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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 2008
REGISTRATION NO. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
AETHLON MEDICAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 13-3632859
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3826
(Primary Standard Industrial
Classification Number)
----------------------
3030 BUNKER HILL STREET, SUITE 4000
SAN DIEGO, CALIFORNIA 92109
(858) 459-7800 (Address, Including Zip Code and
Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
JAMES A. JOYCE
3030 BUNKER HILL STREET, SUITE 4000
SAN DIEGO, CALIFORNIA 92109
(858) 459-7800
(Name, Address, Including Zip Code and Telephone Number,
Including Area Code, of Agent for Service)
WITH COPIES OF ALL CORRESPONDENCE TO:
JENNIFER A. POST, ESQ.
RICHARDSON & PATEL LLP
10900 WILSHIRE BLVD. SUITE 500
LOS ANGELES, CALIFORNIA 90024
(310) 208-1182
----------------------
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after the effective date of this registration statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_|
Indicate by check mark whether the registrant is a large accelerated filer,
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]
CALCULATION OF REGISTRATION FEE
=================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Per Share Offering Aggregate Offering Registration Fee
Price Price
- -----------------------------------------------------------------------------------------------------------------
Common Stock 966,750 $0.465 $ 449,539 (1) $ 17.67
Common Stock underlying 7,442,992 $0.465 $ 3,460,991 (2) $ 136.02
warrants held by current
shareholders subject to
this offering
Common Stock underlying 673,340 $0.465 $ 313,103 (3) $ 12.30
warrants held by current
shareholders subject to
this offering
Common Stock underlying 3,425,000 $0.50 $ 1,712,500 (4) $ 67.30
warrants held by current
shareholders subject to
this offering
- -----------------------------------------------------------------------------------------------------------------
Total 12,508,082 $ 5,936,133 $ 233.29
=================================================================================================================
(1) Calculated as of September 22, 2008 pursuant to Rule 457(c) under the
Securities Act of 1933, as amended.
(2) Calculated in accordance with Rule 457(g) under the Securities Act on the
basis of an exercise price of $0.20 per share.
(3) Calculated in accordance with Rule 457(g) under the Securities Act on the
basis of an exercise price of $0.40 per share.
(4) Calculated in accordance with Rule 457(g) under the Securities Act on the
basis of an exercise price of $0.50 per share.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED SEPTEMBER 26, 2008
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
AETHLON MEDICAL, INC.
12,508,082 Shares of Common Stock
This prospectus covers the resale by selling shareholders named on page
47 of up to 12,508,082 shares of our common stock which include:
o 966,750 shares of common stock;
o 7,442,992 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.20 per share; and
o 673,340 shares of common stock underlying common stock
purchase warrants at an exercise rice of $0.40 per share; and
o 3,425,000 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.50 per share.
These securities will be offered for sale by the selling shareholders
identified in this prospectus in accordance with the methods and terms described
in the section of this prospectus titled "Plan of Distribution."
We will not receive any of the proceeds from the sale of the shares.
However, we may receive up to $3,470,434 upon the exercise of the warrants. If
some or all of the warrants are exercised, the money we receive will be used for
general corporate purposes, including working capital requirements. We will pay
all expenses incurred in connection with the offering described in this
prospectus, with the exception of the brokerage expenses, fees, discounts and
commissions which will all be paid by the selling shareholders.
Our common stock is registered under Section 12(g) of the Securities
Exchange Act of 1934 and quoted on the Over-The-Counter Bulletin Board under the
symbol "AEMD.OB" On September 22, 2008, the last reported sale price for our
common stock as reported on the Over-The-Counter Bulletin Board was $0.43 per
share.
-------------------
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF THESE RISKS.
-------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------
The date of this Prospectus is _______________, 2008.
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TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY 1
RISK FACTORS 3
FORWARD LOOKING STATEMENTS 14
USE OF PROCEEDS 14
DESCRIPTION OF BUSINESS 15
DESCRIPTION OF PROPERTIES 23
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 24
EXECUTIVE COMPENSATION 26
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 30
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 35
LEGAL PROCEEDINGS 44
DESCRIPTION OF SECURITIES 44
EQUITY COMPENSATION PLANS 44
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 46
THE SELLING SHAREHOLDERS 47
PLAN OF DISTRIBUTION 48
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 50
TRANSFER AGENT 50
LEGAL MATTERS 50
EXPERTS 50
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES 51
REPORTS TO SECURITY HOLDERS 51
WHERE YOU CAN FIND MORE INFORMATION 51
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PROSPECTUS SUMMARY
This summary highlights important information about our company and
business. Because it is a summary, it may not contain all of the information
that is important to you. To understand this offering fully, you should read
this entire prospectus and the financial statements and related notes included
in this prospectus carefully, including the "Risk Factors" section. Unless the
context requires otherwise, "WE," "US," "OUR", " and the "COMPANY" and similar
terms collectively refer to Aethlon Medical, Inc.
THE COMPANY
We are a development stage medical device company focused on expanding
the applications of our Hemopurifier (R) platform technology, which is designed
to rapidly reduce the presence of infectious viruses and other toxins from human
blood. In this regard, our core focus is the development of therapeutic devices
that treat acute viral conditions, chronic viral diseases and pathogens targeted
as potential biological warfare agents. The Hemopurifier(R) combines the
established scientific principles of affinity chromatography and hemodialysis as
a means to mimic the immune system's response of clearing viruses and toxins
from the blood before cell and organ infection can occur. The Hemopurifier(R)
cannot cure viral conditions but can prevent virus and toxins from infecting
unaffected tissues and cells. We have completed pre-clinical blood testing of
the Hemopurifier(R) to treat HIV and Hepatitis-C, and have completed human
safety trials on Hepatitis-C infected patients in India and are in the process
of obtaining regulatory approval from the U.S. Food and Drug Administration
("FDA")to initiate clinical trials in the United States.
The commercialization of the Hemopurifier(R) will likely require the
completion of human efficacy clinical trials. The approval of any application of
the Hemopurifier(R) in the United States will necessitate the approval of the
FDA to initiate human studies. Such studies could take years to demonstrate
safety and effectiveness in humans and there is no assurance that the
Hemopurifier(R) will be cleared by the FDA as a device we can market to the
medical community. We also expect to face similar regulatory challenges from
foreign regulatory agencies, should we attempt to commercialize and market the
Hemopurifier(R) outside of the United States. As a result, we have not generated
revenues from the sale of any Hemopurifier(R) application. Additionally, there
have been no independent validation studies of our Hemopurifiers(R) to treat
infectious disease. We manufacture our products on a small scale for testing
purposes but have yet to manufacture our products on a large scale for
commercial purposes. All of our pre-clinical human blood studies have been
conducted in our laboratories under the direction of Dr. Richard Tullis, our
Chief Science Officer.
CORPORATE INFORMATION
We are a Nevada corporation. Our principal executive offices are
located at 3030 Bunker Hill Street, Suite 4000, San Diego, California 92109. Our
telephone number is (858) 459-7800. The address of our website is
www.aethlonmedical.com. Information on our website is not a part of this
prospectus.
THE OFFERING
We are registering 12,508,082 shares of our common stock for sale by
the selling shareholders identified in the section of this prospectus titled
"Selling Shareholders." The shares included in the table identifying the selling
shareholders consist of:
o 966,750 shares of common stock and 966,750 shares of common
stock underlying common stock purchase warrants at an exercise
price of $0.20 per share both issued as payment of accrued
interest and damages in connection with the Amended and
Restated 10% Series A Convertible Promissory Notes we issued
on November 29, 2007;
o 6,476,242 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.20 per share
issued in connection with the Amended and Restated 10% Series
A Convertible Promissory Notes we issued on November 29, 2007;
o 673,340 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.40 per share
issued to pay liquidated damages in connection with the
Amended and Restated 10% Series A Convertible Promissory Notes
we issued on November 29, 2007;
o 1,485,000 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.50 per share
issued in connection with 8% promissory notes we issued on
December 5, 2007;
o 660,000 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.50 per share
issued in connection with 9% promissory notes we issued on
January 18, 2008; and
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o 1,280,000 shares of common stock underlying common stock
purchase warrants at an exercise price of $0.50 per share
issued in connection with various unit purchase agreements we
entered into in between August 2007 and February 2008.
The shares issued and outstanding prior to this offering consist of
42,378,418 shares of common stock and do not include:
o 16,705,390 shares of common stock issuable upon the exercise
of warrants (including 11,541,332 shares of common stock
covered by this prospectus);
o 12,989,060 shares of common stock reserved for issuance upon
the exercise of outstanding stock options granted under our
2000 Stock Option Plan, our 2003 Consultant Stock Option Plan,
and options granted outside of our plans; and
o 2,531,666 shares of common stock reserved for issuance under
our stock option plans which have not yet been issued.
After this offering, assuming the exercise of warrants with underlying
shares which are covered by this prospectus, we would have 53,919,750 shares of
common stock outstanding. If all of our other issued and outstanding options and
warrants were exercised, we would have a total of 72,072,868 shares of common
stock issued and outstanding.
On November 29, 2007, we entered into Amended and Restated 10% Series A
Convertible Promissory Notes(the "Amended Notes") with the holders of certain
promissory notes as amended (the "Prior Notes"). Pursuant to the terms of the
Amended Notes, we issued to the holders thereof (i) units consisting of
1,476,242 shares of common stock and Class A Warrants to purchase 1,476,242
shares of our common stock at an exercise price of $0.20 per share as payment
for accrued interest; (ii) units consisting of 673,340 shares of our common
stock and Class A-1 Warrants to purchase 673,340 shares of our common stock at
an exercise price of $0.40 per share as payment for liquidated damages; and
(iii) Class A Principal Warrants to purchase 5,000,000 shares of our common
stock at an exercise price of $0.20 per share as consideration for amending the
Prior Notes.
On December 5, 2007, we entered into subscription agreements with two
accredited investors pursuant to which we issued and sold 8% promissory notes in
the principal amount of $495,000 and three-year warrants to purchase an
aggregate of 1,485,000 shares of our common stock at an exercise price of $0.50
per share.
On January 18, 2008, we entered into a subscription agreement with an
accredited investor pursuant to which we issued and sold a 9% promissory note in
the principal amount of $220,000 and a three-year warrant to purchase 660,000
shares of our common stock at an exercise price of $0.50 per share.
Between August 2007 and February 2008, we entered into unit
subscription agreements with various investors pursuant to which we issued an
aggregate of 2,560,000 shares of common stock and three-year warrants to
purchase 1,280,000 shares of our common stock at an exercise price of $0.50 per
share.
On September 19, 2008, we issued 966,750 shares of common stock and
warrants to purchase 966,750 shares of common stock at an exercise price of
$0.20 per share to the holders of the Amended Notes as payment of accrued
interest and penalties as prescribed in the Amended Note agreement.
This prospectus covers the sale of the common stock and common stock underlying
the warrants described above.
SUMMARY FINANCIAL DATA
The following tables summarize the consolidated statements of
operations and balance sheet data for our company.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: THREE MONTHS ENDED YEARS ENDED
JUNE 30, (UNAUDITED) MARCH 31,
-----------------------------------------------------------------
2008 2007 2008 2007
- ---------------------------------------------------------------------------------------------------------------------------
Revenue $ 0 $ 0 $ 0 $ 0
Gross profit $ 0 $ 0 $ 0 $ 0
Operating loss $ (623,659) $ (871,273) $ (2,892,588) $ (2,084,254)
Net loss $ (998,815) $ (536,199) $ (4,140,264) $ (6,024,545)
Net loss attributed to common shareholders $ (998,815) $ (536,199) $ (4,140,264) $ (6,024,545)
Loss per common share, basic and diluted $ (0.03) $ (0.02) $ (0.12) $ (0.22)
Weighted average common shares outstanding,
basic and diluted 39,633,952 31,982,399 34,395,562 26,937,727
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CONSOLIDATED BALANCE SHEET DATA: JUNE 30, MARCH 31,
2008 2008
(UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------
Current assets $ 193,393 $ 329,430
Total assets $ 347,333 $ 488,105
Total current liabilities $ 4,034,341 $ 3,810,369
Accumulated deficit $ (33,226,071) $ (32,227,256)
Total stockholders' deficit $ (3,687,008) $ (3,322,264)
Total liabilities and stockholders' deficit $ 347,333 $ 488,105
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 prospectus
in its entirety and consider all of the information and advisements contained in
this prospectus, 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 $2,892,588, $2,084,254 and $2,094,939, for the fiscal
years ended March 31, 2008, 2007, and 2006, respectively, and an operating loss
of $623,659 in the three months ended June 30, 2008. At June 30, 2008, we had an
accumulated deficit of $33,226,071. We have incurred net losses of $4,140,264
and $6,024,545 for the fiscal years ended March 31, 2008 and 2007 and $998,815
for the three months ended June 30, 2008. We have not had revenues to date. We
expect that our revenues, if any, will not be sufficient to sustain our
operations for the foreseeable future. Our profitability will require the
successful commercialization of our Hemopurifier(R) technology. No assurances
can be given when or if this will occur or that we will ever generate revenues
or be profitable.
WE HAVE RECEIVED AN OPINION FROM OUR AUDITORS REGARDING OUR ABILITY TO
CONTINUE AS A GOING CONCERN
Our independent auditors noted in their report accompanying our
financial statements for our fiscal year ended March 31, 2008 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 addressed management's plans to address these matters.
We cannot assure you that our business plans will be successful in addressing
these issues. This opinion about our ability to continue as a going concern
could affect our ability to obtain additional financing at favorable terms, if
at all, as such an opinion 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.
We will need to raise additional funds in order to finance our
operations, support expansion, develop new or enhanced services and products,
respond to competitive pressures, acquire complementary businesses, or take
advantage of unanticipated opportunities. There can be no assurance that such
additional capital will be available or on terms acceptable to us. If future
financing funds are not available on acceptable terms, we may be forced to
curtail or cease our operations. Even if we are able to continue our operations,
the failure to obtain financing could have a substantial adverse effect on our
business, results of operations and financial results. Furthermore, sales of
additional equity or convertible debt securities would result in additional
dilution to our stockholders.
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.
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At present, the Hemopurifier(R) has not been approved for use by any
U.S. Government agency, nor have we received any contracts to purchase the
Hemopurifier(R). Since inception, we have not generated revenues from the sale
of any product based on our Hemopurifier(R) technology platform. The process of
obtaining government contracts is lengthy with the uncertainty that we will be
successful in obtaining announced grants or contracts for therapeutics as a
medical device technology. Accordingly, we cannot be certain that we will be
awarded any U.S. Government grants or contracts utilizing our Hemopurifier(R)
platform technology.
IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(R) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.
We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(R)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.
U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.
Our business plan to provide biodefense product candidates may involve
contracts with the U.S. Government. U.S. Government contracts typically contain
unfavorable termination provisions and are subject to audit and modification by
the government at its sole discretion, which subjects us to additional risks.
These risks include the ability of the U.S. Government to unilaterally:
o suspend or prevent us for a period of time from receiving new
contracts or extending existing contracts based on violations
or suspected violations of laws or regulations;
o audit and object to our contract-related costs and fees,
including allocated indirect costs;
o control and potentially prohibit the export of our products;
and
o change certain terms and conditions in our contracts.
If we were to become a U.S. Government contractor, we would be required
to comply with applicable laws, regulations and standards relating to our
accounting practices and would be subject to periodic audits and reviews. As
part of any such audit or review, the U.S. Government may review the adequacy
of, and our compliance with, our internal control systems and policies,
including those relating to our purchasing, property, estimating, compensation
and management information systems. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees, including allocated
indirect costs. In addition, if an audit or review uncovers any improper or
illegal activity, we would possibly be subject to civil and criminal penalties
and administrative sanctions, including termination of our contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from
doing business with the U.S. Government. We could also suffer serious harm to
our reputation if allegations of impropriety were made against us. Although
adjustments arising from government audits and reviews have not seriously harmed
our business in the past, future audits and reviews could cause adverse effects.
In addition, under U.S. Government purchasing regulations, some of our costs,
including most financing costs, amortization of intangible assets, portions of
our research and development costs, and some marketing expenses, would possibly
not be reimbursable or allowed under such contracts. Further, as a U.S.
Government contractor, we would be subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower lawsuits and
other legal actions and liabilities to which purely private sector companies are
not.
WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.
Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(R) medical device candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases we target that:
4
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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.
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
To achieve the levels of production necessary to commercialize our
Hemopurifier(R) products, we will need to secure manufacturing agreements with
contract manufacturers which comply with good manufacturing practice standards
and other standards prescribed by various federal, state and local regulatory
agencies in the U.S. and any other country of use.
We have limited experience manufacturing products for testing purposes
and no experience manufacturing products for large scale commercial purposes. We
will likely outsource the manufacture of our Hemopurifier(R) products to third
parties operating FDA-certified facilities. To date, we have manufactured
devices on a small scale for testing purposes. There can be no assurance that
manufacturing and control problems will not arise as we attempt to commercialize
our products or that such manufacturing can be completed in a timely manner or
at a commercially reasonable cost. Any failure to address such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.
OUR HEMOPURIFIER(R) TECHNOLOGY MAY BECOME OBSOLETE.
Our Hemopurifier(R) products may be made unmarketable by new scientific
or technological developments where new treatment modalities are introduced that
are more efficacious and/or more economical than our Hemopurifier(R) products.
The Homeland Security industry is growing rapidly with many competitors trying
to develop products or vaccines to protect against infectious disease. Any one
of our competitors could develop a more effective product which would render our
technology obsolete.
OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO
COMPLY WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.
5
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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 more of these key executive officers,
we would be forced to expend significant time and money in the pursuit of a
replacement, which would result in both a delay in the implementation of our
business plan and the diversion of limited working capital. The loss of Dr.
Tullis would harm the clinical development of our products due to his unique
experience with the 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.
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 President, our Chief
Science Officer and a research scientist, and other personnel employed on a
contract basis. We also employ a Senior Vice President - Finance on a part time
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.
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We will need to significantly expand our operations to implement our
longer-term business plan and growth strategies. We will also be required to
manage multiple relationships with various strategic partners, technology
licensors, customers, manufacturers and suppliers, consultants and other third
parties. This expansion and these expanded relationships will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effectuate these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot assure you that we will
institute, in a timely manner or at all, the improvements to our managerial,
operational and financial systems, procedures and controls necessary to support
our anticipated increased levels of operations and to coordinate our various
corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND
OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR
CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND
SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD
COMPANY.
The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these perceived risks, directors and management are also
becoming increasingly concerned with the availability of directors and officers
liability insurance to pay on a timely basis the costs incurred in defending
such claims. We currently do carry limited directors and officers liability
insurance. Directors and officers liability insurance is expensive and difficult
to obtain. If we are unable to continue or provide directors and officers
liability insurance at affordable rates or at all, it may become increasingly
more difficult to attract and retain qualified outside directors to serve on our
board of directors. We may lose potential independent board members and
management candidates to other companies in the biotechnology field that have
greater directors and officers liability insurance to insure them from liability
or to biotechnology companies that have revenues or have received greater
funding to date which can offer greater compensation packages. The fees of
directors are also rising in response to their increased duties, obligations and
liabilities as well as increased exposure to such risks. As a company with a
limited operating history and limited resources, we will have a more difficult
time attracting and retaining management and outside independent directors than
a more established company due to these enhanced duties, obligations and
liabilities.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, INCLUDING
OUR U.S. AND INTERNATIONAL PATENTS COULD NEGATIVELY IMPACT OUR PROJECTED GROWTH
AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT
ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.
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.
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The Hemopurifier(R) and related treatment approaches are protected by
three issued U.S. patents and five issued international patents. We have also
applied for three additional U.S. patents and a number of additional
international patents.
We also rely on proprietary designs, technologies, processes and
know-how not eligible for patent protection. We cannot give you any assurance
that our competitors will not independently develop the same or superior
designs, technologies, processes and know-how.
While we have and will continue to enter into proprietary rights
agreements with our employees and third parties giving us proprietary rights to
certain technology developed by those employees or parties while engaged by our
company, we can give you no assurance that courts of competent jurisdiction will
enforce those agreements.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS OF DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE
PREVENTED OR DELAYED.
Our pathogen filtration devices, or Hemopurifier(R) products, are
subject to extensive government regulations related to development, testing,
manufacturing and commercialization in the U.S. and other countries. The
determination of when and whether a product is ready for large scale purchase
and potential use will be made by the U.S. government through consultation with
a number of governmental agencies, including the FDA, the National Institutes of
Health, the Centers for Disease Control and Prevention and the Department of
Homeland Security. Our product candidates are in the pre-clinical and clinical
stages of development and have not received required regulatory approval from
the FDA to be commercially marketed and sold. The process of obtaining and
complying with FDA and other governmental regulatory approvals and regulations
is costly, time consuming, uncertain and subject to unanticipated delays. Such
regulatory approval (if any) and product development requires several years.
Despite the time and expense exerted, regulatory approval is never guaranteed.
We also are subject to the following risks and obligations, among others.
o The FDA may refuse to approve an application if they believe
that applicable regulatory criteria are not satisfied.
o The FDA may require additional testing for safety and
effectiveness.
o The FDA may interpret data from pre-clinical testing and
clinical trials in different ways than we interpret them.
o If regulatory approval of a product is granted, the approval
may be limited to specific indications or limited with respect
to its distribution.
o The FDA may change their approval policies and/or adopt new
regulations.
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.
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Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(R) product candidates. Completion of
our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:
o serious adverse events related to our medical device
candidates;
o unsatisfactory results of any clinical trial;
o the failure of our principal third-party investigators to
perform our clinical trials on our anticipated schedules;
and/or
o different interpretations of our pre-clinical and clinical
data, which could initially lead to inconclusive results.
Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our Hemopurifier(R) product
candidates do not prove to be safe or effective or do not receive required
regulatory approvals, our financial results and the commercial prospects for our
product candidates will be harmed. Furthermore, our inability to complete our
clinical trials in a timely manner could jeopardize our ability to obtain
regulatory approval.
THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.
THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.
We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.
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.
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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 five issued patents, four of which
we own and one which we have 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 Food & Drug Administration approves the Hemopurifier(R). These patents
comprise a majority of our assets. At June 30, 2008, our intellectual property
assets comprise 87.6% of our non-current assets, and 38.8% 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.
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
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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.
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
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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 June 30, 2008, the high and low
sale prices of a share of our common stock were $0.88 and $0.38, 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 that the sale of shares or the availability of common shares for
sale at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY
24.0% OF OUR OUTSTANDING COMMON SHARES AS OF SEPTEMBER 19, 2008, WHICH MAY LIMIT
THE ABILITY OF YOURSELF OR 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 September 19, 2008, our officers and directors beneficially own
or control approximately 24.08% of our outstanding common shares (assuming the
exercise of all outstanding options and warrants held by our officers and
directors). These persons will have the ability to substantially influence all
matters submitted to our shareholders for approval and to control our management
and affairs, including extraordinary transactions such as mergers and other
changes of corporate control, and going private transactions.
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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 September 19, 2008, there are outstanding purchase options and
warrants entitling the holders to purchase 27,162,784 common shares at a
weighted average exercise price of $0.36 per share. There are 5,340,000 shares
underlying promissory notes convertible into common stock at a weighted average
exercise price of $0.24. The exercise price for all of the aforesaid warrants,
may be less than your cost to acquire our common shares. In the event of the
exercise of these securities, you could suffer substantial dilution of your
investment in terms of your percentage ownership in the company as well as the
book value of your common shares. In addition, the holders of the common share
purchase options or warrants may sell common shares in tandem with their
exercise of those options or warrants to finance that exercise, or may resell
the shares purchased in order to cover any income tax liabilities that may arise
from their exercise of the options or warrants.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.
We are entitled under our certificate of incorporation to issue up to
100,000,000 shares of common stock. After taking into consideration our
outstanding common stock at September 19, 2008, our convertible notes,
outstanding options and outstanding warrants we will be entitled to issue up to
35,034,450 additional common shares. Our board may generally issue shares of
common stock, or options or warrants to purchase those shares, without further
approval by our shareholders based upon such factors as our board of directors
may deem relevant at that time. It is likely that we will be required to issue a
large amount of additional securities to raise capital to further our
development. It is also likely that we will be required to issue a large amount
of additional securities to directors, officers, employees and consultants as
compensatory grants in connection with their services, both in the form of
stand-alone grants or under our stock plans. We cannot give you any assurance
that we will not issue additional shares of common stock, or options or warrants
to purchase those shares, under circumstances we may deem appropriate at the
time.
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
as our board of directors may deem relevant at that time. For the past three
years and for the three months ended June 30, 2008, we issued a total of
2,020,008 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 59.33% and 46.34% for the years ended March
31, 2008 and 2007. During the three months ended June 30, 2008, we issued
232,033 shares for debt.
For the past three fiscal years and for the three month period ended
June 30, 2008 we issued a total of 5,028,111 shares in payment for services. The
average price discount of common stock issued for services during this period,
weighted by the number of shares issued was 12.80%, 4.54% and 14.86% for the
years ended March 31, 2008, 2007 and 2006, respectively. During the three months
ended June 30, 2008, we issued 42,447 shares for services. 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, which we may be unable to recoup. These provisions and
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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.
FORWARD-LOOKING STATEMENTS
This prospectus, including the sections titled "Prospectus Summary" and
"Risk Factors" and other sections, contains certain statements that constitute
"forward-looking statements". These forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they
do develop, the pace at which they develop;
o our ability to attract and retain the qualified personnel to
implement our growth strategies,
o our ability to obtain approval from the Food and Drug
Administration for our products;
o our ability to protect the patents on our proprietary
technology;
o our ability to fund our short-term and long-term financing
needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in
the sections of this prospectus, including those captioned
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be
offered and sold from time to time by the selling shareholders. We will receive
no proceeds from the sale of shares of common stock in this offering. However,
we may receive up to $3,277,084 upon the exercise of the warrants. Any proceeds
that we receive from the exercise of warrants will be used for working capital
and general corporate purposes.
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DESCRIPTION OF BUSINESS
GENERAL
Aethlon Medical, Inc. ("Aethlon Medical", "We" or the "Company"),
formerly Bishop Equities, Inc. ("Bishop"), was incorporated in Nevada in April
1991 to provide a public vehicle for participation in a business transaction
through a merger with or acquisition of a private company. In March 1993, we
successfully offered our common stock at $6.00 per share through an initial
public offering. In March 1999, Bishop began doing business as "Aethlon Medical,
Inc." In March 2000, the Company's Articles of Incorporation were amended to
formally change the name of the Company from "Bishop Equities, Inc." to "Aethlon
Medical, Inc."
BUSINESS DEVELOPMENT/ACQUISITIONS
On March 10, 1999, (1) Aethlon, Inc., a California corporation
("Aethlon"), (2) Hemex, Inc., a Delaware corporation ("Hemex"), the accounting
predecessor to the Company, and (3) 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.
On January 10, 2000, we acquired all the outstanding common stock of
Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of our restricted
common stock in order to establish research facilities in San Diego, California,
as well as employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a
recognized research scientist in the area of DNA synthesis and antisense. Syngen
had no significant assets, liabilities, or operations, and primarily served as
the entity through which Dr. Tullis performed research consulting services. As
such, the acquisition has been 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 was appointed to the Board of Directors of Aethlon
Medical and was elected its Vice President for Business Development. Effective
June 1, 2001, Dr. Tullis was appointed Chief Science Officer of Aethlon Medical,
replacing Dr. Clara Ambrus, who retired from the Company.
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 issued 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 our wholly-owned subsidiary.
The acquisition was accounted for as a purchase. At March 31, 2001, management
determined that goodwill recognized in the purchase of Cell was impaired due to
the permanent suspension of operations by Cell, and, accordingly, treated the
related goodwill as fully impaired.
BUSINESS OF ISSUER
We are a developmental stage medical device company focused on
expanding the applications of our Hemopurifier (R) platform technology which is
designed to rapidly reduce the presence of infectious viruses and other toxins
from human blood. As such, we focus on developing therapeutic devices to treat
acute viral conditions brought on by pathogens targeted as potential biological
warfare agents and chronic viral conditions including HIV/AIDS and Hepatitis-C.
The Hemopurifier (R) combines the established scientific technologies of
hemodialysis and affinity chromatography as a means to mimic the immune system's
response of clearing viruses and toxins from the blood before cell and organ
infection can occur. The Hemopurifier (R) cannot cure these afflictions but can
lower viral loads and allow compromised immune systems to overcome otherwise
serious or fatal medical conditions.
The Hemopurifier(R)
The Hemopurifier(R) is an broad spectrum platform technology that
combines the established scientific methods of hemodialysis (artificial kidneys)
and affinity chromatography (a method that allows the selective capture of
viruses and related toxins) as a means to augment the natural immune response of
clearing infectious virus and toxins from the blood. The therapeutic goal of
each Hemopurifier (R) application is to improve patient survival rates by
reducing viral load and preserving the immune function. We believe that the
Hemopurifier (R) will enhance and prolong the benefit of current infectious
disease drug therapies and fill the void for patients who inevitably become
resistant to such therapies. The Hemopurifier (R) is also positioned to treat
those infected by biological agents for which there are no effective drug or
vaccine treatments. The Hemopurifier (R) is not a substitute for antiviral drug
or vaccine therapies, as it is solely positioned to treat drug and vaccine
resistant pathogens.
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Traditionally, hemodialysis (kidney dialysis) has been used to remove
urea and other small metabolic toxins that accumulate in the blood of people
with acute or chronic kidney failure (also called renal failure). Acute renal
failure is generally treated in hospital intensive care units using a continuous
filtration therapy. Chronic renal failure is treated through intermittent,
thrice-weekly kidney dialysis in a specialized clinic setting. A catheter is
most often the method used to gain access to the blood which is then pumped
through thousands of hollow micro-fibers running the length of the kidney
dialysis cartridge. Within the cartridge, toxins, urea and excess water pass
through small pores in the walls of the micro-fibers and are removed by a
separately circulating dialysis fluid outside of the fibers. Blood cells and
molecules that are too large to pass through the pores are retained and the
cleansed blood is returned back to circulation.
The Hemopurifier (R) modifies this process in several ways to provide
an efficient method to selectively remove targeted viruses and toxins. First,
the pores of the micro-fibers within the Hemopurifier (R) are large enough to
allow circulating infectious viruses and toxins to separate from the blood and
diffuse through the walls of the fibers. Second, within the cartridge but
outside of the fibers the Hemopurifier (R) contains a unique material (the
"affinity agent") which selectively binds to the viruses or toxins. Because of
the affinity agent's ability to bind to viruses and toxins, there is no need for
a separate circulation of a dialysis solution within the Hemopurifier (R). This
provides the flexibility to use the Hemopurifier (R) either on kidney dialysis
machines (global infrastructure), by employing a simple pump mechanism or by
using a patient's own blood pressure (in field or military applications)to drive
circulation.
Infectious Disease
The current treatment for viral illnesses include vaccines and
antiviral drugs. Vaccines have been the most successful in curing viral diseases
(e.g. polio and smallpox). Unfortunately, newly emerging pathogens (e.g. SARS),
highly mutable RNA viruses (e.g., HIV and Hepatitis C) and exotic viruses that
might be used in terrorist attacks often do not have vaccine treatments.
Similarly, antiviral drugs are often useful in controlling viral infections.
However, there do not seem to be any general, broad-spectrum antiviral agents
similar to penicillin for bacteria and viruses capable of rapidly developing
drug resistant mutations. In addition, it generally takes years and millions of
dollars to develop vaccine and drug candidates that may or may not be approved
by the FDA.
Our Hemopurifier(R) technology represents a new approach to treating
viral diseases. The application is designed to work with current treatments to
remove infectious virus, toxic viral proteins and deleterious immunological
mediators directly from the blood of the patient. By removing circulating virus
and toxins the Hemopurifier(R) cartridge prevents virus and toxins from
infecting tissues and cells. The device cannot cure HIV and Hepatitis-C but
appears to augment the immune response of clearing viruses and toxins from the
blood before infection can occur. Scientifically, this action is known as
"Fusion Inhibition" since the ability of the virus to enter or fuse with host
cells or organs is inhibited.
The Hemopurifier(R) is positioned as a therapeutic medical device that
can be quickly deployed to treat genetically engineered and drug and vaccine
resistant biowarfare agents. For example, we demonstrated the ability to rapidly
build and test new antibody cartridges upon receipt of an antibody against HIV
which was previously untested for its utility as an agent to be immobilized
within the Hemopurifier(R) treatment cartridge. The process included the
attachment of the antibody to agarose beads to create an affinity or binding
solution that was immobilized within the hollow-fiber treatment cartridge as
means to capture HIV as it diffused through the fibers. Human blood infected
with HIV was then circulated through the cartridge to measure the ability of the
Hemopurifier(R) to capture HIV over a range of time periods. Human blood
infected with HIV was also circulated through a control cartridge without
immobilized antibodies as a means to document an improved ability to capture
infectious virus when the immobilized antibody was utilized in the treatment
cartridge. Upon completion of the circulation of infected blood, diagnostic
studies were conducted to verify the viral capture rate of the Hemopurifier(R)
with and without the immobilized antibody.
We have completed an initial preliminary data of Hepatitis-C (HCV)
infected patients treated with the Hemopurifier(R). The HCV treated patients
were among end-stage renal disease (kidney dialysis) patients enrolled in human
safety studies being conducted at the Fortis Hospital, in Delhi, India.
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In the studies, robust viral load reductions were observed in tested
patients completing a three-treatment Hemopurifier(R) protocol. The resulting
data documented that two of three HCV patients tested responded with measurable
viral load reductions during the course of three 4-hour Hemopurifier(R)
treatments. The three treatments were administered during scheduled dialysis
therapy every other day over the span of five days. The third patient showed
both increases and decreases in viral load during the course of treatment, but
demonstrated an overall reduction in follow-on viral load tests. Given the small
sample size, viral load data was averaged for all 3 patients. Average initial
HCV viral load was 3.13 x 108 viral units per ml of blood. After completion of
three Hemopurifier(R) treatments, viral load was reduced an average 57% (final
4.1x107 IU/ml). The stepwise drop in HCV viral load averaged 36% per treatment.
Follow-on testing indicated that HCV viral load was 60% lower than initial viral
load values when measured three days after final Hemopurifier(R) treatment, and
at seven days post treatment, viral load declined to 82% below starting viral
load values. Additionally, none of the patients were being treated with
antiviral drug therapy. Viral load measurements were performed with real-time
quantitative polymerase chain reaction (RT-PCR). Control samples were measured
in duplicate while treatment samples were generally measured in triplicate. In
conclusion, the Hemopurifier(R) treatment of HCV infected patients undergoing
dialysis resulted in a net viral load reduction of 60 to 80% with the effects of
treatment progressing at least 7 days beyond Hemopurifier(R) treatment.
We now plan to further demonstrate a rapid virological response (RVR)
through a case study of an HCV patient receiving up to four weeks of
Hemopurifier(R) therapy.
The opportunity for new antiviral strategies to fight HCV is
significant, as approximately 180 million people worldwide (3% of the world's
population) are HCV infected. According to the World Health Organization (WHO),
only 30-50% of infected patients beneficially respond to the 48-week pegylated
interferon-ribavirin treatment standard.
Biological Weapons and Pandemic Threats
We are developing treatments to combat infectious agents that may be
used in biological warfare and terrorism and to combat pandemic threats. A
pandemic is a global disease outbreak. A flu pandemic occurs when a new
influenza virus emerges for which people have little or no immunity, and for
which there is no vaccine. The disease spreads easily person-to-person, causes
serious illness, and can sweep across the country and around the world in very
short time.
We are working to design Hemopurifiers(R) that can be rapidly deployed
by armed forces as wearable post-exposure treatments on the battlefield, as well
as dialysis-based treatments for civilian populations. We are focusing our
bio-defense strategy on treating "Category A" agents, which are considered by
the Centers for Disease Control ("CDC") to be the worst bioterrorism threats.
These agents include the viruses that cause Smallpox, hemorrhagic fevers such as
Ebola and Marburg, the Anthrax toxin, and Botulinum toxin. To date, we have
completed research collaborations that proved the Hemopurifier(R) was effective
in capturing a variety of Category A agents and pandemic threats including Bird
Flu Virus, West Nile Virus, the Partially Reconstructed 1918 Influenza Virus and
Monkeypox virus ("MPV"). MPV represents a primary model to study candidate
therapies for smallpox virus as research with human infectious smallpox is
prohibited. .
In March 2007, we submitted an Investigational Device Exemption ("IDE")
with the FDA the goal of which is to obtain approval to conduct human safety
and, if applicable, animal efficacy trials targeted to a specific bioterror
viral agent. We are presently in the process of conducting in-vitro trials to
determine the most appropriate "Category A" application.
In June 2008, we submitted a contract proposal to a Broad Agency
Announcement (BAA) solicitation entitled; "Application of Platform Technologies
for the Development of Therapeutic Agents for Biodefense." The solicitation
(DMID-NIAID-NIHAI20080022BARDA) represents a partnership between the National
Institute of Allergy and Infectious Diseases (NIAID) and the recently
established Biomedical Advanced Research and Development Authority (BARDA) to
award contracts that fund the development of innovative approaches to treat
bioterror and emerging pandemic threats.
Our contract response included supporting subcontractor commitments
from leading government and non-government health organizations, including The
United States Army Medical Research Institute for Infectious Diseases
(USAMRIID), Battelle Biomedical Research Center (BMRC), The Renal Research
Institute (RRI), Cato Research Institute, and The University of California
Davis, School of veterinary medicine. Contract recipients will be awarded up to
five years of funding directed toward activities including, research, clinical
programs, and the establishment of large-scale manufacturing protocols. A
significant emphasis of the contract solicitation is to aid in the development
of broad-spectrum therapies able to demonstrate effectiveness against multiple
bioterror pathogens and toxins.
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Additionally, Aethlon Medical has advanced a second human safety study
of the Hemopurifier(R) in India; has executed a collaborative agreement to
develop advanced filter technology for capturing high-dose chemotherapeutic
agents; and has executed a license agreement that advances the filtration
techniques already proven in the Hemopurifier(R) as foundation to deliver new
therapies that inhibit the spread of cancer related metastases.
Manufacturing
We plan to manufacture a small number of cartridges sufficient to
complete clinical trials in our current facilities. Ultimately, we will
outsource cartridge manufacturing to a GMP/ISO9001 compliant contract
manufacturer. Hemopurifiers(R) to treat pathogens that are bioweapons candidates
will be sold directly to the U.S. military and the federal government. Sale of
Hemopurifiers(R) to treat chronic viral conditions will be directed through
organizations with established distribution channels.
Research and Development
In fiscal year 2001, we realigned our research and development
activities from developing Hemopurifiers(R) to treat harmful metals to
developing Hemopurifiers(R) for the treatment of chronic viral conditions. As a
result of this strategic realignment, we initiated the consolidation of all
scientific and administrative functions into our San Diego facilities during the
fourth quarter of fiscal year 2001. This consolidation was completed during the
first quarter of fiscal year 2002 and our facilities in Buffalo, N.Y. were
closed. In 2004, we expanded our research effort to include the development of
Hemopurifiers(R) to treat acute viral diseases as well as countermeasures
against biological weapons. The cost of research and development, all of which
has been charged to operations, amounted to approximately 1,465,750 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. Our current patents expire
between 2011 and 2023.
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 is extremely competitive,
and companies developing new treatment procedures are faced with severe
regulatory challenges. In this regard, only a very small percentage of companies
that are developing new treatments will actually obtain approval from the FDA to
market their treatments in the United States. Currently, the market for treating
chronic and acute viral diseases is comprised of drugs designed to reduce viral
load by inhibiting viral replication or by inhibiting viruses from infecting
healthy cells. Unfortunately, these drugs are generally toxic, are expensive to
develop, and inevitably infected patients will develop viral strains that become
resistant to drug treatment. As a result, patients are ultimately left without
treatment options.
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COMPETITION
We are advancing our Hemopurifier(R) technology as a treatment to
enhance and prolong current drug therapies by removing the viral strains that
cause drug resistance. The Hemopurifier(R) is also designed to prolong life for
infected patients who have become drug resistant and have no other treatment
options. Therefore, we do not believe that the Hemopurifier(R) competes with the
current drug therapy treatment standard. However, if the industry considered the
Hemopurifier(R) to be a potential replacement for drug therapy, then the
marketplace for the Hemopurifier(R) would be extremely competitive. We are also
pursuing the development of Hemopurifiers(R) to be utilized as treatment
countermeasures against biological weapons. In this regard, we are targeting the
treatment of pathogens, which are microbial organisms that cause disease, in
which current treatments are either limited or do not exist. We believe that we
are the sole developer of viral filtration systems (Hemopurifiers(R)) to treat
chronic viral conditions, acute viral conditions and biological weapons.
However, we face competition from the producers of the following alternative
treatment options for all market applications.
Antiviral Drugs
For viral infections, specific antiviral drugs can be effective, but
there are none that are effective against a broad-spectrum of infectious virus.
At present, only a few antiviral drugs are available to treat the multitude of
viruses that could be used as biological weapons. For example, Ribavirin is the
treatment of choice for certain viral hemorrhagic fever infections, but has no
current application to Ebola and Marburg infections. Newer antiviral drugs have
shown some promise in animal models, and limited case reports in humans are
encouraging. The lack of broad-spectrum antivirals takes on added significance
in light of the ability of many viruses to rapidly develop resistance.
Current efforts to define the genetic details of normal and pathogenic
agents on a molecular level promise the hope of new points of attack. Genomic
analysis of viral pathogens and animal models of responses to infection provide
valuable information enabling the potential development of novel treatment and
prevention strategies. However, even the rapid elucidation of the genetic
structure of a specific pathogen does not provide sufficient information to
quickly design an effective cure.
Another approach in drug development is combinatorial chemistry, which
provides the ability to rapidly synthesize large libraries of related compounds,
many of which are completely new. However, there is still a need to laboriously
screen each new compound for efficacy in fighting a particular disease. In that
sense, combinatorial drugs confront the same problem as the traditional method
of screening of plant and animal extracts for active compounds that block viral
or bacterial replication.
Vaccines
Historically, the most effective tools in controlling infections have
been vaccines. Polio, measles, mumps and many other viral illnesses are now
controllable and smallpox has been eradicated from nature. Licensed vaccines for
hemorrhagic fever viruses are limited to yellow fever (though others are in the
trial phase of approval). Promising vaccines are being tested for some of the
other diseases, but research is hampered by the need to conduct the studies in
secure laboratories.
There are other problems with relying on vaccines as our primary
protection against a biological weapons attack. While vaccination may be an
effective treatment in a military setting, it would be problematic for civilian
populations for several reasons:
o The infectious virus would have to be known prior to vaccine
deployment. With the exception of smallpox, post-exposure
vaccination is ineffective.
o If everyone in the United States could be vaccinated, it would
be impossible to vaccinate people against every viral threat.
o Vaccines are only useful if the viral target has not mutated o
or been genetically altered.
Vaccines that are effective and safe are difficult to develop. History
has shown that such development can be a slow process and may not even be
possible for highly mutable pathogens like HIV and Hepatitis C. Moreover,
current vaccine strategies often carry significant risk for complications. For
example, the smallpox vaccine, which uses attenuated strains of a live virus,
can occasionally cause illness or death by infection from the very organism that
usually provides protection.
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GOVERNMENT REGULATION
The Hemopurifier(R) is a medical device subject to extensive and
rigorous regulation by FDA, as well as other federal and state regulatory bodies
in the United States and comparable authorities in other countries. Therefore,
we cannot assure that our technology will successfully complete any regulatory
clinical trial for any of our proposed applications.
One of the problems facing the FDA is the need to ensure public safety
while at the same time preventing unsafe treatments from reaching the public.
The balance between these competing pressures has resulted in a long and
deliberate process for approving new treatments, which is not responsive to the
urgent need for new treatments presented in the era of bioterrorism. For most
drugs, the principal research and development phases take several years prior to
a drug being submitted to the FDA for testing. A clinical research program takes
two to ten years, depending on the agent and clinical indication, after which
the marketing application review period requires an average of one year. Once a
product is approved for market, long-term post-marketing surveillance,
inspections, and product testing must be performed to ensure the quality,
safety, and efficacy of the product, as well as appropriate product labeling.
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Each medical
device we wish to commercialize in the United States will require the filing of
a Premarket Approval ("PMA") from FDA. Medical devices are classified into one
of three classes--Class I, Class II, or Class III--depending on the degree or
risk associated with each medical device and the extent of control needed to
ensure safety and effectiveness. Devices deemed to pose lower risks are placed
in either Class I or II, which requires the manufacturer to submit to FDA a
premarket notification requesting permission to commercially distribute the
device. Our Hemopurifier(R) has been categorized as a Class III device,
requiring premarket approval.
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 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 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 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, FDA or the IRB at each site at which a clinical trial is being
performed may suspend a clinical trial at any time for various reasons,
including a belief that the risks to study subjects outweigh the benefits. Even
if a trial is completed, the results of clinical testing may not demonstrate the
safety and efficacy of the device, may not be equivocal or may otherwise not be
sufficient to obtain approval of the product. Similarly, in Europe the clinical
study must be approved by the local ethics committee and in some cases,
including studies with high-risk devices, by the Ministry of Health in the
applicable country.
In March 2007 we submitted an Investigational Device Exemption ("IDE")
with the FDA the goal of which is to obtain approval to conduct human safety
and, if applicable, animal efficacy trials targeted to a specific bioterror
viral agent. We are presently in the process of conducting in-vitro trials to
determine the most appropriate "Category A" bioterror application. Upon
successful completion of the IDE clinical trials, we would anticipate submitting
a PMA (see below).
PREMARKET APPROVAL PATHWAY. A PMA application must be supported by
extensive data, including but not limited to technical, preclinical, clinical
trials, manufacturing and labeling to demonstrate to FDA's satisfaction the
safety and effectiveness of the device.
After a PMA application is submitted and FDA determines that the
application is sufficiently complete to permit a substantive review, FDA will
accept the application for review. FDA has 180 days to review an "accepted" PMA
application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, FDA may request additional information or clarification of
the information already provided. Also, an advisory panel of experts from
outside FDA may be convened to review and evaluate the application and provide
recommendations to FDA as to the approvability of the device. In addition, FDA
20
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will conduct a pre-approval inspection of the manufacturing facility to ensure
compliance with quality system regulations. New PMA applications or PMA
application supplements are required for significant modification to the
manufacturing process, labeling and design of a device that is approved through
the premarket approval process. Premarket approval supplements often require
submission of the same type of information as a premarket approval application,
except that the supplement is limited to information needed to support any
changes from the device covered by the original premarket approval application
and may not require as extensive clinical data or the convening of an advisory
panel.
PERVASIVE AND CONTINUING REGULATION. After a device is placed on the
market, numerous regulatory requirements continue to apply. These include:
o FDA's Quality System Regulation, or QSR, which requires
manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other
quality assurance procedures during all aspects of the
manufacturing process;
o labeling regulations and FDA prohibitions against the
promotion of products for uncleared, unapproved or off-label
uses;
o clearance or approval of product modifications that could
significantly affect safety or efficacy or that would
constitute a major change in intended use;
o medical device reporting, or MDR, regulations, which require
that manufacturers report to 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. FDA
requires each manufacturer to make this determination initially, but FDA can
review any such decision and can disagree with a manufacturer's determination.
The regulations also require that we report to FDA any incident in
which our product may have caused or contributed to a death or serious injury or
in which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury.
FRAUD AND ABUSE. We may also directly or indirectly be subject to
various federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws. In particular, the federal healthcare program
Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual, or the
furnishing, arranging for or recommending a good or service, for which payment
may be made in whole or part under federal healthcare programs, such as the
Medicare and Medicaid programs. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment and possible exclusion
from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback
Statute is broad and prohibits many arrangements and practices that are lawful
in businesses outside of the healthcare industry. In implementing the statute,
the Office of Inspector General, or OIG, has issued a series of regulations,
known as the "safe harbors." These safe harbors set forth provisions that, if
all their applicable requirements are 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.
21
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The primary regulatory environment in Europe is that of the European
Union, which has adopted numerous directives and has promulgated voluntary
standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential requirements of
the applicable directives and, accordingly, can be commercially distributed
throughout the member states of the European Union, and other countries that
comply with or mirror these directives. The method of assessing conformity
varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a notified body, an independent and neutral institution appointed by a
country to conduct the conformity assessment. This third-party assessment may
consist of an audit of the manufacturer's quality system and specific testing of
the manufacturer's device. Such an assessment is required in order for a
manufacturer to commercially distribute the product throughout these countries.
ISO 9001 and ISO 13845 certifications are voluntary harmonized standards.
Compliance establishes the presumption of conformity with the essential
requirements for a CE Marking.
We have completed preclinical studies that demonstrate the removal of
HIV and Hepatitis C virus from infected human blood. In addition to HIV and HCV,
the Hemopurifier(R) has demonstrated in vitro capture of Dengue hemorrhagic
fever, Ebola hemorrhagic fever, H5N1 avian influenza (Bird Flu), reconstructed
1918 influenza virus, West Nile virus, Vaccinia and Monkeypox, which serve as
models for human smallpox infection. In cancer care, researchers have documented
that the Hemopurifier(R) is efficient in capturing immunosuppressive particles
that are released by tumors to weaken the immune system of cancer patients.
Infectious disease studies documenting in vitro effectiveness of the
Hemopurifier(R) have been performed in collaboration with researchers
representing The Centers for Disease Control and Prevention (CDC), The United
States Army Medical Research Institute of Infectious Diseases (USAMRIID), The
Southwest Foundation for Biomedical Research (SFBR), The Battelle Biomedical
Research Center (BBRC), and the Government of India(1)s National Institute of
Virology (NIV).
At present, we are conducting human safety studies at multiple hospital
sites in India. Patients previously enrolled in the studies or currently being
screened for treatment inclusion include those infected with Hepatitis C virus
and/or HIV virus. We have completed an initial preliminary data of Hepatitis-C
(HCV) infected patients treated with the Hemopurifier(R). The HCV treated
patients were among end-stage renal disease (kidney dialysis) patients enrolled
in human safety studies being conducted at the Fortis Hospital, in Delhi, India.
In the studies, robust viral load reductions were observed in tested
patients completing a three-treatment Hemopurifier(R) protocol. The resulting
data documented that two of three HCV patients tested responded with measurable
viral load reductions during the course of three 4-hour Hemopurifier(R)
treatments. The three treatments were administered during scheduled dialysis
therapy every other day over the span of five days. The third patient showed
both increases and decreases in viral load during the course of treatment, but
demonstrated an overall reduction in follow-on viral load tests. Given the small
sample size, viral load data was averaged for all 3 patients. Average initial
HCV viral load was 3.13 x 108 viral units per ml of blood. After completion of
three Hemopurifier(R) treatments, viral load was reduced an average 57% (final
4.1x107 IU/ml). The stepwise drop in HCV viral load averaged 36% per treatment.
Follow-on testing indicated that HCV viral load was 60% lower than initial viral
load values when measured three days after final Hemopurifier(R) treatment, and
at seven days post treatment, viral load declined to 82% below starting viral
load values. Additionally, none of the patients were being treated with
antiviral drug therapy. Viral load measurements were performed with real-time
quantitative polymerase chain reaction (RT-PCR). Control samples were measured
in duplicate while treatment samples were generally measured in triplicate. In
conclusion, the Hemopurifier(R) treatment of HCV infected patients undergoing
dialysis resulted in a net viral load reduction of 60 to 80% with the effects of
treatment progressing at least 7 days beyond Hemopurifier(R) treatment.
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We now plan to further demonstrate a rapid virological response (RVR)
through a case study of an HCV patient receiving up to four weeks of
Hemopurifier(R) therapy.
The opportunity for new antiviral strategies to fight HCV is
significant, as approximately 180 million people worldwide (3% of the world's
population) are HCV infected. According to the World Health Organization (WHO),
only 30-50% of infected patients beneficially respond to the 48-week pegylated
interferon-ribavirin treatment standard.
We also have entered into agreements with two hospitals in India to
study the use of the Hemopurifier(R) to treat the Human Immunodeficiency Virus
(HIV). The Hemopurifier(R) holds promise to extend the lives of AIDS patients by
removing HIV strains that cause drug failure and reducing the presence of viral
proteins that kill-off immune cells. The clinical study was approved by the
Institutional Ethics Committee at the Jattinder Gambhir Hospital (J.G. Hospital)
in Punjab, India and the Bhvani Hospital in Bihar, India. We expect to commence
those HIV trials later in 2008.
The successful demonstration of treatment benefit would provide us with
an early commercialization opportunity within India's practitioner driven
medical device marketplace. With an estimated 5.7 million people living with
HIV/AIDS, India has the highest HIV/AIDS prevalence in the world according to
UNAIDS. Among 15-49 year olds, an estimated 5.2 million are living with the
disease, according to India's National AIDS Control Organization (NACO).
Because we may market our products abroad we will be subject to varying
foreign regulatory requirements. Although international efforts are being made
to harmonize these requirements, applications must currently be made in each
individual country. The data necessary and the review time varies significantly
from one country to another. Approval by the FDA does not ensure approval by the
regulatory bodies of other countries. Any future collaborators will also be
subject to all of the above-described regulations in connection with the
commercialization of products utilizing our technology.
PRODUCT LIABILITY
The risk of product liability claims, product recalls and associated
adverse publicity is inherent in the testing, manufacturing, marketing and sale
of medical products. We have limited clinical trial liability insurance
coverage. There can be no assurance that future insurance coverage will be
adequate or available. We may not be able to secure product liability insurance
coverage on acceptable terms or at reasonable costs when needed. Any liability
for mandatory damages could exceed the amount of our coverage. A successful
product liability claim against us could require us to pay a substantial
monetary award. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.
SUBSIDIARIES
We have four dormant wholly-owned subsidiaries, Aethlon, Inc., Cell
Activation, Inc., Syngen Research, Inc., and Hemex, Inc.
EMPLOYEES
At September 19, 2008, we had four full-time employees, comprised of
our Chief Executive Officer, our President, our Chief Science Officer, and one
research scientist. We also employ a Senior Vice President - Finance on a part
time basis. We utilize, whenever appropriate, contract and part time
professionals in order to conserve cash and resources. We believe our employee
relations are good. None of our employees is represented by a collective
bargaining unit.
DESCRIPTION OF PROPERTIES
We currently rent approximately 3,200 square feet of executive office
space and laboratory space at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109 at the rate of $7,744 per month on a lease that expired on July
12, 2007. The Company is presently leasing its space on a month to month basis,
at the same terms.
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DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of our directors and executive officers
as of September 19, 2008 are listed below:
NAMES TITLE OR POSITION AGE
-----------------------------------------------------------------------
James A. Joyce (1) Chairman, President, Chief Executive 45
Officer, Chief Financial Officer and
Secretary
Harold H. Handley, PhD (2) President 58
Richard H. Tullis, PhD (3) Vice President, Chief Science Officer 62
and Director
Franklyn S. Barry, Jr. Director 68
Edward G. Broenniman Director 72
(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. Effective December 5, 2007, Mr. Joyce was appointed our
Chief Financial Officer, replacing James W. Dorst.
(2) Effective July 18, 2006, Dr. Handley was appointed President.
(3) 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.
EXECUTIVE OFFICERS
James A. Joyce, Chairman, CEO and CFO
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. On December 5,
2007, our Board also appointed Mr. Joyce CFO. 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.
Harold H. Handley, Ph.D., President
Mr. Harold H. Handley has been President of the Company since July
2006. Mr. Handley brings over 20 years experience in management and research in
immunology, biotechnology and medical devices. Mr. Handley has authored or
co-authored over 20 publications and helped developed 15 patents. Prior to
joining Aethlon, Mr. Handley was Executive Vice President and Chief Scientific
Officer for Transvivo, Inc., a privately-held company, from 2000 to 2006. From
1996 to 2000, Mr. Handley was Vaccine Program Director for Maxim
Pharmaceuticals, Inc. Mr. Handley was a co-founder of Idec Limited Partners,
Inc., today known as Biogen Idec, Inc., operating with a market value exceeding
$14 billion. (NasdaqGS:BIIB). Mr. Handley holds a Ph.D in Anatomy and Cell
Biology from University of Virginia and a B.A. in Zoology from the University of
California, Los Angeles.
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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, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Merchants Mutual Insurance Company.
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon Medical on March 10, 1999.
Mr. Broenniman has 35 years of management and executive experience with
high-tech, privately-held growth firms 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 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
CEO 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.
AUDIT COMMITTEE
The Audit Committee is responsible for recommending to the Board of
Directors the selection of independent public accountants to audit the Company's
books and records annually, to discuss with the independent auditors and
internal auditors the scope and results of any audit, to review and approve any
nonaudit services performed by the Company's independent auditing firm, and to
review certain related party transactions. The members of the Audit Committee
are Franklyn Barry and Edward Broenniman who are independent directors as
defined under Nasdaq Rule 4200(a)(14). Mr. Barry is the Chairman of the Audit
Committee. The Audit Committee met four times in the 2008 fiscal year. The Audit
Committee oversees our financial reporting process on behalf of the Board of
Directors. The Board has determined that the Audit Committee does not have a
designated financial expert serving on the Committee but the Board believes that
its current members have the sufficient knowledge and experience necessary to
fulfill the duties and obligations.
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.
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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.
INVOLVEMENT IN LEGAL PROCEEDINGS
To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
CODE OF ETHICS
On February 23, 2005, the Board of Directors approved a "Code of
Business Conduct and Ethics."
EXECUTIVE COMPENSATION
The following executive compensation disclosure reflects all
compensation awarded to, earned by or paid to the executive officers below for
the fiscal years ended March 31, 2008 and March 31, 2007. The following table
summarizes all compensation for fiscal year 2008 and 2007 received by our Chief
Executive Officer, and the Company's three most highly compensated executive
officers who earned more than $100,000 in fiscal year 2008.
SUMMARY COMPENSATION TABLE
NON-EQUITY NONQUALIFIED
INCENTIVE DEFERRED ALL
STOCK OPTION PLAN COMPENSATION OTHER
NAMED EXECUTIVE OFFICER AWARDS AWARDS COMPENSATION EARNINGS COMP. TOTAL
AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) ($) ($) ($) ($) ($)
James A. Joyce (1) 2008 $256,010 $ -- $ -- $ -- $ -- $ -- $ -- $256,010
CHIEF EXECUTIVE OFFICER 2007 240,000 -- -- -- -- -- -- 240,000
AND CHIEF FINANCIAL
OFFICER
Richard H. Tullis, Ph.D (2) 2008 $172,500 $ -- $ -- $ -- $ -- $ -- $ -- $172,500
VICE PRESIDENT AND CHIEF 2007 180,000 -- -- -- -- -- -- 180,000
SCIENCE OFFICER
Harold H. Handley, Ph.D. (3) 2008 $172,500 $ -- $ -- $ -- $ -- $ -- $ -- $172,500
PRESIDENT 2007 127,500 -- -- -- -- -- -- 127,500
James W. Dorst (4) 2008 $109,571 $ -- $ -- $ -- $ -- $ -- $ -- $109,571
CHIEF FINANCIAL OFFICER 2007 150,000 -- -- -- -- -- -- 150,000
(1) The aggregate number of stock awards and stock option awards issued to Mr.
Joyce and outstanding as of March 31, 2008 is zero and 7,588,243.
(2) The aggregate number of stock awards and stock option awards issued to Dr.
Tullis and outstanding as of March 31, 2008 is zero and 2,014,350.
(3) The aggregate number of stock awards and stock option awards issued to Dr.
Handley and outstanding as of March 31, 2008 is zero and 500,000.
(4) The aggregate number of stock awards and stock option awards issued to Mr.
Dorst and outstanding as of March 31, 2008 is 0 and 0. Effective December 5,
2007, Mr. James W. Dorst resigned as the Chief Financial Officer of the Company.
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The following table sets forth certain information concerning stock option
awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
- -----------------------------------------------------------------------------------------------
OPTIONS AWARDS
-------------------------------------------------------------------
EQUITY
INCENTIVE
PLAN AWARDS;
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE OPTIONS PRICE DATE
- ------------------- ------------ ------------- ----------- ---------- ------------
(#) (#) (#) ($)
James A. Joyce 1,115,550(1) -- -- $ 0.38 02/23/10
557,775(1) -- -- $ 0.38 12/31/10
557,775(1) -- -- $ 0.38 12/31/11
2,857,143(1) -- -- $ 0.21 09/09/15
1,500,000(2) 1,000,000 -- $ 0.36 06/13/17
Richard H. Tullis 30,000(1) -- -- $ 2.56 12/31/10
250,000(1) -- -- $ 1.90 03/12/12
867,175(1) -- -- $ 0.38 02/23/10
433,588(1) -- -- $ 0.38 12/31/10
433,587(1) -- -- $ 0.38 12/31/11
Harold H. Handley 166,667(3) 333,333 -- $ 0.27 10/02/16
(1) This option was fully vested as of March 31, 2008.
(2) The option vested 1,000,000 shares at grant, with 500,000 shares vesting
each annual anniversary date through June 13, 2010.
(3) 166,667 options vest each year on July 18 starting July 18, 2007.
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STOCK AWARDS
- ------------------------------------------------------------------------------------------------------
EQUITY
EQUITY INCENTIVE PLAN
INCENTIVE PLAN AWARDS: MARKET
AWARDS: NUMBER OR PAYOUT VALUE
NUMBER OF OF UNEARNED OF UNEARNED
SHARES OR MARKET VALUE OF SHARES, UNITS SHARES, UNITS
UNITS OF STOCK SHARES OR UNITS OR OTHER OR OTHER RIGHTS
THAT HAVE NOT THAT HAVE NOT RIGHTS THAT THAT HAVE NOT
NAME VESTED VESTED HAVE NOT VESTED VESTED
- ------------------------ --------------- ----------------- ------------------ ----------------
(#) ($) (#) ($)
James A. Joyce -- $ -- -- $ --
Richard H. Tullis, Ph.D -- $ -- -- $ --
James W. Dorst -- $ -- -- $ --
Harold H. Handley, Ph.D -- $ -- -- $ --
OPTION GRANTS TO EXECUTIVE OFFICERS IN 2008
On June 13, 2007, Mr. Joyce was granted a stock option award to
purchase 2,500,000 shares of common stock at an exercise price of $0.36 per
share. This award was granted outside of our stock plans. No other options were
granted to our executive officers in fiscal year 2008
DIRECTOR COMPENSATION
The following director compensation disclosure reflects all
compensation awarded to, earned by or paid to the directors below for the fiscal
years ended March 31, 2008 and 2007.
Change in
Pension
Fees Value
Earned and
or Non-Equity Nonqualified
Paid Incentive Deferred All
in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
- ------------------------- ------ ------- ------ ------------ ------------- ------------ -------
James A. Joyce (1) -- -- -- -- -- -- --
Richard H. Tullis (2) -- -- -- -- -- -- --
Franklyn S. Barry (3) -- -- -- -- -- -- --
Edward G. Broenniman (4) -- -- -- -- -- -- --
(1) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2008 are 0 and 7,588,243.
(2) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2008 are 0 and 2,014,350.
(3) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2008 are 0 and 516,417.
(4) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2008 are 0 and 520,050.
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.
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We entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief
Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Effective January 1,
2005 Dr. Tullis' salary was increased from $150,000 to $165,000 per year. Under
the terms of the agreement, his employment continues at a salary of $165,000 per
year for successive one-year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement. Dr. Tullis was granted
250,000 stock options to purchase our common stock in connection the completing
certain milestones, such as the initiation and completion of certain clinical
trials, the submission of proposals to the FDA and the filing of a patent
application. Effective April 1, 2006, Dr. Tullis salary was increased to
$180,000 per year.
Both Mr. Joyce's and Dr. Tullis' agreements provide for medical
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth selected information, computed as of
September 19, 2008, about the amount of shares of common stock beneficially
owned by: each of our "EXECUTIVE OFFICERS" (defined as our President, Secretary,
Chief Financial Officer or Treasurer, any vice-president in charge of a
principal business function, such as sales, administration or finance, or any
other person who performs similar policy making functions for our company); each
of our directors; each person known to us to own beneficially more than 5% of
any class of our securities; and the group comprised of our current directors
and executive officers.
Except as otherwise noted in the footnotes below, the entity,
individual Director or Executive Officer has sole voting and investment power
over such securities.
COMMON
(VOTING)
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) (2) AMOUNT %(3)
Ellen R. Weiner Family Revocable Trust (4)(7) 4,344,359 9.9%
10645 N. Tatum Blvd. Suite 200-166
Phoenix, Arizona 85028
James A. Joyce (5)(6)(7)(8) 7,288,243 14.88%
Estate of Allan S. Bird (4)(7) 3,690,214 8.14%
PO Box 371179
Las Vegas, Nevada 89137
Richard H. Tullis (5)(6)(7)(9) 2,541,100 5.72%
Phillip A. Ward (15) 3,209,992 7.26%
P.O. Box 3322
Rancho Santa Fe, CA 92067 (7)
Fusion Capital Fund II, LLC (11) 3,258,333 7.69%
222 Merchandise Mart Plaza, Suite 9-112
Chicago, IL 60654
Edward G. Broenniman (6)(12) 1,437,224 3.32%
Franklyn S. Barry, Jr. (6)(13) 1,108,010 2.58%
Harold H. Handley (5)(14) 333,334 0.78%
Directors and executive officers, as a group 12,707,911 24.08%
(5 members)
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act and is generally determined by voting power
and/or investment power with respect to securities. Except as indicated
by footnote and subject to community property laws where applicable,
the Company believes the persons named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Unless otherwise indicated, the
address of each shareholder is 3030 Bunker Hill Street, Suite 4000, San
Diego, CA 92109.
(2) A person is deemed to be the beneficial owners of securities that can
be acquired by such person within 60 days from September 19, 2008 upon
the exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options and warrants that are
held by such person (but not those held by any other person) and that
are exercisable within 60 days from September 19, 2008 have been
exercised.
(3) Assumes 42,378,418 shares of Common Stock outstanding at September 19,
2008.
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(4) Includes shares issuable upon conversion of convertible notes and
exercise of warrants held by the Ellen R. Weiner Family Revocable Trust
(the "Trust") and the Estate of Allan S. Bird (the "Estate").
Beneficial ownership is limited to the extent that such conversion or
exercise would cause the aggregate number of shares of common stock
beneficially owned by either to exceed 9.9%. Accordingly, beneficial
ownership for the Trust does not reflect 7,954,359 shares underlying
convertible notes and warrants that would cause the number of shares
beneficially owned by the Trust to exceed 9.9%. The Trust owns a
convertible promissory note in the principal amount of $660,000
convertible at $0.20 per share, a Class A Interest Warrant for
1,128,788 shares exercisable at $0.20 per share, a Class A-1 Damages
Warrant for 511,621 shares exercisable at $0.40 per share, a Class A
Principal Warrant for 3,800,000 shares exercisable at $0.20 per share
and a Warrant for accrued interest and damages for 708,950 shares
exercisable at $0.20 per share. The Estate owns a convertible
promissory note in the principal amount of $225,000 convertible at
$0.20 per share, a Class A Interest Warrant for 326,799 shares
exercisable at $0.20 per share, a Class A-1 Damages Warrant for 151,621
shares exercisable at $0.40 per share, a Class A Principal Warrant for
1,125,000 shares exercisable at $0.20 per Share and a Warrant for
accrued interest and damages for 241,688 shares exercisable at $0.20
per share. Mr. Bird was Ms. Weiner's father-in-law. The Ellen R. Weiner
Family Trust disclaims any beneficial ownership of Mr. Bird's notes,
associated warrants and underlying common stock. The Estate of Mr. Bird
disclaims any beneficial ownership of such Trust's notes and associated
warrants.
(5) Executive officer.
(6) Director.
(7) More-than-5% shareholder.
(8) Includes options to purchase 2,231,100 restricted common shares at
$0.38 and options to purchase 2,857,143 restricted common shares at
$0.21. Also includes 1,500,000 options to purchase restricted common
shares at $0.36. Mr. Joyce also owns options to purchase 1,000,000
restricted common shares at $0.36 which are not yet vested.
(9) Includes 250,000 stock options exercisable at $1.90 per share, 30,000
stock options exercisable at $2.56 per share and 1,734,350 stock
options with an exercise price of $0.38 per share. Dr. Tullis also owns
options to purchase 750,000 restricted common shares at $0.41 which are
not yet vested.
(11) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion
Capital, are deemed to be beneficial owners of all of the shares of
common stock owned by Fusion Capital. Messrs. Martin and Scheinfeld
have shared voting and disposition power over the shares being offered
under this prospectus.
(12) Includes 53,885 common shares owned by Mr. Broenniman's wife and
options to purchase 2,500 shares at an exercise price of $3.00, 3,000
shares at an exercise price of $1.78, 514,550 shares at an exercise
price of $0.38 and 335,000 shares at an exercise price of $0.41. Mr.
Broenniman also owns options to purchase 165,000 shares at $0.41 which
are not yet vested.
(13) Includes 1,867 stock options with an exercise price of $1.84 and
264,550 stock options with an exercise price of $0.38 and 335,000
shares at an exercise price of $0.41. Mr. Barry also owns options to
purchase 165,000 shares at $0.41 which are not yet vested.
(14) Includes 333,334 stock options with an exercise price of $0.27. Dr.
Handley also owns options to purchase 166,666 restricted common shares
at $0.27 which are not yet vested.
(15) Includes warrants to purchase 100,000 shares of common stock at an
exercise price of $0.50; 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
100,000 shares of common stock at an exercise price of $0.17; warrants
to purchase 555,556 shares of common stock at an exercise price of
$0.18; warrants to purchase 555,556 shares of common stock at an
exercise price of $0.18; warrants to purchase 194,118 shares of common
stock at an exercise price of $0.17; and warrants to purchase 194,118
shares of common stock at an exercise price of $0.17.
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CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Described below are certain transactions or series of transactions
between us and our executive officers, directors and the beneficial owners of 5%
or more of our common stock, on an as converted basis, and certain persons
affiliated with or related to these persons, including family members, in which
they had or will have a direct or indirect material interest in amounts that
exceed $60,000 for the last two completed fiscal years, other than compensation
arrangements that are otherwise required to be described under "Executive
Compensation."
On November 14, 2006, in exchange for $100,000, the Company issued to
the Phillip A Ward Trust 555,556 restricted shares of common stock. In addition,
the Company issued an initial five-year non-cashless warrant to purchase 555,556
restricted shares of common stock at an exercise price of $0.18. In the event
that the initial warrant is exercised, the holder will receive an additional
five-year non-cashless warrant to purchase 555,556 restricted shares of common
stock at an exercise price of $0.18.
On December 15, 2006, the Company issued a $33,000 10% Convertible
Note, due March 15, 2007 to the Phillip A Ward Trust. The note is presently in
default and since March 15, 2007 has accrued interest at 15%. The face value of
the note is convertible into 194,118 restricted shares of common stock. In
addition, the Company issued an initial five-year non-cashless warrant to
purchase 194,118 restricted shares of common stock at an exercise price of
$0.17. In the event that the initial warrant is exercised, the holder will
receive an additional five-year non-cashless warrant to purchase 194,118
restricted shares of common stock at an exercise price of $0.17. In May 2008, we
agreed to issue 232,033 shares of common stock to the Phillip A Ward Trust to
convert the $33,000 principal balance and $6,325 of accrued interest of the 10%
convertible note to equity.
On July 13, 2007, in exchange for $60,000, the Company issued the
Phillip A Ward Trust a 12% Convertible Note, with accrued interest due at
Maturity on July 13, 2008. The face value of the note is convertible at a $0.50
conversion price into 120,000 restricted shares of common stock. This note was
repaid in cash in February 2008.
From July 11, 2005 through December 15, 2005, the Company received
$760,000 From the Ellen R. Weiner Family Revocable Trust and $225,000 from Allan
S. Bird (the "Noteholders") as a portion of a $1.0 Promissory Note (the
"Notes")funding. The Promissory Notes accrued interest at the rate of 10% per
annum and originally matured on January 2, 2007. Effective March 22, 2007, the
Company entered into Allonges with the Noteholders and amended and restated the
Notes to extend the maturity date until January 2, 2008. The Notes were
convertible into Units at any time prior to the maturity date at the conversion
price of $0.20 per Unit. Each Unit was comprised 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 expired on January 2, 2011 and was exercisable
to purchase one share of Common Stock at a price of $0.20 per share (the
"Exercise Price"). If the Holder exercised Class A Warrants on or before July 3,
2008, the Company 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 had a
three-year term and was 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.
On November 2007, the Company entered into Amended and Restated 10%
Series A Convertible Promissory Notes (the "Amended Notes") with the holders of
certain promissory notes previously issued by the Company (the "Prior Notes"),
and all amendments to the Prior Notes, including on March 5, 2007.
The Amended Notes, in the principal amount of $1,000,000, are
convertible into an aggregate of 5,000,000 shares of the Company's Common Stock
and mature on February 15, 2009. The Amended Notes provide for the payment of
accrued and default interest through December 31, 2007 in the aggregate amount
of $295,248 to be paid in units ("Units") at a fixed rate of $0.20 per Unit,
each Unit consisting of one share of the Company's Common Stock and one Class A
Common Stock Purchase Warrant (the "Class A Warrant") to purchase one share of
the Company's 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, the
Company 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.
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The Amended Notes also provided for the payment of liquidated damages
through November 29, 2007 in the aggregate amount $269,336 to be paid in units
("Damages Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit
consisting of one share of the Company's Common Stock and one Class A-1 Common
Stock Purchase Warrant (the "Class A-1 Warrant") to purchase one share of the
Company's Common Stock at a fixed exercise price of $0.40 per share. If the
Holders exercise the Class A-1 Warrants on or before February 15, 2010, the
Company will issue them one Class B-1 Common Stock Purchase Warrant (the "Class
B-1 Warrant") for every two Class A-1 Warrants exercised. The Class B-1 Warrants
will have a fixed exercise price of $0.40 per share.
In addition, the Amended Notes provide 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 the Company's Common Stock on the
same terms as the Class A Warrants.
The following table summarizes the number of shares of the Company's
Common Stock issuable upon the conversion of the Amended Notes or the exercise
of the various warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
----------
Total 15,373,955
==========
The Company was obligated to register the shares underlying the Class A
Warrants, the Class A-1 Warrants and the Class A Principal Warrants with the SEC
by March 31, 2008, and the shares underlying the Class B Warrants and to
register the Class B-1 Warrants with the SEC by the 30th day following the
issuance date of such warrants. Since we failed to register the shares
underlying those warrants by the required date, we are accruing damages on a
monthly basis of approximately $15,000.
For accounting purposes, the amendment of the 10% Series A Convertible
Notes was treated as an extinguishment pursuant to EITF Issue No. 06-6. The
changes in the note agreements, conversion feature and warrants were considered
substantive as prescribed in that consensus. Consequently, at the amendment date
the company initially recorded an estimated loss on extinguishment of $489,013
as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized note (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
-----------
Loss on extinguishment $ 489,013
===========
Subsequently, the Company engaged a third party valuation firm to value
the various components of the amendment of the Series A Convertible Notes. As a
result of that valuation, the Company recorded an additional $58,106 of loss on
extinguishment of debt with the offset being recorded to additional paid-in
capital.
The new warrants issued in connection with the Amended Notes were
evaluated pursuant to EITF Issue No. 00-19 and classified as equity instruments.
In connection with the new warrants, the Company recorded $4,392,664 as an
increase to additional paid in capital, based on the estimated fair value at
issuance. The amended conversion feature contains a beneficial conversion at the
date of the Amended Notes; consequently, the Company recorded a discount of
$1,000,000 against the notes and a corresponding increase in additional paid in
capital. Through March 31, 2007, the Company amortized approximately $69,000 of
such discount into interest expense using the effective interest method.
In January 2008, one of the holders of the Amended Notes requested the
conversion of $100,000 into our common stock at the agreed conversion rate of
$0.20 per share and, as a result, we issued 500,000 shares of common stock to
convert the $100,000 note.
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On July 30, 2008, the holders of the 10% Amended Series A Convertible
Notes notified us that we were in default on the notes due to our failure to
register the warrants by March 31, 2008 and for failing to make required
interest payments. We are currently negotiating potential ways to cure the
default with the holders of the Amended Series A Convertible Notes.
In May 2008, we entered into a Private Placement Agreement with Fusion
Capital Fund II, LLC, an Illinois limited liability company ("Fusion Capital"),
for the sale of 1,000,000 shares of our common stock for an aggregate purchase
price of $500,000.00. There were no placement agent or other similar fees paid
or payable in connection with this private placement. We did not grant any
registration rights or issue any warrants in connection with this transaction.
The Private Placement Agreement does not contain any anti-dilution provisions,
price reset provisions, negative covenants or restrictions on future fundings.
On March 21, 2007, we entered into a common stock purchase agreement
(the "Purchase Agreement") with Fusion Capital for the purchase of up to $8.4
million of our common stock. On May 1, 2008, we entered into a Mutual
Termination Agreement with Fusion Capital to terminate the Purchase Agreement
and all of each party's rights and obligation to buy and sell shares of common
stock thereunder. The SEC did not declare effective the registration statement
related to the Purchase Agreement which we withdrew in connection with the
termination of the Purchase Agreement. There were no costs or fees paid or
payable by either party in connection with the termination of the Purchase
Agreement.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion of our financial condition and results of
operations should be read in conjunction with, and is qualified in its entirety
by the consolidated financial statements and notes thereto for the year ended
March 31, 2008 and for the quarter ended June 30, 2008, included in this
Registration Statement beginning on pages F-1 to F-71. This Registration
Statement contains forward-looking statements that involve risks and
uncertainties. Actual results may differ materially from those indicated in such
forward-looking statements.
FORWARD LOOKING STATEMENTS
This prospectus, including the sections titled "Prospectus Summary" and
"Risk Factors" and other sections, contains certain statements that constitute
"forward-looking statements". These forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they
do develop, the pace at which they develop;
o our ability to attract and retain the qualified personnel to
implement our growth strategies,
o our ability to obtain approval from the Food and Drug
Administration for our products;
o our ability to protect the patents on our proprietary
technology;
o our ability to fund our short-term and long-term financing
needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in
the sections of this prospectus, including those captioned
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2007
Operating Expenses
Consolidated operating expenses for the three months ended June 30,
2008 were $623,659 in comparison with $871,273 for the comparable quarter a year
ago. This decrease of $247,614, or 28%, was due to a decrease in Payroll &
Related expenses of $168,423 a decrease in general and administrative expenses
of $52,061 and a decrease in professional fees of $27,130.
The $168,423 decrease in payroll and related expenses was due to a
$214,009 decrease in non-cash stock compensation expense. Without that non-cash
expense, our payroll and related expenses would have increased by $45,586.
The $52,062 decrease in general and administrative expenses was due
primarily to decrease in lab supplies of $46,371.
Our professional fees decreased due to reduced use of investor
relations of $31,325, legal fees of $16,547 and scientific consulting fees of
$12,500 partially offset by an increase in accounting fees of $33,799.
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Other Expenses (Income)
Other expenses (income) consist primarily of the change in the fair
value of our warrant liability, interest expense and other expense. Other
expenses for the three months ended June 30, 2008 were $375,156 in comparison
with other income of $335,074 for the comparable quarter a year ago. Both
periods included non-cash income from the change in the fair value of warrant
liability. For the three months ended June 30, 2008, the change in estimated
fair value was $187,692 and for the three months ended June 30, 2007, the change
in estimated fair value was $421,775.
Interest expense was $562,848 for the three months ended June 30, 2008
compared to $86,701, an increase of $476,147. The largest component of our
interest expense in the three months ended June 30, 2008 was the amortization of
debt discount of $463,178 that arose from the valuation of any warrants or
beneficial conversion feature associated with a debt instrument. That value was
recorded as a discount against the face value of the notes and then amortized
over the term of the notes. We had no such amortization of debt discount in the
three months ended June 30, 2007. We also incurred $38,250 in amortization of
deferred financing costs related to our recent debt financings while we had no
such amortization of deferred financing costs in the three months ended June 30,
2007. The amortization of deferred financing costs is calculated using the
effective interest method.
Net Loss
As a result of the increased expenses noted above, we recorded a
consolidated net loss of approximately $1,000,000 and $536,000 for the quarters
ended June 30, 2008 and 2007, respectively.
Basic and diluted loss per common share were ($0.03) for the three
month period ended June 30, 2008 compared to ($0.02) for the period ended June
30, 2008. This increase in loss per share was primarily a result of the higher
net loss during the three month period ended June 30, 2008, as compared to the
three month period ended June 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
To date, we have funded our capital requirements for the current
operations from net funds received from the public and private sale of debt and
equity securities, as well as from the issuance of common stock in exchange for
services. Our cash position at June 30, 2008 was approximately $157,000 compared
to approximately $255,000, at March 31, 2008, representing a decrease of
approximately $98,000. During the three months ended June 30, 2008, operating
activities used net cash of approximately $598,000, while we received $500,000
from financing activities from the issuance of common stock and convertible
notes.
During the three month period ended June 30, 2008, net cash used in
operating activities was approximately ($598,000) and resulted from the
approximate net loss of $999,000, the change in the estimated fair value of
warrant liability of approximately $188,000 and a reduction of due to related
parties of approximately $28,000. These were offset principally by the
amortization of note discount of $501,000, fair market value of common stock of
approximately $25,000 issued in payment for services and approximately $69,000
in stock-based compensation and an increase in accounts payable and accrued
liabilities of approximately $16,000.
A decrease in working capital during the three months ended June 30,
2008 in the amount of approximately $360,000 changed our negative working
capital position to approximately ($3,841,000) at June 30, 2008 from a negative
working capital of approximately ($3,481,000) at March 31, 2008.
Our current deficit in working capital requires us to obtain funds in
the short-term to be able to continue in business, and in the longer term to
fund research and development on products not yet ready for market. Subsequent
to June 30, 2008, we raised an additional $370,000 through the sale to
accredited investors of convertible notes and warrants and we continue to seek
additional financing.
Our operations to date have consumed substantial capital without
generating revenues, and will continue to require substantial capital funds to
conduct necessary research and development and pre-clinical and clinical testing
of Hemopurifier(R) products, and to market any of those products that receive
regulatory approval. We do not expect to generate revenue from operations for
the foreseeable future, and our ability to meet our cash obligations as they
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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. Our
future capital requirements will depend upon many factors, including progress
with pre-clinical testing and clinical trials, the number and breadth of our
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, and our ability to establish collaborative
arrangements, effect successful commercialization strategies, marketing
activities and other arrangements. We expect to continue to incur increasing
negative cash flows and net losses for the foreseeable future, and presently
require a minimum of $186,000 per month to sustain operations.
On July 30, 2008, the holders of the 10% Amended Series A Convertible
Notes notified us that we were in default on the notes due to our failure to
register the warrants by March 31, 2008 and for failing to make required
interest payments. We are currently negotiating potential ways to cure the
default with the holders of the Amended Series A Convertible Notes.
On September 5, 2008, two notes payable in the aggregate amount of
$594,000 matured. We currently in negotiations to extend those notes but there
can be no assurance that such extension will be obtained on terms acceptable to
us or at all.
As of June 30, 2008, we had accrued penalties of $331,900 due to the
failure to file a registration statement. The terms of such damages vary between
1% and 2% per month of the amount invested depending on the financing. We are
currently accruing damages at a rate of $38,600 per month.
We do not believe that inflation has had or is likely to have any
material impact on our limited operations.
At the date of this filing, we plan to purchase significant amounts of
equipment and hire significant numbers of employees subject to successfully
raising additional capital.
PLAN OF OPERATION
We are a development stage medical device company that has not yet
engaged in significant commercial activities. The primary focus of our resources
is 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.
We plan to continue research and development activities related to our
Hemopurifier(R) platform technology, with particular emphasis on the advancement
of our treatment for "Category A" pathogens as defined by the Federal Government
under Project Bioshield and the All Hazards Preparedness Act of 2006. The
Company has filed an Investigational Device Exemption ("IDE") with the FDA in
order to proceed with Human safety studies of the Hemopurifier(R). Such studies,
complemented by planned IN VIVO and appropriate animal IN VITRO studies should
allow us to proceed to the Premarket Approval ("PMA") process. The PMA process
is the last major FDA hurdle in determining the safety and effectiveness of
Class III medical Devices (of which the Hemopurifier(R) is one).
Subject to the availability of working capital, we anticipate
continuing to increase spending on research and development over the next 12
months. Additionally, associated with our anticipated increase in research and
development expenditures, we anticipate purchasing additional amounts of
equipment during this period to support our laboratory and testing operations.
Operations to date have consumed substantial capital without generating
revenues, and will continue to require substantial and increasing capital funds
to conduct necessary research and development and pre-clinical and clinical
testing of our Hemopurifier(R) products, as well as market any of those products
that receive regulatory approval. We do not expect to generate revenue from
operations for the foreseeable future, and our ability to meet our cash
obligations as they become due and payable is dependent 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.
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GOING CONCERN
Our independent registered public accounting firm has stated in their
audit report on our March 31, 2008 consolidated financial statements that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires the Company to make a number of estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements. Such
estimates and assumptions affect the reported amounts of expenses during the
reporting period. On an ongoing basis, we evaluate estimates and assumptions
based upon historical experience and various other factors and circumstances. We
believe our estimates and assumptions are reasonable in the circumstances;
however, actual results may differ from these estimates under different future
conditions.
We believe that the estimates and assumptions that are most important
to the portrayal of our financial condition and results of operations, in that
they require the most difficult, subjective or complex judgments, form the basis
for the accounting policies deemed to be most critical to us. These critical
accounting policies relate to measurement of stock purchase warrants issued with
notes payable, beneficial conversion feature of convertible notes payable,
impairment of intangible assets and long lived assets, stock compensation, and
the classification of warrant obligations, and evaluation of contingencies. 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.
There have been no changes to our critical accounting policies as
disclosed in our Form 10-KSB for the year ended March 31, 2008 and our Quarterly
Report on Form 10-Q for the three months ended June 30, 2008.
OFF-BALANCE SHEET ARRANGEMENTS
There are no guarantees, commitments, lease and debt agreements or
other agreements that could trigger an adverse change in our credit rating,
earnings, cash flows or stock price, including requirements to perform under
standby agreements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION FOR THE FISCAL YEARS
ENDED MARCH 31, 2008 AND 2007
The following discussion and analysis should be read in conjunction
with the consolidated Financial Statements and Notes thereto appearing elsewhere
in this report.
Operating Expenses
Consolidated operating expenses were $2,892,588 for the fiscal year
ended March 31, 2008, versus $2,084,254 for the comparable period one year ago.
The net increase of $808,334 was comprised of increases in payroll expense of
$474,759, professional fees of $305,265 and general and administrative expense
of $28,310.
Payroll and related expenses increased by $474,759 as compared to the
prior fiscal year. The increase was principally driven by an increase in stock
compensation expense of $487,093 due to the recognition of expense related to
the amortization of stock options vesting during the fiscal year ended March 31,
2008. Additionally, research and development payroll increased by $68,854 due to
the hiring of our new president (whose duties are primarily development-related)
and a result of increases in senior management salaries. Administrative payroll
decreased by $45,694 because of turnover in our financial department. Finally,
due to the change in the mix of payroll expenses, payroll taxes decreased by
$563.
Professional fees increased by $305,265. This increase was driven by a
$303,274 increase in legal fees and a $109,520 increase in accounting-related
fees. Those fees were partially offset by a $51,732 reduction in investor
relations fees, a $32,821 reduction in scientific consulting fees and a $8,987
decrease in website-related professional fees.
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General and administrative expenses increased by $28,310. This
increase is comprised of increases in lab supplies of $80,222, lab fees of
$7,005, which were partially offset by a number of general and administrative
expenses that decreased.
Other Expenses
In the fiscal year ended March 31, 2008, we recognized a $547,119
non-cash loss on extinguishment of debt that arose out of the restructuring of
$1,000,000 in convertible notes. In the fiscal year ended March 31, 2007, we
recognized a $1,216,748 non-cash loss on the extinguishment of debt as a result
of the issuance of Allonges to our 10% Series A Convertible Notes.
In addition, we recognized $637,179 in non-cash income related to
warrant liability revaluation in comparison to the prior fiscal year when
$2,112,575 in non-cash expense was recognized to reflect the change in fair
value of the warrants that were classified as derivative liabilities under EITF
Issue No. 00-19.
The combination of interest expenses and other expense increased by
$726,768 due to the high level of amortization of discounts associated with
several short-term notes that we entered into during the fiscal year ended March
31, 2008 and as a consequence of the full amortization of beneficial conversion
feature discount associated with convertible notes outstanding in the prior
fiscal year. We recognized approximately $386,000 in liquidated damages
associated with the failure to register shares in the fiscal year ended March
31, 2008 compared to approximately $220,000 in the prior fiscal year.
PLAN OF OPERATION
We are a development stage medical device company that has not yet
engaged in significant commercial activities. The primary focus of our resources
is 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 current plan of operation is to fund our anticipated increased
research and development activities and operations for the near future by
raising funds through the sale of private equity or debt. Based on our
projections of additional resources required for operations and to complete
research, development and testing associated with our Hemopurifier(R) products,
we anticipate that we will need to raise additional capital to continue our
operations over the next twelve months. However, there can be no assurance that
we will be able to arrange such financing on acceptable terms, or at all.
We plan to continue research and development activities related to our
Hemopurifier(R) platform technology, with particular emphasis on the advancement
of our treatment for "Category A" pathogens as defined by the Federal Government
under Project Bioshield and the All Hazards Preparedness Act of 2006. The
Company has filed an Investigational Device Exemption ("IDE") with the FDA in
order to proceed with human safety studies of the Hemopurifier(R). Such studies,
complemented by planned IN-VIVO and appropriate animal IN VITRO studies should
allow the Company to proceed to Premarket Approval ("PMA") process. The PMA
process is the last major FDA hurdle in determining the safety and effectiveness
of Class III Medical Devices (of which the Hemopurifier(R) is one).
We anticipate continuing to increase spending on research and
development over the next 12 months. Additionally, associated with our
anticipated increase in research and development expenditures, we anticipate
purchasing additional amounts of equipment during this period to support our
laboratory and testing operations. Operations to date have consumed substantial
capital without generating revenues, and will continue to require substantial
and increasing capital funds to conduct necessary research and development and
pre-clinical and clinical testing of our Hemopurifier(R) products, as well as
market any of those products that receive regulatory approval. We do not expect
to generate revenue from operations for the foreseeable future, and our ability
to 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 management's 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.
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CONVERTIBLE NOTES PAYABLE AND WARRANTS
On November 2007, the Company entered into Amended and Restated 10%
Series A Convertible Promissory Notes (the "Amended Notes") with the holders of
certain promissory notes previously issued by the Company (the "Prior Notes"),
and all amendments to the Prior Notes, including on March 5, 2007.
The Amended Notes, in the principal amount of $1,000,000, are
convertible into an aggregate of 5,000,000 shares of the Company's Common Stock
and mature on February 15, 2009. The Amended Notes provide for the payment of
accrued and default interest through December 31, 2007 in the aggregate amount
of $295,248 to be paid in units ("Units") at a fixed rate of $0.20 per Unit,
each Unit consisting of one share of the Company's Common Stock and one Class A
Common Stock Purchase Warrant (the "Class A Warrant") to purchase one share of
the Company's 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, the
Company will issue them one Class B Common Stock Purchase Warrant (the "Class B
Warrant") for every two Class A Warrants exercised. The Class B Warrants will
have a fixed exercise price of $0.60 per share.
The Amended Notes also provided for the payment of liquidated damages
through November 29, 2007 in the aggregate amount $269,336 to be paid in units
("Damages Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit
consisting of one share of the Company's Common Stock and one Class A-1 Common
Stock Purchase Warrant (the "Class A-1 Warrant") to purchase one share of the
Company's Common Stock at a fixed exercise price of $0.40 per share. If the
Holders exercise the Class A-1 Warrants on or before February 15, 2010, the
Company will issue them one Class B-1 Common Stock Purchase Warrant (the "Class
B-1 Warrant") for every two Class A-1 Warrants exercised. The Class B-1 Warrants
will have a fixed exercise price of $0.40 per share.
In addition, the Amended Notes provide 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 the Company's Common Stock on the
same terms as the Class A Warrants.
The following table summarizes the number of shares of the Company's
Common Stock issuable upon the conversion of the Amended Notes or the exercise
of the various warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
----------
Total 15,373,955
==========
The Company was obligated to register the shares underlying the Class A
Warrants, the Class A-1 Warrants and the Class A Principal Warrants with the SEC
by March 31, 2008, and the shares underlying the Class B Warrants and to
register the Class B-1 Warrants with the SEC by the 30th day following the
issuance date of such warrants. Since we failed to register the shares
underlying those warrants by the required date, we are accruing damages on a
monthly basis of approximately $15,000.
For accounting purposes, the amendment of the 10% Series A Convertible
Notes was treated as an extinguishment pursuant to EITF Issue No. 06-6. The
changes in the note agreements, conversion feature and warrants were considered
substantive as prescribed in that consensus. Consequently, at the amendment date
the company initially recorded an estimated loss on extinguishment of $489,013
as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized note (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
-----------
Loss on extinguishment $ 489,013
===========
Subsequently, the Company engaged a third party valuation firm to value
the various components of the amendment of the Series A Convertible Notes. As a
result of that valuation, the Company recorded an additional $58,106 of loss on
extinguishment of debt with the offset being recorded to additional paid-in
capital.
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The new warrants issued in connection with the Amended Notes were
evaluated pursuant to EITF Issue No. 00-19 and classified as equity instruments.
In connection with the new warrants, the Company recorded $4,392,664 as an
increase to additional paid in capital, based on the estimated fair value at
issuance. The amended conversion feature contains a beneficial conversion at the
date of the Amended Notes; consequently, the Company recorded a discount of
$1,000,000 against the notes and a corresponding increase in additional paid in
capital. Through March 31, 2007, the Company amortized approximately $69,000 of
such discount into interest expense using the effective interest method.
In January 2008, one of the holders of the Amended Notes requested the
conversion of $100,000 into our common stock at the agreed conversion rate of
$0.20 per share and, as a result, we issued 500,000 shares of common stock to
convert the $100,000 note.
In March 2008, a noteholder converted a $150,000 note to common stock
at the agreed conversion rate of $0.25 per share along with accumulated interest
of approximately $66,000.
$495,000 NOTE WITH WARRANTS FINANCING
On December 5, 2007, the Company entered into a Subscription Agreement
with two accredited investors pursuant to which the Company issued and sold
promissory notes in the principal amount of $495,000 and three-year warrants to
purchase an aggregate of 1,485,000 shares of the Registrant's common stock at a
fixed exercise price of $0.50 per share. The promissory notes bear interest
compounded monthly at the annual rate of eight percent (8%) and mature on
September 5, 2008. The net proceeds to the Company were $440,000.
The warrants associated with this financing did not meet all of the
conditions required for equity classification under EITF Issue No. 00-19;
consequently, the warrants (with an estimated fair value of $693,050) were
accounted for as derivative liabilities at issuance. The Company revalued the
warrants at December 31, 2007 and again at March 31, 2008 and the resulting
aggregate reduction in the estimated fair value of $252,895 was recorded to
income from change in fair value of warrant liability.
On September 5, 2008, the notes matured. The Company is currently in
negotiations to extend those notes but there can be no assurance that such
extension will be obtained on terms acceptable to the Company or at all.
$220,000 NOTE WITH WARRANTS FINANCING
On January 18, 2008, the Company entered into a Subscription Agreement
with an accredited investor pursuant to which the Company issued and sold
promissory notes in the principal amount of $220,000 and three-year warrants to
purchase an aggregate of 660,000 shares of the Registrant's common stock at a
fixed exercise price of $0.50 per share. The promissory note bear interest
compounded monthly at the annual rate of nine percent (9%) and matures on
October 19, 2008. The net proceeds to the Company were $220,000.
The warrants associated with this financing did not meet all of the
conditions required for equity classification under EITF Issue No. 00-19;
consequently, the warrants (with an estimated fair value of $222,450) were
accounted for as derivative liabilities at issuance. The Company revalued the
warrants at March 31, 2008 and the resulting aggregate reduction in the
estimated fair value of $27,060 was recorded to income from change in fair value
of warrant liability.
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,
2008 we issued 589,350 common shares for services of which 223,187 were
unregistered. We also issued 250,000 under a stock option exercise by one of our
directors restricted common shares for payment of accrued liabilities, 1,365,500
for the retirement of notes payable, 90,000 for investor communications
services, 15,152 for licensing rights and 49,414 in exchange for the conversion
of Warrants. Included in the 589,350 common shares issued for services are
366,163 shares, registered under a Form S-8 registration statement, which were
issued as follows: 263,057 for scientific and regulatory consulting and 103,106
for legal expense 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 12.8%.
SECURITIES ISSUED FOR DEBT
We have also issued securities for debt to reduce our obligations to
avoid using our cash resources. In the fiscal year ended March 31, 2008 we
issued 1,365,500 restricted common shares for repayment in full of notes,
including accrued interest in the aggregate amount of $66,375. The price
discount of the common stock issued for debt was approximately 59.3%
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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, 2008 consolidated financial statements that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make a number of estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Such estimates and
assumptions affect the reported amounts of expenses during the reporting period.
On an ongoing basis, the Company evaluates estimates and assumptions based upon
historical experience and various other factors and circumstances. Management
believes the Company's estimates and assumptions are reasonable in the
circumstances; however, actual results may differ from these estimates under
different future conditions. The Company believes that the estimates and
assumptions that are most important to the portrayal of the Company's financial
condition and results of operations, in that they require the most difficult,
subjective or complex judgments, form the basis for the accounting policies
deemed to be most critical to us. These critical accounting policies relate to
stock purchase warrants issued with notes payable, beneficial conversion feature
of convertible notes payable, impairment of intangible assets and long lived
assets, stock compensation, contingencies and litigation. We believe estimates
and assumptions related to these critical accounting policies are appropriate
under the circumstances; however, should future events or occurrences result in
unanticipated consequences, there could be a material impact on the Company's
future financial conditions or results of operations.
Long-Lived Assets
SFAS No.144 ("SFAS 144"), "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
SFAS 144 also requires companies to separately report discontinued operations
and extends that reporting requirement to a component of an entity that either
has been disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to sell.
Management noted no indicators requiring review for impairment during the fiscal
year ended March 31, 2008.
Stock Purchase Warrants Issued with Notes Payable
The Company granted warrants in connection with the issuance of certain
notes payable. Under Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable. Such discounts are amortized to interest expense over the
term of the notes.
Derivatives
In the fiscal year ending March 31, 2006, the Company was obligated to
register for resale the shares underlying warrants in connection with the
issuance of its 10% Series A Convertible Promissory Notes. In accordance with
Emerging Issues Task Force ("EITF") No. 00-19, "Accounting for Derivative
Financial Instruments Indexed To, and Potentially Settled In, a Company's Own
Stock," the value of the warrants were recorded as a liability until the
registration became effective on January 20, 2006. At that time the Company
determined the fair value of these warrants and recorded an additional non-cash
expense of $363,875. Coincident with this valuation, the derivative liability
balance was reclassified to equity.
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On or about March 13, 2007, the Company determined that the
effectiveness of the registration statement underlying the conversion and
warrant shares associated with the 10% Series A Promissory Notes had lapsed on
October 27, 2006. In accordance with EITF No. 00-19, the Company reversed the
accounting effect of the prior registration effectiveness and reduced additional
paid-in-capital by $1,090,000 and recorded a warrant liability of like amount.
Between October 27, 2006 and March 22, 2007 (when the debt was effectively
extinguished), the Company recorded an additional expense related to the change
in the fair value of the associated warrant liability of $1,969,450.
Beneficial Conversion Feature of Notes Payable
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities With Beneficial Conversion Features or
Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of
EITF Issue No. 98-5 to Certain Convertible Instruments," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.
Accounting for Transactions involving Stock Compensation
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based
Payment," which requires that the compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No.
123-R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No.123-R replaces
SFAS No. 123 and supersedes APB 25. As originally issued, SFAS No. 123
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of APB 25,
provided that the financial statements disclosed the pro forma net income or
loss based on the preferable fair-value method.
Registrants are required to apply SFAS No. 123-R in the first interim
or annual reporting period of the registrant's first fiscal year that begins
after December 15, 2005. Thus, the Company's consolidated financial statements
reflect an expense for (a) all share-based compensation arrangements granted on
or after January 1, 2006 and for any such arrangements that are modified,
cancelled, or repurchased on or after that date, and (b) the portion of previous
share-based awards for which the requisite service has not been rendered as of
that date, based on the grant-date estimated fair value. The Company adopted
SFAS No. 123-R in the first fiscal quarter of 2007. For the fiscal year ended
March 31, 2008, the Company recognized $487,093 of share-based compensation.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources and would be
considered material to investors.
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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 not aware of any material pending
legal proceedings involving our Company.
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital consists of 100,000,000 shares of common stock,
par value $0.001 per share (these shares are referred to in this prospectus as
"Common Shares"). As of September 19, 2008, there were issued and outstanding
42,378,418 common shares.
COMMON SHARES
Our common shareholders are entitled to one vote per share on all
matters to be voted upon by those shareholders. Upon the liquidation,
dissolution, or winding up of our Company, our common shareholders will be
entitled to share ratably in all of the assets which are legally available for
distribution, after payment of all debts and other liabilities. Our common
shareholders have no preemptive, subscription, redemption or conversion rights.
All of our currently outstanding common shares are, and all of our common shares
offered for sale under this prospectus will be, validly issued, fully paid and
non-assessable.
OPTIONS AND WARRANTS CONVERTIBLE INTO COMMON SHARES
As of September 19, 2008, there were outstanding common share purchase
options entitling the holders to purchase 12,989,060 common shares at a weighted
average exercise price of $0.38 per share and warrants entitling the holders to
purchase up to 16,705,390 common shares at a weighted average exercise price of
$0.34 per share.
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth September 19, 2008 information on our
equity compensation plans (including the potential effect of debt instruments
convertible into common stock) in effect as of that date:
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available
of outstanding options, outstanding options, for future issuance
warrants and rights (1)(2) warrants and rights under equity
compensation plans
(excluding securities
reflected in column
(a))
Equity compensation
plans approved by
security holders 32,500 $2.65 467,500
Equity compensation
plans not approved by
security holders (1) 10,921,560 $0.37 N/A
------------- ------ --------
Totals 10,954,060 $0.38 467,500
(1) The description of the material terms of non-plan issuances of equity
instruments is discussed in Notes 4, 5, 6 and 7 to the accompanying consolidated
financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
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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 $ 2.65 467,500
- --------------------- ------------------- ------------------ ----------------
Equity compensation
plans not approved
by security holders -- -- --
- --------------------- ------------------- ------------------ ----------------
Total 32,500 $ 2.65 467,500
- --------------------- ------------------- ------------------ ----------------
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 September 19, 2008, we had granted 32,500
options under the 2000 Stock Option Plan, with 467,500 available for future
issuance.
2003 CONSULTANT STOCK PLAN
- -------------------- ------------------- ------------------ -----------------
Plan Category Number of shares
of common stock Weighted average Number of common
available for price of shares shares remaining
issuance under issued under the available for
the plan plan future issuance
- -------------------- ------------------- ------------------ -----------------
(a) (b) (c)
- -------------------- ------------------- ------------------ -----------------
Equity compensation
plans approved by
security holders -- -- --
- -------------------- ------------------- ------------------ -----------------
Equity compensation
plans not approved
by security holders 5,000,000 $ 0.32 1,741,135
- -------------------- ------------------- ------------------ -----------------
Total 5,000,000 $ 0.32 1,741,135
- -------------------- ------------------- ------------------ -----------------
Our 2003 Consultant Stock Plan (the "Stock Plan"), adopted by us in
August 2003, advances our interests by helping us obtain and retain the services
of persons providing consulting services upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or
providing those persons with incentives or inducements affording such persons an
opportunity to become owners of our capital stock. Consultants or advisors are
eligible to receive grants under the plan program only if they are natural
persons providing bona fide consulting services to us, with the exception of any
services they may render in connection with the offer and sale of our securities
in a capital-raising transaction, or which may directly or indirectly promote or
maintain a market for our securities. The Stock Plan provides for the grants of
common stock. No awards may be issued after the ten-year anniversary of the date
we adopted the Stock Plan, the termination date for the plan.
On March 29, 2004, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 1,000,000 common shares issuable under
the Stock Plan under the Securities Act of 1933.
On August 29, 2005, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 2,000,000 common shares issuable under
The Stock Plan under the Securities Act of 1933.
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On August 9, 2007, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 2,000,000 common shares issuable under
The Stock Plan under the Securities Act of 1933.
At March 31, 2008, 1,741,135 shares of common stock remain to be issued
under the 2003 Consultant Stock Plan.
STAND-ALONE GRANTS
From time to time our board of directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
DESCRIPTION OF MARKET
Our common shares are currently quoted on the OTCBB under the symbol
"AEMD." Our Common Stock has had a limited and sporadic trading history. The
following table sets forth the quarterly high and low bid prices for our common
shares on the OTCBB for the periods indicated. The prices set forth below
represent inter-dealer quotations, without retail markup, markdown or commission
and may not be reflective of actual transactions.
BID PRICE
-----------------------
PERIOD HIGH LOW
- -----------------------------------------------------------------------------
2008:
Second Quarter $0.61 $0.38
First Quarter 0.75 0.46
2007:
Fourth Quarter $0.76 $0.49
Third Quarter 0.88 0.57
Second Quarter 0.79 0.55
First Quarter 0.84 0.25
2006:
Fourth Quarter 0.34 0.25
Third Quarter 0.34 0.19
Second Quarter 0.84 0.32
First Quarter 0.98 0.26
There are approximately 147 record holders of our Common Stock at
September 19, 2008. The number of registered shareholders includes an estimate
of the number of beneficial owners of common shares held in street name. The
transfer agent and registrar for our common stock is Computershare Trust
Company, located in Denver, Colorado.
DIVIDEND POLICY
We have never paid any cash dividends on our common shares, and we do
not anticipate that we will pay any dividends with respect to those securities
in the foreseeable 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 as our board may deem
relevant at that time.
46
<page>
THE SELLING SHAREHOLDERS
The following table sets forth the names of the selling shareholders
who may sell their shares under this prospectus from time to time. No selling
shareholder has, or within the past three years has had, any position, office or
other material relationship with us or any of our predecessors or affiliates.
The following table also provides certain information with respect to
the selling shareholders' ownership of our securities as of September 19, 2008,
the total number of securities they may sell under this prospectus from time to
time, and the number of securities they will own thereafter assuming no other
acquisitions or dispositions of our securities. The selling shareholders can
offer all, some or none of their securities, thus we have no way of determining
the number they will hold after this offering. Therefore, we have prepared the
table below on the assumption that the selling shareholders will sell all shares
covered by this prospectus.
Some of the selling shareholders may distribute their shares, from time
to time, to their limited and/or general partners or managers, who may sell
shares pursuant to this prospectus. Each selling shareholder may also transfer
shares owned by him or her by gift, and upon any such transfer the donee would
have the same right of sale as the selling shareholder.
<table>
<caption>
<s>
NUMBER OF
SHARES NUMBER OF
OWNED NUMBER OF SHARES OWNED PERCENT OWNED
BEFORE SHARES BEING AFTER AFTER
NAME OF SELLING SHAREHOLDER OFFERING OFFERED OFFERING (1) OFFERING (2)
Alan Albrecht (3) 2,134,550 275,000 1,859,550 4.2%
Alpha Capital Anstalt (4) 1,237,500 1,237,500 0 *
Leslie J. Armour Jr. (5) 30,000 10,000 20,000 *
Ashford Capital, LLC (6) 300,000 100,000 200,000 *
Nicholas Barham (7) 300,000 100,000 200,000 *
Estate of Allan S. Bird (8) 3,690,215 2,086,795 1,603,420 3.7%
Harold L. Brooks, Jr. (9) 315,000 105,000 210,000 *
Steve Brooks (10) 75,000 25,000 50,000 *
Claypoole Capital LLC (11) 81,244 45,993 35,251 *
Gemini Master Fund, Ltd (12) 1,250,000 860,000 390,000 *
Wayne Hamersly (13) 75,000 25,000 50,000 *
Christian J. Hoffman (14) 162,487 91,985 70,502 *
Steven A. Jensen (15) 75,000 25,000 50,000 *
Van Louie (16) 30,000 10,000 20,000 *
Kevin B Murphy (17) 250,000 50,000 200,000 *
Osher Capital Partners LLC (18) 247,500 247,500 0 *
Donald W. Remlinger & Sharon A Remlinger (19) 225,000 75,000 150,000 *
James Schoenike (20) 75,000 25,000 50,000 *
John A. Tujo & Christine F. Tujo JTWROS (21) 60,000 20,000 40,000 *
UBS Jersey Nominees, Ltd (22) 300,000 100,000 200,000 *
Ellen R. Weiner Family Revocable Trust (23) 12,298,718 6,858,309 5,440,409 9.9%
Mark Westman (24) 105,000 35,000 70,000 *
Zanett Opportunity Fund, Ltd (25) 300,000 100,000 200,000 *
TOTAL 23,617,214 12,508,082 11,109,132
</table>
47
<page>
- -------------------------------
* Indicates less than 1%
(1) Assumes that all of the shares offered hereby are sold and that shares owned
before the offering but not offered hereby are not sold.
(2) Percentage based upon 42,378,418 shares outstanding as of September 19,
2008.
(3) Includes 650,000 shares underlying convertible notes at a conversion price
of $0.50 per share and warrants to purchase 925,000 shares of common stock at an
exercise price of $0.50 per share.
(4) The natural person with voting and investment decision power for the selling
stockholder is Ari Kluger. Includes warrants to purchase 1,237,500 shares of
common stock at an exercise price of $0.50 per share.
(5) Includes warrants to purchase 10,000 shares of common stock at an exercise
price of $0.50 per share.
(6) The natural person with voting and investment decision power for the selling
stockholder is Frank Kavanaugh. Includes warrants to purchase 100,000 shares of
common stock at an exercise price of $0.50 per share.
(7) Includes warrant to purchase 100,000 shares of common stock at an exercise
price of $0.50 per share.
(8) The natural person with voting and investment decision power for the selling
stockholder is Martin Gerst. Includes warrants to purchase 1,693,487 shares of
common stock at an exercise price of $0.20 per share and warrants to purchase
151,621 shares of common stock at an exercise price of $0.40 per share.
(9) Includes warrants to purchase 105,000 shares of common stock at an exercise
price of $0.50 per share.
(10) Includes warrants to purchase 25,000 shares of common stock at an exercise
price of $0.50 per share.
(11) The natural person with voting and investment decision power for the
selling stockholder is Christian Hoffman. Includes 25,000 shares underlying a
convertible note with a conversion price of $0.20 per share; 1,125,000 shares
underlying a convertible note with a conversion price of $0.20 per share;
warrants to purchase 37,256 shares of common stock at an exercise price of $0.20
per share and warrants to purchase 3,366 shares of common stock at an exercise
price of $0.40 per share. The total number of shares beneficially owned by the
selling shareholder at any given time may not exceed 9.9% of the total
outstanding shares of the Company. The total number of shares beneficially owned
by the selling shareholder at any given time may not exceed 9.9% of the total
outstanding shares of the Company.
(12) The natural person with voting and investment decision power for the
selling stockholder is Steven Winters. Includes warrants to purchase 860,000
shares of common stock at an exercise price of $0.50 per share.
(13) Includes warrants to purchase 25,000 shares of common stock at an exercise
price of $0.50 per share.
(14) Includes 50,000 shares underlying a convertible note at a conversion price
of $0.20 per share; warrants to purchase 74,512 shares of common stock at an
exercise price of $0.20 per share and warrants to purchase 6,732 shares of
common stock at an exercise price of $0.40 per share. The total number of shares
beneficially owned by the selling shareholder at any given time may not exceed
9.9% of the total outstanding shares of the Company.
48
<page>
(15) Includes warrants to purchase 25,000 shares of common stock at an exercise
price of $0.50 per share.
(16) Includes warrants to purchase 10,000 shares of common stock at an exercise
price of $0.50 per share.
(17) Includes warrants to purchase 100,000 shares of common stock at an exercise
price of $0.50 per share.
(18) The natural person with voting and investment decision power for the
selling stockholder is Ari Kluger. Includes warrants to purchase 247,500 shares
of common stock at an exercise price of $0.50 per share.
(19) Includes warrants to purchase 75,000 shares of common stock at an exercise
price of $0.50 per share.
(20) Includes warrants to purchase 25,000 shares of common stock at an exercise
price of $0.50 per share.
(21) Includes warrants to purchase 20,000 shares of common stock at an exercise
price of $0.50 per share.
(22) The natural person with voting and investment decision power for the
selling stockholder is Tony Wilshin. Includes warrants to purchase 100,000
shares of common stock at an exercise price of $0.50 per share.
(23) Includes 3,300,000 shares underlying a convertible note with a conversion
price of $0.20 per share; warrants to purchase 5,637,738 shares of common stock
at an exercise price of $0.20 per share and warrants to purchase 511,621 shares
of common stock at an exercise price of $0.40 per share. The total number of
shares beneficially owned by the selling shareholder at any given time may not
exceed 9.9% of the total outstanding shares of the Company.
(24) Includes warrants to purchase 35,000 shares of common stock at an exercise
price of $0.50 per share.
(25) The natural person with voting and investment decision power for the
selling stockholder is Zachary MacAdoo. Includes warrants to purchase 100,000
shares of common stock at an exercise price of $0.50 per share.
PLAN OF DISTRIBUTION
The common stock offered by this prospectus is being offered by the
selling shareholders. The common stock may be sold or distributed from time to
time by the selling shareholders directly to one or more purchasers or through
brokers, dealers, or underwriters who may act solely as agents at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices, or at fixed prices, which may be changed. The sale
of the common stock offered by this Prospectus may be effected in one or more of
the following methods:
o ordinary brokers' transactions;
o transactions involving cross or block trades;
o through brokers, dealers, or underwriters who may act solely as
agents
o "at the market" into an existing market for the common stock;
o in other ways not involving market makers or established
business markets, including direct sales to purchasers or
sales effected through agents;
o in privately negotiated transactions; or
o any combination of the foregoing.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.
Brokers, dealers, underwriters, or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling shareholder and/or
purchasers of the common stock for whom the broker-dealers may act as agent. The
compensation paid to a particular broker-dealer may be less than or in excess of
customary commissions.
49
<page>
The selling shareholders are "underwriters" within the meaning of the
Securities Act.
Neither we nor the selling shareholders can presently estimate the
amount of compensation that any agent will receive. We know of no existing
arrangements between the selling shareholders, any other shareholder , broker,
dealer, underwriter, or agent relating to the sale or distribution of the shares
offered by this Prospectus. At the time a particular offer of shares is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any agents, underwriters, or dealers and any compensation from the
selling shareholder, and any other required information.
We will pay all of the expenses incident to the registration, offering,
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents.
This offering will terminate on the date that all shares offered by
this Prospectus have been sold by the selling shareholders.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
The report of Squar, Milner, Peterson, Miranda & Williamson, LLP on our
financial statements as of and for the years ended March 31, 2008, 2007 and 2006
did not contain an adverse opinion, or a disclaimer of opinion. Such report did
contain an explanatory paragraph regarding uncertainty as to the Company's
ability to continue as a going concern.
TRANSFER AGENT
The transfer agent for our common shares is Computershare Trust
Company, Inc., 350 Indiana Street, Suite 800, Golden, Colorado 80401. We act as
our own transfer agent with regard to our outstanding common share purchase
options and warrants.
LEGAL MATTERS
The validity of the issuance of the common shares to be sold by the
selling shareholder under this prospectus was passed upon for our company by
Richardson & Patel LLP. As of September 19, 2008, Richardson & Patel LLP owns
110,138 shares of our common stock and a warrant to purchase 225,000 shares with
an exercise price of $0.76. Partners of Richardson & Patel LLP own collectively
warrants to purchase 509,275 shares of common Stock at exercise prices of $0.25
(for 418,365 shares) and $0.76 (for 90,910 shares). The warrants were issued to
Richardson & Patel LLP as payment for services rendered in connection with the
representation of the Company in our financings and this registration statement.
Additionally, Erick E. Richardson and Nimish Patel, the principals of Richardson
& Patel LLP own a warrant to purchase 113,636 shares with an exercise price of
$0.76 through RP Capital, LLP.
EXPERTS
Squar, Milner, Peterson, Miranda & Williamson, LLP, a registered
independent public accounting firm, has audited the accompanying consolidated
balance sheet as of March 31, 2008 and the related consolidated statements of
operations, stockholders' deficit and cash flows for each of the years in the
two-year period then ended and for the period from January 31, 1984 (Inception)
to March 31, 2008 to the extent set forth in their report, and such financial
statements have been included herein this prospectus in reliance upon the report
of such Firm given upon their authority as experts in auditing and accounting.
50
<page>
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
Our Articles of Incorporation permit us to limit the liability of our
directors to the fullest extent permitted under Section 78.037 of the Nevada
General Corporation Law. As permitted by Section 78.037 of the Nevada General
Corporation Law, our Bylaws and Articles of Incorporation also include
provisions that eliminate the personal liability of each of its officers and
directors for any obligations arising out of any acts or conduct of such officer
or director performed for or on behalf of the Company. To the fullest extent
allowed by Section 78.751 of the Nevada General Corporation Law, we will defend,
indemnify and hold harmless its directors or officers from and against any and
all claims, judgments and liabilities to which each director or officer becomes
subject to in connection with the performance of his or her duties and will
reimburse each such director or officer for all legal and other expenses
reasonably incurred in connection with any such claim of liability. However, we
will not indemnify any officer or director against, or reimburse for, any
expense incurred in connection with any claim or liability arising out of the
officer's or director's own negligence or misconduct in the performance of duty.
The provisions of our Bylaws and Articles of Incorporation regarding
indemnification are not exclusive of any other right we have to indemnify or
reimburse our officers or directors in any proper case, even if not specifically
provided for in our Articles of Incorporation or Bylaws.
We believe that the indemnity provisions contained in our bylaws and
the limitation of liability provisions contained in our certificate of
incorporation are necessary to attract and retain qualified persons for these
positions. No pending material litigation or proceeding involving our directors,
executive officers, employees or other agents as to which indemnification is
being sought exists, and we are not aware of any pending or threatened material
litigation that may result in claims for indemnification by any of our directors
or executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
REPORTS TO SECURITY HOLDERS
We file annual and quarterly reports with the SEC. In addition, we file
additional reports for matters such as material developments or changes. Our
executive officers, directors and beneficial owners of 10% or more of our common
shares also file reports relative to the acquisition or disposition of our
common shares or acquisition, disposition or exercise of our common share
purchase options or warrants. These filings are a matter of public record and
any person may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers, including us, that file electronically with
the SEC. We are not required to deliver an annual report with this prospectus,
nor will we do so. However, you may obtain a copy of our annual report, or any
of our other public filings, by contacting the Company or from the SEC as
mentioned above.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with
the SEC. The reports, information statements and other information we file with
the Commission can be inspected and copied at the Commission Public Reference
Room, 100 F Street, N.E. Washington, D.C. 20549. You may obtain information on
the operation of the Public Reference Room by calling the SEC at (800) SEC-0330.
The Commission also maintains a Web site (http://www.sec.gov) that contains
reports, proxy, and information statements and other information regarding
registrants, like us, which file electronically with the Commission. Our
headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego, CA
92109. Our phone number at that address is (858) 459-7800. Our Web site is
maintained at http://www.aethlonmedical.com.
This prospectus constitutes a part of a registration statement on Form
S-1 filed by us with the Commission under the Securities Act of 1933. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information that is contained in the registration statement. We refer
you to the registration statement and related exhibits for further information
with respect to us and the securities offered. Statements contained in the
prospectus concerning the content of any documents filed as an exhibit to the
registration statement (or otherwise filed with the Commission) are not
necessarily complete. In each instance you may refer to the copy of the filed
document. Each statement is qualified in its entirety by such reference.
51
<page>
No person is authorized to give you any information or make any
representation other than those contained or incorporated by reference in this
prospectus. Any such information or representation must not be relied upon as
having been authorized. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs since the date of the prospectus.
52
<page>
PART II
Indemnification of Directors and Officers
Our Articles of Incorporation permit us to limit the liability of our
directors to the fullest extent permitted under Section 78.037 of the Nevada
General Corporation Law. As permitted by Section 78.037 of the Nevada General
Corporation Law, our Bylaws and Articles of Incorporation also include
provisions that eliminate the personal liability of each of its officers and
directors for any obligations arising out of any acts or conduct of such officer
or director performed for or on behalf of the Company. To the fullest extent
allowed by Section 78.751 of the Nevada General Corporation Law, we will defend,
indemnify and hold harmless its directors or officers from and against any and
all claims, judgments and liabilities to which each director or officer becomes
subject to in connection with the performance of his or her duties and will
reimburse each such director or officer for all legal and other expenses
reasonably incurred in connection with any such claim of liability. However, we
will not indemnify any officer or director against, or reimburse for, any
expense incurred in connection with any claim or liability arising out of the
officer's or director's own negligence or misconduct in the performance of duty.
The provisions of our Bylaws and Articles of Incorporation regarding
indemnification are not exclusive of any other right we have to indemnify or
reimburse our officers or directors in any proper case, even if not specifically
provided for in our Articles of Incorporation or Bylaws.
We believe that the indemnity provisions contained in our bylaws and
the limitation of liability provisions contained in our certificate of
incorporation are necessary to attract and retain qualified persons for these
positions. No pending material litigation or proceeding involving our directors,
executive officers, employees or other agents as to which indemnification is
being sought exists, and we are not aware of any pending or threatened material
litigation that may result in claims for indemnification by any of our directors
or executive officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed hereby in the Securities Act and we
will be governed by the final adjudication of such issue.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses which
we expect to incur with respect to the offering and sale or distribution of
common shares under this registration statement. We have agreed to pay all of
these expenses.
SEC Filing Fee $ 233
Financial printer fees 1,000*
Legal fees and expenses 11,500*
Blue Sky Fees and Expenses 500*
Accounting fees and expenses 15,000*
Miscellaneous 500*
- -------------------------------------------------------------------------------
Total $ 28,733
- -------------------------------------------------------------------------------
* estimated
II-1
<page>
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 three year period ending on the date of filing of this registration
statement. Except as stated below, no underwriting discounts or commissions were
payable with respect to any of the following transactions.
APRIL 1, 2008 THROUGH SEPTEMBER 19, 2008
ACCRUED INTEREST AND DAMAGES
On September 19, 2008, we issued 966,750 shares of common stock and
warrants to purchase 966,750 shares of common stock at an exercise price of
$0.20 per share to the holders of certain Amended Notes as payment of accrued
interest and penalties as prescribed in the Amended Note agreement.
CONVERTIBLE NOTES
In late July and through September 19, 2008, we have raised an
aggregate amount of $370,000 from the sale to accredited investors of 10%
convertible notes and warrants. The notes are convertible into our common stock
at $0.50 per share and the warrants are exercisable at $0.50 per share. 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.
COMMON STOCK
In April 2008, we issued 10,170 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.59 per
share in payment for regulatory affairs consulting services valued at $6,000
based on the value of the services.
Effective as of April 22, 2008, per a patent license agreement, we
issued 10,849 shares of restricted common stock to Boston University. This
issuance represented the initial payment under the license agreement and was
based on our share price at April 22, 2008 and the payment amount of $5,750.
In May 2008, we entered into a Private Placement Agreement with Fusion
Capital Fund II, LLC, an Illinois limited liability company for the sale of
1,000,000 shares of our common stock for an aggregate purchase price of
$500,000.
In May 2008, we issued 6,667 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 regulatory affairs consulting services valued at $3,000
based on the value of the services.
In May 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 (See Note 5).
In June 2008, we issued 25,610 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.41 per
share in payment for regulatory affairs consulting services valued at $10,500
based on the value of the services.
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.
On July 24, 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.
On July 28, 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.
On July 31, 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.
II-2
<page>
FISCAL YEAR ENDED MARCH 31, 2008
WARRANTS ISSUED IN CONNECTION WITH CONVERTIBLE DEBT
On November 2007, we entered into Amended and Restated 10% Series A
Convertible Promissory Notes (the "Amended Notes") with the holders of certain
promissory notes that we previously issued (the "Prior Notes"), and all
amendments to the Prior Notes, including on March 5, 2007.
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 mature
on February 15, 2009. The Amended Notes provide for the payment of accrued and
default interest through December 31, 2007 in the aggregate amount of $295,248
to be paid in units ("Units") at a fixed rate of $0.20 per Unit, each Unit
consisting of one share of our Common Stock and one Class A Common Stock
Purchase Warrant (the "Class A Warrant") to purchase one share of our Common
Stock at a fixed exercise price of $0.20 per share. If the Holders exercise the
Class A Warrants on or before February 15, 2010, we will issue them one Class B
Common Stock Purchase Warrant (the "Class B Warrant") for every two Class A
Warrants exercised. The Class B Warrants will have a fixed exercise price of
$0.60 per share.
The Amended Notes also provided for the payment of liquidated damages
through November 29, 2007 in the aggregate amount $269,336 to be paid in units
("Damages Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit
consisting of one share of our Common Stock and one Class A-1 Common
Stock Purchase Warrant (the "Class A-1 Warrant") to purchase one share of our
Common Stock at a fixed exercise price of $0.40 per share. If the Holders
exercise the Class A-1 Warrants on or before February 15, 2010, we will issue
them one Class B-1 Common Stock Purchase Warrant (the "Class B-1 Warrant") for
every two Class A-1 Warrants exercised. The Class B-1 Warrants will have a fixed
exercise price of $0.40 per share.
In addition, the Amended Notes provide for the issuance of Class A
Principal Common Stock Purchase Warrants (the "Class A Principal Warrant") to
purchase an aggregate of 5,000,000 shares of our Common Stock on the same terms
as the Class A Warrants.
The following table summarizes the number of shares of our Common Stock
issuable upon the conversion of the Amended Notes or the exercise of the various
warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
-----------
Total 15,373,955
===========
We were obligated to register the shares underlying the Class A
Warrants, the Class A-1 Warrants and the Class A Principal Warrants with the SEC
by March 31, 2008, and the shares underlying the Class B Warrants and to
register the Class B-1 Warrants with the SEC by the 30th day following the
issuance date of such warrants.
II-3
<page>
In January 2008, one of the holders of the Amended Notes requested the
conversion of $100,000 into our common stock at the agreed conversion rate of
$0.20 per share and, as a result, we issued 500,000 shares of common stock to
convert the $100,000 note.
In March 2008, a noteholder converted a $150,000 note to common stock
at the agreed conversion rate of $0.25 per share along with accumulated interest
of approximately $66,000.
$495,000 NOTE WITH WARRANTS FINANCING
On December 5, 2007, we entered into a Subscription Agreement with two
accredited investors pursuant to which we issued and sold promissory notes in
the principal amount of $495,000 and three-year warrants to purchase an
aggregate of 1,485,000 shares of the Registrant's common stock at a fixed
exercise price of $0.50 per share. The promissory notes bear interest compounded
monthly at the annual rate of eight percent (8%) and mature on September 5,
2008. The net proceeds to us were $440,000.
The warrants associated with this financing did not meet all of the
conditions required for equity classification under EITF Issue No. 00-19;
consequently, the warrants (with an estimated fair value of $693,050) were
accounted for as derivative liabilities at issuance. We revalued the warrants at
December 31, 2007 and again at March 31, 2008 and the resulting aggregate
reduction in the estimated fair value of $252,895 was recorded to derivative
income.
$220,000 NOTE WITH WARRANTS FINANCING
On January 18, 2008, we entered into a Subscription Agreement with an
accredited investor pursuant to which we issued and sold promissory notes in the
principal amount of $220,000 and three-year warrants to purchase an aggregate of
660,000 shares of the Registrant's common stock at a fixed exercise price of
$0.50 per share. The promissory note bears interest compounded monthly at the
annual rate of nine percent (9%) and matures on October 19, 2008. The net
proceeds to us were $220,000.
COMMON STOCK AND WARRANTS
In April 2007, we 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, we issued 15,152 shares of restricted common stock at
$0.33 per share in payment of an option agreement valued at $5,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In April 2007, we issued 8,651 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.58 per
share in payment for regulatory affairs consulting services to us valued at
$5,000 based on the value of the services.
In April 2007, we issued 3,937 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.76 per
share in payment for regulatory affairs consulting services to us valued at
$3,000 based on the value of the services.
In May 2007, we issued 13,124 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.76 per
share in payment for regulatory affairs consulting services to us valued at
$10,000 based on the value of the services.
In May 2007, we issued 5,155 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.58 per
share in payment for regulatory affairs consulting services to us valued at
$3,000 based on the value of the services.
In June 2007, we issued 41,999 shares of restricted common stock at
between $0.30 and $0.74 per share in payment for investor relations services to
us valued at $20,000 based on the value of the services.
In June 2007, we issued 17,526 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.58 per
share in payment for regulatory affairs consulting services to us valued at
$10,200 based on the value of the services.
In June 2007, we issued 5,155 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.58 per
share in payment for regulatory affairs consulting services to us valued at
$3,000 based on the value of the services.
II-4
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In June 2007, we issued 10,174 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.63 per
share in payment for regulatory affairs consulting services to us valued at
$6,450 based on the value of the services.
In August 2007, we 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, we issued 107,153 shares of common stock pursuant to
our S-8 registration statement covering our 2003 Consultant Stock Plan at an
average price of $0.37 per share in payment of grant writing and regulatory
consulting services to us valued at $39,963 based upon the value of the
services.
In August of 2007, we issued 103,106 shares of common stock pursuant to
our S-8 registration statement covering our 2003 Consultant Stock Plan at $0.59
per share in payment of legal fees related to general corporate legal services
to us valued at $62,894 based upon the value of the services provided.
In August 2007, we 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 us valued at $15,000 based on the value of the services.
In August 2007, we issued 8,264 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at prices
between $0.68 and $0.78 per share in payment for regulatory affairs consulting
services to us valued at $6,000 based on the value of the services.
In September 2007, we 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, we issued 5,294 shares of common stock pursuant to
our S-8 registration statement covering our 2003 Consultant Stock Plan at $0.68
per share in payment for regulatory affairs consulting services to us valued at
$3,600 based on the value of the services provided.
In October 2007, we issued 4,601 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.65 per
share in payment for regulatory affairs consulting services to us valued at
$3,000 based on the value of the services provided.
In December 2007, we 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, we issued 21,992 shares of common stock pursuant to
our S-8 registration statement covering our 2003 Consultant Stock Plan at $0.68
per share in payment for regulatory affairs consulting services to us valued at
$15,000 based on the value of the services provided.
In January 2008, we 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, we 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, we 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, we 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, we issued 25,380 shares of common stock pursuant to
our S-8 registration statement covering our 2003 Consultant Stock Plan at $0.50
per share in payment for regulatory affairs consulting services to us valued at
$12,690 based on the value of the services provided.
II-5
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In February 2008, we issued 100,000 shares for cash proceeds of
$100,000. The shares were issued to a corporation at a price of $1.00 per share.
In March 2008, we issued 13,895 shares of common stock pursuant to our
S-8 registration statement covering our 2003 Consultant Stock Plan at $0.54 per
share in payment for regulatory affairs consulting services to us valued at
$7,500 based on the value of the services provided.
In March 2008, we issued 865,500 shares of common stock based on the
conversion of a $150,000 note plus accumulated interest of approximately
$66,000.
In March 2008, we issued 167,188 shares of restricted common stock at
prices between $0.53 and $0.60 per share in payment for investor relations
services and other consulting services to us valued at $94,750 based on the
value of the services.
FISCAL YEAR ENDED MARCH 31, 2007
CONVERTIBLE NOTES PAYABLE AND WARRANTS
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 mature 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 are exercised prior to December
15, 2007, the holder will receive 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 common stock. The December 10% Note Warrants have been
valued using a Binomial Lattice option pricing model and an associated discount
of $15,627, the relative fair value measured at the commitment date, was
recorded and presented net against the face amount of the December 10% Notes.
The convertible feature of the December 10% Notes provides for an effective
conversion rate that is below market value. Pursuant to EITF No. 98-5 and EITF
No. 00-27, we estimated the fair value of such BCF to be $34,373 and recorded
such amount as a debt discount. The discounts associated with the warrants and
the BCF are being accreted to interest expense over the term of the December 10%
Notes. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
Effective March 22, 2007, we entered into four Allonges (the
"Allonges") to its 10% Series A Convertible Promissory Notes entered into in
December 2005 having an aggregate principal amount of $1,000,000 (the "Notes")
with the Estate of Allan S. Bird, the Ellen R. Weiner Family Revocable Trust,
Claypoole Capital, LLC and Christian J. Hoffmann III (the "Holders") Each Holder
has qualified as an "accredited investor" as that term is defined in the
Securities Act of 1933, as amended (the "Act"). Pursuant to the Allonges, we
amended and restated the Notes to extend the maturity date of the Notes from
January 2, 2007 until January 3, 2008. We also agreed to 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 are 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 our Common Stock and on Class A Common Stock
Purchase Warrant (the "Class A Warrant"). Each Class A Warrant expires on
January 2, 2001 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. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
COMMON STOCK
In April 2006, we 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. This transaction was exempt from registration pursuant to
section 4(2) of the Securities Act of 1933.
II-6
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In April 2006, we repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.406 per share to an accredited individual investor. There was no
gain or loss on the extinguishment. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In May 2006, we 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. This transaction was exempt from registration pursuant to
section 4(2) of the Securities Act of 1933.
In July 2006, we issued 6,250 shares of restricted common
stock at $0.40 per share in payment for investor relations services to us valued
at $2,500 based on the value of the services. This transaction was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
In July 2006, we issued 7,813 shares of restricted common
stock at $0.32 per share in payment for investor relations services to us valued
at $2,500 based on the value of the services. This transaction was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
In August 2006, we issued 114,132 shares of restricted common stock at
$0.20 per share in payment for accrued accounting consulting services provided
to us by a third party valued at $23,111 based upon the value of the services.
This transaction was exempt from registration pursuant to section 4(2) of the
Securities Act of 1933.
In October 2006, we issued 8,065 shares of restricted common stock at
$0.31 per share in payment for investor relations services to us valued at
$2,500 based on the value of the services. This transaction was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
In October 2006, we issued 8,929 shares of restricted common stock at
$0.28 per share in payment for investor relations services to us valued at
$2,500 based on the value of the services. This transaction was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
In November 2006, we issued 555,556 shares of restricted common stock
at $0.18 per share in exchange for an investment of $100,000. As an inducement
wealso 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.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
In December 2006, we 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 $10,000 based on the fair market value
of the intellectual property license. This transaction was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933.
On March 31, 2007, we entered into a common stock purchase agreement
(the "Purchase Agreement"), as amended on August 10, 2007, with Fusion Capital
Fund II, LLC, an Illinois limited liability company ("Fusion Capital") for the
purchase of up to $8.4 million. We agreed to sell to Fusion Capital 1,333,333
shares of our common stock for $400,000 on March 27, 2007. We agreed to issue to
Fusion Capital 1,050,000 shares of our common stock as a commitment fee for
entering into the Purchase Agreement. These issuances were exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
FISCAL YEAR ENDED MARCH 31, 2006
CONVERTIBLE DEBT AND WARRANTS
On May 16, 2005 we issued Fusion Capital ("Fusion") a $30,000
Convertible Promissory Note (the "Note") with an interest rate of fifteen
percent (15%) per annum that matured on August 15, 2005. In addition, we also
issued a five-year, cashless warrant to purchase 300,000 shares of our common
stock at an exercise price of $0.25. The Note was converted into 174,716
restricted shares of common stock in March 2006. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
II-7
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From July 11, 2005 through December 15, 2005 we received cash
investments of $760,000 from an accredited investor (Ellen R. Weiner Family
Revocable Trust) based on agreed-upon terms reached on the cash receipt dates.
Such investments were documented on November 2, 2005, November 4, 2005 and
December 15, 2005 in three 10% Series A Convertible Notes ("Weiner Series A
Notes"). The Weiner Series A Notes accrue interest at a rate of ten percent
(10%) per annum and mature on January 2, 2007. The Weiner Series A Notes are
convertible into shares of restricted common stock at any time at the election
of the holder at a conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date. In addition, upon conversion, the we
were obligated to issue three-year Warrants (the "Weiner Series A Warrants") to
purchase a number of shares equal to the number of shares into which the Weiner
Series A Notes can be converted at an exercise price of $0.20. The Weiner Series
A Warrants have been valued using a Binomial Lattice option pricing model and an
associated discount of $531,875, measured at the commitment dates, will be
expensed as future conversions occur. The convertible feature of the Weiner
Series A Notes provides for a rate of conversion that is below market value.
Pursuant to EITF 98-5 and EITF 00-27, we estimated the fair value of such BCF to
be $228,125 and records such amount as a debt discount. Such discount is being
accreted to interest expense over the term of the Weiner Series A Notes. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
From August 8, 2005 through December 14, 2005 we received cash
investments of $225,000, from an accredited investor (Allan S. Bird) based on
agreed upon terms reached on the cash receipt dates. Such investments were
documented on November 2, 2005, November 7, 2005 and December 14, 2005 in three
10% Series A Convertible Notes ("Bird Series A Notes"). The Bird Series A Notes
accrue interest at a rate of ten percent (10%) per annum and mature on January
2, 2007. The Bird Series A Notes are convertible into shares of restricted
common stock at any time at the election of the holder at a conversion price
equal to $0.20 per share for any conversion occurring on or prior to the
maturity date. In addition, upon conversion, we are obligated to issue
three-year Warrants (the "Bird Series A Warrants") to purchase a number of
shares equal to the number of shares into which the Bird Series A Notes can be
converted at an exercise price of $0.20. The Bird Series A Warrants have been
valued using a Binomial Lattice option pricing model and an associated discount
of $183,000, measured at the commitment dates. The discount will be expensed
when the warrants are issued when future debt conversions occur. The convertible
feature of the Bird Series A Note provides for a rate of conversion that is
below market value. Pursuant to EITF 98-5 and EITF 00-27, we have estimated the
fair value of such BCF to be $42,000 and records such amount as a debt discount.
Such discount is being accreted to interest expense over the term of the Bird
Series A Note. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
On December 15, 2005, we received total cash investments of $15,000
from two related accredited investors (Christian Hoffmann III and Claypoole
Capital, LLC). Such investments were documented in two 10% Series A Convertible
Notes ("December Notes"). The December Notes accrue interest at a rate of ten
percent (10%) per annum and mature on January 2, 2007. The December Notes are
convertible into shares of restricted common stock at any time at the election
of the holder at a conversion price of $0.20 per share for any conversion
occurring on or before the maturity date. In addition, upon conversion, we are
obligated to issue three-year Warrants (the "December Warrants") to purchase a
number of shares equal to the number of shares into which the December Notes
were converted at an exercise p rice of $0.20. The December Warrants have been
valued using a Binomial Lattice option pricing model and an associated discount
of $15,000, measured at the commitment date and the discount will be expensed
when the warrants are issued upon the occurrence of future debt conversion. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
COMMON STOCK AND WARRANTS
In May 2005 we issued 100,000 shares of common stock and a warrant to
purchase 400,000 shares of common stock at a purchase price of $0.176 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.
II-8
<page>
In June 2005, we issued 836,730 shares of restricted common stock and a
three-year warrant to purchase 418,365 shares of our 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
our restricted common stock were valued at $209,183 and, using a Black-Scholes
option pricing model, the warrant was valued at $100,408. Additional non-cash
expense of $142,245 was recorded as professional fees expense during the quarter
ended June 30, 2005. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
COMMON STOCK
In December 2005, we issued 73,964 shares of restricted common stock at
$0.246 per share in payment of legal fees related to capital raising
transactions valued at $18,202. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In January 2006, we issued 579,813 shares of restricted common stock at
$0.24 per share in payment for patent fees valued at $139,155. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In January 2006, we issued 66,017 shares of restricted common stock at
Prices ranging from $0.28 to $0.33 per share in payment for investor relations.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
During March 2006, we issued 568,181 shares of common stock, at $0.76
per share, to Fusion Capital for total proceeds of $431,818 pursuant to an
outstanding warrant held by Fusion Capital. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In March 2006, we repaid a $30,000 10% promissory notes, including
accrued interest of $4,564, through the issuance of 140,000 restricted common
shares at $0.25 per share to an accredited individual investor. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In March 2006, a $30,000 15% convertible note was converted at $0.20
per share for 174,716 shares of common stock at a price of $0.20 per share. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
In March 2006, we issued 150,000 shares of restricted common stock at
$0.326 per share in payment of profession services related to investor relations
valued at $49,000. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In March 2006, we issued 35,714 shares of restricted common stock at
$0.28 per share in payment of profession services related to investor relations
valued at $10,000. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In March 2006, we issued 15,152 shares of restricted common stock at
$0.33 per share in payment of profession services related to investor relations
valued at $5,000. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In March 2006, we issued 33,333 shares of restricted common stock at
$0.33 per share in payment of an option agreement valued at $10,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
OPTIONS
On September 9, 2005, we granted 2,857,143 options to James A. Joyce,
its Chief Executive Officer, in exchange for $300,000 of accrued related-party
liabilities. The fair value of such options approximated the value of the
accrued related-party liability. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
II-9
<page>
EXHIBITS
2.1 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Aethlon, Inc. dated March 10, 1999 (5)
2.2 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Hemex, Inc. dated March 10, 1999 (5)
2.3 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Syngen Research, Inc. (6)
2.4 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Cell Activation, Inc. (7)
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated
March 28, 2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated
June 13, 2005(3)
3.5 Certificate of Amendment of Articles of Incorporation dated
March 6, 2007 (23)
5.1 * Legal opinion by Richardson & Patel LLP
10.1 Employment Agreement between Aethlon Medical, Inc. and James
A. Joyce dated April 1, 1999 (4)
10.2 Common Stock Purchase Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.3 Registration Rights Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.4 Form of Securities Purchase Agreement for Private Placement
closing on June 7, 2004 (8)
10.5 Form of Common Stock Purchase Warrant for Private Placement
closing on June 7, 2004 (8)
10.6 Form of Registration Rights Agreement for Private Placement
closing on June 7, 2004 (8)
10.7 Note Purchase Agreement by and between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.8 Convertible Promissory Note by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.9 Form of Common Stock Cashless Purchase Warrant for benefit of
Fusion Capital Fund II, LLC, dated May 16, 2005. (9)
10.10 2003 Consultant Stock Plan (10)
10.11 Lease by and between Aethlon Medical, Inc. and San Diego
Science Center (11)
10.12 Consulting Agreement by and between Aethlon Medical, Inc. and
Jean-Claude Chermann, PhD (11)
10.13 Consulting Agreement by and between Aethlon Medical, Inc. and
Franklyn S. Barry, Jr. (11)
10.14 Patent License Agreement by and amongst Aethlon Medical, Inc.,
Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra
(11)
10.15 Employment Agreement by and between Aethlon Medical, Inc. and
Dr.Richard H. Tullis (11)
10.16 Employment Agreement by and between Aethlon Medical, Inc. and
Edward C. Hall (11)
10.17 Cooperative Agreement by and between Aethlon Medical, Inc. and
George Mason University (12)
10.18 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Charles Bailey (13)
II-10
<page>
10.19 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Ken Alibek (13)
10.20 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A Joyce (14)
10.21 Stock Option Agreement by and between Aethlon Medical, Inc.
and Richard Tullis (14)
10.22 Stock Option Agreement by and between Aethlon Medical, Inc.
and Franklyn S. Barry (14)
10.23 Stock Option Agreement by and between Aethlon Medical, Inc.
and Ed Broenniman (14)
10.24 Stock Option Agreement by and between Aethlon Medical, Inc.
and Calvin Leung (14)
10.25 Warrant for the benefit of Richardson and Patel, LLP (14)
10.26 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A. Joyce(15)
10.27 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Allan S. Bird(16)
10.28 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Ellen R. Weiner Family Revocable Trust(16)
10.29 Form of Warrant for Series A Convertible Noteholders(16)
10.30 Form of Registration Rights Agreement for Series A Convertible
Noteholders(16)
10.31 Employment Agreement by and between Aethlon Medical, Inc. and
James Dorst(17)
10.32 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Christian Hoffmann(18)
10.33 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Claypoole Capital, LLC(18)
10.34 Form of Warrant for additional Series A Convertible
Noteholders(18)
10.35 Form of Registration Rights Agreement for additional Series A
Convertible Noteholders(18)
10.36 Option Agreement by and between Aethlon Medical, Inc. and
Trustees of Boston University(19)
10.37 Warrant for the benefit of Fusion Capital Fund II, LLC(20)
10.38 Common Stock Purchase Agreement by and between Aethlon
Medical, Inc. and Fusion Capital Fund II, LLC dated March 21,
2007 (24)
10.39 Registration Rights Agreement by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC dated March 21, 2007(24)
10.40 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Christian
Hoffman III(25)
10.41 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Joel S.
Aronson, Patricia Green, Christina J. Bird, Co-Executor of the
Estate of Allan S. Bird(25)
10.42 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Claypoole
Capital, LLC(25)
10.43 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Ellen R.
Weiner Family Revocable Trust(25)
10.44 Private Placement Agreement with Fusion Capital Fund II, LLC
(25)
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<page>
10.45 Form of Registration Rights Agreement for Amended and Restated
Notes and Warrants (25)
10.46 Form of Class A Warrant (25)
10.47 Form of Class A Principal Warrant (25)
10.48 Form of Class A-1 Warrant (25)
10.49 Form of 10% Convertible Note (25)
10.50 Form of Class B Warrant (25)
10.51 Form of Class B-1 Warrant (25)
10.52 Form of Amended and Restated 10% Convertible Notes (25)
10.53 Form of Unit Securities including Promissory Note and Common
Stock Purchase Warrants (27)
10.54 Form of Unit Offering Subscription Agreement (25)
10.55 Form of Common Stock Warrant (25)
10.56 Form of Unit Securities including Promissory Note and Common
Stock Purchase Warrant (25)
10.57 First Amendment to Common Stock Purchase Agreement by and
between Aethlon Medical, Inc. and Fusion Capital Fund II, LLC
dated March 21, 2007 (25)
10.58 Form of Class C Common Stock Purchase Warrant (28)
10.59 Form of 10% Convertible Note (28)
14 Code of Ethics (25)
21 List of subsidiaries (10)
23.1* Consent of Squar, Milner, Peterson, Miranda & Williamson,
LLP, Independent Registered Public Accounting Firm
23.2* Consent of Richardson & Patel LLP (included in Exhibit 5.1)
* Filed herewith
(1) December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 14, 2005
and incorporated by reference.
(4) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 1999 and incorporated by reference.
(5) Filed with the Company's Current Report on Form 8-K dated March 26, 1999
and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated January 24,
2000 an incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated April 25, 2000
and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K dated June 9, 2004
and incorporated by reference.
(9) Filed with the Company's Current Report on Form 8-K dated May 23, 2005
and incorporated by reference.
II-12
<page>
(10) Filed with the Company Registration Statement on Form S-8 (File No.
333-114017) filed on August 29, 2005 and incorporated by reference.
(11) Filed with the Company's Annual Report on Form 10-KSB/A for the year
ended March 31, 2004 and incorporated by reference.
(12) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 filed on October 28, 2004 and incorporated by reference.
(13) Filed with the Company's Amendment No. 3 to Registration Statement on
Form SB-2 (File No. 333-117203) filed on November 24, 2004 and
incorporated by reference.
(14) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2005 and incorporated by reference.
(15) Filed with the Company's Current Report on Form 8-K filed on September
12, 2005 and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K filed on November 7,
2005 and incorporated by reference.
(17) Filed with the Company's Post-Effective Amendment to Registration
Statement on Form SB-2 filed on December 8, 2005 and incorporated by
reference.
(18) Filed with the Company's Registration Statement on Form SB-2 (File No.
333-130915) filed on January 9, 2006 and incorporated by reference.
(19) Filed with the Company's Current Report on Form 8-K filed on February
23, 2006 and incorporated by reference.
(20) Filed with the Company's Current Report on Form 8-K filed on April 4,
2006 and incorporated by reference.
(21) Filed with the Company's Current Report on Form 8-K filed on May 1, 2008
and incorporated by reference.
(22) Filed with the Company's Registration Statement on Form SB-2 filed on
July 7, 2004 and incorporated by reference.
(23) Filed with the Company's Current Report on form 8-K dated March 7, 2007
and incorporated herein by reference.
(24) Filed with the Company's Current Report on form 8-K dated March 22, 2007
and incorporated herein by reference.
(25) Filed with the Company's Registration Statement on Form S-1 filed on
February 11, 2008 and incorporated by reference.
(26) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2006 and incorporated by reference.
(27) Filed with the Company's Current Report on Form 8-K dated December 11,
2007 and incorporated by reference.
(28) Filed with the Company's Current Report on Form 8-K dated August 14,
2008 And incorporated by reference.
II-13
<page>
UNDERTAKINGS.
We hereby undertake to:
1. File, during any period in which we offer or sell securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC under Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table on
the face page of the effective registration statement; or
(iii) Include any additional or changed material information on the
plan of distribution.
2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
3. For determining liability of the undersigned registrant
under the Securities Act to any purchaser in the initial distribution
of the securities, the undersigned registrant undertakes
that in a primary offering of securities of the undersigned small
business issuer pursuant to this registration statement, regardless of
the underwriting method used to sell the securities to the purchaser,
if the securities are offered or sold to such purchaser by means of any
of the following communications, the undersigned registrant
will be a seller to the purchaser and will be considered to offer or
sell such securities to such purchaser: Any preliminary prospectus or
prospectus of the undersigned registrant relating to the
offering required to be filed pursuant to Rule 424; Any free writing
prospectus relating to the offering prepared by or on behalf of the
undersigned registrant or used or referred to by the
undersigned registrant; The portion of any other free
writing prospectus relating to the offering containing material
information about the undersigned registrant or its
securities provided by or on behalf of the undersigned small business
issuer; and Any other communication that is an offer in the offering
made by the undersigned registrant to the purchaser.
4. File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
5. Each prospectus filed by the undersigned registrant pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as
of the date the filed prospectus was deemed part of and included in the
registration statement.
6. Each prospectus filed pursuant to Rule 424(b) as part of a registration
statement relating to an offering, other than registration statements
relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after
effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration
statement or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such
document immediately prior to such date of first use.
II-14
<page>
7. Each prospectus required to be filed pursuant to Rule 424(b)(2),
(b)(5), or (b)(7) as part of a registration statement in reliance on
Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i),
(vii), or (x) for the purpose of providing the information required by
section 10(a) of the Securities Act shall be deemed to be part of and
included in the registration statement as of the earlier of the date
such form of prospectus is first used after effectiveness or the date
of the first contract of sale of securities in the offering described
in the prospectus. As provided in Rule 430B, for liability purposes of
the issuer and any person that is at that date an Underwriter, such
date shall be deemed to be a new effective date of the registration
statement Relating to the securities in the registration statement to
which that prospectus relates, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement will, as to a
purchaser with a time of contract of sale prior to such effective date,
supersede or modify any statement that was made in the registration
statement or prospectus that was part of the registration statement or
made in any such document immediately prior to such effective date.
5. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
under the foregoing provisions or otherwise, we have been advised that
in the opinion of the SEC such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. If
a claim for indemnification against such liabilities (other than our
payment of expenses incurred or paid by any of our directors, officers
or controlling persons in the successful defense of any action, suit,
or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, we will,
unless in the opinion of our counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-15
<page>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Form S-1 Registration Statement and
authorized this Form S-1 Registration Statement to be signed on its behalf by
the undersigned, in the City of San Diego, State of California on September 26,
2008.
AETHLON MEDICAL, INC.
By: /s/ James A. Joyce
-------------------------------------
James A. Joyce
Chief Executive Officer, President and
Chief Financial Officer
(principal executive officer and principal
accounting officer)
In accordance with the requirements of the Securities Act of 1933, this
Form S-1 Registration Statement was signed by the following persons in the
capacities and on the dates stated:
By: /S/ James A. Joyce President, Chief Executive Officer, September 26, 2008
-------------------------------- Chief Financial Officer and Chairman
James A. Joyce (principal executive officer and principal
accounting officer)
By: /S/ Richard H. Tullis Chief Science Officer and Director September 26, 2008
--------------------------------
Richard H. Tullis
By: /S/ Franklyn S. Barry, Jr. Director September 26, 2008
--------------------------------
Franklyn S. Barry, Jr.
By: /S/ Edward Broenniman Director September 26, 2008
--------------------------------
Edward Broenniman
II-16
<page>
EXHIBIT INDEX
2.1 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Aethlon, Inc. dated March 10, 1999 (5)
2.2 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Hemex, Inc. dated March 10, 1999 (5)
2.3 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Syngen Research, Inc. (6)
2.4 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Cell Activation, Inc. (7)
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated
March 28, 2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated
June 13, 2005(3)
3.5 Certificate of Amendment of Articles of Incorporation dated
March 6, 2007 (23)
5.1 * Legal opinion by Richardson & Patel LLP
10.1 Employment Agreement between Aethlon Medical, Inc. and James
A. Joyce dated April 1, 1999 (4)
10.2 Common Stock Purchase Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.3 Registration Rights Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.4 Form of Securities Purchase Agreement for Private Placement
closing on June 7, 2004 (8)
10.5 Form of Common Stock Purchase Warrant for Private Placement
closing on June 7, 2004 (8)
10.6 Form of Registration Rights Agreement for Private Placement
closing on June 7, 2004 (8)
10.7 Note Purchase Agreement by and between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.8 Convertible Promissory Note by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.9 Form of Common Stock Cashless Purchase Warrant for benefit of
Fusion Capital Fund II, LLC, dated May 16, 2005. (9)
10.10 2003 Consultant Stock Plan (10)
10.11 Lease by and between Aethlon Medical, Inc. and San Diego
Science Center (11)
10.12 Consulting Agreement by and between Aethlon Medical, Inc. and
Jean-Claude Chermann, PhD (11)
10.13 Consulting Agreement by and between Aethlon Medical, Inc. and
Franklyn S. Barry, Jr. (11)
10.14 Patent License Agreement by and amongst Aethlon Medical, Inc.,
Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra
(11)
10.15 Employment Agreement by and between Aethlon Medical, Inc. and
Dr.Richard H. Tullis (11)
10.16 Employment Agreement by and between Aethlon Medical, Inc. and
Edward C. Hall (11)
10.17 Cooperative Agreement by and between Aethlon Medical, Inc. and
George Mason University (12)
10.18 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Charles Bailey (13)
II-17
<page>
10.19 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Ken Alibek (13)
10.20 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A Joyce (14)
10.21 Stock Option Agreement by and between Aethlon Medical, Inc.
and Richard Tullis (14)
10.22 Stock Option Agreement by and between Aethlon Medical, Inc.
and Franklyn S. Barry (14)
10.23 Stock Option Agreement by and between Aethlon Medical, Inc.
and Ed Broenniman (14)
10.24 Stock Option Agreement by and between Aethlon Medical, Inc.
and Calvin Leung (14)
10.25 Warrant for the benefit of Richardson and Patel, LLP (14)
10.26 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A. Joyce(15)
10.27 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Allan S. Bird(16)
10.28 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Ellen R. Weiner Family Revocable Trust(16)
10.29 Form of Warrant for Series A Convertible Noteholders(16)
10.30 Form of Registration Rights Agreement for Series A Convertible
Noteholders(16)
10.31 Employment Agreement by and between Aethlon Medical, Inc. and
James Dorst(17)
10.32 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Christian Hoffmann(18)
10.33 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Claypoole Capital, LLC(18)
10.34 Form of Warrant for additional Series A Convertible
Noteholders(18)
10.35 Form of Registration Rights Agreement for additional Series A
Convertible Noteholders(18)
10.36 Option Agreement by and between Aethlon Medical, Inc. and
Trustees of Boston University(19)
10.37 Warrant for the benefit of Fusion Capital Fund II, LLC(20)
10.38 Common Stock Purchase Agreement by and between Aethlon
Medical, Inc. and Fusion Capital Fund II, LLC dated March 21,
2007 (24)
10.39 Registration Rights Agreement by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC dated March 21, 2007(24)
10.40 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Christian
Hoffman III(25)
10.41 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Joel S.
Aronson, Patricia Green, Christina J. Bird, Co-Executor of the
Estate of Allan S. Bird(25)
10.42 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Claypoole
Capital, LLC(25)
10.43 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Ellen R.
Weiner Family Revocable Trust(25)
10.44 Private Placement Agreement with Fusion Capital Fund II, LLC
(25)
10.45 Form of Registration Rights Agreement for Amended and Restated
Notes and Warrants (25)
II-18
<page>
10.46 Form of Class A Warrant (25)
10.47 Form of Class A Principal Warrant (25)
10.48 Form of Class A-1 Warrant (25)
10.49 Form of 10% Convertible Note (25)
10.50 Form of Class B Warrant (25)
10.51 Form of Class B-1 Warrant (25)
10.52 Form of Amended and Restated 10% Convertible Notes (25)
10.53 Form of Unit Securities including Promissory Note and Common
Stock Purchase Warrants (27)
10.54 Form of Unit Offering Subscription Agreement (25)
10.55 Form of Common Stock Warrant (25)
10.56 Form of Unit Securities including Promissory Note and Common
Stock Purchase Warrant (25)
10.57 First Amendment to Common Stock Purchase Agreement by and
between Aethlon Medical, Inc. and Fusion Capital Fund II, LLC
dated March 21, 2007 (25)
10.60 Form of Class C Common Stock Purchase Warrant (28)
10.61 Form of 10% Convertible Note (28)
14 Code of Ethics (25)
21 List of subsidiaries (10)
23.1* Consent of Squar, Milner, Peterson, Miranda & Williamson,
LLP, Independent Registered Public Accounting Firm
23.2* Consent of Richardson & Patel LLP (included in Exhibit 5.1)
* Filed herewith
(1) December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 14, 2005
and incorporated by reference.
(4) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 1999 and incorporated by reference.
(5) Filed with the Company's Current Report on Form 8-K dated March 26, 1999
and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated January 24,
2000 an incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated April 25, 2000
and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K dated June 9, 2004
and incorporated by reference.
(9) Filed with the Company's Current Report on Form 8-K dated May 23, 2005
and incorporated by reference.
(10) Filed with the Company Registration Statement on Form S-8 (File No.
333-114017) filed on August 29, 2005 and incorporated by reference.
II-19
<page>
(11) Filed with the Company's Annual Report on Form 10-KSB/A for the year
ended March 31, 2004 and incorporated by reference.
(12) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 filed on October 28, 2004 and incorporated by reference.
(13) Filed with the Company's Amendment No. 3 to Registration Statement on
Form SB-2 (File No. 333-117203) filed on November 24, 2004 and
incorporated by reference.
(14) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2005 and incorporated by reference.
(15) Filed with the Company's Current Report on Form 8-K filed on September
12, 2005 and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K filed on November 7,
2005 and incorporated by reference.
(17) Filed with the Company's Post-Effective Amendment to Registration
Statement on Form SB-2 filed on December 8, 2005 and incorporated by
reference.
(18) Filed with the Company's Registration Statement on Form SB-2 (File No.
333-130915) filed on January 9, 2006 and incorporated by reference.
(19) Filed with the Company's Current Report on Form 8-K filed on February
23, 2006 and incorporated by reference.
(20) Filed with the Company's Current Report on Form 8-K filed on April 4,
2006 and incorporated by reference.
(21) Filed with the Company's Current Report on Form 8-K filed on May 1, 2008
and incorporated by reference.
(22) Filed with the Company's Registration Statement on Form SB-2 filed on
July 7, 2004 and incorporated by reference.
(23) Filed with the Company's Current Report on form 8-K dated March 7, 2007
and incorporated herein by reference.
(24) Filed with the Company's Current Report on form 8-K dated March 22, 2007
and incorporated herein by reference.
(25) Filed with the Company's Registration Statement on Form S-1 filed on
February 11, 2008 and incorporated by reference.
(26) Filed with the Company's Annual Report on Form 10-KSB for the year ended
March 31, 2006 and incorporated by reference.
(27) Filed with the Company's Current Report on Form 8-K dated December 11,
2007 and incorporated by reference.
(28) Filed with the Company's Current Report on Form 8-K dated August 14,
2008 And incorporated by reference.
II-20
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FINANCIAL STATEMENTS
Year Ended March 31, 2008
Report of Independent Registered Public Accounting Firm.................... F-2
Consolidated Balance Sheet ................................................ F-3
Consolidated Statements of Operations ..................................... F-45
Consolidated Statements of Stockholders' Deficit........................... F-5
Consolidated Statements of Cash Flows ..................................... F-18
Notes to Consolidated Financial Statements................................. F-20
Quarter Ended June 30, 2008 (UNAUDITED)
Consolidated Balance Sheet ................................................ F-58
Consolidated Statement of Operations ...................................... F-59
Consolidated Statement of Cash Flows ...................................... F-60
Notes to Consolidated Financial Statements ................................ F-62
F-1
<page>
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 sheet of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2008 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2008. 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, 2008 and the consolidated results of their
operations and their cash flows for each of the years in the two-year period
then ended and for the period from January 31, 1984 (Inception) to March 31,
2008, in conformity with accounting principles generally accepted in the United
States of America.
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 $3,481,000 and a deficit accumulated
during the development stage of approximately $32,227,000 at March 31, 2008. As
discussed in Note 1 to the consolidated financial statements, a significant
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
These conditions, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/S/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
NEWPORT BEACH, CALIFORNIA
JULY 14, 2008
F-2
<page>
- --------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2008
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 254,691
Deferred financing costs 71,139
Prepaid expenses 3,600
------------
TOTAL CURRENT ASSETS 329,430
NON-CURRENT ASSETS
Property and equipment, net 8,313
Patents, net 137,162
Deposits 13,200
------------
TOTAL ASSETS $ 488,105
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,442,070
Due to related parties 949,063
Notes payable, net of discounts 633,611
Convertible notes payable, net of discounts 152,530
Warrant obligation 633,095
------------
TOTAL CURRENT LIABILITIES 3,810,369
------------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' DEFICIT
Common stock, par value of $0.001, 100,000,000 shares
authorized; 38,991,151 issued and outstanding 38,992
Additional paid-in capital 28,866,000
Deficit accumulated during the development stage (32,227,256)
------------
TOTAL STOCKHOLDERS' DEFICIT (3,322,264)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 488,105
============
- --------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<page>
- -----------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -----------------------------------------------------------------------------------------------
JANUARY 31, 1984
(INCEPTION) THROUGH
2008 2007 MARCH 31, 2008
-------------------------------------------------
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
-------------------------------------------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 1,005,442 700,092 6,943,669
Payroll and related 1,363,950 889,192 9,499,147
General and administrative 523,196 494,970 5,450,197
Impairment -- -- 1,313,253
-------------------------------------------------
2,892,588 2,084,254 23,206,266
-------------------------------------------------
OPERATING LOSS (2,892,588) (2,084,254) (21,672,698)
OTHER (INCOME) EXPENSE
Loss on extinguishment of debt 547,119 1,216,748 1,763,867
Change in fair value of warrant liability (637,179) 2,112,575 1,835,521
Interest expense 1,319,487 390,968 6,581,907
Interest income -- -- (17,415)
Other 18,249 220,000 390,678
-------------------------------------------------
1,247,676 3,940,291 10,554,558
-------------------------------------------------
NET LOSS $ (4,140,264) $ (6,024,545) $(32,227,256)
=================================================
Basic and diluted net loss per share
attributable to common stockholders $ (0.12) $ (0.22)
===============================
Weighted average number of common
shares outstanding 34,395,562 26,937,727
===============================
- -----------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<page>
- --------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- --------------------------------------------------------------------------------------------------------------
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
<page>
- --------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- --------------------------------------------------------------------------------------------------------------
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
<page>
- ---------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- ---------------------------------------------------------------------------------------------------------------
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
<page>
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -----------------------------------------------------------------------------------------------------------------
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
<page>
- --------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- --------------------------------------------------------------------------------------------------------------------
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
<page>
- -------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -------------------------------------------------------------------------------------------------------------------
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) -- -- (0)
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
<page>
- ----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- ----------------------------------------------------------------------------------------------------------------
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 $ 16,088,278 $ (30,000) $(19,142,264) $(3,066,971)
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
<page>
- ----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- ----------------------------------------------------------------------------------------------------------------
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
<page>
- ----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- ----------------------------------------------------------------------------------------------------------------
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
<page>
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -----------------------------------------------------------------------------------------------------------------
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 $ 25,384 $ 20,322,494 $ (44,917) $(22,062,447) $(1,759,486)
----------- -------- ------------ ---------- ------------- ------------
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 -- -- 31,965
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
<page>
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -----------------------------------------------------------------------------------------------------------------
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) (144) 144 -- -- --
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 $ 31,912 $ 20,963,410 $ -- $(28,086,992) $ (7,091,670)
============ ======== ============ ========= ============= =============
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-15
<page>
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -----------------------------------------------------------------------------------------------------------------
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 $ 31,912 $ 20,963,410 $ -- $(28,086,992) $(7,091,670)
----------- -------- ---------- --------- ------------- ------------
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
<page>
- -----------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- -----------------------------------------------------------------------------------------------------------------
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)
============ ======== ============ ======== ============= =============
- -----------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-17
<page>
- ---------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008
- ---------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2008 2007 March 31, 2008
-----------------------------------------------
Cash flows from operating activities:
Net loss $ (4,140,264) $ (6,024,545) $(32,227,256)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 21,550 23,400 1,028,943
Amortization of deferred consulting fees -- 44,917 109,000
Gain on settlement of debt -- -- (131,175)
Loss on settlement of accrued legal liabilities -- -- 142,245
Gain on sale of property and equipment -- -- (13,065)
Change in estimated fair value of warrant liability (637,179) 2,112,575 1,835,521
Fair market value of warrants issued in connection
with accounts payable and debt related costs -- -- 2,715,736
Fair market value of common stock, warrants and
options issued for services and interest 325,157 274,914 3,812,073
Stock based compensation 487,093 38,132 949,487
Loss on debt extinguishment 547,119 1,216,748 1,763,867
Amortization of debt discount 1,195,863 177,762 2,481,650
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 970 27,652 157,937
Other assets -- 4,000 (13,200)
Accounts payable and accrued liabilities 140,355 535,166 2,189,471
Due to related parties (44,936) (149,625) 1,277,564
------------------------------------------------
Net cash used in operating activities (2,104,272) (1,718,904) (12,390,726)
-------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (4,746) (17,810) (271,443)
Patents and patents pending (6,797) (6,294) (376,924)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
-------------------------------------------------
Net cash used in investing activities (11,543) (24,104) (620,574)
-------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-18
<page>
- ---------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2008 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2008 2007 March 31, 2008
------------------------------------------------
Cash flows from financing activities:
Net proceeds from the issuance of notes payable 640,000 -- 2,350,000
Principal repayments of notes payable (60,000) -- (352,500)
Proceeds from the issuance of convertible notes payable 60,000 50,000 2,138,000
Net proceeds from the issuance of common stock 1,290,400 1,296,737 9,207,222
Professional fees related to registration statements -- -- (76,731)
------------------------------------------------
Net cash provided by financing activities 1,930,400 1,346,737 13,265,991
------------------------------------------------
Net increase (decrease) in cash (185,415) (396,271) 254,691
Cash at beginning of period 440,106 836,377 --
------------------------------------------------
Cash at end of period $ 254,691 $ 440,106 $ 254,691
================================================
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 3,717 $ -- $ 266,975
================================================
Income taxes $ -- $ -- $ 13,346
================================================
Supplement schedule of noncash investing and financing activities:
Debt and accrued interest converted to common stock $ 316,375 $ 43,750 $ 2,797,086
================================================
Stock option exercise by director for accrued expenses $ 95,000 $ -- $ 95,000
================================================
Debt discount on notes payable associated with detachable
warrants $ -- $ 50,000 $ 1,154,860
================================================
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related parties $ -- $ 23,111 $ 1,003,273
================================================
Reclassification of derivative liability to (from)
additional paid-in capital $ -- $ (1,090,000) $ --
================================================
Issuance of common stock in connection with license agreements $ -- $ -- $ 18,000
================================================
Net assets of entities acquired in exchange for equity
securities $ -- $ -- $ 1,597,867
================================================
Debt placement fees paid by issuance of warrants $ -- $ -- $ 843,538
================================================
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 $ 5,000 $ 10,800 $ 15,800
================================================
- ---------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
</table>
F-19
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. ("Aethlon" or the "Company") 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 Excemption ("IDE") to the FDA and plans to
begin FDA sanctioned clinical trials within the next twelve months. Since many
of Aethlon's patents were issued in the 1980's, some have expired and other are
scheduled to expire in the near future. Thus, some patents may expire before FDA
approval or approval in a foreign country, if any, is obtained. However, the
Company believes that certain patent applications and/or other patents issued
more recently will help protect the proprietary nature of the Hemopurifier(R)
treatment technology.
Aethlon is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its planned principal operations.
Aethlon's common stock is quoted on the Over-the-Counter Bulletin Board
administered by the Financial Industry Regulatory Authority ("OTCBB") under the
symbol "AEMD.OB."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its inactive wholly-owned subsidiaries Aethlon, Inc.,
Hemex, Inc., Syngen Research, Inc. and Cell Activation, Inc.(hereinafter
collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has incurred continuing losses from
operations, is in default on certain debt agreements, has negative working
capital of approximately $3,481,000, recurring losses from operations and a
deficit accumulated during the development stage of approximately $32,227,000 at
March 31, 2008, which among other matters, raises substantial doubt about its
ability to continue as a going concern. A significant amount of additional
capital will be necessary to advance the development of the Company's products
to the point at which they may become commercially viable. The Company intends
to fund operations through debt and/or equity financing arrangements, which
management believes may be insufficient to fund its capital expenditures,
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, 2009. Therefore, the
Company will be required to seek additional funds to finance its current and
long-term operations.
The Company is currently addressing its liquidity issue by continually seeking
investment capital through private placements of common stock and debt. The
Company believes that its cash on hand and funds expected to be received from
additional private investment will be sufficient to meet its liquidity needs for
fiscal 2009. However, no assurance can be given that the Company will receive
any funds in addition to the funds it has received to date.
F-20
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOING CONCERN (continued)
The successful outcome of future activities cannot be determined at this time
and there is no assurance that, if achieved, the Company will have sufficient
funds to execute its intended business plan or generate positive operating
results.
The consolidated financial statements do not include any adjustments related to
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
RISKS AND UNCERTAINTIES
The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.
USE OF ESTIMATES
The Company prepares its consolidated financial statements in conformity with
GAAP, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods. Significant
estimates made by management include, among others, realization of long-lived
assets, valuation of derivative liabilities, estimating fair value associated
with debt and equity transactions and valuation of deferred tax assets. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. The carrying amount of the Company's cash, accounts payable and accrued
liabilities approximates their estimated fair values due to the short-term
maturities of those financial instruments. The fair value of certain convertible
notes at March 31, 2008 approximates $6,668,601 based upon a third party
valuation report that we commissioned.
Management has concluded that it is not practical to determine the estimated
fair value of amounts due to related parties. SFAS No. 107 requires that for
instruments for which it is not practicable to estimate their fair value,
information pertinent to those instruments be disclosed, such as the carrying
amount, interest rate, and maturity, as well as the reasons why it is not
practicable to estimate fair value. Information about these related party
instruments is included in Note 8. Management believes it is not practical to
estimate the fair value of such financial instruments because the transactions
cannot be assumed to have been consummated at arm's length, the terms are not
deemed to be market terms, there are no quoted values available for these
instruments, and an independent valuation would not be practicable due to the
lack of data regarding similar instruments, if any, and the associated potential
costs.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at a single financial institution. The Federal Deposit
Insurance Corporation ("FDIC") insures accounts at each institution for up to
$100,000. At times, cash may be in excess of the FDIC insurance limit. The
Company had approximately $155,000 exceeding this limit at March 31, 2008.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from two to five years. Repairs and maintenance are charged to
expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation with any gain or loss included in the
statements of operations.
INCOME TAXES
Under SFAS No. 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carry-forwards. The Company records a valuation allowance for deferred
tax assets when, based on management's best estimate of taxable income in the
foreseeable future, it is more likely than not that some portion of the deferred
income tax assets may not be realized.
In May 2007, the FASB issued Staff Position FIN 48-1, "Definition of SETTLEMENT
in FASB Interpretation No. 48" ("FSP FIN 48-1"), which amends FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement No. 109" ("FIN 48," together with FSP FIN 48-1
referred as "FIN 48, as amended"). As of April 1, 2007, we adopted the
provisions of FIN 48, as amended, which clarify the accounting for uncertainty
in income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." FIN 48, as amended, prescribes
a recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position an entity takes or expects to take
in a tax return. To recognize a tax position, the tax position must be
more-likely-than-not sustainable upon examination by the relevant taxing
authority, and the relevant measurement of the position must be the largest
amount of benefit that we would more than 50% likely realize upon settlement. We
would recognize the benefit of a position in the interim reporting period during
which it meets the threshold, unless we effectively settle it earlier through
examination, negotiation, or litigation or the applicable statute of limitations
period expires.
The Company did not recognize any additional liability for unrecognized tax
benefit as a result of the implementation. As of March 31, 2008, the Company did
not increase or decrease liability for unrecognized tax benefit related to tax
positions in prior period nor did the company increase its liability for any tax
positions in the current year. Furthermore, there were no adjustments to the
liability or lapse of statute of limitation or settlements with taxing
authorities.
F-21
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
LONG-LIVED ASSETS
SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of," addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be
recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset, an impairment loss
is recognized.
Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value. SFAS No. 144 also requires companies to
separately report discontinued operations and extends that reporting requirement
to a component of an entity that either has been disposed of (by sale,
abandonment or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or the
estimated fair value less costs to sell. The provisions of this pronouncement
relating to assets held for disposal generally are required to be applied
prospectively after the adoption date to newly initiated commitments to sell or
dispose of such assets, (as defined), by management. As a result, management
cannot determine the potential effects that adoption of SFAS No. 144 will have
on the Company's financial statements with respect to future disposal decisions,
if any. Management believes no impairment charges were necessary during the
fiscal years ended March 31, 2008 and 2007.
EARNINGS (LOSS) PER SHARE
Under SFAS No. 128, "Earnings per Share," basic earnings (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 earnings (loss) per share is computed similar to basic
earnings 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. In each of the years ended March 31, 2008 and 2007, 9,865,775 and
12,885,453 shares would have been considered additional common stock
equivalents, respectively, based on the treasury stock method. As the Company
had net losses for the 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.
SEGMENTS
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information," requires public companies to report selected segment information
in their quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds significant assets and how the Company reports
revenues and its major customers. The Company currently operates in one segment,
as disclosed in the accompanying consolidated statements of operations.
F-22
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK-BASED COMPENSATION
Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123-R,
"Share-Based Payment." SFAS No. 123-R requires employee stock options and rights
to purchase shares under stock participation plans to be accounted for under the
fair value method and requires the use of an option pricing model for estimating
fair value. 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. Prior to April 1, 2006, the Company accounted for awards
granted under its equity incentive plan under the intrinsic value method
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, and provided the
required pro forma disclosures prescribed by SFAS No. 123, "Accounting for Stock
Based Compensation," as amended. The exercise price of options is generally
equal to the market price of the Company's common stock (defined as the closing
price as quoted on the Over-the-Counter Bulletin Board administered by Nasdaq)
on the date of grant. Under the modified prospective method of adoption for SFAS
No. 123-R, the compensation cost recognized by the Company beginning April 1,
2006 includes (a) compensation cost for all equity incentive awards granted
prior to, but not yet vested as of April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS No. 123, and
(b) compensation cost for all equity incentive awards granted subsequent to
April 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123-R.
From time to time, the Company's 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 the Company's formal stock plans. The terms
of these grants are individually negotiated and generally expire within five
years from the grant date.
In August 2000, the Company 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 Company 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 the Company's 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, 2008, the Company had granted 47,500 options under
the 2000 Stock Option Plan of which 15,000 had been forfeited, with 467,500
available for future issuance. All of these options vested prior to the adoption
of FAS 123-R.
The effects of share-based compensation resulting from the application of SFAS
No. 123-R to options granted outside of the Company's Stock Option Plan resulted
in an expense of $487,093 for the fiscal year ended March 31, 2008. This expense
was recorded as stock compensation included in payroll and related expenses in
the accompanying March 31, 2008 condensed consolidated statement of operations.
Share-based compensation recognized as a result of the adoption of SFAS No.
123-R as well as pro forma disclosures according to the original provisions of
SFAS No. 123 for periods prior to the adoption of SFAS No. 123-R use the
Binomial Lattice option pricing model for estimating fair value of options
granted.
F-23
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
The following table summarizes the effect of share-based compensation resulting
from the application of SFAS No. 123-R to options granted:
Fiscal Year Ended Fiscal Year Ended
March 31, 2008 March 31, 2007
Payroll and related $ 487,093 $ 38,132
=========== ========
Net share-based compensation effect
in net loss from operations $ 487,093 $ 38,132
=========== ========
Basic and diluted loss per common share $ (0.01) $ (0.00)
=========== ========
The Company follows SFAS No. 123-R (as interpreted by EITF Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services") to account for
transactions involving services provided by third parties where the Company
issues equity instruments as part of the total consideration.
Pursuant to paragraph 8 of SFAS No. 123, the Company accounts for such
transactions 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. The Company applies EITF Issue No. 96-18,
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, using the following methodology:
a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the performance
is complete (and valued on the date of issuance).
b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the date of
the contract.
c) For any transactions not meeting the criteria in (a) or (b) above, the
Company re-measures the consideration at each reporting date based on its then
current stock value.
In accordance with SFAS No. 123-R, the Company reviews 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, 2008 was insignificant.
F-24
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PATENTS
The Company capitalizes the cost of patents and patents pending, some of which
were acquired, and amortizes such costs over the shorter of the remaining legal
life or their estimated economic life, upon issuance of the patent.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company granted warrants in connection with the issuance of certain notes
payable. Under APB Opinion No. 14, "Accounting for Convertible Debt and Debt
Issued With Stock Purchase Warrants", as amended, the relative estimated fair
value of such warrants represents a discount from the face amount of the notes
payable. Accordingly, the relative estimated fair value of the warrants in those
certain transactions where the warrants qualified for equity classification has
been recorded in the consolidated financial statements as a discount from the
face amount of the notes. The discount is amortized using the effective yield
method over the respective term of the related notes payable.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable (see Notes 6 and 7) provides
for a rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging
Issues Task Force Issue No. 98-5 ("EITF Issue No. 98-5"), "Accounting for
Convertible Securities With Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio" and Emerging Issues Task Force Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible Instruments," the
estimated fair value of the BCF is recorded in the consolidated financial
statements as a discount from the face amount of the notes. Such discounts are
accreted to interest expense over the term of the notes using the effective
yield method.
REGISTRATION PAYMENT ARRANGEMENTS
The Company accounts for its liquidated damages on registration rights
agreements (see Note 6) in accordance with FASB Staff Position EITF 00-19-2,
which specifies that the contingent obligation to make future payments or
otherwise transfer consideration under a registration payment arrangement should
be separately recognized and measured in accordance with SFAS No. 5, "Accounting
for Contingencies." As of March 31, 2008, we have accrued $368,487 for
liquidated damages.
RESEARCH AND DEVELOPMENT EXPENSES
The Company incurred approximately $792,136 and $673,614 of research and
development expenses during the years ended March 31, 2008 and 2007,
respectively, which are included in various operating expenses in the
accompanying consolidated statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on the
Company's financial statements.
F-25
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109."
This interpretation clarifies the accounting for uncertainty in income taxes
recognized in an enterprise's financial statements in accordance with SFAS No.
109,"Accounting for Income Taxes." FIN No. 48 prescribes a more-likely-than-not
recognition threshold and a measurement attribute for the financial statement
recognition and measurement of tax positions taken (or expected to be taken) in
an income tax return. It also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. The requirement to assess the need for a valuation
allowance on net deferred tax assets is not affected by FIN No. 48. This
pronouncement is effective for fiscal years beginning after December 31, 2006.
The adoption of this interpretation did not have a material impact on the
Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS
No. 157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS No. 157 applies under other accounting pronouncements
that require or permit fair value measurements, the FASB having previously
concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS No. 157 does not require any new fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after
December 15, 2007. The Company plans to adopt SFAS No. 157 beginning in the
first quarter of fiscal 2008. The Company is currently evaluating the impact, if
any, the adoption of SFAS No. 157 will have on its financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 expands the scope of
specific types of assets and liabilities that an entity may carry at fair value
on its statement of financial position, and offers an irrevocable option to
record the vast majority of financial assets and liabilities at fair value, with
changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. The Company is currently evaluating the
impact, if any, SFAS No. 159 will have on its financial statements.
F-26
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In November 2007, the EITF issued a consensus on EITF 07-1, "Accounting for
Collaborative Arrangements" ("EITF 07-1"). The Task Force reached a consensus on
how to determine whether an arrangement constitutes a collaborative arrangement,
how costs incurred and revenue generated on sales to third parties should be
reported by the partners to a collaborative arrangement in each of their
respective income statements, how payments made to or received by a partner
pursuant to a collaborative arrangement should be presented in the income
statement, and what participants should disclose in the notes to the financial
statements about a collaborative arrangement. This issue shall be effective for
annual periods beginning after December 15, 2008. Entities should report the
effects of applying this Issue as a change in accounting principle through
retrospective application to all periods to the extent practicable. Upon
application of this issue, the following should be disclosed: a) a description
of the prior-period information that has been retrospectively adjusted, if any,
and b) the effect of the change on revenue and operating expenses (or other
appropriate captions of changes in the applicable net assets or performance
indicator) and on any other affected financial statement line item. We are
currently evaluating the impact, if any, of the adoption of EITF 07-1 on our
consolidated financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141(revised 2007), "Business
Combinations" ("SFAS 141(R)"). This statement requires an acquiror to recognize
the assets acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values as of that
date. SFAS 141(R) replaces the cost-allocation process of SFAS No. 141,
"Business Combinations" ("SFAS 141") which required the cost of an acquisition
to be allocated to the individual assets acquired and liabilities assumed based
on their estimated fair values. This statement applies prospectively to business
combinations for which the acquisition date is on or after January 1, 2009.
Earlier adoption is prohibited.
The Sarbanes-Oxley Act of 2002 ("the Act") introduced new requirements regarding
corporate governance and financial reporting. Among the many requirements of the
Act is for management to annually assess and report on the effectiveness of its
internal control over financial reporting under Section 404(a) and for its
registered public accountant to attest to this report under Section 404(b). The
SEC has modified the effective date and adoption requirements of Section 404(a)
and Section 404(b) implementation for non-accelerated filers multiple times,
such that we are first required to issue our management report on internal
control over financial reporting in this annual report on Form 10-KSB for the
fiscal year ending March 31, 2008. Based on current SEC requirements, we will
not be required to have our auditor attest to management's assessment until our
fiscal year ending March 31, 2010.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
F-27
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2008:
Furniture and office equipment $ 266,280
Accumulated depreciation (257,967)
---------------
$ 8,313
===============
Depreciation expense for the years ended March 31, 2008 and 2007 approximated
$12,000 and 16,500, respectively.
3. PATENTS
Patents include both foreign and domestic patents. There were several patents
pending at March 31, 2008 and 2007. The unamortized cost of patents and patents
pending is written off when management determines there is no future benefit. At
March 31, 2008, the gross carrying amount of patents and patents in process
totaled approximately $181,000 and the related accumulated amortization totaled
approximately $44,000. Amortization of patents approximated $11,000 and $7,000
during the years ended March 31, 2008 and 2007, respectively. Amortization
expense on patents is estimated to be approximately $7,000 per year for the next
five fiscal years. Some of the Company's patents have expired and others may
expire before FDA approval, if any, is obtained.
4. NOTES PAYABLE
12% NOTES
From August 1999 through September 2000, the Company entered into arrangements
for the issuance of notes payable from private placement offerings (the "12%
Notes") in the original aggregate amount of $422,500. The 12% Notes bore annual
interest at 12% (15% after maturity), required interest to be paid quarterly,
matured one year from the date of issuance, and carried detachable warrants.
These notes have no acceleration provisions. In June 2004, one such note in the
principal amount of $12,500 plus accrued interest was repaid. In December 2004,
two of the notes in the principal amount of $25,000, plus $17,778 accrued
interest, were converted to 87,303 restricted common shares at $0.49 per share.
On May 27, 2005 the Company issued a promissory note to an accredited investor
in an amount of $100,000 with 12% interest maturing on December 1, 2005. In
conjunction with the issuance of the Note, the Company also issued a 12-month
warrant to acquire 400,000 shares of Common Stock at $0.25 per share.
Accordingly, this warrant has been valued using a Black-Scholes option pricing
model and an associated discount of $41,860, was accreted to interest expense
over the term of the Note. This entire amount was included in interest expense
during the fiscal year ended March 31, 2006.
At March 31, 2008, $347,500 of principal balance of the 12% Notes were
outstanding and delinquent, in default, and bore interest at the default rate of
15%.
10% NOTES
From time to time, the Company issued convertible notes payable ("10% Note") 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 and may be converted to common
stock of the Company at the conversion price of $0.50 per share at any time at
the option of the noteholder. The total amount of the original notes issued was
$275,000. One remaining 10% Note in the amount of $5,000 was past due and in
default at March 31, 2008. At March 31, 2008, interest payable on this note
totaled $3,375.
F-28
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
4. NOTES PAYABLE (continued)
9% NOTE
In April 2003, the Company issued a convertible note in the amount of $150,000
("9% Note"), bearing interest at 9% per annum, with principal and interest due
in June 2003, which is in default and currently bears penalty interest at 18%
per annum. The 9% Note required no payment of principal or interest during the
term and was convertible into common stock of the Company at the conversion
price of $0.25 per share at the option of the noteholder. On March 31, 2008 this
$150,000 note along with $66,375 of accrued interest was converted into 865,500
shares of common stock at the agreed conversion price of $0.25 per share.
8% NOTES
In December 2007, the Company issued notes payable ("8% Notes") to two
accredited investors in the aggregate amount of $495,000 with 8% interest
maturing on September 5, 2008. In conjunction with the issuance of the 8% Notes,
the Company also issued three year warrants to acquire 1,485,000 shares of
Common Stock at $0.50 per share.
Under this transaction, the Company is obligated to register for resale the
common shares underlying the warrants, and as a result, this warrant obligation
does not meet the scope exception of paragraph 11(a) of SFAS No. 133.
Specifically, at the commitment date, the Company did not have any uncommitted
registered shares to settle the warrant obligation and accordingly, such
obligation was required to be classified as a liability (outside of
stockholders' deficit) in accordance with EITF Issue No.00-19. The warrantswere
valued at $693,050 on the commitment date using a Binomial Lattice option
pricing model. Such amount was recorded as a derivative liability with an
offsetting debt discount recorded against the $495,000 face amount of the 8%
Notes and the remaining $198,050 recorded as interest expense. The debt discount
will be expensed over the term of the 8% Notes.
2008 9% Notes
In January 2008, the Company issued notes payable ("2008 9% Notes") to an
accredited investor in the amount of $220,000 with 9% interest maturing on
October 19, 2008. In conjunction with the issuance of the 2008 9% Notes, the
Company also issued three year warrants to acquire 660,000 shares of Common
Stock at $0.50 per share.
Under this transaction, the Company is obligated to register for resale the
common shares underlying the warrants, and as a result, this warrant obligation
does not meet the scope exception of paragraph 11(a) of SFAS No. 133.
Specifically, at the commitment date, the Company did not have any uncommitted
registered shares to settle the warrant obligation and accordingly, such
obligation was required to be classified as a liability (outside of
stockholders' deficit) in accordance with EITF Issue No. 00-19. The warrant was
valued at $222,450 on the commitment date using a Binomial Lattice option
pricing model. Such amount was recorded as a derivative liability with an
offsetting debt discount recorded against the $220,000 face amount of the 2008
9% Notes and the remaining $2,450 recorded as interest expense. The debt
discount will be expensed over the term of the 2008 9% Notes.
F-29
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
4. NOTES PAYABLE (continued)
Notes payable consist of the following at March 31, 2008:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 347,500 -- $ 347,500
10% Note payable, past due 5,000 -- 5,000
8% Note payable 495,000 275,000 220,000
2008 9% Note payable 220,000 158,889 61,111
----------- --------- ---------
Total Notes Payable $ 1,067,500 $ 433,889 $ 633,611
=========== ========= =========
Management's plans to satisfy the remaining outstanding balance on these notes
include converting the notes to common stock at market value or repayment with
available funds.
5. CONVERTIBLE NOTES PAYABLE
10% CONVERTIBLE NOTES
On December 15, 2006, the Company 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 mature 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, the Company 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 are exercised prior to
December 15, 2007, the holder will receive 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 common stock. The December 10% Note
Warrants have been valued using a Binomial Lattice option pricing model and an
associated discount of $15,627, the relative fair value measured at the
commitment date, was recorded and presented net against the face amount of the
December 10% Notes. The convertible feature of the December 10% Notes provides
for an effective conversion rate that is below market value. Pursuant to EITF
No. 98-5 and EITF No. 00-27, the Company 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. Interest expense on the December 10% Notes resulting from
accretion of such debt discounts totaled approximately $50,000 for the fiscal
year ended March 31, 2007.
F-30
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
10% SERIES A CONVERTIBLE NOTES
From July 11, 2005 through December 15, 2005 the Company received cash
investments totaling $1,000,000 from accredited investors based on agreed-upon
terms reached on the cash receipt dates. Such investments were documented in
November and December 2005 in several 10% Series A Convertible Promissory Notes.
The 10% Series A Convertible Notes accrue interest at a rate of ten percent
(10%) per annum and matured on January 2, 2007. The 10% Series A Convertible
Notes were convertible into shares of common stock at any time at the election
of the holder at a fixed conversion price equal to $0.20 per share for any
conversion occurring on or prior to the maturity date.
The Conversion Option
SFAS No. 133 states that a contract issued by an entity that is both (a) indexed
to its own stock and (b) would be classified in stockholders' equity if it were
a freestanding financial instrument is not a derivative for purposes of that
pronouncement. Management has concluded that the conversion option associated
with the 10% Series A Convertible Notes is "indexed to the Company's own stock"
as that term is defined by EITF Issue No. 01-6, "The Meaning of Indexed to
Company's Own Stock". In addition, since such notes have been determined to be
"conventional convertible debt instruments" as defined in EITF Issue No. 05-2,
"The Meaning of Conventional Convertible Debt Instrument" in Issue 00-19", the
requirements of EITF Issue No. 00-19 do not apply. Lastly, the debt host
contract is not a derivative in its entirety and (based on SFAS No. 133) the
conversion option need not be bifurcated from such contract. Therefore, the
conversion option is not a derivative instrument as contemplated by EITF Issue
No. 00-19 or SFAS No. 133. As explained below, the Company has therefore applied
intrinsic value accounting, where applicable, to the BCF embedded in the
conversion option.
Intrinsic Value Accounting for the BCF
The Company accounted for the BCF associated with the issuance of the 10% Series
A Convertible Notes in accordance EITF Issue No. 98-5, EITF Issue No. 00-27, and
APB No. 14. The convertible feature of the 10% Series A Convertible Notes
provides for a rate of conversion that is below market value. The excess of the
proceeds over the estimated fair value of the warrants (see "Accounting for the
Warrants" below) was used to calculate the effective conversion price per share.
Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated the fair value
of such BCF to be $270,125 and recorded such amount as a debt discount against
the face amount of the notes. Such discount was accreted to interest expense
over the original term of the notes. Total interest expense on the 10% Series A
Convertible Notes for amortization of the above BCF debt discount totaled
$142,364 for the fiscal year ended March 31, 2007, which completed the
amortization of such discount.
F-31
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
Accounting for the Warrants
Under this transaction, the Company is obligated to register for resale the
common shares underlying the warrants, and as a result, this warrant obligation
does not meet the scope exception of paragraph 11(a) of SFAS No. 133.
Specifically, at the commitment date, the Company did not have any uncommitted
registered shares to settle the warrant obligation and accordingly, such
obligation was required to be classified as a liability (outside of
stockholders' deficit) in accordance with EITF Issue No. 00-19. The Series A
Warrants were valued at $729,875 on the commitment date using a Binomial Lattice
option pricing model. Such amount was recorded as a derivative liability and an
offsetting debt discount against the face amount of the 10% Series A Convertible
Notes. Such debt discount will begin to be expensed as future conversions occur
and the warrants are issued.
On January, 2006, the registration statement which included the shares
underlying the 10% Series A Convertible Notes ("Notes")and related warrants was
deemed effective. At such time, the Company re-evaluated the classification of
the warrant obligation and determined that the warrant obligation me the
criteria for equity classification under EITF No. 00-19. Accordingly, the
Company revalued the warrants at such date, totaling $1,090,000, with the change
in fair value of the warrant liability totaling $360,125 expensed in the
consolidated statement of operations for the year ended March 31, 2006.
On or about March 13, 2007, the Company determined that the effectiveness of the
registration statement underlying the warrant shares associated with the 10%
Series A Convertible Notes had lapsed on October 27, 2006. Pursuant to EITF
Issue No. 00-19, the Company believed it could no longer control settlement in
registered shares. Accordingly, the Company reversed the effect of the prior
registration effectiveness and reduced additional-paid-in-capital by $1,090,000
and recorded a warrant liability of like amount. In addition the Company also
recorded estimated liquidated damages in an amount of $220,000, an amount of the
Company's estimate of the damages that are expected to be paid prior to the
effective registration of the shares underlying the warrants.
The Allonge Transactions
Effective March 22, 2007, the Company entered into four Allonges (the
"Allonges") to its 10% Series A Convertible Notes entered into in December 2005
having an aggregate principal amount of $1,000,000 (the "Notes") with the Estate
of Allan S. Bird, the Ellen R. Weiner Family Revocable Trust, Claypoole Capital,
LLC and Christian J. Hoffmann III (the "Holders"). Each Holder has qualified as
an "accredited investor" as that term is defined in the Securities Act of 1933,
as amended (the "Act"). Pursuant to the Allonges, the Company amended and
restated the Notes to extend the maturity date of the Notes from January 2, 2007
until January 3, 2008. The Company will 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
Allonges amend the Notes so that they are now 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, the Company
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. Pursuant to EITF 06-06, and because of the change in the
fair value of embedded conversion options as a result of the issuance of Units
under the Allonges on March 22, 2007, such issuance was determined to be a
substantial change in the 10% Series A Notes resulting in the extinguishment of
the Notes as per ABP No. 26. Therefore on March 22, 2007, the Company recorded a
net increase of $270,127 of discount on convertible notes payable, an increase
in the warrant liability of $1,486,875 and a loss on extinguishment of debt of
$1,216,748. Between March 22, 2007 and March 31, 2007, the Company also recorded
an additional other expense of $143,125 to record the change in fair value of
the warrant liability at the end of the fiscal year. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
F-32
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
10% SERIES A CONVERTIBLE NOTES AMENDMENT
On November 2007, the Company entered into Amended and Restated 10% Series A
Convertible Promissory Notes (the "Amended Notes") with the holders of certain
promissory notes previously issued by the Company (the "Prior Notes"), and all
amendments to the Prior Notes, including on March 5, 2007.
The Amended Notes, in the principal amount of $1,000,000, are convertible into
an aggregate of 5,000,000 shares of the Company's Common Stock and mature on
February 15, 2009. The Amended Notes provide for the payment of accrued and
default interest through December 31, 2007 in the aggregate amount of $295,248
to be paid in units ("Units") at a fixed rate of $0.20 per Unit, each Unit
consisting of one share of the Company's Common Stock and one Class A Common
Stock Purchase Warrant (the "Class A Warrant") to purchase one share of the
Company's 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, the
Company will issue them one Class B Common Stock Purchase Warrant (the "Class B
Warrant") for every two Class A Warrants exercised. The Class B Warrants will
have a fixed exercise price of $0.60 per share.
The Amended Notes also provided for the payment of liquidated damages through
November 29, 2007 in the aggregate amount $269,336 to be paid in units ("Damages
Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit consisting
of one share of the Company's Common Stock and one Class A-1 Common Stock
Purchase Warrant (the "Class A-1 Warrant") to purchase on share of the Company's
Common Stock at a fixed exercise price of $0.40 per share. If the Holders
exercise the Class A-1 Warrants on or before February 15, 2010, the Company will
issue them one Class B-1 Common Stock Purchase Warrant (the "Class B-1 Warrant")
for every two Class A-1 Warrants exercised. The Class B-1 Warrants will have a
fixed exercise price of $0.40 per share.
In addition, the Amended Notes provide 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 the Company's Common Stock on the same terms as
the Class A Warrants.
The following table summarizes the number of shares of the Company's Common
Stock issuable upon the conversion of the Amended Notes or the exercise of the
various warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
------------
Total 15,373,955
============
The Company was obligated to register the shares underlying the Class A
Warrants, the Class A-1 Warrants and the Class A Principal Warrants with the SEC
by March 31, 2008, and the shares underlying the Class B Warrants and to
register the Class B-1 Warrants with the SEC by the 30th day following the
issuance date of such warrants. Since the Company failed to effect a
registration statement by March 31, 2008, it is recording liquidated damages of
$15,000 per month.
F-33
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
5. CONVERTIBLE NOTES PAYABLE (continued)
For accounting purposes, the amendment of the 10% Series A Convertible Notes was
treated as an extinguishment pursuant to EITF Issue No. 06-6. The changes in the
note agreements, conversion feature and warrants were considered substantive as
prescribed in that consensus. Consequently, at the amendment date the Company
initially recorded an estimated loss on extinguishment of $489,013 as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized notes (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
------------
Loss on extinguishment $ 489,013
============
Subsequently, the Company engaged a third party valuation firm to value the
various components of the amendment of the Series A Convertible Notes. As a
result of that valuation, the Company recorded an additional $58,106 of loss on
extinguishment of debt with the offset being recorded to additional paid-in
capital.
The new warrants issued in connection with the Amended Notes were evaluated
pursuant to EITF Issue No. 00-19 and classified as equity instruments. In
connection with the new warrants, the Company recorded $4,392,664 as an increase
to additional paid in capital, based on the estimated fair value at issuance.
The amended conversion feature contains a beneficial conversion at the date of
the Amended Notes; consequently, the Company recorded a discount of $1,000,000
against the notes and a corresponding increase in additional paid in capital.
Through March 31, 2008, the Company amortized approximately $109,000 of such
discount into interest expense using the effective interest method.
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.
Convertible Notes Payable consists of the following at March 31, 2008:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $(797,470) $ 102,530
December 10% Convertible Notes 50,000 -- 50,000
--------- --------- ---------
Total - Convertible Notes $ 950,000 $(797,470) $ 152,530
========= ========== =========
F-34
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS
2003 CONSULTANT STOCK PLAN
In August 2003, the Company adopted the 2003 Consultant Stock Plan (the "Stock
Plan"), which provides for grants of common stock through August 2013, to assist
the Company in obtaining and retaining the services of persons providing
consulting services for the Company. A total of 1,000,000 common shares are
reserved for issuance under the Stock Plan. On March 29, 2004, the Company filed
a registration statement on Form S-8 for the purpose of registering 1,000,000
common shares issuable under the Stock Plan under the Securities Act of 1933. On
August 29, 2005, the Company filed a Form S-8 for the purpose of registering an
additional 2,000,000 shares, for a total of 3,000,000 common shares reserved
under the Plan.
2005 DIRECTORS COMPENSATION PROGRAM
In February 2005, the Company adopted the 2005 Directors Compensation Program
(the "Directors Compensation Program") to assist in obtaining and retaining the
services of outside directors. Under the Directors Compensation Program, a newly
elected director will receive a one time grant of a non-qualified stock option
of 1.5% of the common stock outstanding at the time of election. The options
will vest one-third at the time of election to the board and the remaining
two-thirds will vest equally at year end over three years. Additionally, each
director will also receive an annual $25,000 non-qualified stock option
retainer, $15,000 of which is to be paid at the first of the year to all
directors who are on the Board prior to the first meeting of the year and a
$10,000 retainer will be paid if a director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned.
COMMON STOCK
In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In April 2004, the Company issued 50,000 shares of restricted common stock to
Fusion Capital Fund II, LLC, an accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. The Company recorded no
expense related to the issuance of these shares since they were related to
equity fund raising activities. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.
In May 2004, the Company issued 225,000 shares of common stock at $0.44 per
share and 225,000 warrants to purchase the Company's common stock at a price of
$0.76 per share to legal counsel for legal services in the amount of $99,000,
which was recorded as expense in the accompanying consolidated financial
statements. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares of common stock and 113,636 warrants to purchase the Company's
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
F-35
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
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.
F-36
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In January 2005, the Company issued 55,556 shares of restricted common stock at
$0.36 per share and a warrant to purchase 55,556 shares of common stock at $0.44
per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In January 2005, the Company issued 66,666 shares of restricted common stock at
$0.45 per share to an accredited individual investor under a consulting
agreement for investor relations services to the Company. The fair value of the
transaction of $30,000 was recorded as deferred compensation and presented as an
offset to additional paid-in capital in the accompanying consolidated financial
statements. Such amount is being amortized to expense over the six month term of
the agreement. At March 31, 2005, $15,000 of such amount remained unamortized.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. The remaining $15,000 balance in deferred consulting
fees were amortized during the fiscal year ended March 31, 2006.
In January 2005, the Company issued 25,834 shares of restricted common stock to
an accredited individual investor in connection with the exercise of a warrant
to purchase 25,834 shares of common stock at $0.25 per share for cash totaling
$6,459. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In February 2005, the Company issued 139,063 shares of restricted common stock
to an accredited individual investor in connection with the exercise of a
warrant to purchase 139,063 shares of common stock at $0.25 per share for cash
totaling $34,766. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In February 2005, the Company issued 90,000 shares of restricted common stock at
$0.27 per share and a three-year warrant to purchase 90,000 shares of common
stock at $0.34 per share for cash in the amount of $24,300 to an accredited
individual investor. This transaction was exempt from registration pursuant to
Section 4(2)of the Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional total of
1,416,958 shares of restricted common stock at prices ranging from $0.25 to
$0.52 for total cash proceeds of approximately $541,000.
During the year ended March 31, 2005, the Company issued an additional 557,647
shares of restricted common stock at prices ranging from $0.25 to $0.55 under
various consulting service agreements for total recorded value of approximately
$196,000. All services on these agreements were completed and expensed during
the year ended March 31, 2005.
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.
F-37
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2005, the Company issued 31,424 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $7,900.
During the year ended March 31, 2006, the Company issued 3,990,807 shares of
common stock at prices between $0.25 to and $0.76 per share to Fusion Capital
under its $6,000,000 common stock purchase agreement for cash proceeds totaling
$1,436,815. These shares are registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
During the quarter ended June 30, 2005, the Company issued 95,420 shares of
common stock pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.262 per share in payment for
regulatory affairs consulting services to the Company valued at $25,000.
In May 2005, the Company issued 33,228 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $8,440.
In May 2005, the Company issued 24,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for investor relations consulting
services to the Company valued at $6,000.
In May 2005 the Company issued 100,000 shares of common stock and a warrant to
purchase 400,000 shares of common stock at a purchase price of $0.18 per share
to an accredited investor for $17,600. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In May 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 21,008 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 836,730 shares of restricted common stock and a
three-year warrant to purchase 418,365 shares of the Company's restricted common
stock at an exercise price of $0.25 to legal counsel as an inducement to settle
accrued past due legal services payable in the amount of $167,346 which had been
expensed in the prior fiscal year. At the time of the settlement, the shares of
the Company's restricted common stock were valued at $209,183 and, using a
Black-Scholes option pricing model, the warrant was valued at $100,408. The
non-cash additional consideration of $142,245 has been recorded as professional
fees expense during the fiscal year ended March 31, 2006.
F-38
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In June 2005, the Company issued 12,605 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for scientific consulting services to
the Company valued at $3,000.
During the quarter ended June 30, 2005, the Company expensed $30,000 of deferred
consulting fees, which were included in additional paid-in capital at March 31,
2005, as the related consulting services were completed.
In July 2005, the Company issued 43,479 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000.
In July 2005, the Company issued 2,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $500.
In August 2005, the Company issued 37,863 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $8,557.
In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $21,100.
In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $37,260.
In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $5,738.
In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.22 per share in payment for regulatory affairs consulting
services to the Company valued at $7,620.
In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $7,660.
In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $36,135.
In November 2005, the Company issued 13,298 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
F-39
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2005, the Company issued 371,847 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.25 per share in payment of general
legal fees valued at $91,509.
In December 2005, the Company issued 73,964 shares of restricted common stock at
$0.25 per share in payment of legal fees related to capital raising transactions
valued at $18,202.
In December 2005, the Company issued 13,333 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $3,840.
In December 2005, the Company issued 15,060 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In January 2006, the Company issued 579,813 shares of restricted common stock at
$0.24 per share in payment for patent fees valued at $139,155.
In January 2006, the Company issued 66,017 shares of restricted common stock at
Prices ranging from $0.28 to $0.33 per share in payment for investor relations
valued at $20,000.
In January 2006, the Company issued 9,091 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In January 2006, the Company issued 13,889 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.36 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In February 2006, the Company issued 10,563 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In March 2006, the Company issued 17,730 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In March 2006, the Company issued 79,255 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for Corporate communications consulting
services to the Company valued at $19,974.
In March 2006, the Company issued 110,040 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan and 110,040 shares of restricted stock at
$0.39 per share in payment of general legal fees valued at $85,392.
In March 2006, the Company issued 7,275 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.49 per share in payment for regulatory affairs consulting
services to the Company.
In March 2006, the Company issued 27,284 shares of common stock to legal counsel
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment of general legal fees valued
at $9,197.
In March 2006, the Company issued 158,046 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $52,155.
F-40
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In March 2006, the Company converted a $30,000 10% promissory notes held by an
accredited individual investor, including accrued interest of $4,564, through
the issuance of 140,000 restricted common shares at $0.25 per share.
In March 2006, a $30,000 15% convertible note, including accrued interest of
$4,943, was converted at $0.20 per share for 174,716 shares of common stock.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In March 2006, the Company issued 150,000 shares of restricted common stock
under a one year investor relations consulting agreement which was valued at
$49,000 and being amortized over a one year period. Approximately $4,000 was
amortized during the year ended March 31, 2006. As a result, the remaining
balance of $44,917 represents that entire balance of deferred consulting fees
(contra equity) in accompanying consolidated balance sheet.
In March 2006, the Company issued 35,714 shares of restricted common stock
payment of professional services related to investor relations valued at
$10,000.
In March 2006, the Company issued 15,152 shares of restricted common stock at
$0.33 per share in payment of professional services related to investor
relations valued at $5,000.
In March 2006, the Company issued 33,333 shares of restricted common stock at
$0.30 per share in payment of an option agreement valued at $10,000.
In April 2006, the Company issued 3,782 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In April 2006, the Company issued 25,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for past due rents owed by the Company
valued at $12,801 based on the value of the services.
In April 2006, the Company issued 6,313 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 10,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 14,563 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $4,165 based on the value of the services.
F-41
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations valued at $2,500 based on the
value of the services.
During April 2006, the Company issued 209,679 shares of common stock at prices
between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $140,002. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.41 per share to an accredited individual investor. There was no
gain or loss on the extinguishment.
In May 2006, the Company issued 8,532 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In May 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In May 2006, the Company issued 4,545 shares of restricted common stock at $0.55
per share in payment for investor relations valued at $2,500 based on the value
of the services.
In June 2006, the Company issued 8,681 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In June 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2006, the Company issued 3,363 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.
F-42
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In July 2006, the Company issued 10,684 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.47 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In July 2006, the Company issued 6,250 shares of restricted common stock at
$0.40 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In July 2006, the Company issued 7,813 shares of restricted common stock at
$0.32 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In July 2006, the Company issued 132,765 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $48,858 based on the value of the services.
In July 2006, the Company issued 14,535 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
During August 2006, the Company issued 113,235 shares of common stock at prices
between $0.26 and $0.27 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $30,000. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In August 2006, the Company issued 9,434 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In August 2006, the Company issued 86,779 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for general legal expenses to the
Company valued at $22,085 based on the value of the services.
In August 2006, the Company issued 114,132 shares of restricted common stock at
$0.20 per share in payment for accrued accounting consulting services provided
to the Company by a third party valued at $23,111 based upon the value of the
services.
During September 2006, the Company issued 439,936 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $110,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In September 2006, the Company issued 4,808 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.
In September 2006, the Company issued 15,723 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In September 2006, the Company issued 9,868 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
F-43
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In September 2006, the Company issued 16,447 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In September 2006, the Company issued 9,733 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $2,550 based on the value of the services.
During October 2006, the Company issued 201,165 shares of common stock at $0.25
per share to Fusion Capital under its $6,000,000 common stock purchase agreement
for net cash proceeds totaling $50,000. These shares are registered pursuant to
the Company's Form SB-2 registration statement effective December 7, 2004.
In October 2006, the Company issued 16,994 shares of restricted common stock at
$0.31 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In October 2006, the Company issued 8,929 shares of restricted common stock at
$0.28 per share in payment for investor relations services to the Company valued
at $2,500 based on the value of the services.
In October 2006, the Company issued 18,797 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In October 2006, the Company issued 11,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In October 2006, the Company issued 7,540 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $1,900 based on the value of the services.
In November 2006, the Company issued 555,556 shares of restricted common stock
at $0.18 per share in exchange for an investment of $100,000. As an inducement
the Company also issued five-year warrants to purchase a number of shares equal
to the number of restricted shares issued converted at a fixed exercise price of
$0.18. Additionally, if the warrants are exercised prior to November 14, 2007,
the holder will receive an additional warrant on the same terms as the warrants.
In November 2006, the Company issued 11,905 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In November 2006, the Company issued 19,841 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
F-44
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2006, the Company issued 12,397 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In December 2006, the Company issued 20,661 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In December 2006, the Company issued 40,000 shares of restricted common stock at
$0.25 per share in exchange for license and development rights related to
certain intellectual property valued at $10,800 based on the fair market value
of the intellectual property license.
During December 2006, the Company issued 118,360 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $30,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In January 2007, the Company issued 15,248 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $4,300 based on the value of the services.
In January 2007, the Company issued 10,714 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In January 2007, the Company issued 125,091 shares of restricted common stock at
between $0.24 and $0.31 per share in payment for investor relations services to
the Company valued at $32,500 based on the value of the services.
In January 2007, the Company issued 17,857 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
During January 2007, the Company issued 782,268 shares of common stock at prices
between $0.25 and $0.273 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $200,001. These shares
were registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In February 2007, the Company issued 31,394 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.255 per share in payment for general legal expenses to the
Company valued at $8,005 based on the value of the services.
In February 2007, the Company issued 9,740 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.308 per share in payment for regulatory affairs consultant
services to the Company valued at $3,000 based on the value of the services.
During February 2007, the Company issued 692,751 shares of common stock at
prices between $0.28 and $0.32 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $199,998. These
shares were registered pursuant to the Company's Form SB-2 registration
statement effective December 7, 2004.
F-45
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In March 2007, the Company issued 15,723 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.318 per share in payment for regulatory affairs consultant
services to the Company valued at $5,000 based on the value of the services.
In March 2007, the Company issued 4,934 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.608 per share in payment for regulatory affairs consultant
services to the Company valued at $3,000 based on the value of the services.
In March 2007, the Company issued 21,078 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.51 per share in payment for regulatory affairs consultant
services to the Company valued at $10,750 based on the value of the services.
In March 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.578 per share in payment for regulatory affairs consultant
services to the Company valued at $5,000 based on the value of the services.
During March 2007, the Company issued 92,379 shares of common stock at prices
between $0.36 and $0.44 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $36,745. These shares
were registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In March 2007, the Company issued 1,333,333 shares of common stock at $0.30 per
share to Fusion Capital for net cash proceeds of $400,000. In addition, the
Company issued 1,050,000 of common shares as a commitment fee under a common
stock purchase agreement.
In April 2007, the Company issued 30,617 shares of restricted common stock as
the result of a cashless exercise of 80,000 warrants held by a former
noteholder.
In April 2007, the Company issued 15,152 shares of restricted common stock at
$0. 33 per share in payment of an option agreement valued at $5,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In April 2007, the Company issued 8,651 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2007, the Company issued 3,937 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In May 2007, the Company issued 13,124 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.76 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000 based on the value of the services.
In May 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
F-46
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In June 2007, the Company issued 41,999 shares of restricted common stock at
between $0.30 and $0.74 per share in payment for investor relations services to
the Company valued at $20,000 based on the value of the services.
In June 2007, the Company issued 17,526 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $10,200 based on the value of the services.
In June 2007, the Company issued 5,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In June 2007, the Company issued 10,174 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.63 per share in payment for regulatory affairs consulting
services to the Company valued at $6,450 based on the value of the services.
In August 2007, the Company issued 1,630,000 shares of common stock for cash
proceeds of $815,000 ($757,950 net of commissions). The shares were issued to
accredited investors in the form of Units comprised of two shares of common
stock and one three-year warrant to acquire common stock at an exercise price of
$0.50. The offering price of each Unit was $1.00.
In August 2007, the Company issued 107,153 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at an average price of $0.37 per share in payment of grant writing
and regulatory consulting services to the Company valued at $39,963 based upon
the value of the services.
In August of 2007, the Company issued 103,106 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment of legal fees related to general
corporate legal services to the Company valued at $62,894 based upon the value
of the services provided.
In August 2007, the Company issued 21,020 shares of restricted common stock at
prices between $0.68 and $0.78 per share in payment for investor relations
services to the Company valued at $15,000 based on the value of the services.
In September 2007, the Company issued 14,000 shares of common stock to an
accredited investor at $0.50 per share in payment of commissions related to the
August Private Placement transaction valued at $7,000 based upon the value of
services provided.
In September 2007, the Company issued 5,294 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $3,600 based on the value of the services
provided.
In October 2007, the Company issued 4,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.65 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In December 2007, the Company issued 330,000 shares of common stock for cash
proceeds of $165,000. The shares were issued to accredited investors and were in
the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
F-47
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In January 2008, the Company issued 21,992 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.68 per share in payment for regulatory affairs consulting
services to the Company valued at $15,000 based on the value of the services
provided.
In January 2008, the Company issued 200,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to an accredited investor and were
in the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In January 2008, the Company issued 500,000 shares of common stock for a
conversion of $100,000 of Amended Series A 10% Convertible Notes at the agreed
conversion price of $0.20 per share (see Note 6).
In January 2008, the Company issued 18,797 shares of restricted common stock as
the result of a cashless exercise of 55,556 warrants held by a former
noteholder.
In February 2008, the Company issued 400,000 shares of common stock for cash
proceeds of $200,000. The shares were issued to accredited investors and were in
the form of Units comprised of two shares of common stock and one three-year
warrant per Unit to acquire common stock at a fixed exercise price of $0.50 per
share. The offering price of each Unit was $1.00.
In February 2008, the Company issued 1000,000 shares of common stock for cash
proceeds of $100,000. The shares were issued to a corporate investor.
In February 2008, the Company issued 25,380 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $12,690 based on the value of the services
provided.
In March 2008, the Company issued 6,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services
provided.
In March 2008, the Company issued 7,895 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.57 per share in payment for regulatory affairs consulting
services to the Company valued at $4,500 based on the value of the services
provided.
In March 2008, the Company issued 50,000 shares of common stock to an accredited
investor at $0.53 per share in payment of commissions related to the August
Private Placement transaction valued at $26,500 based upon the value of services
provided.
In March 2008, the Company issued 25,000 shares of common stock to an accredited
investor at $0.53 per share in payment of commissions related to the August
Private Placement transaction valued at $13,250 based upon the value of services
provided.
In March 2008, the Company issued 92,188 shares of restricted common stock at an
average price of $0.60 in payment for investor relations services to the Company
valued at $55,000 based on the value of the services.
In March 2008, the Company issued 250,000 shares to a Director under a stock
option exercise at a strike price of $0.38 per share through the conversion of
$95,000 in accounts payable owed to such Director.
In March 2008, the Company issued 865,500 shares of common stock for a
conversion of $150,000 of 9% Convertible Notes and $66,375 of accrued interest
at the agreed conversion price of $0.25 per share (see Note 6).
F-48
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS
During the year ended March 31, 2005, the Company 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, the Company 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 has been recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2005, the Company 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 7 and 8). 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, the Company 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).
During the year ended March 31, 2005, the Company issued 260,000 warrants to
purchase common stock for $0.50 per share, which vested upon grant and expire in
October 2007. The warrants were issued in connection with the issuance of notes
payable (see Note 7). 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, the Company issued 144,443 warrants to
purchase common stock for $0.90 per share, which vested upon grant and expire in
October 2007. The warrants were issued in connection with the issuance of notes
payable (see Note 7). 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, the Company 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 are 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, the Company 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 are 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, the Company 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 are exercisable through May
2008.
On May 16, 2005, the Company 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, the Company 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.
F-49
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
On June 27, 2005, the Company 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, the Company 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, the Company 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 the
Company's restricted common stock, the Company 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, the Company 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.
On March 22, 2007 in effecting the Allonges, the Company amended its 10% Series
A Convertible Notes to extend the maturity date of the Notes from January 2,
2007 until January 3, 2008. The Company 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, the Company 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.
F-50
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
In August 2007, as part of the purchase of 815,000 units, we issued 815,000
warrants to investors.
At various points in the three months ended December 31, 2007, 144,443 warrants
expired.
In December 2007, we issued 1,650,000 warrants in association with debt and
equity financings.
In January 2008, we issued 760,000 warrants 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 warrants in connection with equity
financings.
In March 2008, 90,000 warrants expired.
A summary of the aggregate warrant activity for the years ended March 31, 2008
and 2007 is presented below:
Year Ended March 31,
-----------------------------------------------------
2008 2007
------------------------- -------------------------
Weighted Weighted
Average Exercise Average Exercise
Warrants Price Warrants Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 4,497,910 $ 0.46 3,791,908 $ 0.61
Granted 3,589,346 $ 0.47 1,535,002 $ 0.19
Exercised (55,556) $ 0.44 (160,000) $ 0.50
Cancelled/Forfeited (234,443) $ 0.69 (669,000) $ 0.72
----------- -------- ---------- --------
Outstanding, end of year 7,797,257 $ 0.46 4,497,910 $ 0.46
=========== ======== ========== ========
Exercisable, end of year 7,797,257 $ 0.46 4,497,910 $ 0.46
=========== ========= ========== ========
Weighted average estimated fair
value of warrants granted $ 0.36 $ 0.29
========= ========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented, with respect to warrants
utilizing the Black-Scholes and Binomial Lattice option pricing models:
Years Ended March 31,
2008 2007
----------- -----------
Risk free interest rate 1.79%-4.03% 4.47%-4.57%
Average expected life 3 years 4.4 years
Expected volatility 84.0% - 88.6% 90.7% - 93.4%
Expected dividends None None
F-51
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
The detail of the warrants outstanding and exercisable as of March 31, 2008 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
- --------------------------- -------------- ------------- ---------- --------------- ----------
$0.17 - $0.20 1,799,348 3.07 $ 0.18 1,799,348 $ 0.18
$0.25 - $0.44 718,365 1.38 $ 0.25 718,365 $ 0.25
$0.50 - $0.90 5,279,544 1.82 $ 0.59 5,279,544 $ 0.59
-------------- ---------------
7,797,257 7,797,257
============== ===============
OPTIONS
At March 31, 2008 the Company had issued 1,337,825 options to outside directors
and 3,965,450 options to employee-directors under the 2005 Directors
Compensation Program. Of the options issued to outside directors, 308,725
options had been forfeited and 250,000 options had been exercised.
From time to time, the Company's 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 the Company's formal stock plans. The terms
of these grants are individually negotiated.
In August 2000, the Company 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 Company 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 the Company's 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, 2008, the Company had granted 47,500 options under
the 2000 Stock Option Plan of which 15,000 had been forfeited, with 467,500
available for future issuance.
In March 2002, the Board of Directors granted the Company's 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, the Board of Directors granted the Company's Chief Executive
Officer ("CEO")and Chief Scientific Officer ("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 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, the Company recorded approximately $424,000 of compensation expense
in the accompanying consolidated statement of operations for the year ended
March 31, 2005.
F-52
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
6. EQUITY TRANSACTIONS (continued)
OPTIONS (continued)
On September 9, 2005, the Company granted 2,857,143 options to James A. Joyce,
it's Chief Executive Officer, in exchange for $300,000 of accrued related-party
liabilities. The fair value of such options approximated the value of the
accrued related-party liability.
The following is a summary of the stock options outstanding at March 31, 2008
and 2007 and the changes during the two years then ended:
Year Ended March 31,
-----------------------------------------------------
2008 2007
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 9,204,060 $ 0.38 9,012,785 $ 0.38
Granted 2,500,000 $ 0.36 500,000 0.27
Exercised (250,000) $ 0.38 -- --
Cancelled/Forfeited (500,000) $ 0.23 (308,725) 2.74
----------- ---------- ----------- ----------
Outstanding, end of year 10,954,060 $ 0.38 9,204,060 $ 0.38
=========== ========== =========== ==========
Exercisable, end of year 9,231,839 $ 0.38 8,369,060 $ 0.39
=========== ========== =========== ==========
Weighted average estimated fair
value of options granted $ 0.26 $ 0.23
========== ==========
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, 2008 and March 31, 2007:
Years Ended March 31,
2008 2007
----------- -----------
Risk free interest rate 4.85% 4.84%
Average expected life 3 years 10 years
Expected volatility 91% 92%
Expected dividends None None
The detail of the options outstanding and exercisable as of March 31, 2008 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 - $0.27 3,357,143 7.61 years $ 0.22 3,134,922 $ 0.23
$0.36 - $0.38 7,244,550 5.24 years $ 0.37 5,744,550 $ 0.36
$1.78 - $3.75 352,367 3.57 years $ 2.02 352,367 $ 2.02
----------- ----------
10,954,060 9,231,839
=========== ==========
As of March 31, 2008, we had $538,002 of remaining unrecognized stock option
expense, which is expected to be recognized over a weighted average period of
2.08 years.
F-53
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain officers of the Company and other related parties have advanced the
Company funds, agreed to defer compensation and/or paid expenses on behalf of
the Company to cover working capital deficiencies. These non interest-bearing
liabilities have been included as due to related parties in the accompanying
consolidated balance sheet.
Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.
8. INCOME TAXES
INCOME TAXES
On July 13, 2006, the FASB issued Interpretation No. 48, ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT NO. 109 ("FIN
48"), which clarifies the accounting for uncertainty in income taxes recognized
in an entity's financial statements in accordance with SFAS No. 109, ACCOUNTING
FOR INCOME Taxes, and prescribes a recognition threshold and measurement
attributes for financial statement disclosure of tax positions taken or expected
to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006.
The Company adopted the provisions of FIN 48 on April 1, 2007, and has commenced
analyzing filing positions in all of the federal and state jurisdictions where
it is required to file income tax returns, as well as all open tax years in
these jurisdictions. As a result of adoption, the Company has recorded no
additional tax liability. There are no unrecognized tax benefits as of April 1,
2007, or as of March 31, 2008. As of March 31, 2008 the Company has not yet
completed its analysis of the deferred tax assets for net operating losses. As
such, this amount and the offsetting valuation allowance have been removed from
the Company's deferred tax assets. The Company will complete a Section 382
analysis regarding the limitation of the net operating loss, if the company
utilizes the net operating loss.
Due to the existence of the valuation allowance, future changes in our
unrecognized tax benefits will not impact the Company's effective tax rate.
The Company is subject to taxation in the U.S. and state jurisdictions. The
Company's tax years for 1993 and forward are subject to examination by the U.S.
and 2003 and forward by California tax authorities due to the carryforward of
unutilized net operating losses. The Company is currently not under examination
by any taxing authorities.
The Company's practice is to recognize interest and/or penalties related to
income tax matters in income tax expense. During the twelve months ended March
31, 2008, the Company did not recognize any interest or penalties. Upon adoption
of FIN 48 on April 1, 2007, the Company did not record any interest or
penalties.
F-54
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
8. INCOME TAXES (continued)
The adoption of FIN 48 did not impact the Company's financial condition, results
of operations or cash flows. At March 31, 2008, the Company had net deferred tax
assets of approximately $3,123 million. These deferred tax assets are primarily
composed of capitalized research and development costs and other accruals. Due
to uncertainties surrounding the Company's 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
company's 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. The Company has not
yet determined whether such an ownership change has occurred. Until this
analysis has been completed the Company has removed the deferred tax assets
associated with these carryforwards from its deferred tax asset schedule and has
recorded a corresponding decrease to their valuation allowance.
Significant components of the Company's net deferred tax assets at March 31,
2008 are shown below (in thousands). A valuation allowance of $3.1 million has
been established to offset the net deferred tax assets as of March 31, 2008, as
realization of such assets is uncertain.
YEAR ENDED
MARCH 31,
----------------
2008
----------------
Deferred tax assets:
Net operating loss carryforwards $ --
Capitalized research and development 2,987
Other 136
Total deferred tax assets 3,123
----------------
Total deferred tax liabilities --
----------------
Net deferred tax assets 3,123
Valuation allowance for deferred tax assets (3,123)
----------------
Net deferred tax assets $ --
================
The provision for income taxes on earnings subject to income taxes differs from
the statutory federal rate at March 31, 2008, due to the following (in
thousands):
2008 2007
------------ -------------
Federal income taxes at 34% $ (1,323) $ (2,048)
Derivative expense -- 718
Debt extinguishment -- 414
State income tax, net of federal benefit (223) (162)
Tax effect on non-deductible expenses
and credits 57 --
Increase in valuation allowance (1) 1,489 1,078
------------ -----------
$ -- $ --
============ ===========
- -------------------
(1) The removal of the valuation allowance related to the net operating losses
is not included in the increase in the valuation allowance. See above for
explanation.
Pursuant to Internal Revenue Code Sections 382, use of the Company's net
operating loss carryforwards may be limited if a cumulative change in ownership
of more than 50% occurs within a three-year period.
F-55
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company entered into an employment agreement with its 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 the Company. The Chairman of the Board was appointed President and
Chief Executive Officer ("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.
The Company entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed the Company's
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 the Company's common stock in connection the
completing certain milestones, such as the initiation and completion of certain
clinical trials, the submission of proposals to the FDA and the filing of a
patent application. Under the terms of the agreement, if the employee is
terminated he may become eligible to receive a salary continuation payment in
the amount of twelve months base salary. Effective April 1, 2006, the CSO's
salary was increased from $165,000 per year to $185,000 per year.
LEASE COMMITMENTS
The Company leases its office and research and development space the rate of
$7,744 per month under an operating lease agreement which expired in July 2007.
The Company is presently leasing its space on a month to month basis, at the
same terms.
Rent expense approximated $91,000 and $105,000 for the years ended March 31,
2008 and 2007, respectively.
10. SUBSEQUENT EVENTS
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 will be an issuance
of shares of common stock equivalent to 115% of $5,000.
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 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.
F-56
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
- --------------------------------------------------------------------------------
10. SUBSEQUENT EVENTS (continued)
In May 2008, the Company entered into a Private Placement Agreement with Fusion
Capital Fund II, LLC, an Illinois limited liability company ("Fusion Capital"),
for the sale of 1,000,000 shares of our common stock for an aggregate purchase
price of $500,000.00. There were no placement agent or other similar fees paid
or payable in connection with this private placement. The Company did not grant
any registration rights or issue any warrants in connection with this
transaction. The Private Placement Agreement does not contain any anti-dilution
provisions, price reset provisions, negative covenants or restrictions on future
fundings. The proceeds received by the Company under the Private Placement
Agreement will be used for working capital and general corporate purposes.
On March 21, 2007, we entered into a common stock purchase agreement (the
"Purchase Agreement") with Fusion Capital for the purchase of up to $8.4 million
of our common stock. On May 1, 2008, we entered into a Mutual Termination
Agreement with Fusion Capital to terminate the Purchase Agreement and all of
each party's rights and obligation to buy and sell shares of common stock
thereunder. The SEC did not declare effective the registration statement related
to the Purchase Agreement which we withdrew in connection with the termination
of the Purchase Agreement. There were no costs or fees paid or payable by either
party in connection with the termination of the Purchase Agreement.
In May 2008, the Board of Directors approved the issuance to the director of
investor relations of an option to purchase 100,000 shares of common stock at
$0.63 per share.
In May 2008, we agreed to issue 232,033 shares of common stock to a 10%
convertible noteholder in order to convert the $33,000 principal balance and
$6,446 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, the Board of Directors approved the following recommendations of
the Compensation Committee:
1. The issuance of 750,000 non-qualified stock options to Dr. Richard
Tullis, Chief Scientist and a director and 300,000 non-qualified
options to a research scientist both with a an exercise price of $0.41
per share, which was the closing price on the day of the meeting.
2. An increase in the compensation for James Joyce, Chief Executive
Officer, from $265,000 per annum to $290,000 per annum effective May
2008.
3. The issuance of non-qualified stock options of 500,000 shares to the
outside directors. 4. The issuance of 5,000 stock grants to two
employees (research scientists).
In June 2008, we issued the two 5,000 stock grants to two employees (research
scientists) as approved in the June Board of Directors meeting.
F-57
<page>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, March 31,
2008 2008
(Unaudited)
------------ ------------
ASSETS
Current assets
Cash $ 156,904 $ 254,691
Deferred financing costs 32,889 71,139
Prepaid expenses and other current assets 3,600 3,600
------------ ------------
Total current assets 193,393 329,430
Property and equipment, net 5,869 8,313
Patents and patents pending, net 134,871 137,162
Other assets 13,200 13,200
------------ ------------
Total assets $ 347,333 $ 488,105
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable $ 365,349 $ 351,261
Due to related parties 921,063 949,063
Notes payable, net of discounts 863,087 633,611
Convertible notes payable, net of discounts 353,241 152,530
Warrant obligation 445,403 633,095
Other current liabilities 1,086,198 1,090,809
------------ ------------
Total current liabilities 4,034,341 3,810,369
Commitments and Contingencies
Stockholders' Deficit
Common stock, par value $0.001 per share; 100,000,000
shares authorized; 40,286,480 and 38,991,151 shares
issued and outstanding as of June 30, 2008 and
March 31, 2008, respectively 40,286 38,992
Additional paid-in capital 29,498,777 28,866,000
Deficit accumulated during development stage (33,226,071) (32,227,256)
------------ ------------
(3,687,008) (3,322,264)
------------ ------------
Total liabilities and stockholders' deficit $ 347,333 $ 488,105
============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial
statements.
F-58
<page>
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
June 30, 2008 and 2007 and For the Period January 31,
1984 (Inception) Through June 30, 2008
(Unaudited)
January 31, 1984
Three Months Three Months (Inception)
Ended Ended through
June 30, June 30, June 30,
2008 2007 2008
------------ ------------ ------------
REVENUES
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
------------ ------------ ------------
-- -- 1,533,568
EXPENSES
Professional Fees 160,275 187,405 7,103,944
Payroll and related 352,763 521,186 9,851,910
General and administrative 110,621 162,682 5,560,818
Impairment -- -- 1,313,253
------------ ------------ ------------
623,659 871,273 23,829,925
------------ ------------ ------------
OPERATING LOSS (623,659) (871,273) (22,296,357)
------------ ------------ ------------
OTHER EXPENSE (INCOME)
Loss on extinguishment of debt -- -- 1,763,867
Change in fair value of
warrant liability (187,692) (421,775) 1,647,829
Interest and other debt expenses 562,848 86,701 7,144,755
Interest income -- -- (17,415)
Other -- -- 390,678
------------ ------------ ------------
375,156 (335,074) 10,929,714
------------ ------------ ------------
NET LOSS $ (998,815) $ (536,199) $(33,226,071)
============ ============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.03) $ (0.02)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 39,633,952 31,982,399
============ ============
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
F-59
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2008
(Unaudited)
Three Months Three Months January 31, 1984
Ended Ended (Inception)
June 30, June 30, Through
2008 2007 June 30,
2008
------------ ------------ ------------
Cash flows from operating activities:
Net loss $ (998,815) $ (536,199) $(33,226,071)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 4,735 7,479 1,033,678
Amortization of deferred consulting fees -- -- 109,000
Gain on sale of property and equipment -- 1,777 (13,065)
Gain on settlement of debt -- -- (131,175)
Loss on settlement of accrued legal liabilities -- -- 142,245
Stock based compensation 69,496 283,505 1,018,983
Loss on debt extinguishment -- -- 1,763,867
Fair market value of warrants issued in
connection with accounts payable and debt -- -- 2,715,736
Fair market value of common stock, warrants
and options issued for services 25,250 65,661 3,837,323
Change in fair value of warrant liability (187,692) (421,775) 1,647,829
Amortization of debt discount and
deferred financing costs 501,437 -- 2,983,087
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 -- (585) 157,937
Other assets -- -- (13,200)
Accounts payable and other current
liabilities 15,802 171,686 2,205,273
Due to related parties (28,000) (5,000) 1,249,564
------------ ------------ ------------
Net cash used in operating activities (597,787) (433,451) (12,988,513)
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment -- (3,997) (271,443)
Additions to patents and patents pending -- -- (376,924)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------ ------------ ------------
Net cash used in investing activities -- (3,997) (620,574)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of notes payable -- -- 2,350,000
Principal repayments of notes payable -- -- (352,500)
Proceeds from the issuance of convertible notes
payable -- -- 2,138,000
Proceeds from the issuance of common stock 500,000 -- 9,707,222
Professional fees related to registration statement -- -- (76,731)
------------ ------------ ------------
Net cash provided by financing activities 500,000 -- 13,765,991
------------ ------------ ------------
Net (decrease) increase in cash (97,787) (437,448) 156,904
Cash at beginning of period 254,691 440,106 --
------------ ------------ ------------
Cash at end of period $ 156,904 $ 2,658 $ 156,904
============ ============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial
statements.
F-60
<page>
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE THREE MONTHS ENDED JUNE 30, 2008 AND 2007 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2008
(Unaudited)
Three Months Three Months January 31, 1984
Ended Ended (Inception)
June 30, June 30, Through
2008 2007 June 30,
2008
------------ ------------ ------------
Supplemental disclosures of non-cash investing
and financing information:
Debt and accrued interest converted to common stock $ 39,325 $ -- $ 2,836,411
============ ============ ============
Stock option exercise by director for accrued expenses -- -- 95,000
============ ============ ============
Debt discount on notes payable associated with detachable
warrants -- -- 1,154,860
============ ============ ============
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related parties -- -- 1,003,273
============ ============ ============
Issuance of common stock in connection with license agreements -- -- 33,800
============ ============ ============
Net assets of entities acquired in exchange for equity
securities -- -- 1,597,867
============ ============ ============
Debt placement fees paid by issuance of warrants -- -- 843,538
============ ============ ============
Patent pending acquired for 12,500 shares of common stock -- -- 100,000
============ ============ ============
Common stock issued for prepaid expenses -- -- 161,537
============ ============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial
statements.
F-61
<page>
AETHLON MEDICAL, INC.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2008
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. ("Aethlon", "We" or the "Company") is a development stage
medical device company focused on expanding the applications of our Hemopurifier
(R) platform technology, which is designed to rapidly reduce the presence of
infectious viruses and other toxins from human blood. In this regard, our core
focus is the development of therapeutic devices that treat acute viral
conditions, chronic viral diseases and pathogens targeted as potential
biological warfare agents. The Hemopurifier(R) combines the established
scientific principles of affinity chromatography and hemodialysis as a means to
mimic the immune system's response of clearing viruses and toxins from the blood
before cell and organ infection can occur. The Hemopurifier(R) cannot cure viral
conditions but can prevent virus and toxins from infecting unaffected tissues
and cells. We have completed pre-clinical blood testing of the Hemopurifier(R)
to treat HIV and Hepatitis-C, and have completed human safety trials on
Hepatitis-C infected patients in India and are in the process of obtaining
regulatory approval from the U.S. Food and Drug Administration ("FDA") to
initiate clinical trials in the United States.
The commercialization of the Hemopurifier(R) will require the completion of
human efficacy clinical trials. The approval of any application of the
Hemopurifier(R) in the United States will necessitate the approval of the FDA to
initiate human studies. Such studies could take years to demonstrate safety and
effectiveness in humans and there is no assurance that the Hemopurifier(R) will
be cleared by the FDA as a device we can market to the medical community. We
also expect to face similar regulatory challenges from foreign regulatory
agencies, should we attempt to commercialize and market the Hemopurifier(R)
outside of the United States. As a result, we have not generated revenues from
the sale of any Hemopurifier(R) application. Additionally, there have been no
independent validation studies of our Hemopurifiers(R) to treat infectious
disease. We manufacture our products on a small scale for testing purposes but
have yet to manufacture our products on a large scale for commercial purposes.
All of our pre-clinical human blood studies have been conducted in our
laboratories under the direction of Dr. Richard Tullis, our Chief Science
Officer.
We are classified as a development stage enterprise under accounting principles
generally accepted in the United States of America ("GAAP"), and have not
generated revenues from our principal operations.
Our common stock is quoted on the Over-the-Counter Bulletin Board administered
by the Financial Industry Regulatory Authority ("OTCBB") under the symbol
"AEMD.OB".
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with GAAP for interim financial information. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. The condensed consolidated balance sheet as of
March 31, 2008 was derived from our audited financial statements. Operating
results for the three month period ended June 30, 2008 are not necessarily
indicative of the results that may be expected for the year ending March 31,
2009. For further information, refer to our Annual Report on Form 10-KSB for the
year ended March 31, 2008, which includes audited financial statements and
footnotes as of March 31, 2008 and for the years ended March 31, 2008 and 2007
and the period January 31, 1984 (Inception) through March 31, 2008.
NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying unaudited condensed consolidated financial statements have been
prepared on a going concern basis, which contemplates, among other things, the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. We have experienced continuing losses from operations, are in
default on certain debt, have negative working capital of approximately
($3,841,000) recurring losses from operations and a deficit accumulated during
the development stage of approximately ($33,226,000) at June 30, 2008, which
among other matters, raises significant doubt about our ability to continue as a
going concern. We have not generated significant revenue or any profit from
operations since inception. A significant amount of additional capital will be
necessary to advance the development of our products to the point at which they
may become commercially viable. Our current financial resources are insufficient
to fund our capital expenditures, 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, 2009. Therefore we will be required to seek additional funds through
debt and/or equity financing arrangements to finance our current and long-term
operations.
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We are currently addressing our liquidity issue by exploring investment capital
opportunities through the public markets, specifically, through private
placement of common stock. We believe that our access to capital, together with
existing cash resources, will be sufficient to meet our liquidity needs for
fiscal 2009. However, no assurance can be given that we will receive any funds
in a connection with our capital raising efforts.
The unaudited consolidated financial statements do not include any adjustments
relating to the recoverability of assets that might be necessary should we be
unable to continue as a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies presented below is designed
to assist the reader in understanding our consolidated financial statements.
Such financial statements and related notes are the representations of our
management, who are responsible for their integrity and objectivity. These
accounting policies conform to GAAP in all material respects, and have been
consistently applied in preparing the accompanying consolidated financial
statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc. and Cell Activation, Inc. (collectively hereinafter referred
to as the "Company" or "Aethlon"). These subsidiaries are dormant and there
exist no material intercompany transactions or balances.
LOSS PER COMMON SHARE
Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year in
accordance with SFAS No. 128, "EARNINGS PER SHARE."
Securities that could potentially dilute basic loss per share (prior to their
conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive. There
were 4,235,025 and 9,475,184 potentially dilutive common shares outstanding for
the three months ended June 30, 2008 and 2007, respectively, have not been
included in loss per share calculations.
PATENTS
We capitalize the cost of patents, some of which were acquired, and amortize
such costs over the shorter of the remaining legal life or their estimated
economic life, upon issuance of the patent.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred approximately $163,000 and $227,000 of research and development
expenses during the three months ended June 30, 2008 and 2007, respectively,
which are included in various operating expense line items in the accompanying
consolidated statements of operations.
EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY OTHER THAN EMPLOYEES
We follow SFAS No. 123-R (as interpreted by Emerging Issues Task Force ("EITF")
Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES") ("EITF No. 96-18") to account for transactions involving goods and
services provided by third parties where we issue equity instruments as part of
the total consideration. Pursuant to paragraph 7 of SFAS No. 123-R, we account
for such transactions 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.
We apply EITF No. 96-18, 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, using the
following methodology:
(a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
(b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about the
date of the contract.
(c) For any transactions not meeting the criteria in (a) or (b) above, we
re-measure the consideration at each reporting date based on its then
current stock value.
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IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
SFAS No.144 ("SFAS 144"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. We believe that
no impairment existed at or during the three months ended June 30, 2008.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a rate of
conversion that is below the market value of our common stock. Such feature is
normally characterized as a "Beneficial Conversion Feature" ("BCF"). Pursuant to
EITF Issue No. 98-5, "ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL
CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF No.
00-27, "APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS,"
the estimated fair value of the BCF is recorded, when applicable, in the
consolidated financial statements as a discount from the face amount of the
notes. Such discounts are accreted to interest expense over the term of the
notes using the effective yield basis.
DERIVATIVE LIABILITIES AND CLASSIFICATION
We evaluate free-standing instruments (or embedded derivatives) indexed to its
common stock to properly classify such instruments within equity or as
liabilities in our financial statements, pursuant to the requirements of the
EITF Issue No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED
TO AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," EITF Issue No. 01-06,
"THE MEANING OF INDEXED TO A COMPANY'S OWN STOCK," FSP EITF Issue No. 00-19-2,
"ACCOUNTING FOR REGISTRATION PAYMENT ARRANGEMENTS," and SFAS No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," as amended. Our
policy is to settle instruments indexed to our common shares on a
first-in-first-out basis. Pursuant to EITF Issue No. 00-19, the classification
of an instrument indexed to our stock, which is carried as a liability, must be
reassessed at each balance sheet date. If the classification required under this
Consensus 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.
In the fiscal year ended March 31, 2006, we were obligated to register for
resale the shares underlying warrants in connection with the issuance of our 10%
Series A Convertible Notes. In accordance with EITF Issue No. 00-19, the value
of the warrants was recorded as a liability until the registration became
effective on January 20, 2006. On or about March 13, 2007, we determined that
the effectiveness of the registration statement underlying the conversion and
warrant shares associated with the 10% Series A Convertible Notes had lapsed. In
accordance with EITF Issue No. 00-19, we reclassified the warrants from
stockholders' equity and recorded a warrant liability which is required to be
revalued at the end of each reporting period. Such warrant liability was
revalued through November 29, 2007. On November 29, 2007, the notes and warrant
agreements associated with the 10% Series A Convertible Notes were amended and
restated. For accounting purposes, such amendment was treated as an
extinguishment pursuant to EITF Issue No. 06-6 and the existing warrant
liability relieved. See Note 5 for further description.
REGISTRATION PAYMENT ARRANGEMENTS
We account for our liquidated damages on registration rights agreements in
accordance with FASB Staff Position EITF Issue No. 00-19-2 "ACCOUNTING FOR
REGISTRATION PAYMENT ARRANGEMENTS" which specifies that the contingent
obligation to make future payments or otherwise transfer consideration under a
registration payment arrangement should be separately recognized and measured in
accordance with SFAS No. 5, "ACCOUNTING FOR CONTINGENCIES" ("SFAS No. 5").
Pursuant to SFAS No. 5, a liability related to potential liquidated damages if
such damages were determined to be both probable and reasonably estimable. We
had accrued liquidated damages on the 10% Series A Convertible Notes. In
connection with the amendment of these instruments and related warrants on
November 29, 2007, the liquidated damages related to these Notes were settled.
As of June 30, 2008, we have accrued $130,000 in liquidated damages in
connection with potential liquidated damages related to the November 29, 2007
transaction and accrued an additional $201,900 related to other transactions
that required liquidated damages on registration rights agreements.
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The following table lists the amounts of liquidated damages accrued by
transaction, the quarterly amount of damages being accrued and the relevant
damages formula by transaction:
Accrued Recurring Monthly Accrual
Transaction Damages Until Registration Occurs Damages Formula
- ----------------------------------------------------------------------------------------------------------
Amended Series A 10% Convertible Notes $130,000 $ 15,000 No cap on damages
8% Notes 119,000 9,900 Maximum of $150,000
2008 9% Notes 48,400 4,400 Maximum of $75,000
Stock Units 34,500 9,300 No cap on damages
-------- --------
$331,900 $ 38,600
======== ========
See Notes 4 and 5 for further description.
STOCK BASED COMPENSATION
Effective April 1, 2006, we adopted the provisions of SFAS No. 123-R,
"Share-Based Payment," ("SFAS No. 123-R"). SFAS No. 123-R requires employee
stock options and rights to purchase shares under stock participation plans to
be accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the award. We
previously accounted for awards granted under our equity incentive plan under
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations, and
provided the required pro forma disclosures prescribed by SFAS No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION," as amended. The exercise price of
options is generally equal to the market price of our common stock (defined as
the closing price as quoted on the Over-the-Counter Bulletin Board on the date
of grant. Accordingly, no share-based compensation was recognized in the
financial statements for periods prior to April 1, 2006.
Under the modified prospective method of adoption for SFAS No. 123-R, the
compensation cost that we recognize beginning April 1, 2006 includes (a)
compensation cost for all equity incentive awards granted prior to, but not yet
vested as of April 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123, and (b) compensation
cost for all equity incentive awards granted subsequent to April 1, 2006, based
on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123-R.
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 and generally expire within five years from the grant
date. Such grants are recorded based on the grant date fair value of the equity
instruments.
In August 2000, we adopted the 2000 Stock Option Plan ("Stock Option Plan"),
which was approved by our stockholders in December 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 the Company's
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 June 30,
2008, we had granted 47,500 options under the 2000 Stock Option Plan of which
15,000 had been forfeited. All of these options vested prior to the adoption of
SFAS 123-R. We have reserved 467,500 shares for future issuance.
Share-based compensation resulting from the application of SFAS No. 123-R to
options granted resulted in an expense of $64,696 for the three month period
ended June 30, 2008 and $283,505 for the three month period ended June 30, 2007.
We use the Binomial Lattice option pricing model for estimating fair value of
options granted.
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The following table summarizes the effect of share-based compensation resulting
from the application of SFAS No. 123-R to options granted:
Three Months Ended Three Months Ended
June 30, 2008 June 30, 2007
------------------ ------------------
Payroll and related $ 64,696 $ 283,505
========== =========
Net share-based compensation effect
in net loss from continuing operations $ 64,696 $ 283,505
========== =========
Basic and diluted loss per common share $ (0.00) $ (0.01)
========== =========
In accordance with SFAS No. 123-R, beginning on April 1, 2006, we adjust
share-based compensation on a quarterly basis for changes to the estimate of
expected award forfeitures based on actual forfeiture experience. The effect, if
any, of adjusting the forfeiture rate for all expense amortization is recognized
in the period the forfeiture estimate is changed. The effect of forfeiture
adjustments for the three month period ended June 30, 2008 was insignificant.
The following weighted average assumptions were used in the valuation of these
instruments.
Three Months Ended
June 30
-------------------------------
2008 2007
None Issued
----------- ----------
Annual dividends n/a zero
Expected volatility n/a 92%
Risk free interest rate n/a 4.72%
Expected life n/a 2.14 years
The expected volatility is based on the historic volatility. The expected life
of options granted is based on the "simplified method" described in the SEC's
Staff Accounting Bulletin No. 107 due to changes in the vesting terms and
contractual life of current option grants compared to our historical grants.
Options outstanding that have vested and are expected to vest as of June 30,
2008 are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term in Years Value (1)
- ------------------------- ----------- -------- ------------- ----------
Vested (2) 9,731,839 $ 0.38 5.02 $ 291,955
Expected to vest 1,222,221 0.34 8.86 $ 85,556
----------- ----------
Total 10,954,060 $ 377,511
=========== ==========
(1) These amounts represent the difference between the exercise price and $0.41,
the closing market price of our common stock on June 30, 2008 as quoted on the
Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all in-the-money
options outstanding.
(2) 4,278,375 options were granted prior to April 1, 2006 (the date of adoption
for SFAS 123-R) and were fully vested at the date of adoption.
Additional information with respect to stock option activity is as follows:
Outstanding Options
-------------------------------------
Weighted Aggregate
Number of Average Intrinsic
Shares Exercise Price Value (1)
- --------------------------- ------ -------------- ----------
March 31, 2008 10,954,060 $ 0.37 $1,694,776
==========
Grants -- --
Exercises -- --
Cancellations -- --
---------- ------
June 30, 2008 10,954,060 $ 0.38 $ 377,511
========== ====== ==========
Options exercisable at:
June 30, 2008 9,731,839 $ 0.38
========== ======
(1) Represents the difference between the exercise price and the March 31, 2008
or June 30, 2008 market price of our common stock, which was $0.53 and $0.41,
respectively.
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At June 30, 2008, there was approximately $473,000 of unrecognized compensation
cost related to share-based payments which is expected to be recognized over a
weighted average period of 1.83 years.
INCOME TAXES
Under SFAS 109, "ACCOUNTING FOR 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.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In December 2006, the FASB issued SFAS No. 157, "FAIR VALUE MEASUREMENTS," which
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not
require any new fair value measurements. The guidance in SFAS No. 157 applies to
derivatives and other financial instruments measured at estimated fair value
under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We adopted Statement of Financial
Accounting Standards No. 157 ("SFAS No. 157") as of April 1, 2008. SFAS No. 157
applies to certain assets and liabilities that are being measured and reported
on a fair value basis. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in accordance with generally accepted accounting
principles, and expands disclosure about fair value measurements. This Statement
enables the reader of the financial statements to assess the inputs used to
develop those measurements by establishing a hierarchy for ranking the quality
and reliability of the information used to determine fair values. The Statement
requires that assets and liabilities carried at fair value will be classified
and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or
liabilities.
Level 2: Observable market based inputs or unobservable inputs that are
corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of our warrant liabilities is determined based on observable
market based inputs or unobservable inputs that are corroborated by market data,
which is a Level 3 classification. We record variations in our warrant liability
account on our balance sheet at fair value with changes in fair value recorded
as change in fair value of warrant liability 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:
Quarter Ended June 30, 2008
---------------------------
Risk free interest rate 2.91%
Average expected life 3 years
Expected volatility 84.8%
Expected dividends None
We did not make any changes to our valuation techniques in the quarter ended
June 30, 2008.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 expands the scope of
specific types of assets and liabilities that an entity may carry at fair value
on its statement of financial position, and offers an irrevocable option to
record the vast majority of financial assets and liabilities at fair value, with
changes in fair value recorded in earnings. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We have not yet elected to use the fair
value option.
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 our present or future
consolidated financial statements.
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NOTE 4. NOTES PAYABLE
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings
(the "12% Notes). At June 30, 2008, $347,500 of principal balance of the 12%
Notes was outstanding and delinquent, in default, and bore interest at the
default rate of 15%.
10% NOTES
From time to time, we issued convertible notes payable ("10% Note") 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 and may be converted to our common stock
at the conversion price of $0.50 per share at any time at the option of the
noteholder. The total amount of the original notes issued was $275,000. One
remaining 10% Note in the amount of $5,000 was past due and in default at June
30, 2008. At June 30, 2008, interest payable on this note totaled $3,500.
8% NOTES
In December 2007, we issued notes payable ("8% Notes") to two accredited
investors in the aggregate amount of $495,000 with 8% interest maturing on
September 5, 2008. In conjunction with the issuance of the 8% Notes, we also
issued three year warrants to acquire 1,485,000 shares of Common Stock at $0.50
per share.
Under this transaction, we are obligated to register for resale the common
shares underlying the warrants, and as a result, this warrant obligation does
not meet the scope exception of paragraph 11(a) of SFAS No. 133. Specifically,
at the commitment date, we did not have any uncommitted registered shares to
settle the warrant obligation and accordingly, such obligation was required to
be classified as a liability (outside of stockholders' deficit) in accordance
with EITF Issue No.00-19. The warrants were valued at $693,050 on the commitment
date using a Binomial Lattice option pricing model. Such amount was recorded as
a derivative liability with an offsetting debt discount recorded against the
$495,000 face amount of the 8% Notes and the remaining $198,050 recorded as
interest expense. The debt discount is amortized to expense over the term of the
8% Notes.
2008 9% NOTES
In January 2008, we issued notes payable ("2008 9% Notes") to an accredited
investor in the amount of $220,000 with 9% interest maturing on October 19,
2008. In conjunction with the issuance of the 2008 9% Notes, we also issued
three year warrants to acquire 660,000 shares of Common Stock at $0.50 per
share.
Under this transaction, we are obligated to register for resale the common
shares underlying the warrants, and as a result, this warrant obligation does
not meet the scope exception of paragraph 11(a) of SFAS No. 133. Specifically,
at the commitment date, the we did not have any uncommitted registered shares to
settle the warrant obligation and accordingly, such obligation was required to
be classified as a liability (outside of stockholders' deficit) in accordance
with EITF Issue No. 00-19. The warrant was valued at $222,450 on the commitment
date using a Binomial Lattice option pricing model. Such amount was recorded as
a derivative liability with an offsetting debt discount recorded against the
$220,000 face amount of the 2008 9% Notes and the remaining $2,450 recorded as
interest expense. The debt discount is amortized to expense over the term of the
2008 9% Notes.
Notes payable consist of the following at June 30, 2008:
Face Amount of Notes Payable,
Notes Payable Note Discounts Net of Discounts
------------- -------------- ----------------
12% Notes payable, all past due $ 347,500 -- $ 347,500
10% Note payable, past due 5,000 -- 5,000
8% Note payable 495,000 (108,640) 386,360
2008 9% Note payable 220,000 (95,773) 124,227
----------- --------- ---------
Total Notes Payable $ 1,067,500 ($204,413) $ 863,087
=========== ========= =========
Our plans to satisfy the remaining outstanding balance on these notes include
converting the notes to common stock at market value or repayment with available
funds.
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NOTE 5. CONVERTIBLE NOTES PAYABLE
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 mature 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 are exercised prior to December 15, 2007, the holder will receive
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 common
stock. The December 10% Note Warrants have been valued using a Binomial Lattice
option pricing model and an associated discount of $15,627, the relative fair
value measured at the commitment date, was recorded and presented net against
the face amount of the December 10% Notes. The convertible feature of the
December 10% Notes provides for an effective conversion rate that is below
market value. Pursuant to EITF No. 98-5 and EITF No. 00-27, we estimated the
fair value of such beneficial conversion feature to be $34,373 and recorded such
amount as a debt discount. The discounts associated with the warrants and the
beneficial conversion feature were accreted to interest expense over the term of
the December 10% Notes.
On May 1, 2008, a holder of $33,000 of the December 10% Notes converted his
$33,000 principal amount and accrued interest of $6,325 at the agreed conversion
rate of $0.17 per share. As a result, we issued 232,033 shares of common stock
under this conversion.
10% SERIES A CONVERTIBLE NOTES
From July 11, 2005 through December 15, 2005 we received cash investments
totaling $1,000,000 from accredited investors based on agreed-upon terms reached
on the cash receipt dates. Such investments were documented in November and
December 2005 in several 10% Series A Convertible Promissory Notes. The 10%
Series A Convertible Notes accrue interest at a rate of ten percent (10%) per
annum and matured on January 2, 2007. The 10% Series A Convertible Notes were
convertible into shares of our common stock at any time at the election of the
holder at a fixed conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date.
10% SERIES A CONVERTIBLE NOTES AMENDMENT
On November 2007, we entered into Amended and Restated 10% Series A Convertible
Promissory Notes (the "Amended Notes") with the holders of certain promissory
notes that we previously issued (the "Prior Notes"), and all amendments to the
Prior Notes.
The Amended Notes, in the principal amount of $1,000,000, are convertible into
an aggregate of 5,000,000 shares of our Common Stock and mature on February 15,
2009. The Amended Notes provide for the payment of accrued and default interest
through December 31, 2007 in the aggregate amount of $295,248 to be paid in
units ("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of one
share of our Common Stock and one Class A Common Stock Purchase Warrant (the
"Class A Warrant") to purchase one share of our Common Stock at a fixed exercise
price of $0.20 per share. If the Holders exercise the Class A Warrants on or
before February 15, 2010, we will issue them one Class B Common Stock Purchase
Warrant (the "Class B Warrant") for every two Class A Warrants exercised. The
Class B Warrants will have a fixed exercise price of $0.60 per share.
The Amended Notes also provided for the payment of liquidated damages through
November 29, 2007 in the aggregate amount $269,336 to be paid in units ("Damages
Units") at a fixed rate of $0.40 per Damages Unit, each Damages Unit consisting
of one share of our Common Stock and one Class A-1 Common Stock Purchase Warrant
(the "Class A-1 Warrant") to purchase one share of our Common Stock at a fixed
exercise price of $0.40 per share. If the Holders exercise the Class A-1
Warrants on or before February 15, 2010, we will issue them one Class B-1 Common
Stock Purchase Warrant (the "Class B-1 Warrant") for every two Class A-1
Warrants exercised. The Class B-1 Warrants will have a fixed exercise price of
$0.40 per share.
In addition, the Amended Notes provided for the issuance of Class A Principal
Common Stock Purchase Warrants (the "Class A Principal Warrant") to purchase an
aggregate of 5,000,000 shares of our Common Stock on the same terms as the Class
A Warrants.
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The following table summarizes the number of shares of the our Common Stock
issuable upon the conversion of the Amended Notes or the exercise of the various
warrants issued or issuable pursuant to the Amended Notes.
Note Conversion 5,000,000
Accrued Interest 1,476,242
Liquidated Damages 673,340
Class A Warrants 1,476,242
Class A-1 Warrants 673,340
Class A Principal Warrants 5,000,000
Class B Warrants 738,121
Class B-1 Warrants 336,670
------------
Total 15,373,955
============
We are obligated to register the shares underlying the Class A Warrants, the
Class A-1 Warrants and the Class A Principal Warrants with the SEC by March 31,
2008, and the shares underlying the Class B Warrants and to register the Class
B-1 Warrants with the SEC by the 30th day following the issuance date of such
warrants. Since we failed to effect a registration statement by March 31, 2008,
we are recording liquidated damages of $15,000 per month.
For accounting purposes, the amendment of the 10% Series A Convertible Notes was
treated as an extinguishment pursuant to EITF Issue No. 06-6. The changes in the
note agreements, conversion feature and warrants were considered substantive as
prescribed in that consensus. Consequently, at the amendment date we initially
recorded an estimated loss on extinguishment of $489,013 as follows:
Reacquisition Price (Fair value of new notes and warrants) $ 5,392,664
Less amounts relieved at date of extinguishment:
Carrying amount of the unamortized notes (166,667)
Carrying amount of derivative liability (4,172,400)
Accrued interest and liquidated damages (564,584)
------------
Loss on extinguishment $ 489,013
============
Subsequently, we engaged a third party valuation firm to value the various
components of the amendment of the Series A Convertible Notes. As a result of
that valuation, we recorded an additional $58,106 of loss on extinguishment of
debt with the offset being recorded to additional paid-in capital.
The new warrants issued in connection with the Amended Notes were evaluated
pursuant to EITF Issue No. 00-19 and classified as equity instruments. In
connection with the new warrants, we recorded $4,392,664 as an increase to
additional paid in capital, based on the estimated fair value at issuance. The
amended conversion feature contains a BCF at the date of the Amended Notes;
consequently, we recorded a discount of $1,000,000 against the notes and a
corresponding increase in additional paid in capital.
In January 2008, one of the holders of the Amended Series A Convertible Notes
converted $100,000 of their notes into 500,000 shares of common stock at the
agreed conversion rate of $0.20 per share.
On July 30, 2008, the holders of the Amended Series A Convertible Notes notified
us that we were in default on the notes due to our failure to register the
warrants by March 31, 2008 and for failing to make required interest payments.
Convertible Notes Payable consists of the following at June 30, 2008:
Net
Principal Discount Amount
--------- --------- ---------
Amended Series A 10% Convertible Notes $ 900,000 $(563,759) $ 336,241
December 10% Convertible Notes 17,000 -- 17,000
--------- --------- ---------
Total - Convertible Notes $ 917,000 $(563,759) $ 353,241
========= ========== =========
NOTE 6. EQUITY TRANSACTIONS
In April 2008, we issued 10,170 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.59 per
share in payment for regulatory affairs consulting services valued at $6,000
based on the value of the services.
Effective as of April 22, 2008, per a patent license agreement, we issued 10,849
shares of restricted common stock to Boston University. This issuance
represented the initial payment under the license agreement and was based on our
share price at April 22, 2008 and the payment amount of $5,750.
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In May 2008, we entered into a Private Placement Agreement with Fusion Capital
Fund II, LLC, an Illinois limited liability company for the sale of 1,000,000
shares of our common stock for an aggregate purchase price of $500,000.
In May 2008, we issued 6,667 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 regulatory affairs consulting services valued at $3,000
based on the value of the services.
In May 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 (See Note 5).
In June 2008, we issued 25,610 shares of common stock pursuant to our S-8
registration statement covering our 2003 Consultant Stock Plan at $0.41 per
share in payment for regulatory affairs consulting services valued at $10,500
based on the value of the services.
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.
NOTE 7. OTHER CURRENT LIABILITIES
At June 30, 2008 and March 31, 2008, our other current liabilities were
comprised of the following items:
June 30, March 31,
2008 2008
---------- ----------
Accrued damages 331,900 337,400
Accrued interest 469,395 412,914
Accrued legal fees 159,555 159,555
Other accrued liabilities 125,348 180,940
---------- ----------
Total other current liabilities $1,086,198 $1,090,809
========== ==========
NOTE 8. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
From time to time, claims are made against us in the ordinary course of
business, which could result in litigation. Claims and associated litigation are
subject to inherent uncertainties and unfavorable outcomes could occur, such as
monetary damages, fines, penalties or injunctions prohibiting us from selling
one or more products or engaging in other activities. The occurrence of an
unfavorable outcome in any specific period could have a material adverse effect
on our results of operations for that period or future periods. We are not
presently a party to any pending or threatened legal proceedings.
OTHER
We have not filed our income tax returns for certain prior periods. Whereas we
are in the process of remediating this matter, we may be subject to penalties;
however, those amounts are not expected to be significant.
NOTE 9. SUBSEQUENT EVENTS
On July 24, 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.
On July 28, 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.
On July 31, 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.
On July 30, 2008, the holders of the 10% Amended Series A Convertible Notes (see
Note 5) notified us that we were in default on the notes due to our failure to
register the warrants by March 31, 2008 and for failing to make required
interest payments (see Note 5). We are currently negotiating potential ways to
cure the default with the holders of the Amended Series A Convertible Notes.
In late July and through August 8, 2008, we have raised an aggregate amount of
$300,000 from the sale to accredited investors of 10% convertible notes and
warrants. The notes are convertible into our common stock at $0.50 per share and
the warrants are exercisable at $0.50 per share. 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.
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LIST OF EXHIBITS AND SCHEDULES
------------------------------
Exhibit 5.1
Exhibit 23.1