SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2008
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ________ to __________
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
(Name of Small Business issuer in its charter)
NEVADA 13-3632859
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 Bunker Hill Street, Suite 4000,
San Diego, California 92109
(Address of principal executive office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (858) 459-7800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK--$.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[x]
The registrant had no revenue for the fiscal year ended March 31, 2008. The
aggregate market value of the Common Stock held by non-affiliates was
approximately $15,204,545 based upon the closing price of the Common Stock of
$0.39, as reported by the NASDAQ Over-the-Counter Bulletin Board ("OTCBB") on
July 7, 2008.
The number of shares of the Common Stock of the registrant outstanding as of
July 7, 2008 was 40,286,480.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
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Forward-Looking Statements 1
PART I.
Item 1. Description of Business 1
Item 2. Description of Property 9
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 9
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 17
Item 7. Financial Statements 35
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
Item 8A. Controls and Procedures 35
Item 8B. Other Information 36
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons
and Corporate Governance; Compliance with Section 16(a) of
the Exchange Act 36
Item 10. Executive Compensation 40
Item 11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 43
Item 12. Certain Relationships and Related Transactions
and Director Independence 44
Item 13. Exhibits 44
Item 14. Principal Accountant Fees and Services 48
Signatures 49
Certifications
FORWARD-LOOKING STATEMENTS
All statements, other than statements of historical fact, included in
this Form 10-KSB are, or may be deemed to be, "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The safe harbor for forward looking statements provided by the
Private Securities Litigation Reform Act of 1995 does not apply to us. We note,
however, that such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Aethlon Medical, Inc. ("Aethlon
Medical", "We" or the "Company") to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements contained in this Form 10-KSB. Such potential risks
and uncertainties include, without limitation, Food and Drug Administration
("FDA") and other regulatory approval of our products, patent protection on our
proprietary technology, product liability exposure, uncertainty of market
acceptance, competition, technological change, and other risk factors detailed
herein and in other of our filings with the Securities and Exchange Commission.
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 annual report as well as other public reports
filed with the Securities and Exchange Commission. The forward-looking
statements are made as of the date of this Form 10-KSB, and we assume no
obligation to update the forward-looking statements or to update the reasons
actual results could differ from those projected in such forward-looking
statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW
We are a developmental stage medical device company focused on
expanding the applications of our Hemopurifier(R) platform technology which is
designed to 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. 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.
On March 10, 1999, Aethlon, Inc., a California corporation ("Aethlon"),
Hemex, Inc., a Delaware corporation ("Hemex"), the accounting predecessor to the
Company and Bishop, Inc. ("Bishop"), a publicly traded "shell" company completed
an Agreement and Plan of Reorganization (the "Plan") structured to result in
Bishop's acquisition of all of the outstanding common shares of Aethlon and
Hemex (the "Reorganization"). The Reorganization was intended to qualify as a
tax-free transaction under Section 368(a)(1)(B) of the 1986 Internal Revenue
Code, as amended. Under the Plan's terms Bishop issued 733,500 and 1,350,000
shares of its common stock to the common stock shareholders of Aethlon and
Hemex, respectively, such that Bishop then owned 100% of each company. Upon
completion of the transaction, Bishop was renamed Aethlon Medical, Inc.
On January 10, 2000, we acquired all of the outstanding common stock of
Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of our common
stock in order to establish research facilities in San Diego, California, as
well as to employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a
recognized research scientist in the area of DNA synthesis and antisense. Syngen
has no significant assets, liabilities or operations and primarily served as the
entity through which Dr. Tullis performed research consulting services. As such,
the acquisition was accounted for as an acquisition of assets in the form of an
employment contract with Dr. Tullis and not as a business combination. Dr.
Tullis is presently the chief scientific officer of Aethlon Medical, Inc.
On April 6, 2000, we completed the acquisition of Cell Activation, Inc.
("Cell"). In accordance with the Purchase Agreement, we issued 99,152 shares of
restricted common stock and 50,148 options to purchase common stock in exchange
for all of the outstanding common shares and options to purchase common stock of
Cell. After the transaction, Cell became a wholly-owned subsidiary of the
Company. The acquisition was accounted for as a purchase. At March 31, 2001, we
determined that goodwill recorded during the acquisition of Cell was impaired
due to the permanent suspension of operations by Cell and, accordingly, treated
the related goodwill as fully impaired.
1
THE HEMOPURIFIER
The Hemopurifier(R) is a broad spectrum platform technology that
combines the established scientific methods of hemodialysis (artificial kidneys)
and affinity chromatography (a method that allows the selective capture of
viruses and related toxins) as a means to augment the natural immune response of
clearing infectious 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 present treatment gap 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.
Traditionally, hemodialysis (kidney dialysis) has been used to remove
urea and other small metabolic toxins that accumulate in the blood of people
with acute or chronic kidney failure (also called renal failure). Acute renal
failure is generally treated in hospital intensive care units using a continuous
filtration therapy. Chronic renal failure is treated through intermittent,
thrice-weekly kidney dialysis in a specialized clinic setting. A catheter is
most often the method used to gain access to the blood which is then pumped
through thousands of hollow micro-fibers running the length of the kidney
dialysis cartridge. Within the cartridge, toxins, urea and excess water pass
through small pores in the walls of the micro-fibers and are removed by a
separately circulating dialysis fluid outside of the fibers. Blood cells and
molecules that are too large to pass through the pores are retained and the
cleansed blood is returned to circulation.
The Hemopurifier(R) modifies this process in several ways to provide an
efficient method to selectively remove targeted viruses and toxins. First, the
pores of the 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. Finally, because of the
affinity agent's ability to bind to viruses and toxins, there is no need for a
separate circulation of a dialysis solution with the Hemopurifier(R). This
provides the flexibility to use the Hemopurifier(R) either on kidney dialysis
machines (global infrastructure), by employing a simple pump mechanism or using
a patient's own blood pressure (in field or military applications).
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 injurious immunological
mediators directly from the blood of the patient. By removing circulating virus
and toxins the Hemopurifier(R) cartridge prevents virus and toxins from
infecting tissues and cells. The device 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.
2
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. The data was then provided in a
confidential report to the antibody manufacturer within ten days of the original
receipt of the antibody in our labs.
BIOLOGICAL WEAPONS
We are developing treatments to combat infectious agents that may be
used in biological warfare and terrorism. 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. We have not yet published any data related
to the treatment of any "Category A" agent. 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.
CANCER TREATMENT
We have licensed an invention and related patent rights for a method to
treat cancer under an assignment agreement with the London Health Science Center
Research, Inc. The invention provides for the "Depression of anticancer immunity
through extracorporeal removal of microvesicular particles" for which a
provisional patent application was filed in the United States. The agreement
provides that the Company will pay certain patent application and filing costs
as well as a 2% royalty on any future net sales.
In addition to our efforts to treat infectious disease, we are
developing treatments to remove the immunosuppressive activity normally found in
the fluid of cancer patients. Studies in 2007, led by Dr. Douglas Taylor at the
University of Louisville, have demonstrated that the capture of tumor secreted
exosomes by the Hemopurifier(R) does result in reversing immunosuppressive
activity. Dr. Taylor is a recognized authority on the causative effects of
immune suppression in cancer patients. He is credited with the initial
characterization of exosomes and is a leading peer-reviewed author on the
subject.
In the studies, the Aethlon Hemopurifier(R) removed the
immunosuppressive activity normally found in the ascites fluid of ovarian cancer
patients. Immunosuppressive activity in ovarian cancer patients is known to
correlate with disease progression and long-term survival. The studies measured
the expression of two biological markers required for T-cell activation. The
markers, Jak-3 kinase and CD3-zeta chain expression are respectively required
for interleukin (cytokine) activation of cell proliferation and T-cell receptor
mediated activation. Both markers are highly expressed in T-cell lines. When
cells were subjected to ovarian cancer ascites fluid, both markers were
consistently absent. However, the circulation of the same ascites fluid through
the Aethlon Hemopurifier(R) allowed the expression of both biological markers
necessary to activate the immune response.
Previously, Dr. Taylor documented that 60% of circulating exosomes were
removed from the blood of ovarian cancer patients during first pass
(approximately 10 minutes) through a small scale Hemopurifier(R). The capture
data was consistent over the course of five different studies. Exosomes, are
released by solid tumors, lymphomas, and leukemia. They induce T-cell apoptosis
(programmed cell death), and block T-cell signaling, proliferation, and cytokine
production. High concentrations of circulating exosomes correlate with reduced
T-cell production and tumor progression in cancer patients. The ability to
reduce the presence of circulating exosomes would reverse immune suppression and
increase patient responsiveness to both immunotherapy and chemotherapy. As such,
Aethlon believes the Hemopurifier(R) can address a significant unmet medical
need in cancer care. Aethlon further disclosed that Dr. Taylor has not received
nor requested any compensation for conducting these research studies.
We have also exercised an option to exclusively license a pending
patent entitled, "Method to Inhibit Proliferation and Growth of Metastases" from
The Trustees of Boston University. The license provides a rapid development
strategy for new cancer therapies by uniting drug agents that inhibit the spread
of cancer-related metastases, with filtration techniques already proven in the
3
Aethlon Hemopurifier(R). The resulting devices would inhibit tumor growth by
reducing the presence of circulating growth factors without interfering with
surgical wound healing or the recovery of tissue injured by radiation therapy.
While the market for anti-growth factor drug agents exceeds $5 billion, there
remains a significant unmet clinical need, as these drug agents may not be
indicated for use in conjunction with surgical procedures or radiation treatment
as they inhibit wound healing and tissue recovery.
MANUFACTURING AND METHODS OF DISTRIBUTION
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. If approved, Hemopurifiers(R) to treat pathogens that are
bioweapons candidates will be sold directly to the U.S. military and the federal
government, and 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, New York 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 $1,470,000 over the
last two fiscal years.
PATENTS
We currently own or have license rights to a number of U.S. and foreign
patents and patent applications and endeavor to continually improve our
intellectual property position. We consider the protection of our technology,
whether owned or licensed, to the exclusion of use by others, to be vital to our
business. While we intend to focus primarily on patented or patentable
technology, we may also rely on trade secrets, unpatented property, know-how,
regulatory exclusivity, patent extensions and continuing technological
innovation to develop our competitive position.
In certain countries, medical devices are not patentable or only
recently have become patentable, and enforcement of intellectual property rights
in some countries has been limited or non-existent. Future enforcement of
patents and proprietary rights in many countries can be expected to be
problematic or unpredictable. We cannot guarantee that any patents issued or
licensed to us will provide us with competitive advantages or will not be
challenged by others. Furthermore, we cannot be certain that others will not
independently develop similar products or will not design around patents issued
or licensed to us. We cannot guarantee that patents that are issued will not be
challenged, invalidated or infringed upon or designed around by others, or that
the claims contained in such patents will not infringe the patent claims of
others, or provide us with significant protection against competitive products,
or otherwise be commercially valuable. We may need to acquire licenses under
patents belonging to others for technology potentially useful or necessary to
us. If any such licenses are required, we cannot be certain that they will be
available on terms acceptable to us, if at all. To the extent that we are unable
to obtain patent protection for our products or technology, our business may be
materially adversely affected by competitors who develop substantially
equivalent technology.
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.
4
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 fails to 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 Even if a large population 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 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.
5
LICENSING AGREEMENTS
Effective January 1, 2000, we entered into an agreement with a related
party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(R) were
assigned to us by the inventors in exchange for a royalty to be paid on future
sales of the patented product or process and shares of our common stock. On
March 4, 2003, the related patent was issued and we issued 196,078 shares of
restricted common stock.
On February 9, 2006, we entered into an option agreement with the
Trustees of Boston University which provides for the right to negotiate an
exclusive license for a Boston University patent BU05-41, "Method to Prevent
Proliferation and Growth of Metastases." On February 8, 2007 we entered into an
amendment to this agreement to extend its term until August 9, 2007. On April
22, 2008, we entered into the actual license agreement for this patent and as
the initial payment under this license will issue shares of our common stock
equivalent to 115% of $5,000.
On November 7, 2006 we entered into an assignment agreement with the
London Health Science Center Research, Inc. and Thomas Ichim under which an
invention and related patent rights for a method to treat cancer were assigned
to the Company. The invention provides for the "Depression of anticancer
immunity through extracorporeal removal of microvesicular particles" for which a
provisional patent application was filed in the United States. The agreement
provides that the Company will pay certain patent application and filing costs
as well as a 2% royalty on any future net sales.
GOVERNMENT REGULATION
The Hemopurifier(R) is a medical device subject to extensive and
rigorous regulation by FDA, as well as other federal and state regulatory bodies
in the United States and comparable authorities in other countries. Therefore,
we cannot assure that our technology will successfully complete any regulatory
clinical trial for any of our proposed applications.
One of the problems facing the FDA is the need to ensure public safety
while at the same time preventing unsafe treatments from reaching the public.
The balance between these competing pressures has resulted in a long and
deliberate process for approving new treatments which is not responsive to the
urgent need for new treatments presented in the era of bioterrorism. For most
drugs, the principal research and development phases take several years prior to
a drug being submitted to the FDA for testing. A clinical research program takes
two to ten years, depending on the agent and clinical indication, after which
the marketing application review period requires an average of one year. Once a
product is approved for market, long-term post-marketing surveillance,
inspections, and product testing must be performed to ensure the quality,
safety, and efficacy of the product, as well as appropriate product labeling.
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS.
Each medical device we wish to commercialize in the United States will
require the filing of a Premarket Approval ("PMA") from the FDA. Medical devices
are classified into one of three classes--Class I, Class II, or Class
III--depending on the degree or risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness. Devices deemed to
pose lower risks are placed in either Class I or II, which requires the
manufacturer to submit to the FDA a premarket notification requesting permission
to commercially distribute the device. Our Hemopurifier(R) has been categorized
as a Class III device, requiring premarket approval.
CLINICAL TRIALS.
Clinical trials are almost always required to support an FDA premarket
application. In the United States, these trials generally require submission of
an application for an Investigational Device Exemption, or IDE, to the FDA. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results, showing that it is safe to test the device in humans
and that the testing protocol is scientifically sound. The IDE must be approved
in advance by the FDA for a specific number of patients unless the product is
deemed a non-significant risk device eligible for more abbreviated IDE
requirements. Clinical trials for significant risk devices may not begin until
the IDE application is approved by the FDA and the appropriate institutional
review boards, or IRBs, at the clinical trial sites. Our clinical trials must be
conducted under the oversight of an IRB at the relevant clinical trial sites and
in accordance with FDA regulations, including but not limited to those relating
to good clinical practices. We are also required to obtain patients' informed
consent that complies with both FDA requirements and state and federal privacy
regulations. We, the FDA or the IRB at each site at which a clinical trial is
being performed may suspend a clinical trial at any time for various reasons,
including a belief that the risks to study subjects outweigh the benefits. Even
if a trial is completed, the results of clinical testing may not demonstrate the
safety and efficacy of the device, may not be equivocal or may otherwise not be
sufficient to obtain approval of the product. Similarly, in Europe the clinical
study must be approved by a local ethics committee and in some cases, including
studies with high-risk devices, by the Ministry of Health in the applicable
country.
6
In March 2007 we submitted an 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 the FDA's satisfaction the safety and effectiveness
of the device.
After a PMA application is submitted and FDA determines that the
application is sufficiently complete to permit a substantive review, the FDA
will accept the application for review. FDA has 180 days to review an "accepted"
PMA application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, the FDA may request additional information or clarification
of the information already provided. Also, an advisory panel of experts from
outside the FDA may be convened to review and evaluate the application and
provide recommendations to the FDA as to the approvability of the device. In
addition, the FDA will conduct a pre-approval inspection of the manufacturing
facility to ensure compliance with quality system regulations. New PMA
applications or PMA application supplements are required for significant
modification to the manufacturing process, labeling and design of a device that
is approved through the premarket approval process. Premarket approval
supplements often require submission of the same type of information as a
premarket approval application, except that the supplement is limited to
information needed to support any changes from the device covered by the
original premarket approval application and may not require as extensive
clinical data or the convening of an advisory panel.
PERVASIVE AND CONTINUING REGULATION.
After a device is placed on the market, numerous regulatory
requirements continue to apply. These include:
o FDA's Quality System Regulation, or QSR, which requires
manufacturers, including third-party manufacturers, to follow stringent design,
testing, control, documentation and other quality assurance procedures during
all aspects of the manufacturing process;
o labeling regulations and FDA prohibitions against the promotion of
products for uncleared, unapproved or off-label uses;
o clearance or approval of product modifications that could
significantly affect safety or efficacy or that would constitute a major change
in intended use;
o medical device reporting, or MDR, regulations, which require that
manufacturers report to the FDA if their device may have caused or contributed
to a death or serious injury or malfunctioned in a way that would likely cause
or contribute to a death or serious injury if the malfunction were to recur; and
o post-market surveillance regulations, which apply when necessary to
protect the public health or to provide additional safety and effectiveness data
for the device.
After a device receives a PMA, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, will require a new clearance or approval. The
FDA requires each manufacturer to make this determination initially, but FDA can
review any such decision and can disagree with a manufacturer's determination.
The regulations also require that we report to FDA any incident in
which our product may have caused or contributed to a death or serious injury or
in which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury.
FRAUD AND ABUSE.
We may also directly or indirectly be subject to various federal and
state laws pertaining to healthcare fraud and abuse, including anti-kickback
laws. In particular, the federal healthcare program Anti-Kickback Statute
prohibits persons from knowingly and willfully soliciting, offering, receiving
or providing remuneration, directly or indirectly, in exchange for or to induce
either the referral of an individual, or the furnishing, arranging for or
recommending a good or service, for which payment may be made in whole or part
under federal healthcare programs, such as the Medicare and Medicaid programs.
Penalties for violations include criminal penalties and civil sanctions such as
fines, imprisonment and possible exclusion from Medicare, Medicaid and other
federal healthcare programs. The Anti-Kickback Statute is broad and prohibits
7
many arrangements and practices that are lawful in businesses outside of the
healthcare industry. In implementing the statute, the Office of Inspector
General ("OIG") has issued a series of regulations, known as the "safe harbors."
These safe harbors set forth provisions that, if met, will assure healthcare
providers and other parties that they will not be prosecuted under the
Anti-Kickback Statute. The failure of a transaction or arrangement to fit
precisely within one or more safe harbors does not necessarily mean that it is
illegal or that prosecution will be pursued. However, conduct and business
arrangements that do not fully satisfy each applicable element of a safe harbor
may result in increased scrutiny by government enforcement authorities, such as
the OIG.
INTERNATIONAL.
International sales of medical devices are subject to foreign
governmental regulations, which vary substantially from country to country. The
time required to obtain clearance or approval by a foreign country may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may be different.
The primary regulatory environment in Europe is that of the European
Union, which has adopted numerous directives and has promulgated voluntary
standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential requirements of
the applicable directives and, accordingly, can be commercially distributed
throughout the member states of the European Union, and other countries that
comply with or mirror these directives. The method of assessing conformity
varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a notified body, an independent and neutral institution appointed by a
country to conduct the conformity assessment. This third-party assessment may
consist of an audit of the manufacturer's quality system and specific testing of
the manufacturer's device. Such an assessment is required in order for a
manufacturer to commercially distribute the product throughout these countries.
ISO 9001 and ISO 13845 certifications are voluntary harmonized standards.
Compliance establishes the presumption of conformity with the essential
requirements for a CE Marking.
We have completed preclinical studies that demonstrate the removal of
HIV and Hepatitis C virus from infected human blood. We have also completed
initial animal safety studies, limited human safety studies and are presently
engaged in the IN VITRO testing and clinical planning required to support our
2007 IDE submission.
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 July 7, 2008, we had five full-time employees, comprised of our
Chief Executive Officer, our President, our Chief Science Officer, our Director
of Investor Relations, one research scientist, and a part-time Senior Vice
President of Finance. 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 are represented by a collective
bargaining unit.
WHERE YOU CAN FIND MORE INFORMATION
We file annual reports on Form 10-KSB, quarterly reports on Form
10-QSB, current reports on Form 8-K and proxy and information statements and
amendments to reports files or furnished pursuant to Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934, as amended. The public may read and copy
these materials at the SEC's Public Reference Room at 450 Fifth St. NW,
Washington, DC 20549. The public may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding other companies, like us,
that file materials with the SEC electronically. 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 website is www.aethlonmedical.com.
8
ITEM 2. DESCRIPTION OF PROPERTY
We currently rent approximately 3,200 square feet of executive office
space and laboratory space at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109 at the rate of $7,744 per month on a lease that expired on July
12, 2007. The Company is presently leasing its space on a month to month basis,
at the same terms.
ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various claims, lawsuits,
disputes with third parties or breach of contract actions incidental to the
normal course of business operations. We are currently not involved in any such
litigation or any pending legal proceedings that we believe could have a
material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
9
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is quoted on the Over-The-Counter Bulletin Board. Our
trading symbol is "AEMD."
Our Common Stock has had a limited and sporadic trading history.
The following table sets forth for the calendar period indicated the
quarterly high and low bid prices for our Common Stock as reported by the OTCBB.
The prices represent quotations between dealers, without adjustment for retail
markup, mark down or commission, and do not necessarily represent actual
transactions.
BID PRICE
-------------------------
PERIOD HIGH LOW
-----------------------------------------------------------------------------
2008:
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 were approximately 2,100 record holders of our common stock at
July 7, 2008. The number of registered shareholders includes any beneficial
owners of common shares held in street name.
We have not declared any cash dividends on our common stock since
inception and do not anticipate any in the future. Our current business plan is
to retain any future earnings to finance the expansion and development of our
business. Any future determination to pay cash dividends will be at the
discretion of our board of directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors our
board may deem relevant at that time.
The transfer agent and registrar for our common stock is Computershare
Investor Services, located at 350 Indiana Street, Suite 800, Golden Colorado
80401; 303-262-0600.
10
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.
WARRANTS ISSUED IN CONNECTION WITH CONVERTIBLE DEBT
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.
11
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
derivative income.
$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 bears 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.
12
COMMON STOCK AND WARRANTS
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.
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 August 2007, the Company issued 8,264 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at prices between $0.68 and $0.78 per share in payment for
regulatory affairs consulting services to the Company valued at $6,000 based on
the value of the services.
13
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.
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 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 February 2008, the Company 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, the Company issued 13,895 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.54 per share in payment for regulatory affairs
consulting services to the Company valued at $7,500 based on the value of the
services provided.
In March 2008, the Company 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, the Company 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 the Company valued at
$94,750 based on the value of the services.
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. 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.
14
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth March 31, 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.
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
--------------------- ------------------- ------------------ ----------------
15
Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000,
provides for the grant of incentive stock options (ISOs") to our full-time
employees (who may also be directors) and nonstatutory stock options ("NSOs") to
non-employee directors, consultants, customers, vendors or providers of
significant services. The exercise price of any ISO may not be less than the
fair market value of the Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of the Common Stock on the date of grant.
The amount reserved under the Plan is 500,000 options. At March 31, 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.
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.
16
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or
providing those persons with incentives or inducements affording them an
opportunity to become owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will
receive a one-time grant of a non-qualified stock option of 1.5% of the common
stock outstanding at the time of election. The options will vest one-third at
the time of election to the Board and the remaining two-thirds will vest equally
at year end over three years. Additionally, each director will also receive an
annual $25,000 non-qualified stock option retainer, $15,000 of which is to be
paid at the first of the year to all directors who are on the Board prior to the
first meeting of the year and a $10,000 retainer will be paid if a director
attends 75% of the meetings either in person, via conference call or other
electronic means. The exercise price for the options under the Directors
Compensation Program will equal the average closing of the last ten (10) trading
days prior to the date earned. At March 31, 2008 under the 2005 Directors
Compensation Program we had issued 1,337,825 options to outside directors,
3,965,450 options to employee-directors, 308,725 outside directors options had
been forfeited, 250,000 outside directors options had been exercised and
4,744,550 options remained outstanding.
STAND-ALONE GRANTS
From time to time our Board of Directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.
To date we have issued 8,443,158 options (of which 3,397,025 have been
exercised or cancelled) outside of both the 2005 Directors Compensation Plan,
2000 Stock Option Plan and the 2003 Consultant Stock Plan.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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.
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.
17
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.
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.
18
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.
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.
19
$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.
$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%
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.
20
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.
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.
21
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.
Small Business Issuers 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.
23
RISK FACTORS
An investment in our common shares involves a high degree of risk and
is subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. In such an
event, the trading price for our common shares could decline substantially, and
you could lose all or part of your investment. In order to attain an
appreciation for these risks and uncertainties, you should read this annual
report in its entirety and consider all of the information and advisements
contained in this annual report, including the following risk factors and
uncertainties.
RISKS RELATING TO OUR BUSINESS
WE HAVE INCURRED SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE FOR
THE FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. We have
not had any significant revenues from our principal operations. We have incurred
annual operating losses of $2,892,588, $2,084,254 and $2,094,939, for the fiscal
years ended March 31, 2008, 2007, and 2006, respectively. At March 31, 2008, we
had an accumulated deficit of $(32,227,256). We have incurred net losses of
$4,140,264 and $6,024,545 for the fiscal years ended March 31, 2008 and 2007. We
have not had revenues to date. We expect that our revenues, if any, will not be
sufficient to sustain our operations for the foreseeable future. Our
profitability will require the successful commercialization of our
Hemopurifier(R) technology. No assurances can be given when or if this will
occur or that we will ever generate revenues or be profitable.
WE HAVE RECEIVED AN EXPLANATORY PARAGRAPH FROM OUR AUDITORS REGARDING
OUR ABILITY TO CONTINUE AS A GOING CONCERN
Our independent registered public accounting firm noted in their report
accompanying our financial statements for our fiscal year ended March 31, 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 for the year ended March 31, 2008 addressed
management's plans to address these matters. We cannot assure you that our
business plans will be successful in addressing these issues. This explanatory
paragraph about our ability to continue as a going concern could affect our
ability to obtain additional financing at favorable terms, if at all, as it may
cause investors to lose faith in our long-term prospects. If we cannot
successfully continue as a going concern, our shareholders may lose their entire
investment in our common shares.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.
Should the financing we require to sustain our working capital needs
be unavailable to us on reasonable terms when we require it, the consequences
could be a material adverse effect on our business, operating results, financial
condition and prospects.
WE MAY FAIL TO OBTAIN GOVERNMENT CONTRACTS TO DEVELOP OUR
HEMOPURIFIER(R) TECHNOLOGY FOR BIODEFENSE APPLICATIONS.
The U.S. Government has undertaken commitments to help secure improved
countermeasures against bioterrorism. To date, we have been unsuccessful in
obtaining grant income. As a result, future attempts to obtain grant income from
the Federal Government will be sought through direct communication to government
health and military agencies, and may include unsolicited proposals to provide
the Hemopurifier(R) as a treatment countermeasure.
At present, the Hemopurifier(R) has not been approved for use by any
U.S. Government agency, nor have we received any contracts to purchase the
Hemopurifier(R). Since inception, we have not generated revenues from the sale
of any product based on our Hemopurifier(R) technology platform. The process of
obtaining government contracts is lengthy with the uncertainty that we will be
successful in obtaining announced grants or contracts for therapeutics as a
medical device technology. Accordingly, we cannot be certain that we will be
awarded any U.S. Government grants or contracts utilizing our Hemopurifier(R)
platform technology.
IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(R) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.
We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(R)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.
24
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:
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.
25
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.
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
26
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 five full time
employees consisting of our Chief Executive Officer, our President, our Chief
Science Officer, a research scientist and a Director of Investor Relations. We
also employ a Senior Vice President - Finance on a part-time, contract basis.
Although we believe that these employees and consultants will be able to handle
most of our additional administrative, research and development and business
development in the near term, we will nevertheless be required over the
longer-term to hire highly skilled managerial, scientific and administrative
personnel to fully implement our business plan and growth strategies. Due to the
specialized scientific nature of our business, we are highly dependent upon our
ability to attract and retain qualified scientific, technical and managerial
personal. Competition for these individuals, especially in San Diego where many
biotechnology companies are located, is intense and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. We cannot assure you that we will be able to engage the services of such
qualified personnel at competitive prices or at all, particularly given the
risks of employment attributable to our limited financial resources and lack of
an established track record.
WE PLAN TO GROW RAPIDLY, WHICH WILL PLACE STRAINS ON OUR MANAGEMENT
TEAM AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED
MANAGERIAL, OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO
TRAIN AND MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR
INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND
PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES,
WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
INVESTMENT.
We will need to significantly expand our operations to implement our
longer-term business plan and growth strategies. We will also be required to
manage multiple relationships with various strategic partners, technology
licensors, customers, manufacturers and suppliers, consultants and other third
parties. This expansion and these expanded relationships will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effectuate these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot assure you that we will
institute, in a timely manner or at all, the improvements to our managerial,
operational and financial systems, procedures and controls necessary to support
our anticipated increased levels of operations and to coordinate our various
corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND
OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR
CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND
SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD
COMPANY.
The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these perceived risks, directors and management are also
becoming increasingly concerned with the availability of directors and officers
liability insurance to pay on a timely basis the costs incurred in defending
such claims. We currently do carry limited directors and officers liability
insurance. Directors and officers liability insurance is expensive and difficult
to obtain. If we are unable to continue or provide directors and officers
liability insurance at affordable rates or at all, it may become increasingly
more difficult to attract and retain qualified outside directors to serve on our
board of directors. We may lose potential independent board members and
management candidates to other companies in the biotechnology field that have
greater directors and officers liability insurance to insure them from liability
or to biotechnology companies that have revenues or have received greater
funding to date which can offer greater compensation packages. The fees of
directors are also rising in response to their increased duties, obligations and
liabilities as well as increased exposure to such risks. As a company with a
limited operating history and limited resources, we will have a more difficult
time attracting and retaining management and outside independent directors than
a more established company due to these enhanced duties, obligations and
liabilities.
27
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, INCLUDING
OUR U.S. AND INTERNATIONAL PATENTS COULD NEGATIVELY IMPACT OUR PROJECTED GROWTH
AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT
ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.
In the case of patents, we cannot give you any assurance that our
existing patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. We believe that certain patent applications filed
and/or other patents issued more recently will help to protect the proprietary
nature of the Hemopurifier(R) treatment technology.
The Hemopurifier(R) and related treatment approaches are protected by
three issued U.S. patents and 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.
28
Failure to comply with these or other regulatory requirements of the
FDA may subject us to administrative or judicially imposed sanctions, including:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention;
o product recalls; and
o total or partial suspension of productions.
DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(R) PRODUCT
CANDIDATES ON A TIMELY BASIS.
Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(R) product candidates. Completion of
our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:
o serious adverse events related to our medical device
candidates;
o unsatisfactory results of any clinical trial;
o the failure of our principal third-party investigators to
perform our clinical trials on our anticipated schedules;
and/or
o different interpretations of our pre-clinical and clinical
data, which could initially lead to inconclusive results.
Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our Hemopurifier(R) product
candidates do not prove to be safe or effective or do not receive required
regulatory approvals, our financial results and the commercial prospects for our
product candidates will be harmed. Furthermore, our inability to complete our
clinical trials in a timely manner could jeopardize our ability to obtain
regulatory approval.
THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.
THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.
We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
29
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.
OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE
TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR
MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.
Our previously planned products have not become marketable products due
in part to our transition in 2001 from a focus on utilizing our Hemopurifier(R)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and to take
advantage of the greater sense of urgency surrounding acute and chronic
infectious diseases. Prior to initiating the development of infectious disease
Hemopurifiers(R), we successfully completed an FDA approved Phase I human safety
trial of a Hemopurifier(R) to treat aluminum and iron intoxication. Since
changing the focus to infectious disease research, we have not initiated an FDA
approved human clinical trial as the development of the technology is still
continuing and will require both significant capital and scientific resources.
Our pending products face similar challenges of obtaining successful clinical
trials in route to gaining FDA approval prior to commercialization.
Additionally, our limited financial resources hinder the speed of our product
development due to personnel constraints.
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including the:
o lack of adequate quality or sufficient prevention benefit, or
unacceptable safety during pre-clinical studies or clinical
trials;
o failure to receive necessary regulatory approvals;
o existence of proprietary rights of third parties; and/or
o inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.
THE PATENTS WE OWN COMPRISE A MAJORITY OF OUR ASSETS WHICH COULD LIMIT
OUR FINANCIAL VIABILITY.
The Hemopurifier(R) is protected by three issued U.S. patents and five
issued international patents. One of the U.S. patents is covered via an
exclusive license. Our exclusive license expires March 2020 and is subject to
termination if the inventors have not received a minimum of $15,000 in any year
during the term beginning in the second year after the FDA approves the
Hemopurifier(R). These patents comprise a majority of our assets. At March 31,
2008, our intellectual property assets comprise 86% of our non-current assets,
and 28% 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.
30
OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
Our Hemopurifier(R) products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or
our products are designed inappropriately, we may be subject to lawsuits seeking
significant compensatory and punitive damages. The risk of product liability
claims, product recalls and associated adverse publicity is inherent in the
testing, manufacturing, marketing and sale of medical products. We do not have
general clinical trial liability insurance coverage. There can be no assurance
that future insurance coverage will to be adequate or available. We may not be
able to secure product liability insurance coverage on acceptable terms or at
reasonable costs when needed. Any product recall or lawsuit seeking significant
monetary damages may have a material affect on our business and financial
condition. Any liability for mandatory damages could exceed the amount of our
coverage. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR IMPAIR OUR ABILITY TO MARKET
OUR PRODUCTS.
Products developed to treat diseases caused by or to combat the threat
of bioterrorism will be subject to changing political and social environments.
The political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business. Bioterrorism has become the focus of political debates both
in terms of how to approach bioterrorism and the amount of funding the
government should provide for any programs involving homeland protection.
Government funding for products on bioterrorism could be reduced which would
hinder our ability to obtain governmental grants.
RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL
BE PAID IN THE FORESEEABLE FUTURE.
We do not anticipate paying cash dividends on our common shares in the
foreseeable future, and we cannot assure an investor that funds will be legally
available to pay dividends, or that even if the funds are legally available,
that the dividends will be paid.
THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL
THOSE SHARES.
As long as the trading price of our common shares is below $5 per
share, the open-market trading of our common shares will be subject to the
"penny stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
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
31
will generally support continuous sales without an adverse effect on share
price. We cannot give you any assurance that a broader or more active public
trading market for our common shares will develop or be sustained, or that
current trading levels will be sustained.
THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN
OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC
FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUE WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE
PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In fact, during the 52-week period ended March 31, 2008, the high and
low closing sale prices of a share of our common stock were $0.88 and $0.46,
respectively. The volatility in our share price is attributable to a number of
factors. First, as noted above, our common shares are sporadically and/or thinly
traded. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders may disproportionately influence
the price of those shares in either direction. The price for our shares could,
for example, decline precipitously in the event that a large number of our
common shares are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky" investment due to
our limited operating history and lack of revenue or profit to date, and the
uncertainty of future market acceptance for our potential products. As a
consequence of this enhanced risk, more risk-adverse investors may, under the
fear of losing all or most of their investment in the event of negative news or
lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; acceptance of our proprietary technology as a viable method
of augmenting the immune response of clearing viruses and toxins from human
blood; government regulations, announcements of significant acquisitions,
strategic partnerships or joint ventures; our capital commitments and additions
or departures of our key personnel. Many of these factors are beyond our control
and may decrease the market price of our common shares regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as
to what effect the sale of shares or the availability of common shares for sale
at any time will have on the prevailing market price.
Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
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OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY
21.5% OF OUR OUTSTANDING COMMON SHARES AS OF MARCH 31, 2008, WHICH MAY LIMIT
YOUR ABILITY OR THAT OF OTHER SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR
COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN YOU
RECEIVING A PREMIUM OVER THE MARKET PRICE FOR YOUR COMMON SHARES.
As of March 31, 2008, our officers and directors beneficially own or
control approximately 21.5% of our outstanding common shares (assuming the
exercise of all outstanding options and warrants held by our officers and
directors). These persons will have the ability to substantially influence all
matters submitted to our shareholders for approval and to control our management
and affairs, including extraordinary transactions such as mergers and other
changes of corporate control, and going private transactions.
A LARGE NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
OUTSTANDING COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY
NOTES. THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE
SUBSTANTIAL DILUTION OF YOUR INVESTMENT IN TERMS OF YOUR PERCENTAGE OWNERSHIP IN
THE COMPANY AS WELL AS THE BOOK VALUE OF YOUR COMMON SHARES. THE SALE OF A LARGE
AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON
THE PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME
TAXES, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY
DEPRESS THE PREVAILING MARKET PRICES FOR OUR SHARES.
As of March 31, 2008, there are outstanding purchase options and
warrants entitling the holders to purchase 25,900,899 common shares at a
weighted average exercise price of $0.36 per share. There are 4,794,118 shares
underlying promissory notes convertible into common stock at a weighted average
exercise price of $0.20. The exercise price for all of the aforesaid warrants
may be less than your cost to acquire our common shares. In the event of the
exercise of these securities, you could suffer substantial dilution of your
investment in terms of your percentage ownership in the company as well as the
book value of your common shares. In addition, the holders of the common share
purchase options or warrants may sell common shares in tandem with their
exercise of those options or warrants to finance that exercise, or may resell
the shares purchased in order to cover any income tax liabilities that may arise
from their exercise of the options or warrants.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.
We are entitled under our certificate of incorporation to issue up to
100,000,000 shares of common stock. After taking into consideration our
outstanding common stock at March 31, 2008, our convertible notes, outstanding
options and outstanding warrants we will be entitled to issue up to 30,695,017
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
that our board of directors may deem relevant at that time. For the past four
years, we issued a total of 4,094,078 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 59.3% and
46.34% for the years ended March 31, 2008 and 2007, respectively.
For the past four fiscal years we issued a total of 6,398,289 shares as
payment for services. The average price discount of common stock issued for
services during this period, weighted by the number of shares issued was 12.8%
and 4.54% for the years ended March 31, 2008 and 2007, respectively. It is
likely that we will issue additional securities to pay for services and reduce
debt in the future. We cannot give you any assurance that we will not issue
additional shares of common stock under circumstances we may deem appropriate at
the time.
33
THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS
AND EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.
Our certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to our company and
shareholders. Our bylaws also require us to indemnify our officers and
directors. We may also have contractual indemnification obligations under our
agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,
officers and employees, that we may be unable to recoup. These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our company and shareholders.
ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.
Certain provisions of the Nevada General Corporation Law have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in
acquiring us to negotiate with, and to obtain the approval of, our Board of
Directors in connection with such a transaction. However, certain of these
provisions may discourage a future acquisition of us, including an acquisition
in which the shareholders might otherwise receive a premium for their shares. As
a result, shareholders who might desire to participate in such a transaction may
not have the opportunity to do so.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this document we make a number of statements, referred to as
"FORWARD-LOOKING STATEMENTS" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), that are intended to
convey our expectations or predictions regarding the occurrence of possible
future events or the existence of trends and factors that may impact our future
plans and operating results. The safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995 does not apply
to us. We note, however, that these forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they
do develop, the pace at which they develop;
o our ability to attract and retain the qualified personnel to
implement our growth strategies;
o our ability to obtain approval from the Food and Drug
Administration for our products;
o our ability to protect the patents on our proprietary
technology;
o our ability to fund our short-term and long-term financing
needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in
the sections of this prospectus, including those captioned.
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS".
Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.
34
ITEM 7. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO"), who is also our acting Chief
Financial Officer ("CFO"), we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) of the Exchange Act as of a date (the "Evaluation Date")
within 90 days prior to filing the Company's March 31, 2008 Form 10-KSB.
Based upon that evaluation, our CEO concluded that, as of March 31,
2008, our disclosure controls and procedures were effective in timely alerting
management to the material information relating to us (or our consolidated
subsidiaries) required to be included in our periodic filings with the SEC.
Internal Control over Financial Reporting
(a) MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. The Company's internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
A material weakness is a deficiency, or combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the registrant's annual or interim
financial statements will not be prevented or detected on a timely basis.
The Company's management, with the participation of its Chief Executive
Officer, assessed the effectiveness of the Company's internal control over
financial reporting as of March 31, 2008. In making this assessment, the Company
used the criteria set forth by the Committee of Sponsoring Organizations of The
Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on
that assessment under such criteria, management concluded that the Company's
internal control over financial reporting was not effective as of March 31, 2008
due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for fiscal
2008 identified a lack of sufficient segregation of duties, particularly in cash
disbursements. Specifically, this material weakness is such that the design of
controls over the area of cash disbursements relies primarily on detective
controls and could be strengthened by adding preventative controls to properly
safeguard company assets.
Management has identified a lack of sufficient personnel in the
accounting function due to the limited resources of the Company with appropriate
skills, training and experience to perform the review processes to ensure the
complete and proper application of generally accepted accounting principles,
particularly as it relates to taxes. Specifically, this material weakness led to
segregation of duties issues and resulted in audit adjustments to the annual
consolidated financial statements and revisions to related disclosures,
including tax reporting.
The Company is in the process of developing and implementing
remediation plans to address its material weaknesses.
Management has identified specific remedial actions to address the
material weaknesses described above:
o Improve the effectiveness of the accounting group by
continuing to augment existing Company resources with
additional consultants or employees to improve segregation
procedures and to assist in the analysis and recording of
complex accounting transactions and preparation of tax
disclosures. The Company plans to mitigate the segregation of
duties issues by hiring additional personnel in the accounting
department once the Company has achieved commercialization of
its products and is generating revenue, or has raised
significant additional working capital.
o Improve segregation procedures by strengthening cross approval
of various functions including cash disbursements and
quarterly internal audit procedures where appropriate.
35
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective can provide only reasonable assurance
with respect to financial statement preparation and presentation.
This annual report does not include an attestation report of the
Company's registered public accounting firm due to a transition period
established by rules of the Securities and Exchange Commission for certain
public companies.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes made in our internal controls over
financial reporting during the quarter ended March 31, 2008 that have materially
affected or are reasonably likely to materially affect these controls. Thus, no
corrective actions with regard to significant deficiencies or material
weaknesses were necessary.
ITEM 8B. OTHER INFORMATION
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors, and persons who own more than 10% of a registered class of
our equity securities to file reports of ownership and changes in ownership with
the SEC and Nasdaq. Officers, directors, and greater than 10% beneficial owners
are required by SEC regulation to furnish the Company with copies of all Section
16 (a) forms they file. Based solely on our review of copies of the Section
16(a) reports filed for the fiscal year ended March 31, 2008, we believe that
all filing requirements applicable to its officers, directors, and greater than
10% beneficial owners were complied with.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of our directors and executive officers
as of July 7, 2008 are listed below:
NAMES TITLE OR POSITION AGE
----------------------------------------------------------------------------
James A. Joyce (1) Chairman, Chief Executive 45
Officer, Principal Accounting 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.
(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.
36
Resumes of Management:
James A. Joyce, Chairman, CEO, Principal Accounting Officer and
Secretary
Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman
of the Board and Secretary since March 1999. On June 1, 2001, our Board of
Directors appointed Mr. Joyce with the additional role of CEO. During the
quarter ended December 31, 2007, our chief financial officer resigned and Mr.
Joyce assumed the role of principal accounting officer. In 1992, Mr. Joyce
founded and was the sole shareholder of James Joyce & Associates, an
organization that provided management consulting and corporate finance advisory
services to CEOs and CFOs of publicly traded companies. Previously, from 1989 to
1991, Mr. Joyce was Chairman and Chief Executive Officer of Mission Labs, Inc.
Prior to that Mr. Joyce was a principal in charge of U.S. operations for London
Zurich Securities, Inc. Mr. Joyce is a graduate of the University of Maryland.
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 develop 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
at Los Angeles.
Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
Dr. Tullis has been Vice President and a director of the Company since
January 2000 and Chief Science Officer since June 2001. Dr. Tullis has extensive
biotechnology management and research experience, and is the founder of Syngen
Research, a wholly-owned subsidiary of Aethlon Medical, Inc. Previously, Dr.
Tullis co-founded Molecular Biosystems, Inc., a former NYSE company. At
Molecular Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization,
Senior Research Scientist and Member of the Board of Directors. In research, Dr.
Tullis developed and patented the first application of oligonucleotides to
antisense antibiotics and developed new methods for the chemical synthesis of
DNA via methoxy-hosphorochloridites. Dr. Tullis also co-developed the first
applications of covalently coupled DNA-enzyme conjugates using synthetic
oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis
founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer
in custom DNA synthesis, which was sold to Molecular Biology Resources in 1991.
Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a
company that was eventually acquired by Genetic Vectors. Dr. Tullis received his
Ph.D. in Biochemistry and Cell Biology from the University of California at San
Diego, and has done extensive post-doctoral work at UCSD, USC, and the
University of Hawaii.
Franklyn S. Barry, Jr.
Mr. Barry has over 30 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and our President and CEO from March 10, 1999 to May 31,
2001. He became a director of Aethlon Medical on March 10, 1999. From 1994 to
April 1997, Mr. Barry was a private consultant. Included among his prior
experiences are tenures as President of Fisher-Price and as co-founder and CEO
of Software Distribution Services, which today operates as Ingram Micro-D, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Merchants Mutual Insurance Company.
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon Medical on March 10, 1999.
Mr. Broenniman has 30 years of management and executive experience with
high-tech, privately-held growth companies where he has served as a CEO, COO, or
corporate advisor, using his expertise to focus management on increasing
profitability and stockholder value. He is the Managing Director of The Piedmont
Group, LLC, a venture advisory firm. Mr. Broenniman recently served on the Board
of Directors of publicly-traded QuesTech (acquired by CACI International), and
currently serves on the Boards of four privately-held firms. His nonprofit
Boards are the Dingman Center for Entrepreneurship's Board of Advisors at the
University of Maryland, the National Association of Corporate Directors,
National Capital Chapter and the Board of the Association for Corporate Growth,
National Capital Chapter.
37
Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry and
Broenniman serve. Mr. Barry is Chairman of the Audit Committee, and Mr.
Broenniman is Chairman of the Compensation Committee.
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors services upon whose judgment,
initiative, efforts and/or services we are substantially dependent, by offering
to or providing those persons with incentives or inducements affording such
persons an opportunity to become owners of our capital stock. Under the
Directors Compensation Program, a newly elected director will receive a one time
grant of a non-qualified stock option of 1.5% of the common stock outstanding at
the time of election. The options will vest one-third at the time of election to
the board and the remaining two-thirds will vest equally at year end over three
years. Additionally, each director will also receive an annual $25,000
non-qualified stock option retainer, $15,000 of which is to be paid at the first
of the year to all directors who are on the Board prior to the first meeting of
the year and a $10,000 retainer will be paid if a director attends 75% of the
meetings either in person, via conference call or other electronic means. The
exercise price for the options under the Directors Compensation Program will
equal the average closing of the last ten (10) trading days prior to the date
earned. At March 31, 2008 under the 2005 Directors Compensation Program, we had
issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors for a total of 5,303,275 options, of these 4,744,550 remain
outstanding.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors,
executive officers or persons nominated or charged by us to become directors or
executive officers.
There are no arrangements or understandings between any two or more of
our directors or executive officers. There is no arrangement or understanding
between any of our directors or executive officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether
non-management shareholders will exercise their voting rights to continue to
elect the current Board of Directors. There are also no arrangements, agreements
or understanding between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
SCIENCE ADVISORY BOARD
Each person listed below is a current member of our Science Advisory
Board. The role of the Science Advisory Board is to provide scientific guidance
related to the development of our Hemopurifier(R) technology. Unlike the members
of our Board of Directors, the Science Advisory Board members are not involved
in the management or operations of our company. Members of the Science Advisory
Board are paid $500 per day for services rendered either on-site or at a
mutually agreeable location.
Ken Alibek, M.D., Ph.D., D.Sc.
------------------------------
Dr. Alibek is the Executive Director of Education at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor at GMU as well. Dr. Alibek specializes in medical and scientific
research dedicated to developing new forms of protection against biological
weapons and other infectious diseases.
Formerly, Dr. Alibek was a Soviet Army Colonel, and served as First
Deputy Chief of the civilian branch of the Soviet Union's biological weapons
program until he defected to the United States in 1992 and subsequently served
as a consultant to numerous U.S. government agencies in the areas of medical
microbiology, biological weapons defense, and biological weapons
nonproliferation. Dr. Alibek has worked with the National Institutes of Health,
testified extensively before the U.S. Congress on nonproliferation of biological
weapons and is the author of Biohazard: The Chilling True Story of the Largest
Covert Biological Weapons Program in the World--Told from Inside by the Man Who
Ran It, published by Random House Books. He holds numerous patents, is widely
published in science journals, and has provided over 300 lectures and
presentations to military and civilian universities, as well as foreign
governments. The December 2003 issue of the Acumen Journal of Life Sciences
named Dr. Alibek as one of the top five biological warfare experts in the
nation.
38
Charles Bailey, Ph.D.
---------------------
Dr. Bailey is the former commander of the U.S. Army Medical Research
Institute of Infectious Diseases (USAMRIID). Dr. Bailey has 25 years U.S. Army
experience in R&D and management in infectious diseases and biological warfare
defense. As an officer of the Defense Intelligence Agency, Dr. Bailey wrote
extensively on foreign biological warfare capabilities. Dr. Bailey is currently
the Executive Director for Research & International Relations at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor of Biology at GMU as well. The Acumen Journal of Life Sciences named
Dr. Bailey as one of the top five biological warfare experts in the nation.
Larry Cowgill, D.V.M., Ph.D.
----------------------------
Dr. Cowgill is a Professor in the Department of Medicine and
Epidemiology at the School of Veterinary Medicine, University of California at
Davis and has nearly 30 years of experience as a clinical instructor in small
animal internal medicine, nephrology and hemodialysis. He currently Heads the
Companion Animal Hemodialysis Units at the Veterinary Medical Teaching Hospital
at UC Davis and the UC Veterinary Medical Center at San Diego. Dr. Cowgill is
also Associate Dean for Southern California Clinical Programs and is Co-Director
of the University of California Veterinary Medical Center at San Diego. Prior to
his appointment at the University of California, he was a National Institutes of
Health (NIH) Special Research Fellow at the University of Pennsylvania School of
Veterinary Medicine and at the Renal Electrolyte Section at the University of
Pennsylvania School of Medicine, where he conducted research in basic renal
physiology and clinical nephrology. Dr. Cowgill received his D.V.M. from the
University of California at Davis School of Veterinary Medicine and his Ph.D. in
Comparative Medical Sciences from the University of Pennsylvania, where he also
completed his internship and Residency training in Small Animal Internal
Medicine. He became a Diplomate of the American College of Veterinary Internal
Medicine in 1977. Dr. Cowgill has published extensively in the area of
veterinary nephrology and has established a Clinical Fellowship in Renal
Medicine and Hemodialysis, which is the first of its kind in veterinary
Medicine.
Pedro Cuatrecasas, M.D.
-----------------------
Dr. Cuatrecasas was President of the Pharmaceutical Research Division
of Parke-Davis Co., and Corporate Vice President for Warner Lambert Company from
1989 until his retirement in 1997. From 1986 to 1989, he served as SVP and
Director of Glaxo Inc. For the prior ten years, he was VP/R&D and Director, of
the Burroughs Wellcome Company. During his career in pharmaceutical research, he
was involved in the discovery, development and marketing registration of more
than 40 novel medicines. Dr. Cuatrecasas is widely recognized for the invention
and development of affinity chromatography which is a method for the selective
capture of proteins, sugars, fats and inorganic compounds. He is a member of the
National Academy of Sciences, The Institute of Medicine, and the American
Academy of Arts & Sciences, and he has authored more than 400 original
publications.
Nathan W. Levin, M.D.
---------------------
Dr. Levin is recognized as a leading authority within the hemodialysis
industry. He is the Medical and Research Director of the Renal Research
Institute, LLC, a joint venture between Fresenius Medical Care - North America
and Beth Israel Medical Center, New York. Dr. Levin also serves as Professor of
Clinical Medicine at the Albert Einstein College of Medicine.
Raveendran (Ravi) Pottathil, Ph.D.
----------------------------------
Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV
and HCV) and tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in India.
Currently, Dr. Pottathil is the President of AccuDx, Inc. a pharmaceutical
diagnostics company he founded in 1996.
39
Claudio Ronco, M.D.
-------------------
Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.
Members of the Scientific Advisory Board do not receive any monetary
compensation for service on the Board, however, on occasion, the members may be
awarded stock options.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
CODE OF ETHICS.
On February 23, 2005, the Board of Directors approved a "Code of
Business Conduct and Ethics." Our Code of Business Conduct and Ethics is
available on our company website at www.aethlonmedical.com.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following executive compensation disclosure reflects all
compensation awarded to, earned by or paid to the executive officers below for
the fiscal year ended March 31, 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 PRINCIPAL ACCOUNTING
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.
40
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Joyce effective April
1, 1999. Effective June 1, 2001, Mr. Joyce was appointed President and Chief
Executive Officer and his base annual salary was increased from $120,000 to
$180,000. Effective January 1, 2005, Mr. Joyce's salary was increased from
$180,000 to $205,000 per year. Under the terms of the agreement, his employment
continues at a salary of $205,000 per year for successive one-year periods,
unless given notice of termination 60 days prior to the anniversary of his
employment agreement. Effective April 1, 2006. Mr. Joyce's salary was increased
from $205,000 to $240,000. His salary was subsequently increased to $265,000 per
year and effective May 1, 2008, his salary was increased from $265,000 to
$290,000 per year.
We entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief
Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Effective January 1,
2005 Dr. Tullis' salary was increased from $150,000 to $165,000 per year. Under
the terms of the agreement, his employment continues at a salary of $165,000 per
year for successive one-year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement. Dr. Tullis was granted
250,000 stock options to purchase our common stock in connection the completing
certain milestones, such as the initiation and completion of certain clinical
trials, the submission of proposals to the FDA and the filing of a patent
application. Effective April 1, 2006, Dr. Tullis salary was increased to
$180,000 per year.
Both Mr. Joyce's and Dr. Tullis' agreements provide for medical
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information concerning stock
option Awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
-----------------------------------------------------------------------------------------------
OPTIONS AWARDS
-------------------------------------------------------------------
EQUITY
INCENTIVE
PLAN AWARDS;
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE OPTIONS PRICE DATE
------------------- ------------ ------------- ----------- ---------- ------------
(#) (#) (#) ($)
James A. Joyce 1,115,550(1) -- -- $ 0.38 02/23/10
557,775(1) -- -- $ 0.38 12/31/10
557,775(1) -- -- $ 0.38 12/31/11
2,857,143(1) -- -- $ 0.21 09/09/15
1,000,000(2) 1,500,000 -- $ 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.
41
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 $0.36 per
share. No other options were granted to our executive officers in fiscal year
2008.
DIRECTOR COMPENSATION
The following director compensation disclosure reflects all
compensation awarded to, earned by or paid to the directors below for the fiscal
years ended March 31, 2008 and 2007.
Change in
Pension
Fees Value
Earned and
or Non-Equity Nonqualified
Paid Incentive Deferred All
in Stock Option Plan Compensation Other
Cash Awards Awards Compensation Earnings Compensation Total
Name ($) ($) ($) ($) ($) ($) ($)
------------------------- ------ ------- ------ ------------ ------------- ------------ -------
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.
Directors Compensation Program
Under the Directors Compensation Program, adopted by us in February
2005, a newly elected director will receive a one-time grant of a non-qualified
stock option of 1.5% of the common stock outstanding at the time of election.
The options will vest one-third at the time of election to the board and the
remaining two-thirds will vest equally at year end over three years.
Additionally, each director will also receive an annual $25,000 non-qualified
stock option retainer, $15,000 of which is to be paid at the first of the year
to all directors who are on the Board prior to the first meeting of the year and
a $10,000 retainer will be paid if a Director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned. At March 31,
42
2008 under the 2005 Directors Compensation Program we had issued 1,337,825
options to outside directors and 3,965,450 options to employee-directors for a
total of 5,303,275 options, of which 4,744,550 remained outstanding. A portion
of the employee-director options was awarded in recognition of prior employment
efforts. Since inception of the Program, the Company has not paid any
non-qualified stock option retainers.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 7, 2008, information with
respect to the shares of Common Stock beneficially owned by (i) each director
nominee; (ii) each person (other than a person who is also a director nominee)
who is an executive officer; and (iii) all executive officers and directors as a
group. The term "executive officer" is defined as the President/Chief Executive
Officer, Secretary, Chief Financial Officer/Treasurer, any vice-president in
charge of a principal business function (such as administration or finance), or
any other person who performs similar policy making functions for the Company.
We believe that each individual or entity named has sole investment and voting
power with respect to shares of common stock indicated as beneficially owned by
them, subject to community property laws where applicable, excepted where
otherwise noted:
AMOUNT AND NATURE PERCENT OF
OF TITLE OF CLASS NAME BENEFICIAL OWNERSHIP(1)(2) CLASS
-------------- ------------------------ -------------------------- -------
Common Stock James A. Joyce, Chief Executive Officer
and Director 7,188,243 shares(3) 15%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Richard H. Tullis, Chief Scientific Officer
and Director 2,072,350 shares(4) 5%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Franklyn S. Barry, Director
3030 Bunker Hill Street, Suite 4000, 773,010 shares(5) 2%
San Diego, CA 92109
Common Stock Edward G. Broenniman, Director
3030 Bunker Hill Street, Suite 4000, 655,924 shares(6) 2%
San Diego, CA 92109
Common Stock Harold H. Handley, President
3030 Bunker Hill Street, Suite 4000, 250,000 shares(7) *
San Diego, CA 92109
All Current
Directors and
Executive Officers
as a Group (5 10,939,527 shares 22%
members)
* Less than 1%.
1. Based on 40,286,480 shares of Common Stock outstanding on the transfer
records as of July 7, 2008.
2. Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of
1934. Under Rule 13d-3(d)(1), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and percentage
owned by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. The Company believes that each
individual or entity named has sole investment and voting power with respect to
shares of Common Stock indicated as beneficially owned by them, subject to
community property laws, where applicable, except where otherwise noted.
3. Includes 2,231,100 stock options exercisable at $0.38 per-share, 2,857,143
stock options exercisable at $0.21 per share and 1,500,000 stock options
exercisable at $0.36 per share.
4. Includes 250,000 stock options exercisable at $1.90 per share, 30,000 stock
options exercisable at $3.00 per share and 1,734,350 stock options exercisable
at $0.38 per share.
5. Includes 1,867 stock options exercisable at $1.84 per share and 264,550 stock
options exercisable at $0.38 per share.
43
6. Includes 2,500 stock options exercisable at $3.75 per share, 3,000 stock
options exercisable at $1.78 per share and 514,550 stock options exercisable at
$0.38 per share.
7. Includes 250,000 stock options exercisable at $0.27 per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
ITEM 13. EXHIBITS
The following documents are filed as part of this report on Form 10-KSB:
1. Consolidated Financial Statements for the periods ended March 31, 2008 and
2007:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Deficit
Notes to Consolidated Financial Statements
2. Exhibits
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated
March 28, 2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated
June 13, 2005(3)
3.5 Certificate of Amendment of Articles of Incorporation dated
March 6, 2007 (23)
10.1 Employment Agreement between Aethlon Medical, Inc. and James
A. Joyce dated April 1, 1999 (4)
10.2 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Aethlon, Inc. dated March 10, 1999 (5)
10.3 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Hemex, Inc. dated March 10, 1999 (5)
10.4 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Syngen Research, Inc. (6)
10.5 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Cell Activation, Inc. (7)
10.6 Common Stock Purchase Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.7 Registration Rights Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.8 Form of Securities Purchase Agreement for Private Placement
closing on June 7, 2004 (8)
10.9 Form of Common Stock Purchase Warrant for Private Placement
closing on June 7, 2004 (8)
10.10 Form of Registration Rights Agreement for Private Placement
closing on June 7, 2004 (8)
10.11 Note Purchase Agreement by and between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.12 Convertible Promissory Note by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
44
10.13 Form of Common Stock Cashless Purchase Warrant for benefit of
Fusion Capital Fund II, LLC, dated May 16, 2005. (9)
10.14 2003 Consultant Stock Plan (10)
10.15 Lease by and between Aethlon Medical, Inc. and San Diego
Science Center (11)
10.16 Consulting Agreement by and between Aethlon Medical, Inc. and
Jean-Claude Chermann, PhD (11)
10.17 Consulting Agreement by and between Aethlon Medical, Inc. and
Franklyn S. Barry, Jr. (11)
10.18 Patent License Agreement by and amongst Aethlon Medical, Inc.,
Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra
(11)
10.19 Employment Agreement by and between Aethlon Medical, Inc. and
Dr.Richard H. Tullis (11)
10.20 Employment Agreement by and between Aethlon Medical, Inc. and
Edward C. Hall (11)
10.21 Cooperative Agreement by and between Aethlon Medical, Inc. and
George Mason University (12)
10.22 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Charles Bailey (13)
10.23 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Ken Alibek (13)
10.24 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A Joyce (14)
10.25 Stock Option Agreement by and between Aethlon Medical, Inc.
and Richard Tullis (14)
10.26 Stock Option Agreement by and between Aethlon Medical, Inc.
and Franklyn S. Barry (14)
10.27 Stock Option Agreement by and between Aethlon Medical, Inc.
and Ed Broenniman (14)
10.28 Stock Option Agreement by and between Aethlon Medical, Inc.
and Calvin Leung (14)
10.29 Warrant for the benefit of Richardson and Patel, LLP (14)
10.30 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A. Joyce(15)
10.31 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Allan S. Bird(16)
10.32 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Ellen R. Weiner Family Revocable Trust(16)
10.33 Form of Warrant for Series A Convertible Noteholders(16)
10.34 Form of Registration Rights Agreement for Series A Convertible
Noteholders(16)
10.35 Employment Agreement by and between Aethlon Medical, Inc. and
James Dorst(17)
10.36 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Christian Hoffmann(18)
10.37 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Claypoole Capital, LLC(18)
10.38 Form of Warrant for additional Series A Convertible
Noteholders(18)
10.39 Form of Registration Rights Agreement for additional Series A
Convertible Noteholders(18)
10.40 Option Agreement by and between Aethlon Medical, Inc. and
Trustees of Boston University(19)
10.41 Warrant for the benefit of Fusion Capital Fund II, LLC(20)
45
10.42 Common Stock Purchase Agreement by and between Aethlon
Medical, Inc. and Fusion Capital Fund II, LLC dated March 21,
2007 (24)
10.43 Registration Rights Agreement by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC dated March 21, 2007(24)
10.44 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Christian
Hoffman III(
10.45 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Joel S.
Aronson, Patricia Green, Christina J. Bird, Co-Executor of the
Estate of Allan S. Bird(24)
10.46 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Claypoole
Capital, LLC(24)
10.47 Form of Allonge to 10% Series A Convertible Notes dated March
5, 2007 by and between Aethlon Medical, Inc. and Ellen R.
Weiner Family Revocable Trust(24)
10.48 Private Placement Agreement with Fusion Capital Fund II, LLC
(25)
14 Code of Ethics (24)
21 List of subsidiaries (22)
23.1 Consent of Independent Registered Public Accounting Firm
(Squar, Milner, Peterson, Miranda & Williamson, LLP) *
31 Certification of our Chief Executive Officer and Chief
Accounting Officer, pursuant to Securities Exchange Act rules
13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of
the Sarbanes Oxley Act of 2002.*
32 Statement of our Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)*
99.1 Resignation Letter dated June 28, 2006 from Calvin Leung (26)
* Filed herewith
(1) December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 14,
2005 and incorporated by reference.
(4) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999 and incorporated by reference.
(5) Filed with the Company's Current Report on Form 8-K dated March 26,
1999 and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated January 24,
2000 an incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated April 25,
2000 and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K dated June 9, 2004
and incorporated by reference.
46
(9) Filed with the Company's Current Report on Form 8-K dated May 23, 2005
and incorporated by reference.
(10) Filed with the Company Registration Statement on Form S-8 (File No.
333-114017) filed on August 29, 2005 and incorporated by reference.
(11) Filed with the Company's Annual Report on Form 10-KSB/A for the year
ended March 31, 2004 and incorporated by reference.
(12) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 filed on October 28, 2004 and incorporated by reference.
(13) Filed with the Company's Amendment No. 3 to Registration Statement on
Form SB-2 (File No. 333-117203) filed on November 24, 2004 and
incorporated by reference.
(14) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2005 and incorporated by reference.
(15) Filed with the Company's Current Report on Form 8-K filed on September
12, 2005 and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K filed on November
7, 2005 and incorporated by reference.
(17) Filed with the Company's Post-Effective Amendment to Registration
Statement on Form SB-2 filed on December 8, 2005 and incorporated by
reference.
(18) Filed with the Company's Registration Statement on Form SB-2 (File No.
333-130915) filed on January 9, 2006 and incorporated by reference.
(19) Filed with the Company's Current Report on Form 8-K filed on February
23, 2006 and incorporated by reference.
(20) Filed with the Company's Current Report on Form 8-K filed on April 4,
2006 and incorporated by reference.
(21) Filed with the Company's Current Report on Form 8-K filed on May 1,
2008 and incorporated by reference.
(22) Filed with the Company's Registration Statement on Form SB-2 filed on
July 7, 2004 and incorporated by reference.
(23) Filed with the Company's Current Report on form 8-K dated March 7, 2007
and incorporated herein by reference.
(24) Filed with the Company's Current Report on form 8-K dated March 22,
2007 and incorporated herein by reference.
(25) Filed with the Company's Registration Statement on Form S-1 filed on
February 11, 2008 and incorporated by reference.
(26) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2006 and incorporated by reference.
47
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by
Squar, Milner, Peterson, Miranda & Williamson LLP ("Squar Milner") for the
annual audit of our consolidated financial statements as of and for the fiscal
years ended March 31, 2008 and 2007 and fees billed for other services rendered
by Squar Milner during such years:
Fiscal Year Ended March 31,
2008 2007
-------- --------
Audit Fees $ 85,000 $ 93,000
Audit Related Fees 20,000 35,625
Tax Fees 30,000 --
All Other Fees -- --
-------- --------
$135,000 $128,625
======== ========
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
Our audit committee of the Board of Directors is responsible for
pre-approving all audit and permitted non-audit services to be performed for us
by our independent auditor.
48
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 15th day of July, 2008.
BY: /S/ JAMES A. JOYCE
---------------------------------
JAMES A. JOYCE
CHAIRMAN, CHIEF EXECUTIVE OFFICER
AND ACTING CHIEF FINANCIAL OFFICER
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JAMES A. JOYCE CHAIRMAN OF THE BOARD JULY 15, 2008
-------------------------
JAMES A. JOYCE
/S/ FRANKLYN S. BARRY, JR. DIRECTOR JULY 15, 2008
--------------------------
FRANKLYN S. BARRY, JR.
/S/ EDWARD G. BROENNIMAN DIRECTOR JULY 15, 2008
--------------------------
EDWARD G. BROENNIMAN
/S/ RICHARD H. TULLIS DIRECTOR JULY 15, 2008
-------------------------
RICHARD H. TULLIS
49
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.................... F-1
Consolidated Balance Sheet................................................. F-2
Consolidated Statements of Operations...................................... F-3
Consolidated Statements of Stockholders' Deficit........................... F-4
Consolidated Statements of Cash Flows...................................... F-17
Notes to Consolidated Financial Statements................................. F-19
50
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-1
--------------------------------------------------------------------------------
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-2
-----------------------------------------------------------------------------------------------
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-3
--------------------------------------------------------------------------------------------------------------
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-4
--------------------------------------------------------------------------------------------------------------
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-5
---------------------------------------------------------------------------------------------------------------
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-6
-----------------------------------------------------------------------------------------------------------------
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-7
--------------------------------------------------------------------------------------------------------------------
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-8
-------------------------------------------------------------------------------------------------------------------
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-9
----------------------------------------------------------------------------------------------------------------
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-10
----------------------------------------------------------------------------------------------------------------
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-11
----------------------------------------------------------------------------------------------------------------
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-12
-----------------------------------------------------------------------------------------------------------------
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-13
-----------------------------------------------------------------------------------------------------------------
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-14
-----------------------------------------------------------------------------------------------------------------
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-15
-----------------------------------------------------------------------------------------------------------------
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-16
---------------------------------------------------------------------------------------------------------------
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-17
---------------------------------------------------------------------------------------------------------------------
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.
F-18
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-19
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-20
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-21
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-22
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-23
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-24
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-25
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-26
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-27
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-28
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-29
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-30
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-31
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-32
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-33
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-34
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-35
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-36
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-37
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-38
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-39
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-40
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-41
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-42
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-43
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-44
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-45
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-46
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-47
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-48
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-49
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-50
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-51
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-52
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-53
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-54
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-55
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-56