of restricted common stock, valued
at the closing price of $0.49, and 966,750 warrants with a strike price of $0.20
in payment of accrued interest of $89,500 and accrued damages of $103,850 per
the payment formula in the Loan Agreement. The difference in value of equity
instruments issued upon settlement and the liabilities settled resulted in a
non-cash loss on settlement of $607,908.
In order to satisfy the accrued interest for the December 2008 quarter, on
February 18, 2009, we issued 168,750 shares of restricted common stock, valued
at the closing price of $0.18, and 168,750 warrants with a strike price of $0.20
in payment of accrued interest of $33,750 per the payment formula in the Loan
Agreement. The difference in value of equity instruments issued upon settlement
and the liabilities settled resulted in a non-cash loss on settlement of
$19,355.
In order to satisfy the accrued interest for the period January 2009 through
January 2010, on January 11, 2010, we issued 731,251 shares of restricted common
stock, valued at the closing price of $0.37, and 731,251 warrants with a strike
price of $0.20 in payment of accrued interest of $146,250 per the payment
formula in the Loan Agreement. The difference in value of equity instruments
issued upon settlement and the liabilities settled resulted in a non-cash loss
on settlement of $341,984.
We have not yet paid certain legal fees, which total approximately $56,000 and
are accrued in our accounts payable, associated with the amendments to the
notes. We are currently in discussions with the noteholders regarding the terms
of a potential extension to the notes but there can be no assurance such an
extension will be finalized on terms acceptable to us or at all.
At March 31, 2010, $900,000 of the Amended Series A 10% Convertible Notes remain
outstanding and in default. These notes are convertible into our common stock at
$0.20 per share. At March 31, 2010, interest payable on these notes totaled
$22,500. In June 2010, we restructured and extended the Amended Series A 10%
Convertible Notes (see Note 12).
F-40
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
DECEMBER 2006 10% CONVERTIBLE NOTES
On December 15, 2006, we issued two 10% Convertible Notes ("December 10% Notes")
totaling $50,000 to accredited investors. The December 10% Notes accrue interest
at a rate of ten percent (10%) per annum and matured on March 15, 2007. Such
notes are convertible into shares of restricted common stock at any time at the
election of the holder at a fixed conversion price of $0.17 per share for any
conversion occurring on or before the maturity date. In addition, upon issuance,
we issued five-year Warrants ("December 10% Note Warrants") to purchase a number
of shares equal to the number of shares into which the December 10% Notes can be
converted at a fixed exercise price of $0.17. Additionally, if the December 10%
Note Warrants were exercised prior to December 15, 2007, the holder would have
received an additional warrant on the same terms as the December 10% Note
Warrants on a one to one basis. The warrants can be settled in unregistered
shares of our common stock. The December 10% Note Warrants have been valued
using a Binomial Lattice option pricing model and an associated discount of
$15,627, the relative fair value measured at the commitment date, was recorded
and presented net against the face amount of the December 10% Notes. The
convertible feature of the December 10% Notes provides for an effective
conversion rate that is below market value. We estimated the fair value of such
beneficial conversion feature to be $34,373 and recorded such amount as a debt
discount. The discounts associated with the warrants and the beneficial
conversion feature were accreted to interest expense over the term of the
December 10% Notes.
On May 1, 2008, a holder of $33,000 of the December 10% Notes converted his
$33,000 principal amount and accrued interest of $6,325 at the agreed conversion
rate of $0.17 per share. As a result, we issued 232,033 shares of common stock
under this conversion.
At March 31, 2010, $17,000 of the December 2006 10% Notes remain outstanding and
in default. These notes are convertible into our common stock at $0.17 per
share. At March 31, 2010, interest payable on these notes totaled $8,146.
6. EQUITY TRANSACTIONS
2003 CONSULTANT STOCK PLAN
In August 2003, we adopted the 2003 Consultant Stock Plan (the "Stock Plan"),
which provides for grants of common stock through August 2013, to assist us in
obtaining and retaining the services of persons providing consulting services. A
total of 1,000,000 common shares were initially reserved for issuance under the
Stock Plan.
On March 29, 2004, we filed a registration statement on Form S-8 for the purpose
of registering 1,000,000 common shares issuable under the Stock Plan under the
Securities Act of 1933. On August 29, 2005, we filed a Form S-8 for the purpose
of registering an additional 2,000,000 shares, for a total of 3,000,000 common
shares reserved under the Plan. On August 9, 2007, we filed a Form S-8 for the
purpose of registering an additional 2,000,000 shares, for a total of 5,000,000
common shares reserved under the Plan. On July 10, 2009, we filed a Form S-8 for
the purpose of registering an additional 1,000,000 shares, for a total of
6,000,000 common shares reserved under the Plan. On February 17, 2010, we filed
a Form S-8 for the purpose of registering an additional 1,500,000 shares, for a
total of 7,500,000 common shares reserved under the Plan.
F-41
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February 2005, we
adopted our 2005 Directors Compensation Program (the "Directors Compensation
Program") which advances our interests by helping us to obtain and retain the
services of outside directors upon whose judgment, initiative, efforts and/or
services we are substantially dependent, by offering to or providing those
persons with incentives or inducements affording them an opportunity to become
owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will receive
a one-time grant of a non-qualified stock option of 1.5% of the common stock
outstanding at the time of election. The options will vest one-third at the time
of election to the Board and the remaining two-thirds will vest equally at year
end over three years. Additionally, each director will also receive an annual
$25,000 non-qualified stock option retainer, $15,000 of which is to be paid at
the first of the year to all directors who are on the Board prior to the first
meeting of the year and a $10,000 retainer will be paid if a director attends
75% of the meetings either in person, via conference call or other electronic
means. The exercise price for the options under the Directors Compensation
Program will equal the average closing of the last ten (10) trading days prior
to the date earned.
At March 31, 2010 under the 2005 Directors Compensation Program we had issued
1,337,825 options to outside directors and 3,965,450 options to
employee-directors, 514,550 outside directors options had been forfeited,
250,000 outside directors options had been exercised and 3,671,550 options
remained outstanding.
COMMON STOCK
In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In April 2004, the Company issued 50,000 shares of restricted common stock to
Fusion Capital Fund II, LLC, an accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. The Company recorded no
expense related to the issuance of these shares since they were related to
equity fund raising activities. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.
In May 2004, the Company issued 225,000 shares of common stock at $0.44 per
share and 225,000 warrants to purchase the Company's common stock at a price of
$0.76 per share to legal counsel for legal services in the amount of $99,000,
which was recorded as expense in the accompanying consolidated financial
statements. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares of common stock and 113,636 warrants to purchase the Company's
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
F-42
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In May 2004, the Company issued a total of 1,415,909 shares of restricted stock
at a price of $0.44 per share for cash totaling $623,000 to fourteen accredited
investors. In connection with the issuance of these shares, the Company granted
the stockholders 1,640,908 warrants to purchase the Company's common stock at a
price of $0.76 per share. The warrants vested immediately and expire on the
fifth anniversary from the date when a registration statement covering the
common stock underlying such warrants is declared effective. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In July 2004, the Company issued 10,715 shares of restricted common stock at
$0.70 per share to an accredited individual for employee placement services in
the amount of $7,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In July 2004, the Company issued 6,850 shares of restricted common stock at
$0.73 per share to an accredited individual for consulting services on
opportunities for the Company's Hemopurifier(R) within the biodefense
marketplace in the amount of $5,000. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In September 2004, the Company issued 479,513 shares of restricted common stock
to an accredited investor, in conjunction with the conversion of $125,000 in
principal amount of notes, plus accrued interest, at $0.34 per share, in
accordance with their convertible note agreement. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
In November and December 2004, the Company issued 80,000 shares of restricted
common stock to an accredited individual investor in connection with the
exercise of 80,000 warrants at $0.25 per share for consideration of a $20,000
reduction in the principal amount of a 10% one-year promissory note. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In December 2004, the Company issued 461,667 shares of restricted common stock
to two accredited individual investors in connection with the exercise of
461,667 warrants at $0.25 per share for cash totaling $115,417. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In December 2004, the Company repaid two $25,000 12% promissory notes, including
accrued interest of $17,778 each, through the issuance of 87,303 restricted
common shares at $0.49 per share to each of two separate accredited individual
investors. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In December 2004, the Company issued 60,000 shares of restricted common stock at
$0.50 per share under a consulting agreement with an accredited individual
investor, for investor relations consulting services to the Company. The fair
value of the transaction of $30,000 was recorded as deferred compensation and
presented as an offset to additional paid-in capital in the accompanying
consolidated financial statements. Such amount is being amortized to expense
over the six month term of the agreement. At March 31, 2005, $15,000 of such
amount remained unamortized. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The remaining $15,000
balance in deferred consulting fees were amortized during the fiscal year ended
March 31, 2006.
In January 2005, the Company issued 55,556 shares of restricted common stock at
$0.36 per share and a warrant to purchase 55,556 shares of common stock at $0.44
per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
F-43
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In January 2005, the Company issued 66,666 shares of restricted common stock at
$0.45 per share to an accredited individual investor under a consulting
agreement for investor relations services to the Company. The fair value of the
transaction of $30,000 was recorded as deferred compensation and presented as an
offset to additional paid-in capital in the accompanying consolidated financial
statements. Such amount is being amortized to expense over the six month term of
the agreement. At March 31, 2005, $15,000 of such amount remained unamortized.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. The remaining $15,000 balance in deferred consulting
fees were amortized during the fiscal year ended March 31, 2006.
In January 2005, the Company issued 25,834 shares of restricted common stock to
an accredited individual investor in connection with the exercise of a warrant
to purchase 25,834 shares of common stock at $0.25 per share for cash totaling
$6,459. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In February 2005, the Company issued 139,063 shares of restricted common stock
to an accredited individual investor in connection with the exercise of a
warrant to purchase 139,063 shares of common stock at $0.25 per share for cash
totaling $34,766. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In February 2005, the Company issued 90,000 shares of restricted common stock at
$0.27 per share and a three-year warrant to purchase 90,000 shares of common
stock at $0.34 per share for cash in the amount of $24,300 to an accredited
individual investor. This transaction was exempt from registration pursuant to
Section 4(2)of the Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional total of
1,416,958 shares of restricted common stock at prices ranging from $0.25 to
$0.52 for total cash proceeds of approximately $541,000.
During the year ended March 31, 2005, the Company issued an additional 557,647
shares of restricted common stock at prices ranging from $0.25 to $0.55 under
various consulting service agreements for total recorded value of approximately
$196,000. All services on these agreements were completed and expensed during
the year ended March 31, 2005.
In April 2005, the Company issued 9,740 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for scientific consulting services to
the Company valued at $3,000.
In April 2005, the Company issued 25,134 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $7,500.
In April 2005, the Company issued 31,424 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $7,900.
During the year ended March 31, 2006, the Company issued 3,990,807 shares of
common stock at prices between $0.25 to and $0.76 per share to Fusion Capital
under its $6,000,000 common stock purchase agreement for cash proceeds totaling
$1,436,815. These shares are registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
During the quarter ended June 30, 2005, the Company issued 95,420 shares of
common stock pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.262 per share in payment for
regulatory affairs consulting services to the Company valued at $25,000.
In May 2005, the Company issued 33,228 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $8,440.
F-44
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In May 2005, the Company issued 24,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for investor relations consulting
services to the Company valued at $6,000.
In May 2005 the Company issued 100,000 shares of common stock and a warrant to
purchase 400,000 shares of common stock at a purchase price of $0.18 per share
to an accredited investor for $17,600. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In May 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 21,008 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 836,730 shares of restricted common stock and a
three-year warrant to purchase 418,365 shares of the Company's restricted common
stock at an exercise price of $0.25 to legal counsel as an inducement to settle
accrued past due legal services payable in the amount of $167,346 which had been
expensed in the prior fiscal year. At the time of the settlement, the shares of
the Company's restricted common stock were valued at $209,183 and, using a
Black-Scholes option pricing model, the warrant was valued at $100,408. The
non-cash additional consideration of $142,245 has been recorded as professional
fees expense during the fiscal year ended March 31, 2006.
F-45
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In June 2005, the Company issued 12,605 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for scientific consulting services to
the Company valued at $3,000.
During the quarter ended June 30, 2005, the Company expensed $30,000 of deferred
consulting fees, which were included in additional paid-in capital at March 31,
2005, as the related consulting services were completed.
In July 2005, the Company issued 43,479 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000.
In July 2005, the Company issued 2,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $500.
In August 2005, the Company issued 37,863 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $8,557.
In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $21,100.
In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $37,260.
In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $5,738.
In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.22 per share in payment for regulatory affairs consulting
services to the Company valued at $7,620.
In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $7,660.
In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $36,135.
In November 2005, the Company issued 13,298 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In December 2005, the Company issued 371,847 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.25 per share in payment of general
legal fees valued at $91,509.
F-46
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2005, the Company issued 73,964 shares of restricted common stock at
$0.25 per share in payment of legal fees related to capital raising transactions
valued at $18,202.
In December 2005, the Company issued 13,333 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $3,840.
In December 2005, the Company issued 15,060 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In January 2006, the Company issued 579,813 shares of restricted common stock at
$0.24 per share in payment for patent fees valued at $139,155.
In January 2006, the Company issued 66,017 shares of restricted common stock at
Prices ranging from $0.28 to $0.33 per share in payment for investor relations
valued at $20,000.
In January 2006, the Company issued 9,091 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In January 2006, the Company issued 13,889 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.36 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In February 2006, the Company issued 10,563 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In March 2006, the Company issued 17,730 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In March 2006, the Company issued 79,255 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for Corporate communications consulting
services to the Company valued at $19,974.
In March 2006, the Company issued 110,040 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan and 110,040 shares of restricted stock at
$0.39 per share in payment of general legal fees valued at $85,392.
In March 2006, the Company issued 7,275 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.49 per share in payment for regulatory affairs consulting
services to the Company.
In March 2006, the Company issued 27,284 shares of common stock to legal counsel
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment of general legal fees valued
at $9,197.
In March 2006, the Company issued 158,046 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $52,155.
F-47
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In March 2006, the Company converted a $30,000 10% promissory notes held by an
accredited individual investor, including accrued interest of $4,564, through
the issuance of 140,000 restricted common shares at $0.25 per share.
In March 2006, a $30,000 15% convertible note, including accrued interest of
$4,943, was converted at $0.20 per share for 174,716 shares of common stock.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In March 2006, the Company issued 150,000 shares of restricted common stock
under a one year investor relations consulting agreement which was valued at
$49,000 and being amortized over a one year period. Approximately $4,000 was
amortized during the year ended March 31, 2006. As a result, the remaining
balance of $44,917 represents that entire balance of deferred consulting fees
(contra equity) in accompanying consolidated balance sheet.
In March 2006, the Company issued 35,714 shares of restricted common stock
payment of professional services related to investor relations valued at
$10,000.
In March 2006, the Company issued 15,152 shares of restricted common stock at
$0.33 per share in payment of professional services related to investor
relations valued at $5,000.
In March 2006, the Company issued 33,333 shares of restricted common stock at
$0.30 per share in payment of an option agreement valued at $10,000.
In April 2006, the Company issued 3,782 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In April 2006, the Company issued 25,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for past due rents owed by the Company
valued at $12,801 based on the value of the services.
In April 2006, the Company issued 6,313 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 10,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 14,563 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $4,165 based on the value of the services.
In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations valued at $2,500 based on the
value of the services.
During April 2006, the Company issued 209,679 shares of common stock at prices
between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $140,002. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.41 per share to an accredited individual investor. There was no
gain or loss on the extinguishment.
F-48
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In May 2006, the Company issued 8,532 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In May 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In May 2006, the Company issued 4,545 shares of restricted common stock at $0.55
per share in payment for investor relations valued at $2,500 based on the value
of the services.
In June 2006, the Company issued 8,681 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In June 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2006, the Company issued 3,363 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.
In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In July 2006, the Company issued 10,684 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.47 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In July 2006, the Company issued 6,250 shares of restricted common stock at
$0.40 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In July 2006, the Company issued 7,813 shares of restricted common stock at
$0.32 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In July 2006, the Company issued 132,765 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $48,858 based on the value of the services.
In July 2006, the Company issued 14,535 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
During August 2006, the Company issued 113,235 shares of common stock at prices
between $0.26 and $0.27 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $30,000. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
F-49
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In August 2006, the Company issued 9,434 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In August 2006, the Company issued 86,779 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for general legal expenses to the
Company valued at $22,085 based on the value of the services.
In August 2006, the Company issued 114,132 shares of restricted common stock at
$0.20 per share in payment for accrued accounting consulting services provided
to the Company by a third party valued at $23,111 based upon the value of the
services.
During September 2006, the Company issued 439,936 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $110,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In September 2006, the Company issued 4,808 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.
In September 2006, the Company issued 15,723 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In September 2006, the Company issued 9,868 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In September 2006, the Company issued 16,447 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In September 2006, the Company issued 9,733 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $2,550 based on the value of the services.
During October 2006, the Company issued 201,165 shares of common stock at $0.25
per share to Fusion Capital under its $6,000,000 common stock purchase agreement
for net cash proceeds totaling $50,000. These shares are registered pursuant to
the Company's Form SB-2 registration statement effective December 7, 2004.
In October 2006, the Company issued 16,994 shares of restricted common stock at
$0.31 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In October 2006, the Company issued 8,929 shares of restricted common stock at
$0.28 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In October 2006, the Company issued 18,797 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In October 2006, the Company issued 11,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
F-50
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In October 2006, the Company issued 7,540 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $1,900 based on the value of the services.
In November 2006, the Company issued 555,556 shares of restricted common stock
at $0.18 per share in exchange for an investment of $100,000. As an inducement
the Company also issued five-year warrants to purchase a number of shares equal
to the number of restricted shares issued converted at a fixed exercise price of
$0.18. Additionally, if the warrants are exercised prior to November 14, 2007,
the holder will receive an additional warrant on the same terms as the warrants.
In November 2006, the Company issued 11,905 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In November 2006, the Company issued 19,841 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In December 2006, the Company issued 12,397 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In December 2006, the Company issued 20,661 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In December 2006, the Company issued 40,000 shares of restricted common stock at
$0.25 per share in exchange for license and development rights related to
certain intellectual property valued at $10,800 based on the fair market value
of the intellectual property license.
During December 2006, the Company issued 118,360 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $30,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In January 2007, the Company issued 15,248 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $4,300 based on the value of the services.
F-51
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In January 2007, the Company issued 10,714 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In January 2007, the Company issued 125,091 shares of restricted common stock at
between $0.24 and $0.31 per share in payment for investor relations services to
the Company valued at $32,500 based on the value of the services.
In January 2007, the Company issued 17,857 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
During January 2007, the Company issued 782,268 shares of common stock at prices
between $0.25 and $0.273 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $200,001. These shares
were registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In February 2007, the Company issued 31,394 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.255 per share in payment for general legal expenses to the
Company valued at $8,005 based on the value of the services.
In February 2007, the Company issued 9,740 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.308 per share in payment for regulatory affairs consultant
services to the Company valued at $3,000 based on the value of the services.
During February 2007, the Company issued 692,751 shares of common stock at
prices between $0.28 and $0.32 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $199,998. These
shares were registered pursuant to the Company's Form SB-2 registration
statement effective December 7, 2004.
In March 2007, the Company issued 15,723 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.318 per share in payment for regulatory affairs consultant
services to the Company valued at $5,000 based on the value of the services.
In March 2007, the Company issued 4,934 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.608 per share in payment for regulatory affairs consultant
services to the Company valued at $3,000 based on the value of the services.
In March 2007, the Company issued 21,078 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.51 per share in payment for regulatory affairs consultant
services to the Company valued at $10,750 based on the value of the services.
In March 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.578 per share in payment for regulatory affairs consultant
services to the Company valued at $5,000 based on the value of the services.
During March 2007, the Company issued 92,379 shares of common stock at prices
between $0.36 and $0.44 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $36,745. These shares
were registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In March 2007, the Company issued 1,333,333 shares of common stock at $0.30 per
share to Fusion Capital for net cash proceeds of $400,000. In addition, the
Company issued 1,050,000 of common shares as a commitment fee under a common
stock purchase agreement.
In April 2007, the Company issued 30,617 shares of restricted common stock as
the result of a cashless exercise of 80,000 warrants held by a former
noteholder.
In April 2007, the Company issued 15,152 shares of restricted common stock at
$0. 33 per share in payment of an option agreement valued at $5,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
F-52
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2007, the Company issued 3,937 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In May 2007, the Company issued 13,124 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000 based on the value of the services.
In May 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2007, the Company issued 41,999 shares of restricted common stock at
between $0.30 and $0.74 per share in payment for investor relations services to
the Company valued at $20,000 based on the value of the services.
In June 2007, the Company issued 17,526 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $10,200 based on the value of the services.
In June 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2007, the Company issued 10,174 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.63 per share in payment for regulatory affairs consulting
services to the Company valued at $6,450 based on the value of the services.
In August 2007, the Company issued 1,630,000 shares of common stock for cash
proceeds of $815,000 ($757,950 net of commissions). The shares were issued to
accredited investors in the form of Units comprised of two shares of common
stock and one three-year warrant to acquire common stock at an exercise price of
$0.50. The offering price of each Unit was $1.00.
In August 2007, the Company issued 107,153 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at an average price of $0.37 per share in payment of grant writing
and regulatory consulting services to the Company valued at $39,963 based upon
the value of the services.
In August of 2007, the Company issued 103,106 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment of legal fees related to general
corporate legal services to the Company valued at $62,894 based upon the value
of the services provided.
In August 2007, the Company issued 21,020 shares of restricted common stock at
prices between $0.68 and $0.78 per share in payment for investor relations
services to the Company valued at $15,000 based on the value of the services.
In September 2007, the Company issued 14,000 shares of common stock to an
accredited investor at $0.50 per share in payment of commissions related to the
August Private Placement transaction valued at $7,000 based upon the value of
services provided.
In September 2007, the Company issued 5,294 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $3,600 based on the value of the services
provided.
In October 2007, the Company issued 4,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.65 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
F-53
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2007, the Company issued 330,000 shares of common stock for cash
proceeds of $165,000. The shares were issued to accredited investors and were in
the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In January 2008, the Company issued 21,992 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $15,000 based on the value of the services
provided.
In January 2008, the Company issued 200,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to an accredited investor and were
in the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In January 2008, the Company issued 500,000 shares of common stock for a
conversion of $100,000 of Amended Series A 10% Convertible Notes at the agreed
conversion price of $0.20 per share (see Note 6).
In January 2008, the Company issued 18,797 shares of restricted common stock as
the result of a cashless exercise of 55,556 warrants held by a former
noteholder.
In February 2008, the Company issued 400,000 shares of common stock for cash
proceeds of $200,000. The shares were issued to accredited investors and were in
the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In February 2008, the Company issued 100,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to a corporate investor.
In February 2008, the Company issued 25,380 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $12,690 based on the value of the services
provided.
In March 2008, the Company issued 6,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In March 2008, the Company issued 7,895 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.57 per share in payment for regulatory affairs consulting
services to the Company valued at $4,500 based on the value of the services
provided.
In March 2008, the Company issued 50,000 shares of common stock to an accredited
investor at $0.53 per share in payment of commissions related to the August
Private Placement transaction valued at $26,500 based upon the value of services
provided.
In March 2008, the Company issued 25,000 shares of common stock to an accredited
investor at $0.53 per share in payment of commissions related to the August
Private Placement transaction valued at $13,250 based upon the value of services
provided.
In March 2008, the Company issued 92,188 shares of restricted common stock at an
average price of $0.60 in payment for investor relations services to the Company
valued at $55,000 based on the value of the services.
In March 2008, the Company issued 250,000 shares to a Director under a stock
option exercise at a strike price of $0.38 per share through the conversion of
$95,000 in accounts payable owed to such Director.
In March 2008, the Company issued 865,500 shares of common stock for a
conversion of $150,000 of 9% Convertible Notes and $66,375 of accrued interest
at the agreed conversion price of $0.25 per share (see Note 6).
F-54
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2008, the Company issued 10,170 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $6,000 based on the value of the services
provided.
In April 2008, the Company entered into a license agreement with the Trustees of
Boston University which provides for an exclusive license for a Boston
University patent BU05-41, "Method to Prevent Proliferation and Growth of
Metastases." The agreed initial payment under this license was an issuance of
10,849 restricted shares of common stock equivalent to 115% of $5,000.
In April 2008, the Company issued 6,667 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In May 2008, the Company issued 1,000,000 shares of restricted common stock to
an institutional investor for $500,000 of cash.
In May 2008, we issued 232,033 shares of common stock to a 10% convertible
noteholder in order to convert the $33,000 principal balance and $5,325 of
accrued interest of the convertible note to equity.
In June 2008, the Company issued 25,610 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.41 per share in payment for regulatory affairs consulting
services to the Company valued at $10,500 based on the value of the services
provided.
In June 2008, we issued grants of restricted common stock to two employees of
5,000 shares each as additional compensation. Those grants were valued at $2,400
apiece based our closing stock price of $0.48 on the date of issuance.
In July 2008, our Chief Executive Officer converted $35,000 of accrued debt to
100,000 shares of unregistered common stock based upon the closing stock price
of $0.35 per share on that day.
In July 2008, a board member and his spouse, both former executives at Hemex, a
company we acquired in 1999, converted $147,279 of accrued debt to 446,300
shares of unregistered common stock based upon the closing stock price of $0.33
per share on that day.
In July 2008, our Chief Science Officer converted $150,000 of accrued debt to
468,750 shares of unregistered common stock based upon the closing stock price
of $0.32 per share on that day.
In September 2008, we issued 966,750 shares of restricted common stock and
966,750 warrants with a strike price of $0.20 in payment of accrued interest of
$89,500 and accrued damages of $103,850 per the payment formula in the Amended
Series A 10% Convertible Notes(see Note 5).
In September 2008, we issued 110,138 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.45 per
share in payment for legal services valued at $49,562 based on the value of the
services.
In September 2008, we issued 38,150 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.40 per
share in payment for regulatory affairs consulting services valued at $15,260
based on the value of the services.
In October 2008, we issued 770,000 shares, of which 385,000 were through the
exercise of registered warrants and 385,000 were issuances of restricted common
stock, for gross proceeds of $192,500.
In October 2008, we issued 51,398 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.31 per
share in payment for financial consulting services and research services valued
at $16,080 based on the value of the services.
In November 2008, we issued 200,000 shares, of which 100,000 were through the
exercise of registered warrants and 100,000 were issuances of restricted common
stock, for gross proceeds of $50,000.
F-55
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In November 2008, we issued 95,550 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for financial consulting services valued at $23,888 based on
the value of the services.
In November 2008, we issued 98,684 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for legal services valued at $18,750 based on the value of the
services.
In December 2008, we issued 59,950 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for legal services valued at $16,606 based on the value of the
services.
In December 2008, we issued 700,000 shares of restricted common stock and
700,000 warrants with a strike price of $0.25 to an accredited investor for
gross proceeds of $175,000.
In December 2008, we issued 338,099 shares of restricted common stock pursuant
at $0.25 per share in payment for legal services valued at $84,288 based on the
value of the services.
In December 2008, we issued 23,636 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for regulatory affairs consulting services valued at $6,000
based on the value of the services.
In December 2008, we issued 77,192 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for regulatory affairs consulting services valued at $20,070
based on the value of the services.
In December 2008, we issued 35,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $8,400
based on the value of the services.
In December 2008, we issued 15,337 shares of restricted common stock pursuant at
$0.33 per share in payment for public relations services valued at $5,000 based
on the value of the services.
In January 2009, we issued 23,566 shares of restricted common stock as a patent
license payment valued at $5,750.
In January 2009, we issued 1,452,926 shares of common stock as a result of
conversions of $419,473 of convertible notes payable, other notes payable and
related accrued interest. The shares were issued to accredited investors.
In January 2009, we issued 105,869 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at an average
price of $0.19 per share in payment for regulatory affairs consulting services
valued at $19,550 based on the value of the services.
In January 2009, we issued 353,000 shares of restricted common stock and
warrants to purchase 353,000 shares of common stock in exchange for $55,850. The
shares were issued to an accredited investor.
In February 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In February 2009, we issued 582,000 shares of restricted common stock and
warrants to purchase 582,000 shares of common stock in exchange for $88,870. The
shares were issued to an accredited investor.
In February 2009, we issued 78,743 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at a price of
$0.18 per share in payment for regulatory affairs consulting services valued at
$13,780 based on the value of the services.
In February 2009, we issued 53,706 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for regulatory affairs consulting services valued at $9,130
based on the value of the services.
F-56
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In February 2009, we issued 168,750 shares of restricted common stock and
168,750 warrants with a strike price of $0.20 in payment of accrued interest of
$53,105 per the payment formula in the Amended Series A 10% Convertible
Notes(see note 5).
In February 2009, we issued 213,666 shares of common stock as a result of
conversions of $83,500 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In March 2009, we issued 903,135 shares of common stock as a result of
conversions of $179,808 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In March 2009, we issued 385,000 shares of restricted common stock and warrants
to purchase 385,000 shares of common stock in exchange for $57,750. The shares
were issued to an accredited investor.
In March 2009, we issued 50,000 shares of restricted common stock at $0.17 per
share in payment for investor relations services valued at $8,500 based on the
value of the shares issued for the services.
In March 2009, we issued 33,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In March 2009, we issued 47,760 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.18 per
share in payment for financial consulting services valued at $8,597 based on the
value of the services.
In March 2009, we issued 25,674 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $5,263 based on the value of the
services.
In March 2009, we issued 37,695 shares of restricted common stock pursuant at
$0.19 per share in payment for legal services valued at $7,275 based on the
value of the services.
In March 2009, we issued 28,947 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for regulatory affairs consulting services valued at $5,500
based on the value of the services.
In April 2009, we issued 71,519 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.17 per
share in payment for financial consulting services and research services valued
at $12,158 based on the value of the services.
In April 2009, we issued 1,688,211 shares of common stock as a result of
conversions of $263,478 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
In April 2009, we issued 490,000 shares of restricted common stock valued at the
closing price in payment for investor relations services.
In April 2009, we issued 25,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
F-57
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In April 2009, we issued 32,935 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for internal controls consulting services valued at $7,575
based on the value of the services provided.
In April 2009, we issued 12,372 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for regulatory affairs consulting services valued at $2,660
based on the value of the services provided.
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In April 2009, we issued 43,021 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.18 per
share in payment for financial consulting services valued at $7,744 based on the
value of the services provided.
In April 2009, we issued 70,870 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.20 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
In April 2009, we issued 22,817 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, holders of certain convertible notes converted $139,256 of
principal and accrued interest into 878,059 shares of our common stock pursuant
to the terms of the notes at an average conversion rate of approximately $0.16
per share.
In May 2009, we issued 13,043 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 10,714 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In May 2009, we issued 51,118 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.19 per
share in payment for financial consulting services valued at $9,713 based on the
value of the services provided.
In May 2009, we issued 22,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In May 2009, we issued 34,602 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $7,613 based on the
value of the services provided.
In May 2009, we issued 40,104 shares of restricted common stock at $0.24 in
payment for financial advisory services valued at $9,625 based on the value of
the services provided.
In May 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we issued 20,500 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $4,920
based on the value of the services provided.
F-58
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In June 2009, we issued 57,055 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$12,552 based on the value of the services provided.
In June 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In June 2009, we issued 23,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.23 per
share in payment for regulatory affairs consulting services valued at $5,290
based on the value of the services provided.
In June 2009, we issued 48,106 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for scientific and financial consulting services valued at
$10,583 based on the value of the services provided.
In June 2009, we issued 779,956 shares of common stock as a result of
conversions of $143,512 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In June 2009, we issued 16,176 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.34 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
On June 29, 2009, Mr. Joyce, our Chief Executive Officer entered into an Option
Suspension Agreement, whereby Mr. Joyce agreed to not exercise his stock options
pending the filing of amended articles of incorporation of the Company
increasing the Company's authorized capital. Accordingly of Mr. Joyce's total
options, 2,857,143 could not be exercised until the amended articles of
incorporation were filed, and 6,731,090 could not be exercised until the later
of June 9, 2010 or the filing of the amended articles of incorporation. We filed
the amendment to our articles of incorporation on September 21, 2009. The
Agreement also provided Mr. Joyce certain protections in the event the Company
underwent a change of control transaction while his options are suspended. Such
protections include the right to receive, in the form of cash payments, the
positive value of his options (which remain subject to suspension) at the time
of such transaction.
In addition, we committed to issue 4,000,000 shares of restricted common stock,
to Mr. Joyce at a price per share of $0.24, which shall vest in equal
installments over a thirty six month period commencing June 30, 2010.
In July 2009, we registered 1,000,000 additional shares under our 2003
Consultant Stock Plan through the filing of a Form S-8 Registration Statement.
In July 2009, we issued 518,649 shares of common stock as a result of
conversions of $100,566 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In July 2009, we issued 18,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.30 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In July 2009, we issued 51,971 shares of common stock pursuant to our
S-8registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for legal services valued at $14,500 based on the value of the
services provided.
F-59
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In July 2009, we issued 11,647 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.34 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In July 2009, we issued 19,643 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In August 2009, we issued 21,154 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In August 2009, we issued 14,143 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In August 2009, we issued 22,917 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In September 2009, we issued 36,094 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $7,941 based on the
value of the services provided.
In September 2009, we issued 20,370 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.27 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In September 2009, we issued 16,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.24 per
share in payment for regulatory affairs consulting services valued at $3,840
based on the value of the services provided.
In September 2009, we issued 19,784 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.28 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In September 2009, we issued 12,000 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for regulatory affairs consulting services valued at $3,000
based on the value of the services provided.
In October 2009, we issued 100,000 shares of restricted common stock as a
donation to a scientific research foundation valued at $25,000 based on the
closing price of $0.25.
In October 2009, we issued 319,033 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $70,187 based on
the value of the services provided.
In October 2009, we issued 22,088 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.25 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In October 2009, we issued 37,585 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.22 per
share in payment for financial consulting services valued at $8,269 based on the
value of the services provided.
F-60
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In October 2009, we issued 2,511,264 shares of common stock as a result of
conversions of $481,297 of convertible notes payable and related accrued
interest. The shares were issued to accredited investors.
In October 2009, we issued 15,231 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.26 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In October 2009, we issued 11,702 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.47 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In October and November 2009, we raised $430,000 through the issuance of 10%
convertible notes to accredited investors. The notes are convertible into our
common stock at a fixed conversion price of $0.25 per share. The investors also
received 1,720,000 three year warrants to purchase shares of our common stock at
$0.25 per share. We also issued to a finder as deferred offering costs a
convertible note for $20,250 on the same terms as those received by the
investors. Three of the investors in this financing immediately converted their
notes totaling $70,000 to 280,000 shares of our common stock per the conversion
formula in the notes (see Note 5).
In November 2009, we issued 117,759 shares of common stock as a result of
conversions of $38,595 of notes payable ($12,500 in a 12% Note Payable, see Note
4, and $10,000 in a May & June 2009 10% Convertible Note, see Note 5) and
related accrued interest. The shares were issued to accredited investors.
In November 2009, we issued 14,103 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.39 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In November 2009, we issued 89,397 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.36 per
share in payment for legal services valued at $32,451 based on the value of the
services provided.
In November 2009, we issued 19,688 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.35 per
share in payment for financial consulting services valued at $6,891 based on the
value of the services provided.
In November 2009, we issued 15,068 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.37 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In December 2009, we issued 9,900 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.40 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In December 2009, we issued 50,313 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.30 per
share in payment for financial consulting services valued at $15,094 based on
the value of the services provided.
In December 2009, we issued 114,066 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.30 per
share in payment for financial consulting services valued at $34,220 based on
the value of the services provided.
In December 2009, we issued 17,188 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.32 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
F-61
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In December 2009, we issued 11,314 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.35 per
share in payment for regulatory affairs consulting services valued at $3,960
based on the value of the services provided.
In December 2009, we issued 18,333 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.30 per
share in payment for business development consulting services valued at $5,500
based on the value of the services provided.
In December 2009, we issued 211,665 shares of common stock as a result of the
conversion of a $40,000 convertible note payable (see Note 5) and related
accrued interest. The shares were issued to an accredited investor.
In January 2010, we issued 36,683 shares of restricted common stock as a patent
license payment valued at $11,500.
In January 2010, we issued 14,474 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.38 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In January 2010, we issued 731,251 shares of restricted common stock and 731,251
warrants to purchase our common stock at $0.20 per share to repay $146,250 of
interest on certain convertible debentures accrued through January 31, 2010 (see
Note 5).
In January 2010, we issued 13,200 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.30 per share in payment for regulatory affairs consulting services
valued at $3,960 based on the value of the services provided.
In January 2010, we issued 15,714 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.35 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In February 2010, we issued 45,886 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for legal services valued at $14,500 based on
the value of the services provided.
In February 2010, we issued 17,188 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In February 2010, we issued 29,878 shares of restricted common stock as a result
of the conversion of $8,963 of accrued legal expenses based on the value of the
services provided.
In February 2010, we issued 11,314 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.35 per share in payment for regulatory affairs consulting services
valued at $3,960 based on the value of the services provided.
In February 2010, we issued 16,667 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.33 per share in payment for corporate communications and
administration consulting services valued at $5,500 based on the value of the
services provided.
In February 2010, we issued 9,059 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for business development consulting services
valued at $2,917 based on the value of the services provided.
In March 2010, we issued 1,444,185 shares of common stock as a result of the
conversion of a $330,000 convertible note payable (see Note 5) and related
accrued interest. The shares were issued to an accredited investor.
F-62
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In March 2010, we issued 82,678 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.40 per
share in payment for financial consulting services valued at $33,071 based on
the value of the services provided.
In March 2010, we issued 13,095 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.42 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In March 2010, we issued 11,065 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.35 per share in payment for corporate communications and
administration consulting services valued at $3,917 based on the value of the
services provided.
In March 2010, we issued 11,647 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.34 per share in payment for regulatory affairs consulting services
valued at $3,960 based on the value of the services provided.
In March 2010, we issued 20,929 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.37 per
share in payment for financial consulting services valued at $7,744 based on the
value of the services provided.
In March 2010, we issued 14,474 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.38 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In March 2010, we issued 8,125 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.36 per share in payment for corporate communications and
administration consulting services valued at $2,917 based on the value of the
services provided.
In March 2010, we issued 10,895 shares of restricted common stock at $0.34 in
payment for investor relations services valued at $3,750 based on the value of
the services provided.
WARRANTS
During the year ended March 31, 2005, we granted 568,181 warrants to an investor
in connection with a commitment fee for the purchase of common stock. The
warrants have an exercise price of $0.76 per share, vest immediately and are
exercisable through May 2009. As the warrants were issued in connection with
equity financing, no expense has been recorded in the accompanying consolidated
financial statements.
During the year ended March 31, 2005, we granted 847,727 warrants to investors
in connection with the purchase of common stock. The warrants have an exercise
price of $0.76 per share, vest immediately and are exercisable through May 2009.
As the warrants were issued in connection with equity financing, no expense was
recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2005, we issued 113,636 warrants to purchase
common stock for $0.76 per share, which are exercisable through May 2009 and
vested upon grant. The warrants were issued in connection with the conversion of
notes payable (see Notes 4 and 5). These warrants were valued using the Black
Scholes option pricing model; the relative pro-rata estimated fair value was
insignificant and was charged to interest expense upon grant.
During the year ended March 31, 2005, we issued 225,000 warrants to purchase
common stock for $0.76 per share, which are exercisable through May 2009 and
vested upon grant. The warrants were issued in connection with common stock
issued for legal services expense totaling $99,000 (see "Common Stock" above).
F-63
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
During the year ended March 31, 2005, we issued 260,000 warrants to purchase
common stock for $0.50 per share, which vested upon grant and were scheduled to
expire in October 2007. The warrants were issued in connection with the issuance
of notes payable (see Note 4). These warrants were valued using the Black
Scholes option pricing model; the relative pro-rata estimated fair value is
being amortized to interest expense over the life of the notes.
During the year ended March 31, 2005, we issued 144,443 warrants to purchase
common stock for $0.90 per share, which vested upon grant and expired in October
2007. The warrants were issued in connection with the issuance of notes payable
(see Note 4). These warrants were valued using the Black Scholes option pricing
model; the relative pro-rata estimated fair value was amortized to interest
expense over the life of the notes.
During the year ended March 31, 2005, we granted 55,556 warrants to an investor
in connection with the purchase of common stock. The warrants have an exercise
price of $0.44 per share, vest immediately and were exercisable through January
2008. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2005, we granted 90,000 warrants to investors in
connection with the purchase of common stock. The warrants have an exercise
price of $0.34 per share, vest immediately and were exercisable through February
2008. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.
On May 16, 2005, we granted 100,000 warrants to an accredited investor in
connection with the purchase of 100,000 restricted common shares for $17,600.
the warrants have an exercise price of $0.176 and were exercisable through May
2008.
On May 16, 2005, we granted 300,000 warrants to Fusion Capital Fund II, LLC in
connection with the issuance of a 15% Convertible Note. The warrants have an
exercise price of $0.25 per share and are exercisable through May 2010.
On May 27, 2005, we granted 400,000 warrants to an accredited investor in
connection with the issuance of a $100,000 12% note payable. The warrants had an
exercise price of $0.25 and expired on May 27, 2006.
On June 27, 2005, we granted three-year warrants to purchase 418,365 shares of
the Company's restricted common stock at an exercise price of $0.25 to legal
counsel as an inducement to settle accrued past due legal services payable.
From July 11, 2006 through December 14, 2005, we granted three-year warrants to
purchase 5,000,000 shares of common stock to the holders of an aggregate of
$1,000,000 in 10% Series A Convertible Notes. The warrants have an exercise
price of $0.20 and will be issued upon conversion of the underlying 10% Series A
Convertible Notes.
On March 31, 2006, as an inducement to exercise 568,181 warrants at an exercise
price of $0.76 per share, we issued five-year replacement warrants in like
amount to Fusion Capital Fund II, LLC. The 568,181 replacement warrants have an
exercise price of $0.76. Such warrants were valued using Binomial Option Pricing
model and such incremental value was insignificant.
On November 14, 2006, in conjunction with the purchase of 555,556 shares of our
restricted common stock, we granted five-year warrants to purchase 555,556
shares of restricted common stock at an exercise price of $0.18. If such
warrants are exercised on or before November 14, 2007, the warrant holder will
receive five-year warrants to purchase an additional 555,556 shares of
restricted common stock at an exercise price of $0.18.
On December 15, 2006, as an inducement to enter into a $100,000 10% convertible
note, we granted noteholders five-year warrants to purchase 294,118 shares of
restricted common stock at an exercise price of $0.17. If such warrants are
exercised on or before December 15, 2007, the noteholders will receive five-year
warrants to purchase an additional 294,118 shares of restricted common stock at
an exercise price of $0.17.
In March 2007, an investor exercised 160,000 warrants in two cashless
transactions.
F-64
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
On March 22, 2007 in effecting the Allonges, we amended our 10% Series A
Convertible Notes to extend the maturity date of the Notes from January 2, 2007
until January 3, 2008. We agreed to also pay all accrued interest, through
February 15, 2007 and each calendar quarter thereafter, in the form of units
(the "Units")at the rate of $0.20 per Unit (the "Interest Payment Rate"). The
Notes were convertible into Units at any time prior to the Maturity Date at the
conversion price of $0.20 per Unit (the "Conversion Price"). Each Unit is
composed of one share of the Company's Common Stock and one Class A Common Stock
Purchase Warrant (the "Class A Warrant"). Each Class A Warrant expires on
January 2, 2011 and is exercisable to purchase one share of Common Stock at a
price of $0.20 per share (the "Exercise Price"). If the Holder exercises Class A
Warrants on or before July 3, 2008, we will issue the Holder one Class B Common
Stock Purchase Warrant (the "Class B Warrant" and with the Class A Warrant,
collectively, the "Warrants") for every two Class A Warrants exercised. Each
Class B Warrant has a three-year term and is exercisable to purchase one share
of Common Stock at a price equal to the greater of $0.20 per share or 75% of the
average of the closing bid prices of the Common Stock for the five trading days
immediately preceding the date of the notice of conversion. Class A Warrants to
purchase 685,328 shares of Common Stock and Class B Warrants to purchase 342,665
shares of Common Stock were granted under the Allonges.
At various points over the fiscal year ended March 31, 2007, 669,000 warrants
expired.
In August 2007, as part of the purchase of 815,000 units, we issued three-year
warrants to purchase 815,000 shares of our common stock at $0.50 per share to
accredited investors.
At various points in the three months ended December 31, 2007, 144,443 warrants
expired.
In December 2007, we issued 1,650,000 three-year warrants to purchase our common
stock at $0.50 per share in association with debt and equity financings.
In January 2008, we issued 760,000 three-year warrants to purchase our common
stock at $0.50 per share in association with debt and equity financings.
In February 2008, an investor exercised 55,556 warrants to receive 30,617 shares
in a cashless transaction.
In February 2008, we issued 200,000 three-year warrants to purchase our common
stock at $0.50 per share in connection with equity financings.
In March 2008, 90,000 warrants expired.
In the July through September 2008 period, we issued 860,000 warrants to
accredited investors in connection with the issuance of the 2008 10% Convertible
Notes. We also issued 60,200 warrants as a placement fee to an investment
banking firm that arranged the placement of the 2008 10% Convertible Notes. The
warrants had an exercise price of $0.50 and carry three year terms.
In September 2008, we issued 966,750 warrants with a strike price of $0.20 as
part of a payment of accrued interest of $89,500 and accrued damages of $103,850
per the payment formula in the Amended Series A 10% Convertible Notes(see note
5).
In December 2008, we issued 700,000 warrants with a strike price of $0.25 to an
accredited investor as part of the sale of units in exchange for $175,000. These
warrants carry three year terms.
In the three months ended December 31, 2008, investors exercised 485,000
warrants to purchase our common stock at $0.50 per share.
In January 2009, we issued 353,000 warrants to purchase 353,000 shares of common
stock as part of the sale of units to an accredited investor in exchange for
$55,850. 118,000 of the warrants have a strike price of $0.16 per share and
200,000 of the warrants have a strike price of $0.15 per share. These warrants
carry three year terms.
In February 2009, we issued warrants to purchase 582,000 shares of common stock
as part of the sale of units to an accredited investor in exchange for $88,870.
157,000 of the warrants have a strike price of $0.16 per share and 425,000 of
the warrants have a strike price of $0.15 per share. These warrants carry three
year terms.
F-65
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
In February 2009, we issued 168,750 warrants with a strike price of $0.20 as
part of a payment of accrued interest of $53,105 (see note 5) per the payment
formula in the Amended Series A 10% Convertible Notes(see note 5).
In March 2009, we issued warrants to purchase 385,000 shares of common stock as
part of the sale of units to an accredited investor in exchange for $57,750. The
warrants have a strike price of $0.15 per share and carry a three year term.
In the three months ended March 31, 2009, 418,365 warrants expired.
In April 2009, an accredited investor exercised a warrant to purchase 555,556
shares of our common stock at the agreed strike price of $0.18 per share for
cash proceeds of $100,000. We issued that investor a five year warrant to
purchase 555,556 shares at $0.18 per share and a conditional warrant to purchase
a like number of shares at the same strike price if that warrant is exercised.
In April 2009, we issued 80,000 shares of restricted common stock and warrants
to purchase 80,000 shares of common stock in exchange for $15,200. The shares
were issued to an accredited investor.
In May 2009, we raised an aggregate amount of $135,000 from the sale to
accredited investors of 10% convertible notes. The notes are convertible into
our common stock at a fixed conversion price of $0.20 per share prior to
maturity. If the noteholders exercise their conversion privilege, we agreed to
issue a matching three year warrant carrying a strike price of $0.20 per share.
In June 2009, we raised an aggregate amount of $215,000 from the sale to an
accredited investor of a 10% convertible note. The notes are convertible into
our common stock at a fixed conversion price of $0.20 per share prior to
maturity. If the noteholders exercises their conversion privilege, we agreed to
issue a three year warrant carrying a strike price of $0.20 per share equal to
fifty percent warrant coverage.
In July 2009, we issued a convertible promissory note in the principal amount of
$330,000 to an accredited investor. The note is convertible into shares of our
common stock at a price per share that is equal to the lesser of (i) $0.25, or
(ii) the average of the closing bid prices of the common stock for the three
days immediately preceding the conversion date, subject in any case to a floor
of $0.15 per share. The investor also received warrants to purchase 660,000
shares of our common stock at an exercise price of $0.50 per share. See JULY &
AUGUST 2009 10% CONVERTIBLE NOTES in note 5.
In August 2009, we issued two convertible promissory note in the principal
amount of $338,250 to two accredited investors. These notes are convertible into
shares of our common stock at a price per share that is equal to the lesser of
(i) $0.25, or (ii) the average of the closing bid prices of the common stock for
the three days immediately preceding the conversion date, subject in any case to
a floor of $0.15 per share. The investors also received warrants to purchase
676,500 shares of our common stock at an exercise price of $0.50 per share. See
JULY & AUGUST 2009 10% CONVERTIBLE NOTES in note 5.
In October and November 2009, we raised $430,000 through the issuance of 10%
convertible notes to accredited investors. The notes are convertible into our
common stock at a fixed conversion price of $0.25 per share. The investors also
received 1,720,000 three year warrants to purchase shares of our common stock at
$0.25 per share. We also issued to a finder as deferred offering costs a
convertible note for $20,250 on the same terms as those received by the
investors. Three of the investors in this financing immediately converted their
notes totaling $70,000 to 280,000 shares of our common stock per the conversion
formula in the notes (see Note 5).
F-66
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In January 2010, we raised $250,000 from the sale to an accredited investor of
10% convertible notes. The convertible notes mature in July 2011 and are
convertible into our common stock at a fixed conversion price of $0.25 per share
prior to maturity. The investor also received matching three year warrants to
purchase 1,000,000 unregistered shares of our common stock at a price of $0.25
per share. This investment concluded our 10% convertible debt round that began
in October 2009. In aggregate, we issued $700,250 in 10% convertible notes in
that financing round.
In January 2010, we issued 731,251 shares of restricted common stock and 731,251
warrants to purchase our common stock at $0.20 per share to repay $146,250 of
interest on certain convertible debentures accrued through January 31, 2010 (see
Note 5).
On February 12, 2010, we raised $300,000 in cash and received a secured
promissory note in the amount of $300,000 in exchange for the issuance by the
Company of a $660,000 principal amount 10% convertible promissory note (the
"Note") to one accredited investor. The conversion price per share is equal to
eighty percent (80%) of the average of the three lowest closing bid prices of
our common stock as reported by Bloomberg L.P. on the Principal Market for the
ten (10) trading days preceding the conversion date, subject to a maximum price
per share of $0.30 and a minimum price per share of $0.20. The Note is
convertible into a maximum of 3,300,000 shares of our common stock at the
minimum price per share of $0.20. The investor also received 660,000 three-year
warrants to purchase shares of our common stock at $0.50 per share. The Note was
issued in a private placement.
A summary of the aggregate warrant activity for the years ended March 31, 2010
and 2009 is presented below:
Year Ended March 31,
-----------------------------------------------------------
2010 2009
--------------------------- ----------------------------
Weighted Weighted
Average Exercise Average Exercise
Warrants Price Warrants Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 19,193,965 $ 0.29 16,021,629 $ 0.36
Granted 8,489,863 $ 0.28 4,075,701 $ 0.26
Exercised (655,556) $ 0.19 (485,000) $ 0.50
Cancelled/Forfeited (1,040,807) $ 0.82 (418,365) $ 0.25
----------- -------- ---------- --------
Outstanding, end of year 25,987,465 $ 0.31 19,193,965 $ 0.29
=========== ======== ========== ========
Exercisable, end of year 25,987,465 $ 0.31 19,193,965 $ 0.29
=========== ======== ========== ========
Weighted average estimated fair
value of warrants granted $ 0.22 $ 0.19
======== ========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented, with respect to warrants
utilizing the Binomial Lattice option pricing models:
Years Ended March 31,
2010 2009
----------- -----------
Risk free interest rate 1.28%-2.58% 0.94%-3.01%
Average expected life 2 to 5 years 3 to 5 years
Expected volatility 78.8% - 96.28% 83.6% - 103.0%
Expected dividends None None
F-67
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
The detail of the warrants outstanding and exercisable as of March 31, 2010 is
as follows:
Warrants Outstanding Warrants Exercisable
--------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Outstanding Price
--------------------------- -------------- ------------- ---------- --------------- ----------
$0.15 - $0.18 3,754,904 3.20 $ 0.17 3,754,904 $ 0.17
$0.20 - $0.40 14,914,004 2.70 $ 0.23 14,914,004 $ 0.23
$0.50 - $0.76 7,318,557 2.34 $ 0.53 7,318,557 $ 0.53
----------- ------------
25,987,465 25,987,465
=========== ============
At March 31, 2010 we had issued 1,337,825 options to outside directors and
3,965,450 options to employee-directors under the 2005 Directors Compensation
Program. Of the options issued to employee-directors, 867,175 had expired. Of
the options issued to outside directors, 514,550 options had expired or been
forfeited, 250,000 options had been exercised and 3,671,550 options remain
outstanding.
From time to time, our Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone basis
outside of any of our formal stock plans. The terms of these grants are
individually negotiated.
In August 2000, we adopted the 2000 Stock Option Plan ("Stock Option Plan"),
which was approved by its stockholders in September 2000. The Stock Option Plan
provides for the issuance of up to 500,000 options to purchase shares of common
stock. Such options can be incentive options or nonstatutory options, and may be
granted to employees, directors and consultants. The Stock Option Plan has
limits as to the eligibility of those stockholders who own more than 10% of our
stock, as defined. The options granted pursuant to the Stock Option Plan may
have exercise prices of no less than 100% of fair market value of our common
stock at the date of grant (incentive options), or no less than 75% of fair
market value of such stock at the date of grant (nonstatutory). At March 31,
2010, we had granted 47,500 options under the 2000 Stock Option Plan of which
15,000 had been forfeited and also granted 10,000 shares to employees under the
plan, with 457,500 available for future issuance.
In March 2002, the Board of Directors granted our Chief Executive Officer
("CEO") and Chief Scientific Officer ("CSO") non-qualified stock options to
purchase up to 250,000 shares of common stock each, at an exercise price of
$1.90 per share (the estimated fair value of the underlying common stock at
grant date) and expire March 2012. Awards are earned upon achievement of certain
financial and/or research and development milestones. On July 1, 2005, the
Company's CEO forfeited all of his aforementioned 250,000 options.
In February 2005, our Board of Directors granted our CEO and CSO non-qualified
stock options to purchase up to 2,231,100 and 1,734,350 shares of common stock,
respectively, at an exercise price of $0.38 per share and vest fifty percent
immediately, twenty-five percent in December 2005 and twenty-five percent in
December 2006. In addition Mr. Calvin Leung, a board member, was granted
non-qualified stock options to purchase up to 308,725 shares at $0.38 that vest
fifty percent immediately, twenty-five percent in December 2005 and twenty-five
percent in December 2006. Messrs. Franklyn S Barry, Jr. and Edward G Broenniman,
board members, were each granted non-qualified stock options to purchase up to
514,550 shares at $0.38 that vest fifty percent immediately, twenty-five percent
in December 2005 and twenty-five percent in December 2006. All of these options
granted expire in 2010 and 2011 and were granted at a price that was $0.08 below
the estimated fair value of the underlying common stock on the date of grant.
Accordingly, we recorded approximately $424,000 of compensation expense in the
accompanying consolidated statement of operations for the year ended March 31,
2005.
F-68
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
On September 9, 2005, our Board of Directors granted our CEO non-qualified stock
options to purchase up to 2,857,143 shares of common stock, at an exercise price
of $0.21 per share, in exchange for the extinguishment of $300,000 of accrued
related-party liabilities. The fair value of such options approximated the value
of the accrued related-party liability.
On October 2, 2006, our Board of Directors granted our President non-qualified
stock options to purchase up to 500,000 shares of common stock, at an exercise
price of $0.27 per share. 166,667 of the options vested on July 18, 2007 with
the remaining shares of the grant vesting at a rate of 13,889 shares per month.
Due to our President ceasing his employment with us in November 2008, the option
grant was subsequently forfeited.
On June 13, 2007, our Board of Directors granted our CEO non-qualified stock
options to purchase up to 2,500,000 shares of common stock, at an exercise price
of $0.36 per share. 1,000,000 options vested immediately, 500,000 options vested
in June 2008 and 500,000 options vested in June 2009. Unless terminated earlier
in accordance with the agreement, the option, to the extent unexercised, will
expire on June 13, 2017.
On December 15, 2008, our Board of Directors granted our CEO non-qualified stock
options to purchase up to 2,000,000 shares of common stock, at an exercise price
of $0.25 per share. The exercise price was set based on the closing price of our
common stock on November 13, 2008, the date on which our Board of Directors
approved the grant of the option. The option vested on December 15, 2008, the
date of grant, with respect to 1,000,000 shares. Another 500,000 shares vested
on December 31, 2009 and will vest as to the remaining 500,000 shares on
December 31, 2010. Unless terminated earlier in accordance with the agreement,
the option, to the extent unexercised, will expire on November 13, 2018.
Also on December 15, 2008, we entered into separate agreements with Franklyn S.
Barry, Jr. and Edward G. Broenniman, two of our non-employee directors, pursuant
to which we granted to each such director a non-statutory stock option to
acquire an aggregate of 500,000 shares of the Company's common stock at an
exercise price of $0.41 per share. The exercise price was set based on the
closing price of our common stock on June 4, 2008, the date on which our Board
of Directors approved the grant of each option. In the case of each grant, the
option vested on December 15, 2008, the date of grant, with respect to 333,333
shares and vested as to the remaining 166,667 shares on June 4, 2009. Unless
terminated earlier in accordance with its respective agreement, each option, to
the extent unexercised, will expire on June 4, 2018.
Additionally, on December 15, 2008, our Board of Directors granted our CSO and
another employee non-statutory stock options at an exercise price of $0.41 per
share to acquire an aggregate of 750,000 shares and 300,000 shares of our common
stock, respectively. The exercise price was set based on the closing price of
our common stock on June 4, 2008, the date on which our Board of Directors
approved the option grants. The one-third of the options vested on June 4, 2009,
one-third will vest on June 4, 2010 and the final one-third will vest on June 4,
2011. Unless terminated earlier in accordance with the agreements, the options,
to the extent unexercised, will expire on June 4, 2018.
In June 2009, our Chief Executive Officer agreed to suspend the exercise of up
to 9,588,243 of his stock options, which allowed us to utilize the shares
underlying those stock options in capital raising activities while we presented
our stockholders with a proposal to increase the number of authorized shares
from 100,000,000 to 250,000,000. That proposal was approved by our stockholders
at our Annual Meeting on September 16, 2009. Following that approval we extended
the Chief Executive Officer's stock options by 100 days that he had unreserved
his shares. We determined the change in fair value of his stock options due to
this extension, and based on the change in fair value, recorded an increase to
our stock based compensation expense in the quarter ended September 30, 2009 of
$64,678 for his vested options. For his unvested options, we recorded an
increase to fair value of $15,308 which will be expensed over the remaining
vesting period of those options.
F-69
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
The following is a summary of the stock options outstanding at March 31, 2010
and 2009 and the changes during the two years then ended:
Year Ended March 31,
-----------------------------------------------------
2010 2009
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 14,489,060 $ 0.37 10,954,060 $ 0.38
Granted -- $ -- 4,050,000 $ 0.33
Exercised -- $ -- -- $ --
Cancelled/Forfeited (1,073,000) $ 0.38 (515,000) $ 0.32
----------- ---------- ----------- ----------
Outstanding, end of year 13,416,060 $ 0.37 14,489,060 $ 0.38
=========== ========== =========== ==========
Exercisable, end of year 11,716,060 $ 0.37 11,105,726 $ 0.37
=========== ========== =========== ==========
Weighted average estimated fair
value of options granted $ -- $ 0.21
========== ==========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented, with respect to stock options
utilizing the Binomial Lattice option pricing model for the years ended March
31, 2010 and March 31, 2009:
Years Ended March 31,
2010 2009
----------- -----------
Risk free interest rate 2.08% 1.02%
Average expected life 3.8 years 3 years
Expected volatility 96% 112%
Expected dividends None None
The detail of the options outstanding and exercisable as of March 31, 2010 is as
follows:
Options Outstanding Options Exercisable
------------------------------------------ -----------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
--------------- ------------- ------------ --------------- ---------
$0.21 - $0.25 4,857,143 6.75 years $ 0.23 4,357,143 $ 0.22
$0.36 - $0.41 8,221,550 4.64 years $ 0.38 7,021,550 $ 0.36
$1.78 - $3.75 337,367 1.77 years $ 2.02 337,367 $ 2.02
---------- ----------
13,416,060 11,716,060
========== ==========
We recorded stock based compensation expense related to share issuances and to
options granted outside of our Stock Option Plan totaling $504,933 and $733,289
for the fiscal years ended March 31, 2010 and 2009, 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, 2010 and 2009.
F-70
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
As of March 31, 2010, we had $253,149 of remaining unrecognized stock option
expense, which is expected to be recognized over a weighted average remaining
vesting period of 0.61 years.
On March 31, 2010, our stock options had an intrinsic value of approximately
$168,000 comparing the closing price of our stock on that date of $0.38 per
share to the weighted average exercise price of our stock options.
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain of our officers and other related parties have advanced us funds, agreed
to defer compensation and/or paid expenses on our behalf to cover working
capital deficiencies. These non interest-bearing liabilities have been included
as due to related parties in the accompanying consolidated balance sheets.
Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.
8. ACCRUED LIQUIDATED DAMAGES
We follow the guidance of ASC 825-20 regarding our registration payment
arrangements. We have registration payment arrangements associated with
convertible notes (see Footnote 5) related to the registration of warrants and
the common stock underlying the convertible notes. These warrants have lives
extending through 2016. The terms of certain of these arrangements do not
provide for a maximum potential amount of consideration. At March 31, 2010, we
had accrued liquidated damages of $493,000 related to these registration payment
arrangements.
9. OTHER CURRENT LIABILITIES
At March 31, 2010 and 2009, other current liabilities were comprised of the
following items:
March 31, March 31,
2010 2009
---------- ----------
Accrued interest 452,339 352,204
Accrued legal fees 236,902 246,865
Other accrued liabilities 77,699 80,429
---------- ----------
Total other current liabilities $ 766,940 $ 679,498
========== ==========
10. INCOME TAXES
On July 13, 2006, the FASB issued FIN 48, subsequently codified in ASC 740,
which clarifies the accounting for uncertainty in income taxes recognized in an
entity's financial statements in accordance with SFAS No. 109, ACCOUNTING FOR
INCOME Taxes (Codified under ASC 740), and prescribes a recognition threshold
and measurement attributes for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. Under ASC 740, the impact of an
uncertain income tax position on the income tax return must be recognized at the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740 provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. ASC 740 is effective for fiscal years beginning after December 15,
2006.
We adopted the provisions of ASC 740 on April 1, 2007, and have commenced
analyzing filing positions in all of the federal and state jurisdictions where
it is required to file income tax returns, as well as all open tax years in
these jurisdictions. As a result of adoption, we have recorded no additional tax
liability. There are no unrecognized tax benefits as of April 1, 2008, or as of
March 31, 2010. As of March 31, 2010, we have not yet completed our analysis of
the deferred tax assets for net operating losses and we believe that it is more
likely than not that an ownership change may have occurred. As such, this amount
and the offsetting valuation allowance have been removed from our deferred tax
assets. We will complete a Section 382 analysis regarding the limitation of the
net operating loss, if we utilize the net operating loss.
Due to the existence of the valuation allowance, future changes in our
unrecognized tax benefits will not impact our effective tax rate.
We are subject to taxation in the U.S. and state jurisdictions. Our tax years
for 1994 and forward are subject to examination by the U.S. and 2004 and forward
by California tax authorities due to the carryforward of unutilized net
operating losses. We are currently not under examination by any taxing
authorities.
F-71
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
Our practice is to recognize interest and/or penalties related to income tax
matters in income tax expense. During the twelve months ended March 31, 2010, we
did not recognize any interest or penalties. Upon adoption of ASC 740 on April
1, 2007, we did not record any interest or penalties.
At March 31, 2010, we had net deferred tax assets of approximately $4.7 million.
These deferred tax assets are primarily composed of capitalized research and
development costs and other accruals. Due to uncertainties surrounding our
ability to generate future taxable income to realize these assets, a full
valuation has been established to offset the net deferred tax asset.
Additionally, the future utilization of the our net operating loss carryforwards
to offset future taxable income may be subject to an annual limitation as a
result of ownership changes that may have occurred previously or that could
occur in the future.
Significant components of our net deferred tax assets at March 31, 2010 are
shown below (in thousands). A valuation allowance of $4.7 million has been
established to offset the net deferred tax assets as of March 31, 2010, as
realization of such assets is uncertain.
YEAR ENDED MARCH 31,
--------------------------
2010 2009
------------ ------------
Deferred tax assets:
Capitalized research and development $ 3,445 $ 3,245
Other 1,301 626
------------ ------------
Total deferred tax assets 4,746 3,871
------------ ------------
Total deferred tax liabilities -- --
------------ ------------
Net deferred tax assets 4,746 3,871
Valuation allowance for deferred tax assets (4,746) (3,871)
------------ ------------
Net deferred tax assets $ -- $ --
============ ============
The provision for income taxes on earnings subject to income taxes differs from
the statutory federal rate at March 31, 2010, due to the following (in
thousands):
2010 2009
----------- ----------
Federal income taxes at 34% $ (1,539) $ (2,069)
State income tax, net of federal benefit (265) (355)
Tax effect on non-deductible expenses
and credits (70) 472
Increase in valuation allowance 1,874 1,952
----------- ----------
$ -- $ --
=========== ==========
-------------------
Pursuant to Internal Revenue Code Sections 382, use of our net operating loss
carryforwards may be limited if a cumulative change in ownership of more than
50% occurs within a three-year period.
F-72
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
We entered into an employment agreement with our Chairman of the Board effective
April 1, 1999. The agreement, which is cancelable by either party upon sixty
days notice, will be in effect until the employee retires or ceases to be
employed by us. The Chairman of the Board was appointed President and CEO
effective June 1, 2001 upon which the base annual salary was increased from
$120,000 to $180,000. Effective January 1, 2005, the CEO's salary was increased
from $180,000 to $205,000 per year. The CEO is eligible for an annual bonus at
the discretion of the Board of Directors, of which $0 and $20,000 was earned
during each of the years ended March 31, 2007 and 2006, respectively. Under the
terms of the agreement, if the employee is terminated he may become eligible to
receive a salary continuation payment in the amount of at least twelve months'
base salary. Effective April 1, 2006, the CEO's salary was increased from
$205,000 to $240,000 per year. His salary was subsequently increased to $265,000
per year and effective May 1, 2008, his salary was increased from $265,000 to
$290,000 per year. On April 1, 2010, his salary was increased from $290,000 to
$325,000 per year.
We entered into an employment agreement with Dr. Tullis effective January 10,
2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief Science Officer
("CSO"). His compensation under the agreement was modified in June 2001 from
$80,000 to $150,000 per year. Effective January 1, 2005 Dr. Tullis' salary was
increased from $150,000 to $165,000 per year Under the terms of the agreement,
his employment continues at a salary of $165,000 per year for successive
one-year periods, unless given notice of termination 60 days prior to the
anniversary of his employment agreement. Dr. Tullis was granted 250,000 stock
options to purchase the Company's common stock in connection the completing
certain milestones, such as the initiation and completion of certain clinical
trials, the submission of proposals to the FDA and the filing of a patent
application. Under the terms of the agreement, if the employee is terminated he
may become eligible to receive a salary continuation payment in the amount of
twelve months base salary. Effective April 1, 2006, the CSO's salary was
increased from $165,000 per year to $185,000 per year. On April 1, 2010, his
salary was increased from $185,000 to $195,000 per year.
LEASE COMMITMENTS
We currently rent approximately 2,300 square feet of executive office space at
8910 University Center Lane, Suite 660, San Diego, CA 92122 at the rate of
$6,045 per month on a four year lease that expires in September 2013. We also
rent approximately 1,700 square feet of laboratory space at 11585 Sorrento
Valley Road, Suite 109, San Diego, California 92121 at the rate of $1,667 per
month on a two year lease that expires in October 2011.
Rent expense approximated $96,000 and $91,000 for the fiscal years ended March
31, 2010 and 2009, respectively. Our commitments under the rent agreements for
the next four fiscal years are as follows:
OPERATING LEASE COMMITMENTS
FISCAL YEAR ENDED MARCH 31,
2011 2012 2013 2014
------------------------------------------
8910 University Center Lane, Suite 660, San
Diego, CA 92122 office lease $ 73,805 $ 76,388 $ 79,062 $ 40,211
11585 Sorrento Valley Road, Suite 109, San
Diego, California 92121 office lease 22,088 14,586 - -
------------------------------------------
Total Lease Commitments $ 95,893 $ 90,974 $ 79,062 $ 40,211
==========================================
We sublet a portion of the Sorrento Valley Road location for $500 per month to
an independent third party under a month to month sublease. We record this sub
rental income as an offset to our general and administrative expenses.
F-73
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
12. NOTE RECEIVABLE
On February 12, 2010, we received a full recourse secured promissory note
("Investor Note") in the amount of $300,000 in connection with the issuance by
the Company of a $660,000 principal amount 10% convertible promissory note to
one accredited investor (See Note 5). The Investor Note bears interest payable
to the Company at five percent per annum and has a maturity date of April 1,
2011. Accordingly, the Investor note is classified as non-current in the
consolidated balance sheets. We recognize interest income on the Investor Note
as it is earned under the terms of the note. The Investor Note has a prepayment
option.
At March 31, 2010, we had accrued interest income relating to the Investor Note
of $1,932.
13. SUBSEQUENT EVENTS
In April 2010, a holder of one of our 12% Notes payable converted $171,758 of
principal and accrued interest into 687,033 shares of our common stock based
upon an agreed conversion rate of $0.25 per share.
In April 2010, we issued 8,333 shares of restricted common stock to a broker
dealer as partial payment of the registration fee of an investor conference. The
shares were valued at $3,000 based on the closing stock price of $0.36 per
share.
In April 2010, we issued 28,301 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for financial consulting services valued at
$9,056 based on the value of the services provided.
In April 2010, we issued 16,667 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.33 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In April 2010, we issued 8,455 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.35 per share in payment for corporate communications and
administration consulting services valued at $2,917 based on the value of the
services provided.
In April 2010, we issued 10,703 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.37 per share in payment for regulatory affairs consulting services
valued at $3,960 based on the value of the services provided.
In April 2010, we raised $75,000 from the sale to an accredited investor of a
10% convertible note. The convertible note matures in October 2011 and is
convertible into our common stock at a fixed conversion price of $0.25 per share
prior to maturity. The investor also received a matching three year warrant to
purchase unregistered shares of our common stock at a price of $0.25 per share.
In April 2010, we issued 20,341 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.33 per share in payment for internal controls consulting services
valued at $6,713 based on the value of the services provided.
In April 2010, a holder of one of our October & November 2009 10% Convertible
Notes payable converted $183,750 of principal and accrued interest into 735,000
shares of our common stock based upon an agreed conversion rate of $0.25 per
share.
In April 2010, we issued 16,667 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.33 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In April 2010, we issued 8,760 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.33 per share in payment for corporate communications and
administration consulting services valued at $2,917 based on the value of the
services provided.
F-74
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In April 2010, we entered into a one year consulting agreement with a individual
for media relations services. We agreed to pay the consultant 22,727 warrants to
purchase our common stock at a fixed exercise price of $0.33 per share on a
monthly basis. The agreement values these warrant issuances at $5,000 per month.
The first issuance under this arrangement is scheduled for late June 2010.
In May 2010, we issued 29,063 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.28 per share in payment for financial consulting services valued at
$8,109 based on the value of the services provided.
In May 2010, we issued 103,332 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.30 per share in payment for legal services valued at $31,000 based on
the value of the services provided.
In May 2010, we issued 17,188 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In May 2010, we issued 9,319 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.31 per share in payment for corporate communications and
administration consulting services valued at $2,917 based on the value of the
services provided.
In May 2010, we issued 12,375 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for regulatory affairs consulting services
valued at $3,960 based on the value of the services provided.
In May 2010, a warrant holder exercised warrants to purchase 1,599,348 shares of
common stock at the agreed exercise prices, which resulted in proceeds of
$283,600. As an inducement to this warrant holder, we agreed to issue to him
1,599,348 replacement warrants on the same terms as the warrants that he
exercised.
In May 2010, we issued 11,639 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.31 per share in payment for corporate communications consulting
services valued at $3,608 based on the value of the services provided.
On May 21, 2010, the Board of Directors of the Company amended the expiration
terms of certain outstanding stock options such that all outstanding stock
options of the Company shall have a term that is for not less than ten (10)
years following the original date of grant. No other terms or features of the
stock options were modified or amended. Stock options held by Mr. James Joyce,
our Chief Executive Officer and Chairman of the Board of Directors, Mr. Richard
Tullis, our Chief Science Officer and member of the Board of Directors, Mr.
Franklyn Barry, a member of the Board of Directors, and Mr. Edward Broenniman, a
member of the Board of Directors, were modified accordingly. Of the foregoing
(i) options to purchase 2,231,100 shares held by Mr. Joyce were extended to
February 23, 2015; (ii) options to purchase 867,175 shares held by Mr. Tullis
were extended to February 23, 2015; (iii) options to purchase 308,725 shares
held by Mr. Broenniman were extended to February 23, 2015; and (iv) options to
purchase 308,725 shares held by Mr. Barry were extended to February 23, 2015.
All of the foregoing options are at an exercise price of $0.38 per share. The
foregoing represents only a portion of the total options and shares owned by the
directors and officers of the Company.
In June 2010, we issued 17,188 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.32 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In June 2010, we issued 9,349 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.31 per share in payment for corporate communications and
administration consulting services valued at $2,917 based on the value of the
services provided.
F-75
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In June 2010, we issued 15,377 shares of restricted common stock valued at $0.33
per share in payment for investor relations consulting services valued at $5,000
based on the value of the services provided.
In June 2010, we issued 33,056 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.27 per share in payment for financial consulting services valued at
$8,925 based on the value of the services provided.
In June 2010, we issued 17,516 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.31 per share in payment for business development consulting services
valued at $5,500 based on the value of the services provided.
In June 2010, we issued 9,678 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.30 per share in payment for corporate communications and
administration consulting services valued at $2,917 based on the value of the
services provided.
In June 2010, a holder of one of our August 2009 Convertible Notes payable
converted $12,500 of principal into 51,286 shares of our common stock based upon
the agreed conversion formula of the August 2009 Convertible Note.
In June 2010, a holder of one of our August 2009 Convertible Notes payable
converted $17,500 of principal into 75,000 shares of our common stock based upon
the agreed conversion formula of the August 2009 Convertible Note.
In June 2010, we issued 34,514 shares of common stock pursuant to our S-8
registration statement covering our Amended and Restated 2003 Consultant Stock
Plan at $0.27 per share in payment for financial consulting services valued at
$9,319 based on the value of the services provided.
On June 23, 2010, we closed on the restructuring (the "Restructuring") of our
Amended Series A 10% Convertible Notes (see Note 5). In the Restructuring, we
issued four Amended and Restated 12% Series A Convertible Notes (each, a "Note"
and collectively, the "Notes") to the holders in an aggregate amount of
$900,000. The Notes amend and restate certain Amended and Restated 10% Series A
Convertible Notes dated November 29, 2007 and certain amendments and predecessor
notes thereto (collectively, the "Prior Notes") that had been issued to the
holders by us. The effective date of the Restructuring is June 14, 2010.
The Notes were issued effective February 15, 2009, bear an interest rate of 12
percent (12%) per annum on the unpaid principal balance and mature on December
31, 2010 (the "Maturity Date"). Upon closing the Restructuring, we paid interest
on the Notes from February 1, 2010 through the Maturity Date and liquidated
damages due under that certain Registration Rights Agreement dated as of
November 29, 2007 (the "2007 Registration Rights Agreement"), entered into among
the Company and the holders in connection with the Prior Notes, by issuing to
the Holders an aggregate of 1,555,000 units (the "Units") consisting of one
share of our common stock and a warrant to purchase one share of our common
stock at an exercise price of $0.20 per share. The Notes are convertible into
shares of restricted common stock at the election of the holders at any time
prior to repayment at a conversion price of $0.20 per share (the "Conversion
Price"). At any time on or prior to the Maturity Date, we have the right to
prepay the Notes, in whole or in part, on ten (10) days' advance notice to the
Holders, subject to the holders' right to convert in advance of such prepayment.
In addition to issuing the Notes and the Units, we issued to the holders an
aggregate of 10,091,127 amended and restated warrants (collectively, the
"Warrants") to purchase shares of our common stock. The Warrants amend and
restate a like number of warrants previously issued or potentially issuable to
the holders in connection with the Prior Notes. The Warrants bear an exercise
price of $0.20 per share and may be exercised at any time through February 15,
2016. No Holder may convert such Holder's Note or exercise such holder's
Warrants if, upon giving effect to such conversion or exercise, the holder's
ownership would exceed 9.9% of the number of outstanding shares of our common
stock.
In satisfaction of charges for legal services rendered to the holders by Quarles
& Brady LLP in connection with the Prior Notes and the Restructuring, we also
issued to Quarles & Brady two Amended and Restated 12% Series A Convertible
Notes in an aggregate amount of $64,153.14, an aggregate of 31,040 Units to pay
interest thereunder from March 1, 2010 through December 31, 2010, and an
aggregate of 320,765 warrants to purchase our common stock. The notes and
warrants issued to Quarles & Brady contain substantially the same terms and
conditions as the Notes and Warrants issued to the holders, except that the
Quarles & Brady warrants include a cashless exercise feature not provided in the
Holders' Warrants.
F-76
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
--------------------------------------------------------------------------------
In connection with the Restructuring, the Company and the holders amended and
restated the 2007 Registration Rights Agreement by entering into an Amended and
Restated Registration Rights Agreement with an effective date of February 15,
2009 (the "2009 Registration Rights Agreement"). Quarles & Brady also is a party
to the 2009 Registration Rights Agreement. Pursuant to the 2009 Registration
Rights Agreement, we must file no later than July 31, 2010, a registration
statement on Form S-1 under the Securities Act of 1933, as amended (the "Act"),
covering the shares of common stock issuable upon exercise of the warrants
issued to the holders and Quarles & Brady in the Restructuring.
F-77