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, 2007
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.
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(Name of Small Business issuer in its charter)
NEVADA 13-3632859
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 Bunker Hill Street, Suite 4000,
San Diego, CALIFORNIA 92109
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(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, 2007. The
aggregate market value of the Common Stock held by non-affiliates was
approximately $13,111,389 based upon the closing price of the Common Stock of
$0.67, as reported by the NASDAQ Over-the-Counter Bulletin Board ("OTCBB") on
June 29, 2007.
The number of shares of the Common Stock of the registrant outstanding as of
June 29, 2007 was 32,008,389.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
Forward Looking Statements 1
PART I.
Item 1. Description of Business 1
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
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 9
Item 6. Management's Discussion and Analysis or Plan of Operation 18
Item 7. Financial Statements 34
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 34
Item 8A. Controls and Procedures 34
Item 8B. Other Information 34
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons and
Corporate Governance; Compliance with Section 16(a) of the
Exchange Act 35
Item 10. Executive Compensation 40
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 42
Item 12. Certain Relationships and Related Transactions
and Director Independence 43
Item 13. Exhibits 44
Item 14. Principal Accountant Fees and Services 47
Signatures 48
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
back to circulation.
The Hemopurifier(R) modifies this process in several ways to provide an
efficient method to selectively remove targeted viruses and toxins. First, the
pores of the micro-fibers within the Hemopurifier(R) are large enough to allow
circulating infectious viruses and toxins to separate from the blood and diffuse
through the walls of the fibers. Second, within the cartridge but outside of the
fibers the Hemopurifier(R) contains a unique material (the "affinity agent")
which selectively binds to the viruses or toxins. 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.
MANUFACTURING
We plan to manufacture a small number of cartridges sufficient to
complete clinical trials in our current facilities. Ultimately, we will
outsource cartridge manufacturing to a GMP/ISO9001 compliant contract
manufacturer. Hemopurifiers(R) to treat pathogens that are bioweapons candidates
will be sold directly to the U.S. military and the federal government. Sale of
Hemopurifiers(R) to treat chronic viral conditions will be directed through
organizations with established distribution channels.
RESEARCH AND DEVELOPMENT
In fiscal year 2001, we realigned our research and development
activities from developing Hemopurifiers(R) to treat harmful metals to
developing Hemopurifiers(R) for the treatment of chronic viral conditions. As a
result of this strategic realignment, we initiated the consolidation of all
scientific and administrative functions into our San Diego facilities during the
fourth quarter of fiscal year 2001. This consolidation was completed during the
first quarter of fiscal year 2002 and our facilities in Buffalo, N.Y. were
closed. In 2004, we expanded our research effort to include the development of
Hemopurifiers(R) to treat acute viral diseases as well as countermeasures
against biological weapons. The cost of research and development, all of which
has been charged to operations, amounted to approximately $1,429,059 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.
3
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.
COMPETITION
We are advancing our Hemopurifier(R) technology as a treatment to
enhance and prolong current drug therapies by removing the viral strains that
cause drug resistance. The Hemopurifier(R) is also designed to prolong life for
infected patients who have become drug resistant and have no other treatment
options. Therefore, we do not believe that the Hemopurifier(R) competes with the
current drug therapy treatment standard. However, if the industry considered the
Hemopurifier(R) to be a potential replacement for drug therapy, then the
marketplace for the Hemopurifier(R) would be extremely competitive. We are also
pursuing the development of Hemopurifiers(R) to be utilized as treatment
countermeasures against biological weapons. In this regard, we are targeting the
treatment of pathogens, which are microbial organisms that cause disease, in
which current treatments are either limited or do not exist. We believe that we
are the sole developer of viral filtration systems (Hemopurifiers(R)) to treat
chronic viral conditions, acute viral conditions and biological weapons.
However, we face competition from the producers of the following alternative
treatment options for all market applications.
ANTIVIRAL DRUGS
For viral infections, specific antiviral drugs can be effective, but
there are none that are effective against a broad-spectrum of infectious virus.
At present, only a few antiviral drugs are available to treat the multitude of
viruses that could be used as biological weapons. For example, Ribavirin is the
treatment of choice for certain viral hemorrhagic fever infections, but has no
current application to Ebola and Marburg infections. Newer antiviral drugs have
shown some promise in animal models, and limited case reports in humans are
encouraging. The lack of broad-spectrum antivirals takes on added significance
in light of the ability of many viruses to rapidly develop resistance.
Current efforts to define the genetic details of normal and pathogenic
agents on a molecular level promise the hope of new points of attack. Genomic
analysis of viral pathogens and animal models of responses to infection provide
valuable information enabling the potential development of novel treatment and
prevention strategies. However, even the rapid elucidation of the genetic
structure of a specific pathogen does not provide sufficient information to
quickly design an effective cure.
4
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.
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". It is our intention to effect such
license within the term of the option. On February 8, 2007 we entered into an
amendment to this agreement to extend its term until August 9, 2007.
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.
5
One of the problems facing the FDA is the need to ensure public safety
while at the same time preventing unsafe treatments from reaching the public.
The balance between these competing pressures has resulted in a long and
deliberate process for approving new treatments which is not responsive to the
urgent need for new treatments presented in the era of bioterrorism. For most
drugs, the principal research and development phases take several years prior to
a drug being submitted to the FDA for testing. A clinical research program takes
two to ten years, depending on the agent and clinical indication, after which
the marketing application review period requires an average of one year. Once a
product is approved for market, long-term post-marketing surveillance,
inspections, and product testing must be performed to ensure the quality,
safety, and efficacy of the product, as well as appropriate product labeling.
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Each medical
device we wish to commercialize in the United States will require the filing of
a Premarket Approval ("PMA") from FDA. Medical devices are classified into one
of three classes--Class I, Class II, or Class III--depending on the degree or
risk associated with each medical device and the extent of control needed to
ensure safety and effectiveness. Devices deemed to pose lower risks are placed
in either Class I or II, which requires the manufacturer to submit to FDA a
premarket notification requesting permission to commercially distribute the
device. Our Hemopurifier(R) has been categorized as a Class III device,
requiring premarket approval.
CLINICAL TRIALS. Clinical trials are almost always required to support
an FDA premarket application. In the United States, these trials generally
require submission of an application for an Investigational Device Exemption, or
IDE, to FDA. The IDE application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe to test the
device in humans and that the testing protocol is scientifically sound. The IDE
must be approved in advance by FDA for a specific number of patients unless the
product is deemed a non-significant risk device eligible for more abbreviated
IDE requirements. Clinical trials for significant risk devices may not begin
until the IDE application is approved by FDA and the appropriate institutional
review boards, or IRBs, at the clinical trial sites. Our clinical trials must be
conducted under the oversight of an IRB at the relevant clinical trial sites and
in accordance with FDA regulations, including but not limited to those relating
to good clinical practices. We are also required to obtain patients' informed
consent that complies with both FDA requirements and state and federal privacy
regulations. We, 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.
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 FDA's satisfaction the
safety and effectiveness of the device.
After a PMA application is submitted and FDA determines that the
application is sufficiently complete to permit a substantive review, FDA will
accept the application for review. FDA has 180 days to review an "accepted" PMA
application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, FDA may request additional information or clarification of
the information already provided. Also, an advisory panel of experts from
outside FDA may be convened to review and evaluate the application and provide
recommendations to FDA as to the approvability of the device. In addition, FDA
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.
6
PERVASIVE AND CONTINUING REGULATION. After a device is placed on the
market, numerous regulatory requirements continue to apply. These include:
o FDA's Quality System Regulation, or QSR, which requires
manufacturers, including third-party manufacturers, to follow
stringent design, testing, control, documentation and other
quality assurance procedures during all aspects of the
manufacturing process;
o labeling regulations and FDA prohibitions against the
promotion of products for uncleared, unapproved or off-label
uses;
o clearance or approval of product modifications that could
significantly affect safety or efficacy or that would
constitute a major change in intended use;
o medical device reporting, or MDR, regulations, which require
that manufacturers report to FDA if their device may have
caused or contributed to a death or serious injury or
malfunctioned in a way that would likely cause or contribute
to a death or serious injury if the malfunction were to recur;
and
o post-market surveillance regulations, which apply when
necessary to protect the public health or to provide
additional safety and effectiveness data for the device.
After a device receives a PMA, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, will require a new clearance or approval. FDA
requires each manufacturer to make this determination initially, but FDA can
review any such decision and can disagree with a manufacturer's determination.
The regulations also require that we report to FDA any incident in
which our product may have caused or contributed to a death or serious injury or
in which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury.
FRAUD AND ABUSE. We may also directly or indirectly be subject to
various federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws. In particular, the federal healthcare program
Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual, or the
furnishing, arranging for or recommending a good or service, for which payment
may be made in whole or part under federal healthcare programs, such as the
Medicare and Medicaid programs. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment and possible exclusion
from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback
Statute is broad and prohibits many arrangements and practices that are lawful
in businesses outside of the healthcare industry. In implementing the statute,
the Office of Inspector General, or OIG, has issued a series of regulations,
known as the "safe harbors." These safe harbors set forth provisions that, if
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.
7
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
recent 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 March 31, 2007, we had six full-time employees, comprised of our
Chief Executive Officer, our President, our Chief Science Officer, our Chief
Financial Officer, and two research scientists. 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.
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 expires on July
12, 2007. The Company is presently negotiating a new lease arrangement with its
current landlord and will lease its space on a month to month basis, at the same
terms, until such negotiations are completed.
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.
8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 2, 2007, Aethlon Medical, Inc. (the "Company") held an annual
meeting of stockholders at the Company's executive offices for the following
purposes: (1) to elect a director slate, (2) ratify the appointment of Squar,
Milner, Peterson, Miranda & Williamson, L.L.P ("Squar Milner"), as the Company's
independent auditors for the fiscal year ending March 31, 2007, and (3) to
approve an amendment to the Company's Articles of Incorporation to increase the
number of authorized shares of the Company's Common Stock from 50,000,000 to
100,000,000. Stockholders holding an aggregate minimum of 21,763,109 shares of
Common Stock of the Company voted to elect the Directors, 21,811,789 in favor of
ratifying the appointment of Squar Milner as the Company's independent auditors
and stockholders holding an aggregate of 8,628,045 shares of Common Stock of the
Company, with holders of 12,363,691 non-votes excluded, voting in favor of
approving the amendment to the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock from 50,000,000 to 100,000,000.
The number of shares voting in favor of the three proposals was sufficient for
the approval. The number of shares voting against and/or abstaining from the
vote were as follows: Proposal 1: 170,021 shares (maximum); Proposal 2: 121,341
shares and Proposal 3: 941,394 shares with 12,363,691 non-votes. The entire
proposed slate of Directors was approved by the shareholders.
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
-----------------------------------------------------------------------------
2007:
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
2005:
Fourth Quarter 0.77 0.21
Third Quarter 0.25 0.18
Second Quarter 0.33 0.22
First Quarter 0.52 0.25
There are approximately 2,100 record holders of our Common Stock at
June 29, 2007. 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
Trust Company, located at 350 Indiana Street, Suite 800, Golden Colorado 80401;
303-262-0600
9
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.
CONVERTIBLE DEBT
From July 11, 2005 through December 15, 2005 the Company received cash
investments of $760,000 from an accredited investor (Ellen R. Weiner Family
Revocable Trust) based on agreed-upon terms reached on the cash receipt dates.
Such investments were documented on November 2, 2005, November 4, 2005 and
December 15, 2005 in three 10% Series A Convertible Notes ("Weiner Series A
Notes"). The Weiner Series A Notes accrue interest at a rate of ten percent
(10%) per annum and mature on January 2, 2007. The Weiner Series A Notes are
convertible into shares of restricted common stock at any time at the election
of the holder at a conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date. In addition, upon conversion, the
Company is obligated to issue three-year Warrants (the "Weiner Series A
Warrants") to purchase a number of shares equal to the number of shares into
which the Weiner Series A Notes can be converted at an exercise price of $0.20.
The Weiner Series A Warrants have been valued using a Binomial Lattice option
pricing model and an associated discount of $531,875, measured at the commitment
dates, will be expensed as future conversions occur. The convertible feature of
the Weiner Series A Notes provides for a rate of conversion that is below market
value. Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated the fair
value of such BCF to be $228,125 and records such amount as a debt discount.
Such discount is being accreted to interest expense over the term of the Weiner
Series A Notes. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
From August 8, 2005 through December 14, 2005 the Company received cash
investments of $225,000, from an accredited investor (Allan S. Bird) based on
agreed upon terms reached on the cash receipt dates. Such investments were
documented on November 2, 2005, November 7, 2005 and December 14, 2005 in three
10% Series A Convertible Notes ("Bird Series A Notes"). The Bird Series A Notes
accrue interest at a rate of ten percent (10%) per annum and mature on January
2, 2007. The Bird Series A Notes are convertible into shares of restricted
common stock at any time at the election of the holder at a conversion price
equal to $0.20 per share for any conversion occurring on or prior to the
maturity date. In addition, upon conversion, the Company is obligated to issue
three-year Warrants (the "Bird Series A Warrants") to purchase a number of
shares equal to the number of shares into which the Bird Series A Notes can be
converted at an exercise price of $0.20. The Bird Series A Warrants have been
valued using a Binomial Lattice option pricing model and an associated discount
of $183,000, measured at the commitment dates with the warrants being initially
classified as a derivative liability. The derivative liability was reclassified
as additional paid in capital upon obtaining an effective registration statement
in January 2006 and the discount will be expensed when the warrants are issued
when future debt conversions occur. The convertible feature of the Bird Series A
Note provides for a rate of conversion that is below market value (Beneficial
Conversion Feature or "BCF"). Pursuant to EITF 98-5 and EITF 00-27, the Company
has estimated the fair value of such BCF to be $42,000 and records such amount
as a debt discount. Such discount is being accreted to interest expense over the
term of the Bird Series A Note. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.
On December 15, 2005, the Company received total cash investments of
$15,000 from two related accredited investors (Christian Hoffmann III and
Claypoole Capital, LLC). Such investments were documented in two 10% Series A
Convertible Notes ("December Notes"). The December Notes accrue interest at a
rate of ten percent (10%) per annum and mature on January 2, 2007. The December
Notes are convertible into shares of restricted common stock at any time at the
election of the holder at a conversion price of $0.20 per share for any
conversion occurring on or before the maturity date. In addition, upon
conversion, the Company is obligated to issue three-year Warrants (the "December
Warrants") to purchase a number of shares equal to the number of shares into
which the December Notes were converted at an exercise p rice of $0.20. The
December Warrants have been valued using a Binomial Lattice option pricing model
and an associated discount of $15,000, measured at the commitment date, with the
warrants being initially classified as a derivative liability. The derivative
liability was reclassified as additional paid in capital upon obtaining an
effective registration statement in January 2006 and the discount will be
expensed when the warrants are issued upon the occurance of future debt
conversion. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.
10
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.
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 Series A Convertible Promissory Notes
("Notes") had lapsed on October 27, 2006. As a result, 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. 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.
Effective March 22, 2007, the Company entered into four Allonges (the
"Allonges") to the 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 Notes are convertible
into Units at any time prior to the Maturity Date at the conversion price of
$0.20 per Unit (the "Conversion Price"). Each Unit is composed of one share of
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
Issue No. 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
Notes resulting in the extinguishment of the Notes as per Accounting Principles
Board ("ABP") Opinion 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 warrant liability of $1,486,875 and a loss on extinguishment of debt of
$1,216,748 (see Note 6 to the consolidated financial statements). 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 March 31, 2007. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
COMMON STOCK AND WARRANTS
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.
11
In April 2006, the Company issued 10,000 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.50 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In April 2006, the Company issued 14,563 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.29 per share in payment for regulatory affairs
consulting services to the Company valued at $4,165 based on the value of the
services.
In April 2006, the Company issued 3,086 shares of restricted common
stock at $0.81 per share in payment for investor relations valued at $2,500
based on the value of the services.
During April 2006, the Company issued 209,679 shares of common stock at
prices between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $140,002. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In April 2006, the Company repaid a $25,000 15% promissory notes,
including accrued interest of $18,750, through the issuance of 107,759
restricted common shares at $0.41 per share to an accredited individual
investor. There was no gain or loss on the extinguishment.
In May 2006, the Company issued 8,532 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.59 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In May 2006, the Company issued 5,703 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.53 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In May 2006, the Company issued 4,545 shares of restricted common stock
at $0.55 per share in payment for investor relations valued at $2,500 based on
the value of the services.
In June 2006, the Company issued 8,681 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.58 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In June 2006, the Company issued 5,703 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.53 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In June 2006, the Company issued 3,363 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.45 per share in payment for regulatory affairs
consulting services to the Company valued at $1,500 based on the value of the
services.
In July 2006, the Company issued 8,721 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.53 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In 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 $0.32 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In July 2006, the Company issued 6,250 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 July 2006, the Company issued 7,813 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.
12
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 $0.30 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In 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 $0.49 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 $0.34 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In 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 114,130 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 $0.34 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 $0.34 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 $0.32 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In 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.
13
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 $5,000 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.
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 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.
14
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
Consultant 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 $0.26 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
Consultant Stock Plan at $0.31 per share in payment for regulatory affairs
consultant services to the Company valued at $3,000 based on the value of the
services.
During February 2007, the Company issued 692,751 shares of common stock
at prices between $0.28 and $0.32 per share to Fusion Capital under its
$6,000,000 common stock purchase agreement for net cash proceeds totaling
$199,998. These shares were registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
In March 2007, the Company issued 15,723 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.32 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
Consultant Stock Plan at $0.61 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
Consultant 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
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.
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, associated with a Common Stock Purchase Agreement dated March 21,
2007, the Company issued 1,050,000 commitment shares.
15
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth March 31, 2007 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) 9,171,560 $0.39 N/A
----------- ------ --------
Totals 9,204,060 $0.39 467,500
(1) The description of the material terms of non-plan issuances of equity
instruments is discussed in Notes 4, 5 and 6 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
--------------------- ------------------- ------------------ -------------------
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, 2007, we had
granted 32,500 options under the 2000 Stock Option Plan, with 467,500 available
for future issuance.
16
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 3,000,000 $ 0.31 2,928,935
--------------------- ------------------- ------------------ -------------------
Total 3,000,000 $ 0.31 2,928,935
--------------------- ------------------- ------------------ -------------------
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. We initially reserved a total of 1,000,000
common shares for issuance under the Stock Plan and increased this to 3,000,000
on August 29, 2005. 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.
At March 31, 2007, 71,065 shares of common stock remain to be issued
under the 2003 Consultant Stock Plan.
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our 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, 2007 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 and 4,994,550 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 5,828,158 options (of which 1,573,300 have been
exercised or cancelled) outside of both the 2005 Directors Compensation Plan and
2 000 Stock Option Plan.
17
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 $2,084,254 for the fiscal year
ended March 31, 2007, versus $2,094,939 for the comparable period one year ago.
The net decrease of ($10,685) was comprised of an increase in payroll expense of
$214,021 and general and administrative expense of $8,518, offset by decreases
in professional fees and asset impairment charges of ($151,502) and ($81,722),
respectively.
Professional fees decreased by ($151,502). This decrease was primarily
a result of a reduction in scientific consulting expense of ($126,736) due to
higher costs in the prior fiscal year related to human and animal safety studies
conducted by the company. Other decreases in expenses included ($70,622) in
legal expense and ($15,109) related to decreases in web development and
accounting fees. The decreases noted above were offset by an increase of $60,965
in investor relations expenses due to our senior director of communications
being retained for the entire year as well as the addition of a senior director
of investor relations both retained on a consulting basis.
Payroll and related expenses increased by $214,021 as compared to the
prior fiscal year. The increase was principally driven by research and
development payroll which increased $122,114 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 increased by
$38,913 because of salary increases for a senior executive and the employment of
our chief financial officer for the entire fiscal year. Stock compensation
expense increased $38,132 due to the recognition of expense related to the
amortization of stock options vesting during the fiscal year ended March 31,
2007. Finally, due to the general increases in payroll expenses, payroll taxes
increased by $14,862.
General and administrative expenses remained essentially unchanged
from the prior year, increasing by $8,518. This increase is comprised of
reductions in lab supplies of ($64,239) and other expenses of ($4,337), offset
by increases in insurance expense of $44,523 and investor conference expenses of
$32,569. Lab supplies decreased because the company incurred significant
expenses in the prior fiscal year related to animal and human safety studies.
Insurance expense increased primarily due to increases in employee medical
insurance expense and against an approximate $17,000 write-off benefit in the
prior fiscal year.
Interest and Other Expense
In the fiscal year ended March 31, 2007, the Company recognized a
$1,216,748 non-cash loss on the extinguishment of debt as a result of the
issuance of Allonges to the Company's 10% Series A Convertible Notes. In
addition the Company recognized $2,112,575 in non-cash expense related to
warrant liability revaluation in comparison to the prior fiscal year when
$360,125 of non-cash expense was recognized to reflect the change in fair value
of the warrants issued related to our 10% Series A Convertible Notes.
Interest expense decreased by ($59,329) as a consequence of the full
amortization of BCF associated with convertible notes outstanding in the prior
fiscal year.
Other expense increased by $205,178 over the prior fiscal year a result
of the recognition of approximately $220,000 in liquidated damages associated
with the failure to register shares underlying our 10% Series A Convertible
Notes and related warrants (see Note 6 to the consolidated financial
statements).
PLAN OF OPERATION
The Company's current plan of operation is to fund our anticipated
increased research and development activities and operations for the near future
by effecting a new equity line of credit with Fusion Capital and/or by raising
funds through the sale of private equity or a combination thereof.
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 these funds will satisfy our cash requirements,
including this anticipated increase in operations, in excess of the next twelve
months. However, due to market conditions and to assure availability of funding
for operations in the long term, we plan to arrange for additional funding,
subject to acceptable terms, during the next twelve months.
18
The Company is 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.
The Company plans 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).
Management anticipates continuing to increase spending on research and
development over the next 12 months. Additionally, associated with the Company's
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. The Company does
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. The
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future.
Convertible Notes Payable and Warrants
Effective March 22, 2007, the Company entered into four Allonges (the
"Allonges") to its 10% Series A Convertible Promissory Notes entered into in
December 2005 having an aggregate principal amount of $1,000,000 (the "Notes")
with the Estate of Allan S. Bird, the Ellen R. Weiner Family Revocable Trust,
Claypoole Capital, LLC and Christian J. Hoffmann III (the "Holders"). Each
Holder has qualified as an "accredited investor" as that term is defined in the
Securities Act of 1933, as amended (the "Act"). Pursuant to the Allonges, 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 Notes are convertible into Units at any time prior
to the Maturity Date at the conversion price of $0.20 per Unit (the "Conversion
Price"). Each Unit is composed of one share of the Company's Common Stock and on
Class A Common Stock Purchase Warrant (the "Class A Warrant"). Each Class A
Warrant expires on January 2, 2001 and is exercisable to purchase one share of
Common Stock at a price of $0.20 per share (the "Exercise Price"). If the Holder
exercises Class A Warrants on or before July 3, 2008, 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 sub-
stantial change in the Series A Notes resulting in the extinguishment of the
Series A Notes as per ABP 26. Therefore on March 22, 2007, the Company recorded
a loss on extinguishment of $1,216,748, a net increase of $270,127 of discount
on convertible notes payable and an increase in warrant liability of $1,486,875.
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.
19
On March 31, 2007, the Company had $1,000,000 in Notes outstanding,
offset by a ($1,000,000) note discount. The discount is associated with the
unamortized fair value of warrants attached to the Notes. The discount value
will amortize to interest expense over the life of the warrants once they are
issued. These 10% Series A Notes were amended on March 22, 2007 as described
above (the Allonges).
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 BCF to
be $34,373 and recorded such amount as a debt discount. The discounts associated
with the warrants and the BCF are being accreted to interest expense over the
term of the December 10% Notes. Total expense recognized on the December 10%
Notes for amortization of such debt discounts totaled $50,000 for the fiscal
year ended March 31, 2007.
Notes Payable
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 $0.406 per share to an accredited individual
investor. There was no gain or loss on the extinguishment.
The Company is currently in default on approximately $502,500 of
amounts owed under various unsecured notes payable and accrued liabilities and
is currently seeking other financing arrangements to retire all past due notes.
At March 31, 2007 the Company had accrued interest in the amount of $355,410
associated with these notes payable.
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,
2007 we issued 821,996 common shares for services of which 163,779 were
unregistered. We issued 1,050,000 restricted common shares as commitment shares
related to equity line financing, 114,130 restricted common shares for payment
of accrued liabilities, 107,759 for the retirement of notes payable, 163,779 for
investor communications services, 40,000 for licensing rights and 30,617 in
exchange for the conversion of Warrants. Included in the 821,996 common shares
issued for services are 658,217 shares, registered under a Form S-8 registration
statement, which were issued as follows:
540,044 for scientific and regulatory consulting and 118,173 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
9.3%.
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,
2006 we issued 2,737,588 common shares for services of which 1,030,700 were
unregistered. We issued 579,813 restricted common shares in settlement of a
legal dispute, 150,000 restricted common shares for financial consulting
services, 116,883 restricted common shares for corporate communications
services, 110,040 restricted common shares for accrued legal fees and 73,964
restricted common shares for legal fees related to financing activities. In
addition, 1,706,888 shares, registered under a Form S-8 registration statement,
were issued as follows: 1,061,129 for scientific and regulatory consulting,
399,131 for legal expense, 110,040 for payment of accrued legal fees, 103,255
for financial consulting and 33,333 for the right to license intellectual
property assets. 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 9%.
20
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, 2007 we
issued 107,759 restricted common shares for repayment in full of notes,
including accrued interest. The price discount of the common stock issued for
debt was approximately 46.3%
In the fiscal year ended March 31, 2006 we issued 314,716 restricted
common shares for repayment in full of notes, including accrued interest. The
price discount of the common stock issued for debt in this period weighted by
the number of shares issued for conversion of debt was approximately 70%,
primarily to reflect the fact that these common shares were not freely tradable
when issued.
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, 2007 consolidated financial statements, that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires 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, 2007.
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.
21
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.
Extinguishment of Debt
Effective March 22, 2007, the Company entered into four Allonges (the
"Allonges") to its 10% Series A Convertible Promissory Notes entered into in
December 2005 having an aggregate principal amount of $1,000,000 (the "Notes").
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
Notes are convertible into Units at any time prior to the Maturity Date at the
conversion price of $0.20 per Unit (the "Conversion Price"). Each Unit is
composed of one share of the Company's Common Stock and on 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 No. 06-06, "Debtor's Accounting for a Modification (or
Exchange) of Convertible Debt Instruments", such issuance was determined to be a
substantial change in the Notes resulting in the extinguishment of the Notes as
per ABP No. 26, "Accounting for Early Extinguishment of Debt". Therefore on
March 22, 2007, the Company recorded a loss on extinguishment of $1,216,748.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
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.
22
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, 2007, the Company recognized $38,132 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.
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 A LIMITED OPERATING HISTORY WITH 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 $2,084,254, $2,094,939 and $2,183,377, respectively, during
the past three fiscal years of operation. At March 31, 2007, we had an
accumulated deficit of $28,086,992. We have incurred net losses of $6,024,545
and $2,920,183 for the fiscal years ending March 31, 2007 and 2006. Our revenues
have not been sufficient to sustain our operations. We expect that our revenues
will not be sufficient to sustain our operations for the foreseeable future. Our
profitability will require the successful commercialization of our
Hemopurifier(R) technology. No assurances can be given when or if this will
occur or that we will ever generate revenues or be profitable.
WE HAVE RECEIVED AN OPINION FROM OUR AUDITORS REGARDING OUR ABILITY TO
CONTINUE AS A GOING CONCERN
Our independent auditors noted in their report accompanying our
consolidated financial statements for our fiscal year ended March 31, 2007 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 described management's plans to address these matters.
We cannot assure you that our business plans will be successful in addressing
these issues. This opinion about our ability to continue as a going concern
could affect our ability to obtain additional financing at favorable terms, if
at all, as such an opinion may cause investors to lose faith in our long term
prospects. If we cannot successfully continue as a going concern, our
shareholders may lose their entire investment in our common shares.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.
At March 31, 2007 and 2006, we had a working capital deficit of
approximately $7,260,352 and $1,920,000, respectively. The independent auditors'
report for the year ended March 31, 2007, includes an explanatory paragraph
stating that, among other conditions, our recurring losses from operations and
working capital deficiency raise substantial doubt about our ability to continue
as a going concern. We had a net operating cash flow deficit of $1,718,904 for
the fiscal year ended March 31, 2007, a net operating cash flow deficit of
$1,584,281 for the year ended March 31, 2006, and for the year ended March 31,
2005 a net operating cash flow deficit of $1,559,366. We do not currently have
sufficient financial resources to fund our operations or those of our
subsidiaries. Therefore, we will require additional funds to continue these
operations.
23
We are presently negotiating with Fusion Capital to effect a new
financing facility and are also reviewing other possible financing options. The
extent to which we might rely upon Fusion Capital, assuming we can complete the
transaction, as a source of funding will depend on a number of factors
including, the prevailing market price of our common stock and the extent to
which we are able to secure working capital from other sources, such as through
the commercialization or licensing of our Hemopurifier(R) technology or the
receipt of grant revenue. If obtaining sufficient financing from Fusion Capital
were to prove prohibitively expensive, if our present grant applications are not
fruitful and if we are unable to commercialize and sell our Hemopurifier(R)
technology, we will need to secure another source of funding in order to satisfy
our working capital needs. Should the financing we require to sustain our
working capital needs be unavailable or prohibitively expensive when we require
it, the consequences would 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
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 future government grants or contracts utilizing our Hemopurifier(R)
platform technology.
IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(R) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.
We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(R)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.
U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.
Our plan to provide the Hemopurifier(R) as a candidate to treat Certain
infectious disease conditions 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.
24
WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.
Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(R) medical device candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases we target that:
o are more effective;
o have fewer or less severe adverse side effects;
o are better tolerated;
o are more adaptable to various modes of dosing;
o are easier to administer; or
o are less expensive than the products or product candidates we
are developing.
Even if we are successful in developing effective Hemopurifier(R)
products, and obtain FDA and other regulatory approvals necessary for
commercializing them, our products may not compete effectively with other
successful products. Researchers are continually learning more about diseases,
which may lead to new technologies for treatment. Our competitors may succeed in
developing and marketing products that are either more effective than those that
we may develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.
The Congress' passage of the Project BioShield Bill, a comprehensive
effort to develop and make available modern, effective drugs and vaccines to
protect against attack by biological and chemical weapons or other dangerous
pathogens, may encourage competitors to develop their own product candidates. We
cannot predict the decisions that will be made in the future by the various
government agencies as a result of such legislation.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies as well as universities and public and private research
institutions. Many of the organizations competing with us, have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do.
The market for medical devices is intensely competitive. Many of our
potential competitors have longer operating histories, greater name recognition,
more employees, and significantly greater financial, technical, marketing,
public relations, and distribution resources than we have. This intense
competitive environment may require us to make changes in our products, pricing,
licensing, services or marketing to develop, maintain and extend our current
technology. Price concessions or the emergence of other pricing or distribution
strategies of competitors may diminish our revenues (if any), adversely impact
our margins or lead to a reduction in our market share (if any), any of which
may harm our business.
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
To achieve the levels of production necessary to commercialize our
Hemopurifier(R) products, we will need secure manufacturing agreements with
manufacturers which comply with good manufacturing practices 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 surmount such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.
OUR HEMOPURIFER(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.
25
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 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 Chairman and 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 could delay the clinical development of our products due to his unique
experience with the Hemopurifier(R) technology. The loss of Mr. Joyce would be
detrimental to our growth as he possesses unique knowledge of our business model
and infectious disease which would be difficult to replace.
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 six full time
employees consisting of our Chief Executive Officer, our President, our Chief
Science Officer, our Chief Financial Officer, a research scientist, a research
associate, as well as other personnel employed on a contract basis. Although we
believe that these employees, together with the consultants currently engaged by
our company, 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 bio-technology 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.
26
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 has recently become much
more expensive and difficult to obtain. If we are unable to continue or provide
directors and officers liability insurance at affordable rates or at all, it may
become increasingly more difficult to attract and retain qualified outside
directors to serve on our board of directors. We may lose potential independent
board members and management candidates to other companies in the biotechnology
field that have greater directors and officers liability insurance to insure
them from liability or to biotechnology companies that have revenues or have
received greater funding to date which can offer greater compensation packages.
The fees of directors are also rising in response to their increased duties,
obligations and liabilities as well as increased exposure to such risks. As a
company with a limited operating history and limited resources, we will have a
more difficult time attracting and retaining management and outside independent
directors than a more established company due to these enhanced duties,
obligations and liabilities.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, INCLUDING
OUR U.S. AND INTERNATIONAL PATENTS COULD NEGATIVELY IMPACT OUR PROJECTED GROWTH
AND ABILITY TO GENERATE REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT
ON OUR BUSINESS AND THE VALUE OF YOUR INVESTMENT.
We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.
In the case of patents, we cannot give you any assurance that our
existing patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. We believe that certain patent applications filed
and/or other patents issued more recently will help to protect the proprietary
nature of the Hemopurifier(R) treatment technology.
The Hemopurifier(R) is protected by five issued patents, four of which
we own and one in which we own an exclusive license. Two additional patent
applications deal with treatments for virus infection and cancer treatment, one
of which we own and two of which we own exclusive licenses.
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.
27
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 United States 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 government through consultation
with a number of governmental agencies, including the FDA, the National
Institutes of Health, the Centers for Disease Control and Prevention and the
Department of Homeland Security. Our product candidates are in the pre-clinical
and clinical stages of development and have not received required regulatory
approval from the FDA to be commercially marketed and sold. The process of
obtaining and complying with FDA and other governmental regulatory approvals and
regulations is costly, time consuming, uncertain and subject to unanticipated
delays. Such regulatory approval (if any) and product development requires
several years. Despite the time and expense exerted, regulatory approval is
never guaranteed. We also are subject to the following risks and obligations,
among others.
o The FDA may refuse to approve an application if they believe
that applicable regulatory criteria are not satisfied.
o The FDA may require additional testing for safety and
effectiveness.
o The FDA may interpret data from pre-clinical testing and
clinical trials in different ways than we interpret them.
o If regulatory approval of a product is granted, the approval
may be limited to specific indications or limited with respect
to its distribution.
o The FDA may change their approval policies and/or adopt new
regulations.
Failure to comply with these or other regulatory requirements of the
FDA may subject us to administrative or judicially imposed sanctions, including:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention;
o product recalls; and
o total or partial suspension of productions.
DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(R) PRODUCT
CANDIDATES ON A TIMELY BASIS.
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.
28
THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.
THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.
We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.
OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE
TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR
MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.
Our previously planned products have not become marketable products due
in part to our transition in 2001 from a focus on utilizing our Hemopurifier(R)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and to take
advantage of the sense of 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.
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 four issued patents, three of which
we own and one which we have an exclusive license. Our exclusive license expires
March 2020 and is subject to termination if the inventors have not received a
minimum of $15,000 in any year during the term beginning in the second year
after the Food & Drug Administration approves the Hemopurifier(R). These patents
comprise a majority of our assets. At March 31, 2007, our intellectual property
assets comprised 84.08% of our non-current assets, and 23.12% of all 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.
29
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 employee stock options
as a compensation expense. These and other potential changes could materially
increase the expenses we report under accounting principles generally accepted
in the United States of America, and adversely affect our operating results.
OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
Our Hemopurifier(R) products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or
our products are designed inappropriately, we may be subject to lawsuits seeking
significant compensatory and punitive damages. The risk of product liability
claims, product recalls and associated adverse publicity is inherent in the
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.
30
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. As of June 29, 2007, our average trading
volume per day for the past three months was approximately 110,875 shares a day
with a high of 583,500 shares traded and a low of 9,000 shares traded. This
situation is attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common shares will
develop or be sustained, or that current trading levels will be sustained.
THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN
OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC
FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUES 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 June 29, 2007, the high and low
sale prices of a share of our common stock were $0.82 and $0.20, respectively.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
limited operating history and lack of revenues or profits to date, and
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 or rejection of our proprietary technology as
viable method of augmenting the immune response of clearing viruses and toxins
from human blood; government regulations, announcements of significant
acquisitions, strategic partnerships or joint ventures; our capital commitments;
and additions or departures of our key personnel. Many of these factors are
beyond our control and may decrease the market price of our common shares,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common shares will be
at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect that the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price.
Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
31
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY
32% OF OUR OUTSTANDING COMMON SHARES AS OF JUNE 15, 2006, WHICH MAY LIMIT THE
ABILITY OF YOURSELF OR OTHER SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR
COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN YOU
RECEIVING A PREMIUM OVER THE MARKET PRICE FOR YOUR COMMON SHARES.
As of June 29, 2007, our officers and directors beneficially own or
control approximately 32% of our outstanding common shares. These persons will
have the ability to control substantially 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 June 29, 2007, there are outstanding non-variable priced purchase
options and warrants entitling the holders to purchase 24,993,247 common shares
at a weighted average exercise price of $0.33 per share. There are 5,294,118
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 June 29, 2007, our convertible notes, outstanding
options and outstanding warrants we will be entitled to issue up to 37,703,960
additional common shares. Our board may generally issue shares of common stock,
or options or warrants to purchase those shares, without further approval by our
shareholders based upon such factors as our board of directors may deem relevant
at that time. It is likely that we will be required to issue a large amount of
additional securities to raise capital to further our development. It is also
likely that we will be required to issue a large amount of additional securities
to directors, officers, employees and consultants as compensatory grants in
connection with their services, both in the form of stand-alone grants or under
our stock plans. We cannot give you any assurance that we will not issue
additional shares of common stock, or options or warrants to purchase those
shares, under circumstances we may deem appropriate at the time.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES IN EXCHANGE FOR SERVICES OR TO
REPAY DEBT, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS AND
COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
Our board may generally issue shares of common stock to pay for debt or
services, without further approval by our shareholders based upon such factors
as our board of directors may deem relevant at that time. For the past three
fiscal years ended March 31, 2007, we issued a total of 2,728,578 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 53.4%, 69.41% and 46.34% for the years ended 2005, 2006 and
2007. For the past three fiscal years we issued a total of 5,808,939 shares in
payment for services. The average price discount of common stock issued for
services during this period, weighted by the number of shares issued was 36.0%,
14.86% and 4.54% for the years ended 2005, 2006 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.
32
THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS
AND EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.
Our certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to our company and
shareholders. Our bylaws also require us to indemnify our officers and
directors. We may also have contractual indemnification obligations under our
agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,
officers and employees, which we may be unable to recoup. These provisions and
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"), which 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.
33
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. EVALUATION OF CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO") and 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, 2007 Form 10-KSB. Based upon that evaluation, our
CEO and CFO concluded that, as of March 31, 2007, 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. Based on their most recent
evaluation as of the Evaluation Date, our CEO and the CFO have also concluded
that there are no significant deficiencies in the design or operation of
internal controls over financial reporting, at the reasonable assurance level,
which are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, and such officers have identified no
material weaknesses in our internal controls over financial reporting.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes made in our internal controls over
financial reporting during the quarter ended March 31, 2007 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.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL
Our management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Aethlon Medical have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
ITEM 8B. OTHER INFORMATION
On June 13, 2007, upon recommendation of the Compensation Committee,
the Board authorized the issuance of stock options to James A. Joyce to purchase
2,500,000 shares of Common Stock at an exercise price of $0.36 per share. The
options vest 1,000,000 options at the grant date and 500,000 options on each
annual anniversary date ending June 13, 2010. The options expire on June 13,
2017.
34
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, 2007, 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 June 29, 2007 are listed below:
NAMES TITLE OR POSITION AGE
-----------------------------------------------------------------------
James A. Joyce (1) Chairman, President, Chief Executive 45
Officer and Secretary
Harold H. Handley, PhD (2) President 55
Richard H. Tullis, PhD (3) Vice President, Chief Science Officer 62
and Director
James W. Dorst (4) Chief Financial Officer 52
Franklyn S. Barry, Jr. Director 67
Edward G. Broenniman Director 70
(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.
(4) Effective August 1, 2005, Mr. Dorst was appointed Chief Financial
Officer.
Certain additional information concerning the individuals named above
is set forth below. This information is based on information furnished us by
each individual noted.
Resumes of Management:
James A. Joyce, Chairman, President and CEO
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. In 1992, Mr.
Joyce founded and was the sole shareholder of James Joyce & Associates, an
organization that provided management consulting and corporate finance advisory
services to CEOs and CFOs of publicly traded companies. Previously, from 1989 to
1991, Mr. Joyce was Chairman and Chief Executive Officer of Mission Labs, Inc.
Prior to that Mr. Joyce was a principal in charge of U.S. operations for London
Zurich Securities, Inc. Mr. Joyce is a graduate of the University of Maryland.
Harold H. Handley, Ph.D., President
Mr. Harold H. Handley has been President of the Company since July
2006. Mr. Handley brings over 20 years experience in management and research in
immunology, biotechnology and medical devices. Mr. Handley has authored or
co-authored over 20 publications and helped developed 15 patents. Prior to
joining Aethlon, Mr. Handley was Executive Vice President and Chief Scientific
Officer for Transvivo, Inc., a privately-held company, from 2000 to 2006. From
1996 to 2000, Mr. Handley was Vaccine Program Director for Maxim
Pharmaceuticals, Inc. Mr. Handley was a co-founder of Idec Limited Partners,
Inc., today known as Biogen Idec, Inc., operating with a market value exceeding
$14 billion. (NasdaqGS:BIIB). Mr. Handley holds a Ph.D in Anatomy and Cell
Biology from University of Virginia and a B.A. in Zoology from the University of
California, Los Angeles.
35
James W. Dorst, Chief Financial Officer
Mr. Dorst brings more than 20 years of senior management experience in
finance, operations, planning and business transactions to the Company. Prior to
joining Aethlon, Mr. Dorst was Vice President of Finance and Operations for
VerdiSoft Corporation, a developmental-stage mobile-software developer recently
acquired by Yahoo, Inc. (NASDAQ:YHOO). Previously, Mr. Dorst held executive
positions as SVP of Finance and Administration at SeeCommerce; COO/CFO of Omnis
Technology Corp. (now NASDAQ Small Cap: RDTA); CFO and SVP of Information
Technology at Savoir Technology Group, Inc. (acquired by NYSE:AVT). Mr. Dorst
practiced as a Certified Public Accountant with Coopers & Lybrand
(PricewaterhouseCoopers) and holds an MS in Accounting and BS in finance from
the University of Oregon.
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 firms where he has served as a CEO, COO, or
corporate advisor, using his expertise to focus management on increasing
profitability and stockholder value. He is the Managing Director of The Piedmont
Group, LLC, a venture advisory firm. Mr. Broenniman recently served on the Board
of Directors of publicly-traded QuesTech (acquired by CACI International), and
currently serves on the Boards of four privately-held firms. His nonprofit
Boards are the Dingman Center for Entrepreneurship's Board of Advisors at the
University of Maryland, the National Association of Corporate Directors,
National Capital Chapter and the Board of the Association for Corporate Growth,
National Capital Chapter.
Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry,
Broenniman and Leung serve. Mr. Barry is Chairman of the Audit Committee, and
Mr. Broenniman is Chairman of the Compensation Committee.
36
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, 2007 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 4,994,550 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.
REGULATORY AND CLINICAL ADVISOR
Kenneth R. Michael, Pharm.D. R.A.C.
-----------------------------------
Dr. Michael is the President of KRM Associates LLC, a regulatory and
clinical affairs consulting organization. He is the former VP of Regulatory
Affairs and Quality Assurance at Siemens Medical Systems, and he is the founder,
past President and Chairman of The Regulatory Affairs Professional Society. He
is also the founder of the San Diego Regulatory Affairs Network.
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 top five biological warfare experts in the nation.
37
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.
Joseph A. Bellanti, M.D.
------------------------
Dr. Bellanti is the Director of the International Center for Immunology
and Professor of Pediatrics at Georgetown University School of Medicine. He has
authored over 400 scientific articles and 25 books and book chapters in the
areas of Immunology and Virology. Dr. Bellanti's textbook, "Immunology," is used
in medical and graduate schools throughout the country.
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--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-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-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--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 Diplomat 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.
38
Raveendran (Ravi) Pottathil, Ph.D.
----------------------------------
Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV
and HCV) and Tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in India.
Currently, Dr. Pottathil is the President of AccuDx, Inc. a pharmaceutical
diagnostics company he founded in 1996.
Claudio Ronco, M.D.
-------------------
Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.
Members of the Scientific Advisory Board do not receive any monetary
compensation for service on the Board. However, on occasion, the members may be
awarded stock options.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of our knowledge, during the past 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.
39
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, 2007. The following table summarizes all
compensation for fiscal year 2007 received by our Chief Executive Officer, and
the Company's two most highly compensated executive officers who earned more
than $100,000 in fiscal year 2007
SUMMARY COMPENSATION TABLE
NON-EQUITY NONQUALIFIED
INCENTIVE DEFERRED ALL
STOCK OPTION PLAN COMPENSATION OTHER
NAMED EXECUTIVE OFFICER AWARDS AWARDS COMPENSATION EARNINGS COMP. TOTAL
AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) ($) ($) ($) ($) ($)
--------------------------- ---- ---------- --------- ------ ------ ------------ ------------ ---------- ----------
James A. Joyce (1) 2007 $ 240,000 $ -- $ -- $ -- $ -- $ -- $ -- $ 240,000
CHIEF EXECUTIVE OFFICER
Richard H. Tullis, Ph.D (2) 2007 $ 180,000 $ -- $ -- $ -- $ -- $ -- $ -- $ 180,000
VICE PRESIDENT AND CHIEF
SCIENCE OFFICER
James W. Dorst (3) 2007 $ 150,000 $ -- $ -- $ -- $ -- $ -- $ -- $ 150,000
CHIEF FINANCIAL OFFICER
(1) The aggregate number of stock awards and stock option awards issued to Mr.
Joyce and outstanding as of March 31, 2007 is 0 and 5,088,243. 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.
(2) The aggregate number of stock awards and stock option awards issued to Dr.
Tullis and outstanding as of March 31, 2007 is 0 and 2,014,350.
(3) The aggregate number of stock awards and stock option awards issued to Mr.
Dorst and outstanding as of March 31, 2007 is 0 and 500,000.
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.
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
$180,000 per year.
Both Mr. Joyce's and Dr. Tullis' agreements provide for medical
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.
40
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth certain information concerning stock
option Awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
---------------------------------------------------------------------------------------------------
OPTIONS AWARDS
-------------------------------------------------------------------------
EQUITY
INCENTIVE
PLAN AWARDS;
NUMBER OF NUMBER OF NUMBER OF
SECURITIES SECURITIES SECURITIES
UNDERLYING UNDERLYING UNDERLYING
UNEXERCISED UNEXERCISED UNEXERCISED OPTION OPTION
OPTIONS OPTIONS UNEARNED EXERCISE EXPIRATION
NAME EXERCISABLE UNEXERCISABLE OPTIONS PRICE DATE
- ------------------------- -------------- -------------- -------------- -------------- -------------
(#) (#) (#) ($)
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
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
James W. Dorst 165,000(2) 335,000 -- $0.23 08/01/08
Harold H. Handley -- 500,000(3) -- $0.27 10/02/16
(1) This option was fully vested as of March 31, 2007. (2) 165,000 options vest
each year on August 1 starting August 1, 2006. (3) 165,000 options vest each
year on July 18 starting July 18, 2007.
STOCK AWARDS
---------------- ----------------- ---------------- -----------------
EQUITY
EQUITY INCENTIVE PLAN
INCENTIVE PLAN AWARDS: MARKET
AWARDS: NUMBER OR PAYOUT VALUE
NUMBER OF OF UNEARNED OF UNEARNED
SHARES OR MARKET VALUE OF SHARES, UNITS SHARES, UNITS
UNITS OF STOCK SHARES OR UNITS OR OTHER OR OTHER RIGHTS
THAT HAVE NOT THAT HAVE NOT RIGHTS THAT THAT HAVE NOT
NAME VESTED VESTED HAVE NOT VESTED VESTED
----------------------------- ---------------- ----------------- ---------------- -----------------
(#) ($) (#) ($)
James A. Joyce -- $ -- -- $ --
Richard H. Tullis, Ph.D -- $ -- -- $ --
James W. Dorst -- $ -- -- $ --
Harold H. Handley -- $ -- -- $ --
OPTION GRANTS TO EXECUTIVE OFFICERS IN 2007
There were 500,000 stock options granted to our President, Dr. Harold H.
Handley. No options were granted to our Chief Executive Officer, Chief Operating
Officer or Chief Financial Officer in fiscal year 2007.
DIRECTOR COMPENSATION
The following director compensation disclosure reflects all compensation awarded
to, earned by or paid to the directors below for the fiscal year ended March 31,
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 Tullis (2) -- -- -- -- -- -- --
----------------------- ------ ------- ------- ------------ ------------ ------------ --------
Franklyn Barry (3) -- -- -- -- -- -- --
----------------------- ------ ------- ------- ------------ ------------ ------------ --------
Edward Broenniman (4) -- -- -- -- -- -- --
----------------------- ------ ------- ------- ------------ ------------ ------------ --------
(1) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2007 are 0 and 5,088,243.
(2) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2007 are 0 and 2,014,350.
(3) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2007 are 0 and 516,417.
(4) The aggregate number of stock awards and options awards issued and
outstanding as of March 31, 2007 are 0 and 520,050.
41
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,
2007 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 4,994,550 remained outstanding. A portion
of the employee-director options were 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 June 29, 2007, 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 OF PERCENT OF
TITLE OF CLASS NAME BENEFICIAL OWNERSHIP(1)(2) CLASS
-------------- -------------------------------------------- -------------------------- ----------
Common Stock James A. Joyce, Chief Executive Officer and
Director 6,688,243 shares(3) 21%
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) 6%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Franklyn S. Barry, Director
3030 Bunker Hill Street, Suite 4000, 523,010 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 James W. Dorst, Chief Financial Officer
3030 Bunker Hill Street, Suite 4000, 330,000 shares(7) 1%
San Diego, CA 92109
Common Stock Harold H. Handley, President
3030 Bunker Hill Street, Suite 4000, 165,000 shares(8) *
San Diego, CA 92109
All Current
Directors and
Executive Officers
as a Group (6 10,434,527 Shares 32%
members)
*Less than 1%.
1. Based on 32,008,765 shares of Common Stock outstanding on the transfer
records as of June 15, 2007.
42
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 1,000,000 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 514,550 stock
options exercisable at $0.38 per share.
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 165,000 vested stock options and 165,000 stock options vesting
August 1, 2007, all stock options exercisable at $0.23 per share.
8. Includes 165,000 stock options vesting July 18, 2007, exercisable at $0.27
per share.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On September 9, 2005, as previously disclosed on Form 8-K, we issued a
stock option to acquire 2,857,143 stock option to our CEO and Chairman, James A.
Joyce, in satisfaction of $300,000 in previously accrued payroll expense. These
non interest-bearing liabilities have been included as due to related parties in
the accompanying financial statements.
43
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, 2007 and
2006:
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 (22)
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)
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)
44
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)
10.42 Common Stock Purchase Agreement by and between Aethlon
Medical, Inc. and Fusion Capital Fund II, LLC dated March 21,
2007*
10.43 Registration Rights Agreement by and between Aethlon Medica,
Inc. and Fusion Capital Fund II, LLC dated March 21, 2007*
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*
45
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*
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*
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*
14 Code of Ethics*
21 List of subsidiaries (21)
23.1 Consent of Independent Registered Public Accounting Firm
(Squar, Milner, Peterson, Miranda & Williamson, LLP) *
31.1 Certification of our Chief Executive Officer and President,
pursuant to Securities Exchange Act rules 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.*
31.2 Certification of our Chief Financial Officer, pursuant to
Securities Exchange Act rules 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.*
32 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
* 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 10,
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 10,
1999 and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated January 10,
2000 an incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated April 10,
2000 and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K dated June 7, 2004
and incorporated by reference.
(9) Filed with the Company's Current Report on Form 8-K dated May 16, 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.
46
(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 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 Registration Statement on Form SB-2 filed on
July 7, 2004 and incorporated by reference.
(22) Filed with the Company's Current Report on form 8-K dated March 7,
2007 and incorporated herein by reference.
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, 2007, and 2006 and fees billed for other services rendered by Squar
Milner during such years:
Fiscal Years Ended March 31,
2007 2006
------- -------
Audit Fees $93,000 $86,000
Audit Related Fees 35,625 47,050
Tax Fees - -
All Other Fees - -
---------------------------
$128,625 $123,050
===========================
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.
47
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 13th day of July, 2007.
BY: /S/ JAMES A. JOYCE
---------------------------------------------
JAMES A. JOYCE
CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER
BY: /S/ JAMES W. DORST
---------------------------------------------
JAMES W. DORST
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 13, 2007
-------------------------
JAMES A. JOYCE
/S/ FRANKLYN S. BARRY, JR. DIRECTOR JULY 13, 2007
--------------------------
FRANKLYN S. BARRY, JR.
/S/ EDWARD G. BROENNIMAN DIRECTOR JULY 13, 2007
--------------------------
EDWARD G. BROENNIMAN
/S/ RICHARD H. TULLIS DIRECTOR JULY 13, 2007
-------------------------
RICHARD H. TULLIS
48
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
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-15
Notes to Consolidated Financial Statements................................. F-17
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, 2007 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, 2007. 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. 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, 2007 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,
2007, 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 suffered
continuing losses from operations, is in default on certain debt, has negative
working capital of approximately $7,260,000 and a deficit accumulated during the
development stage of approximately $28,087,000 at March 31, 2007. As discussed
in Note 1 to the consolidated financial statements, a significant amount of
additional capital will be necessary to advance the development of the Company's
products to the point at which they may become commercially viable. These
conditions, among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding these matters are also
described in Note 1. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 1 to the consolidated financial statements, effective April
1, 2006, the Company changed its method of accounting for stock-based
compensation to conform to Financial Accounting Standards Board No. 123-R, Share
Based Payment.
/S/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
JULY 12, 2007
NEWPORT BEACH, CALIFORNIA
F-1
--------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2007
--------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 440,106
Prepaid expenses 4,570
------------
TOTAL CURRENT ASSETS 444,676
NON-CURRENT ASSETS
Property and equipment, net 13,662
Patents, net 141,820
Deposits 13,200
------------
TOTAL ASSETS $ 613,358
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 1,374,079
Due to related parties 1,088,999
Notes payable 502,500
Convertible notes payable, net of discounts 50,000
Warrant obligation 4,689,450
------------
TOTAL CURRENT LIABILITIES 7,705,028
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, par value of $0.001, 100,000,000 shares
authorized; 31,912,153 issued and outstanding 31,912
Additional paid-in capital 20,963,410
Deficit accumulated during the development stage (28,086,992)
------------
TOTAL STOCKHOLDERS' DEFICIT (7,091,670)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 613,358
============
--------------------------------------------------------------------------------------------
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, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
----------------------------------------------------------------------------------------------------------
JANUARY 31, 1984
(INCEPTION) THROUGH
2007 2006 MARCH 31, 2007
--------------------------------------------------------
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
--------------------------------------------------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 700,092 851,594 5,938,227
Payroll and related 889,192 675,171 8,135,197
General and administrative 494,970 486,452 4,927,001
Impairment -- 81,722 1,313,253
--------------------------------------------------------
2,084,254 2,094,939 20,313,678
--------------------------------------------------------
OPERATING LOSS (2,084,254) (2,094,939) (18,780,110)
OTHER (INCOME) EXPENSE
Loss on extinguishment of debt 1,216,748 -- 1,216,748
Change in fair value of warrant liability 2,112,575 360,125 2,472,700
Interest expense 390,968 450,297 5,262,420
Interest income -- -- (17,415)
Other 220,000 14,822 372,429
--------------------------------------------------------
3,940,291 825,244 9,306,882
--------------------------------------------------------
NET LOSS $ (6,024,545) $ (2,920,183) $(28,086,992)
========================================================
Basic and diluted net loss per share
attributable to common stockholders $ (0.22) $ (0.15)
==================================
Weighted average number of common
shares outstanding 26,937,727 19,551,501
==================================
----------------------------------------------------------------------------------------------------------
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, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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 (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
-----------------------------------------------------------------------------------------------------------------------------------
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
Correction for issuance of cashless warrants (174,716) (175) 175 -- -- --
Issuance of cashless warrants 30,617 31 (31) -- -- --
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
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.
F-14
--------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007
--------------------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception) Through
2007 2006 March 31, 2007
-------------------------------------------------
Cash flows from operating activities:
Net loss $ (6,024,545) $ (2,920,183) $(28,086,992)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 23,400 34,241 1,007,393
Amortization of deferred consulting fees 44,917 34,083 109,000
Gain on settlement of debt -- (131,175) (131,175)
Loss on settlement of accrued legal liabilities -- 142,245 142,245
Gain on sale of property and equipment -- -- (13,065)
Change in estimated fair value of warrant liability 2,112,575 360,125 2,472,700
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 274,914 704,383 3,486,916
Stock based compensation 38,132 -- 462,394
Loss on debt extinguishment 1,216,748 -- 1,216,748
Amortization of debt discount 177,762 259,416 1,285,787
Impairment of patents and patents pending -- 81,722 416,026
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses 27,652 (22,034) 156,967
Other assets 4,000 20,050 (13,200)
Accounts payable and accrued liabilities 535,166 (118,276) 2,049,116
Due to related parties (149,625) (28,878) 1,322,500
-------------------------------------------------
Net cash used in operating activities (1,718,904) (1,584,281) (10,286,454)
-------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (17,810) (4,651) (266,697)
Patents and patents pending (6,294) (11,000) (370,127)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
-------------------------------------------------
Net cash used in investing activities (24,104) (15,651) (609,031)
-------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-15
--------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2007 AND 2006 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2007 (CONTINUED)
--------------------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception) Through
2007 2006 March 31, 2007
-------------------------------------------------
Cash flows from financing activities:
Net proceeds from the issuance of notes payable -- 100,000 1,710,000
Principal repayments of notes payable -- (80,000) (292,500)
Proceeds from the issuance of convertible notes payable 50,000 1,030,000 2,078,000
Net proceeds from the issuance of common stock 1,296,737 1,454,415 7,916,822
Professional fees related to registration statements -- (76,731) (76,731)
-------------------------------------------------
Net cash provided by financing activities 1,346,737 2,427,684 11,335,591
-------------------------------------------------
Net increase (decrease) in cash (396,271) 827,752 440,106
Cash at beginning of period 836,377 8,625 --
-------------------------------------------------
Cash at end of period $ 440,106 $ 836,377 $ 440,106
=================================================
Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ -- $ 8,000 $ 263,258
=================================================
Income taxes $ -- $ -- $ 13,346
=================================================
Supplement schedule of noncash investing and financing activities:
Debt and accrued interest converted to common stock $ 43,750 $ 69,942 $2,480,711
=================================================
Debt discount on notes payable associated with
detachable warrants $ 50,000 $ 1,070,860 $1,154,860
=================================================
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related parties $ 23,111 $ 467,346 $1,003,273
=================================================
Reclassification of derivative liability to (from)
additional paid-in capital $ (1,090,000) $ 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 $ 10,800 $ -- $ 10,800
=================================================
--------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-16
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
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 National Association of Securities Dealers ("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 suffered continuing losses from
operations, is in default on certain debt, has negative working capital of
approximately $7,260,000 recurring losses from operations and a deficit
accumulated during the development stage of approximately $28,087,000 at March
31, 2007, 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, 2008. Therefore, the Company will
be required to seek additional funds to finance its long-term operations.
The Company is currently addressing its liquidity issue by continually seeking
investment capital through the public markets, specifically, through private
placement of common stock and a pending common stock purchase agreement with
Fusion Capital Fund II, LLC ("Fusion"). The Company believes that its cash on
hand and funds available from Fusion and/or additional private investment will
be sufficient to meet its liquidity needs for fiscal 2008. However, no assurance
can be given that the Company will receive any funds in addition to the funds it
has received to date.
F-17
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
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, accrued
liabilities and notes payable approximates their estimated fair values due to
the short-term maturities of those financial instruments. 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 $340,000 exceeding this limit at March 31, 2007.
F-18
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 2007 and 2006.
EARNINGS PER SHARE
Under SFAS No. 128, "Earnings per Share," basic earnings 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 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
If the Company had net income in each of the years ended March 31, 2007 and
2006, 12,885,453 and 11,086,990 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, as any additional common stock equivalents would be
antidilutive.
F-19
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
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, 2007, 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 $38,132 for the fiscal year ended March 31, 2007. This expense
was recorded as stock compensation included in payroll and related expenses in
the accompanying March 31, 2007 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.
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
March 31, 2007
Payroll and related $ 38,132
==========
Net share-based compensation effect
in net loss from operations $ 38,132
==========
Basic and diluted loss per common share $ (0.00)
==========
F-20
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
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, 2007 was insignificant.
Pro forma information required under SFAS No. 123 for periods prior to April 1,
2006 as if the Company had applied the fair value recognition provisions of SFAS
No. 123 to options granted under and outside of the Company's equity incentive
plans was as follows:
YEAR ENDED MARCH 31,
-------------------
2006
------------
Net loss available to common stockholders, as reported $ 2,920,183
Add back: Recorded intrinsic value --
Pro forma compensation expense 361,111
------------
Pro forma net loss available to common stockholders $ 3,281,294
============
Loss per common share, as reported
Basic and diluted $ (0.15)
============
Loss per common share, pro forma
Basic and diluted $ (0.17)
============
Pro forma compensation expense reported in the above table is generally based on
the vesting provisions in the related stock option grants.
Share compensation expense for the fiscal year ended March 31, 2007 relates to
the vesting of existing grants (issued subsequent to April 1, 2006), the date
the Company adopted SFAS No. 123-R and of grants issued during the current
fiscal year.
The following weighted average assumptions were used in the valuation of these
instruments.
2007 2006
------ ------
Annual dividends Zero Zero
Expected volatility 91.9% 89%
Risk free interest rate 4.84% 4.82%
Expected life 10.0 years 5.0 years
The expected volatility is based on the historic volatility. The expected life
of options granted is based on the "simplified method" described in the SEC's
Staff Accounting Bulletin No. 107 due to changes in the vesting terms and
contractual life of current option grants compared to the Company's historical
grants.
Options outstanding that have vested and are expected to vest as of March 31,
2007 are as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term in Years Value (1)
- ------------------------- ----------- -------- ------------- ----------
Vested 8,369,060 $ 0.39 5.33 $ 3,396,474
Expected to vest 835,000 0.25 5.67 $ 412,550
----------- ----------
Total 9,204,060 $ 3,809,024
=========== ==========
(1) These amounts represent the difference between the exercise price and $0.74,
the closing market price of the Company's common stock on March 31, 2007 as
quoted on the Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all
in-the-money options outstanding.
F-21
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
Options outstanding that are expected to vest are net of estimated future
forfeitures in accordance with the provisions of SFAS No. 123-R, which are
estimated when compensation costs are recognized. The Company estimates that the
fair value of unvested stock options expected to vest and be expensed in future
periods is approximately $134,000. Additional information with respect to stock
option activity is as follows:
Outstanding Options
-------------------------------------
Shares Weighted Aggregate
Available Number of Average Intrinsic
for Grant Shares Exercise Price Value (1)
- --------------------------- --------- ------ -------------- ----------
March 31, 2006 467,500 9,012,785 $ 0.38 $3,875,498
==========
Grants -- 500,000 $ 0.27
Exercises -- -- --
Cancellations -- (308,725) $ 0.38
---------- ----------
March 31, 2007 467,500 9,204,060 $ 0.38 $3,802,324
========== ========== ==========
Options exercisable at:
March 31, 2006 7,135,518 $ 0.39
========= ======
March 31, 2007 8,369,060 $ 0.39
========= ======
(1) Represents the difference between the exercise price and the March 31, 2006
or March 31, 2007 market price of the Company's common stock, which was $0.81
and $0.74, respectively, for "in the money" options.
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.
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.
F-22
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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.
CLASSIFICATION OF WARRANT OBLIGATION
In connection with the issuance of the 10% Series A Convertible Notes (see Note
6), the Company had an obligation to file a registration statement covering the
common shares underlying the convertible notes and related warrants (the
"Registerable Securities", as defined in the Registration Rights Agreement). The
obligation to file the registration statement met the criteria of an embedded
derivative to be bifurcated pursuant to SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. The classification of the
warrant obligation was evaluated at each reporting date. From the original
issuance date through January 20, 2006 and October 27, 2006, the Company was
required to classify the warrant obligation as a derivative liability, recorded
at its fair value, in accordance with SFAS No. 133 under EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled In, a Company's Own Stock." Accordingly, the warrants were classified as
derivative liabilities with the change in fair value reported in earnings.,
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."
RESEARCH AND DEVELOPMENT EXPENSES
The Company incurred approximately $673,614 and $754,000 of research and
development expenses during the years ended March 31, 2007 and 2006,
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.
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.
Management is in the process of evaluating this guidance, and therefore has not
yet determined the impact (if any) that FIN No.48 will have on the Company's
financial position or results of operation upon adoption.
In September 2006, the FASB issued SFAS No.157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not
require any new fair value measurements. The guidance in SFAS No. 157 applies to
derivatives and other financial instruments measured at estimated fair value
under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Management does not expect the
adoption of SFAS No. 157 to have a significant effect on the Company's financial
position or results of operation.
F-23
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities." SFAS No. 159 allows entities to
choose, at specified election dates, to measure eligible financial assets and
liabilities at fair value that are not otherwise required to be measured at fair
value. If the Company elects the fair value option for an eligible item, changes
in that item's fair value in subsequent reporting periods must be recognized in
current earnings. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. Management has not yet evaluated the effects on future
consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2007:
Furniture and office equipment $ 261,535
Accumulated depreciation (247,873)
---------------
$ 13,662
===============
Depreciation expense for the years ended March 31, 2007 and 2006 approximated
$16,500 and $23,000, respectively.
3. PATENTS
Patents include both foreign and domestic patents. There was one patent pending
at March 31, 2007 and 2006. The unamortized cost of patents and patents pending
is written off when management determines there is no future benefit. During the
years ended March 31, 2007 and 2006, patents with net carrying values of $0 and
$81,722, respectively, were written off as impairment expense. At March 31,
2007, the gross carrying amount of patents and patents in process totaled
approximately $175,000and the related accumulated amortization totaled
approximately 33,000. Amortization of patents approximated $7,000 and $12,000
during the years ended March 31, 2007 and 2006, 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. DEBT-TO-EQUITY CONVERSION PROGRAM
In March 2002, for a limited time, the Company extended an offer to certain note
holders and vendors to convert past due amounts into restricted common stock and
warrants to purchase common stock of the Company. The offer entailed the
conversion of liabilities at a rate of one share and one-half of a warrant for
every $1.25 converted. The warrants had an exercise price of $2.00 per share and
expired three years from the date of issuance; none are outstanding at March 31,
2006 and 2005.
5. 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,
each of two such 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, 2007, $347,500 of principal balance of the 12% Notes were
outstanding and delinquent, in default, and bore interest at the default rate of
15%.
F-24
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
5. NOTES PAYABLE (continued)
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 require 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. There were two remaining 10% Notes outstanding at March 31, 2004. As
of such date and through March 31, 2007, these notes were classified as notes
payable since they were no longer convertible.
The remaining 10% Note in the amount of $5,000, was past due and in default at
March 31, 2007. At March 31, 2007, interest payable on this note totaled $2,875.
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 through June 2003 at the option of the noteholder. As
this note is no longer convertible, the outstanding balance totaling $150,000
has been recorded as notes payable in the accompanying consolidated balance
sheet.
Notes payable, which are all in default, consist of the following at March 31,
2006:
12% Notes payable, all past due $347,500
10% Note payable, past due 5,000
9% Note payable, past due 150,000
--------
$502,500
========
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.
6. 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 BCF to
be $34,373 and recorded such amount as a debt discount. The discounts associated
with the warrants and the BCF were accreted to interest expense over the term of
the December 10% Notes. Interest expense on the December 10% Notes for accretion
of such debt discounts totaled approximately $50,000 for the fiscal year ended
March 31, 2007.
15% CONVERTIBLE NOTE
On May 16, 2005 the Company issued Fusion Capital ("Fusion") a $30,000
Convertible Promissory Note (the "Convertible Note") with an interest rate of
fifteen percent (15%) per annum that matured on August 15, 2005 (the "Maturity
Date"). In addition, the Company issued Fusion a five-year warrant to purchase
300,000 shares of the Company's common stock at an exercise price of $0.25 per
share (the "Warrant"). In accordance with EITF Issue No. 98-5, EITF Issue No.
00-27 and APB No. 14, the Company recorded debt discounts associated with
conversion feature and the warrants totaling $30,000 which was entirely
F-25
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
6. CONVERTIBLE NOTES PAYABLE (continued)
accreted to interest expense during the fiscal year ended March 31, 2006. The
Convertible Note and approximately $5,000 in associated accrued interest was
exchanged for 174,716 shares of restricted common stock on March 23, 2006.
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 conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date.
Convertible Notes Payable consistes of the following at March 31, 2007:
Net
Principal Discount Amount
--------- -------- -------
10% Series A Convertible Notes $ 1,000,000 $ (1,000,000) $ --
December 10% Convertible Notes 50,000 -- 50,000
============ ============ =========
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 and $127,762 for the fiscal years ended March 31, 2007 and 2006.
F-26
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
10% SERIES A CONVERTIBLE NOTES (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, the embedded derivative
associated with 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
accompanying consolidated statements of operations for the year ended March 31,
2006.
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
F-27
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
6. CONVERTIBLE NOTES PAYABLE (continued)
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, 2001
and is exercisable to purchase one share of Common Stock at a price of $0.20 per
share (the "Exercise Price"). If the Holder exercises Class A Warrants on or
before July 3, 2008, 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.
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. Between October 27, 2006 and
March 22, 2007 (when the debt was effectively extinguished), the Company
recorded an additional non-cash expense related to the change in the fair value
of the associated warrant liability of $1,969,450. Upon extinguishment, the
Company recorded a net increase in warrant liability of $757,002 and a non-cash
loss on extinguishment of $1,216,748. 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.
7. 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.
F-28
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
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.
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 (see Note 7). This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
F-29
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In November and December 2004, the Company issued 80,000 shares of restricted
common stock to an accredited individual investor in connection with the
exercise of 80,000 warrants at $0.25 per share for consideration of a $20,000
reduction in the principal amount of a 10% one-year promissory note. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In December 2004, the Company issued 461,667 shares of restricted common stock
to two accredited individual investors in connection with the exercise of
461,667 warrants at $0.25 per share for cash totaling $115,417. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In December 2004, the Company repaid two $25,000 12% promissory notes, including
accrued interest of $17,778 each, through the issuance of 87,303 restricted
common shares at $0.49 per share to each of two separate accredited individual
investors. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In December 2004, the Company issued 60,000 shares of restricted common stock at
$0.50 per share under a consulting agreement with an accredited individual
investor, for investor relations consulting services to the Company. The fair
value of the transaction of $30,000 was recorded as deferred compensation and
presented as an offset to additional paid-in capital in the accompanying
consolidated financial statements. Such amount is being amortized to expense
over the six month term of the agreement. At March 31, 2005, $15,000 of such
amount remained unamortized. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The remaining $15,000
balance in deferred consulting fees were amortized during the fiscal year ended
March 31, 2006.
In January 2005, the Company issued 55,556 shares of restricted common stock at
$0.36 per share and a warrant to purchase 55,556 shares of common stock at $0.44
per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
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.
F-30
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In February 2005, the Company issued 90,000 shares of restricted common stock at
$0.27 per share and a three-year warrant to purchase 90,000 shares of common
stock at $0.34 per share for cash in the amount of $24,300 to an accredited
individual investor. This transaction was exempt from registration pursuant to
Section 4(2)of the Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional total of
1,416,958 shares of restricted common stock at prices ranging from $0.25 to
$0.52 for total cash proceeds of approximately $541,000.
During the year ended March 31, 2005, the Company issued an additional 557,647
shares of restricted common stock at prices ranging from $0.25 to $0.55 under
various consulting service agreements for total recorded value of approximately
$196,000. All services on these agreements were completed and expensed during
the year ended March 31, 2005.
In April 2005, the Company issued 9,740 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for scientific consulting services to
the Company valued at $3,000.
In April 2005, the Company issued 25,134 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $7,500.
In April 2005, the Company issued 31,424 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $7,900.
During the year ended March 31, 2006, the Company issued 3,990,807 shares of
common stock at prices between $0.25 to and $0.76 per share to Fusion Capital
under its $6,000,000 common stock purchase agreement for cash proceeds totaling
$1,436,815. These shares are registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
During the quarter ended June 30, 2005, the Company issued 95,420 shares of
common stock pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.262 per share in payment for
regulatory affairs consulting services to the Company valued at $25,000.
In May 2005, the Company issued 33,228 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $8,440.
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.
F-31
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
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.
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.
F-32
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $21,100.
In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $37,260.
In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $5,738.
In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.22 per share in payment for regulatory affairs consulting
services to the Company valued at $7,620.
In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $7,660.
In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $36,135.
In November 2005, the Company issued 13,298 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In December 2005, the Company issued 371,847 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.25 per share in payment of general
legal fees valued at $91,509.
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.
F-33
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
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.
F-34
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
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.
In March 2006, the Company converted a $30,000 10% promissory notes held by an
accredited individual investor, including accrued interest of $4,564, through
the issuance of 140,000 restricted common shares at $0.25 per share.
In March 2006, a $30,000 15% convertible note, including accrued interest of
$4,943, was converted at $0.20 per share for 174,716 shares of common stock.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In March 2006, the Company issued 150,000 shares of restricted common stock
under a one year investor relations consulting agreement which was valued at
$49,000 and being amortized over a one year period. Approximately $4,000 was
amortized during the year ended March 31, 2006. As a result, the remaining
balance of $44,917 represents that entire balance of deferred consulting fees
(contra equity) in accompanying consolidated balance sheet.
In March 2006, the Company issued 35,714 shares of restricted common stock
payment of professional services related to investor relations valued at
$10,000.
In March 2006, the Company issued 15,152 shares of restricted common stock at
$0.33 per share in payment of professional services related to investor
relations valued at $5,000.
In March 2006, the Company issued 33,333 shares of restricted common stock at
$0.30 per share in payment of an option agreement valued at $10,000.
In April 2006, the Company issued 3,782 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.
In April 2006, the Company issued 25,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for past due rents owed by the Company
valued at $12,801 based on the value of the services.
In April 2006, the Company issued 6,313 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 10,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.
In April 2006, the Company issued 14,563 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $4,165 based on the value of the services.
In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations valued at $2,500 based on the
value of the services.
During April 2006, the Company issued 209,679 shares of common stock at prices
between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $140,002. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.
In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.41 per share to an accredited individual investor. There was no
gain or loss on the extinguishment.
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.
F-35
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In May 2006, the Company issued 4,545 shares of restricted common stock
at $0.55 per share in payment for investor relations valued at $2,500 based on
the value of the services.
In June 2006, the Company issued 8,681 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.58 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In June 2006, the Company issued 5,703 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.53 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In June 2006, the Company issued 3,363 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.45 per share in payment for regulatory affairs
consulting services to the Company valued at $1,500 based on the value of the
services.
In July 2006, the Company issued 8,721 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In July 2006, the Company issued 10,684 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.47 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In July 2006, the Company issued 6,250 shares of restricted common
stock at $0.40 per share in payment for investor relations services to the
Company valued at $2,500 based on the value of the services.
In July 2006, the Company issued 7,813 shares of restricted common
stock at $0.32 per share in payment for investor relations services to the
Company valued at $2,500 based on the value of the services.
In July 2006, the Company issued 8,721 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In July 2006, the Company issued 132,765 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.37 per share in payment for regulatory affairs
consulting services to the Company valued at $48,858 based on the value of the
services.
In July 2006, the Company issued 14,535 shares of common stock pursuant
to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
During August 2006, the Company issued 113,235 shares of common stock
at prices between $0.26 and $0.27 per share to Fusion Capital under its
$6,000,000 common stock purchase agreement for net cash proceeds totaling
$30,000. These shares are registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
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.
F-36
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In September 2006, the Company issued 4,808 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.31 per share in payment for regulatory affairs
consulting services to the Company valued at $1,500 based on the value of the
services.
In September 2006, the Company issued 15,723 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.32 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In September 2006, the Company issued 9,868 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.30 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In September 2006, the Company issued 16,447 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.32 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In September 2006, the Company issued 9,733 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.30 per share in payment for regulatory affairs
consulting services to the Company valued at $2,550 based on the value of the
services.
During October 2006, the Company issued 201,165 shares of common stock
at $0.25 per share to Fusion Capital under its $6,000,000 common stock purchase
agreement for net cash proceeds totaling $50,000. These shares are registered
pursuant to the Company's Form SB-2 registration statement effective December 7,
2004.
In October 2006, the Company issued 16,994 shares of restricted common
stock at $0.31 per share in payment for investor relations services to the
Company valued at $2,500 based on the value of the services.
In October 2006, the Company issued 8,929 shares of restricted common
stock at $0.28 per share in payment for investor relations services to the
Company valued at $2,500 based on the value of the services.
In October 2006, the Company issued 18,797 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.27 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In October 2006, the Company issued 11,278 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.27 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In October 2006, the Company issued 7,540 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.25 per share in payment for regulatory affairs
consulting services to the Company valued at $1,900 based on the value of the
services.
In November 2006, the Company issued 555,556 shares of restricted
common stock at $0.18 per share in exchange for an investment of $100,000. As an
inducement the Company also issued five-year warrants to purchase a number of
shares equal to the number of restricted shares issued converted at a fixed
exercise price of $0.18. Additionally, if the warrants are exercised prior to
November 14, 2007, the holder will receive an additional warrant on the same
terms as the warrants.
In November 2006, the Company issued 11,905 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.25 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In November 2006, the Company issued 19,841 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.25 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
In December 2006, the Company issued 12,397 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.24 per share in payment for regulatory affairs
consulting services to the Company valued at $3,000 based on the value of the
services.
In December 2006, the Company issued 20,661 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.24 per share in payment for regulatory affairs
consulting services to the Company valued at $5,000 based on the value of the
services.
F-37
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
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.
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.
F-38
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
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.
On March 22, 2007 in effecting the Allonges (see "The Allonge Transactions"),
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 pay all accrued interest, through February 15, 2007 in the form of units (the
"Units") at the rate of $0.20 per Unit (the "Interest Payment Rate"). The Notes
are convertible into Units at any time prior to the Maturity Date at the
conversion price of $0.20 per Unit (the "Conversion Price"). Each Unit is
composed of one share of the company's common stock and warrants. At March 31,
2007, the Company is obligated to issue, but has not yet issued, 685,328 "Unit
Shares" of common stock under the Allonges.
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.
As noted under "Common Stock", 1,206,564 warrants with an exercise price of
$0.25 per share, which were granted to investors in connection with the purchase
of common stock, were exercised during the year ended March 31, 2005.
F-39
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
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.
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 vale 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 non-cashless
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 non-cashless 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 non-cashless 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 non-cashless warrants to purchase an
additional 294,118 shares of restricted common stock at an exercise price of
$0.17.
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 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 Notes are convertible into Units at any time prior to the Maturity Date at
the conversion price of $0.20 per Unit (the "Conversion Price"). Each Unit is
composed of one share of 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.
F-40
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
A summary of the aggregate warrant activity for the years ended March 31, 2007
and 2006 is presented below:
Year Ended March 31,
-----------------------------------------------------
2007 2006
------------------------- -------------------------
Weighted Weighted
Average Exercise Average Exercise
Warrants Price Warrants Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 3,791,908 $ 0.61 2,833,834 $ 0.91
Granted 1,535,002 $ 0.19 1,786,546 0.41
Exercised (160,000) $ 0.50 (568,182) 0.76
Cancelled/Forfeited (669,000) $ 0.72 (260,290) 3.30
----------- --------- ---------- ---------
Outstanding, end of year 4,479,910 $ 0.46 3,791,908 $ 0.61
=========== ========= ========== =========
Exercisable, end of year 4,479,910 $ 0.46 3,791,908 $ 0.61
=========== ========= ========== =========
Weighted average estimated fair
value of warrants granted $ 0.29 $ 0.23
========= =========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented utilizing the Black-Scholes and
Binomial Lattice option pricing models:
Years Ended March 31,
2007 2006
----------- -----------
Risk free interest rate 4.47%-4.57% 4.18%-4.3%
Average expected life 4.4 years 3 years
Expected volatility 90.7% - 93.4% 72% - 97%
Expected dividends None
The detail of the warrants outstanding and exercisable as of March 31, 2007 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 1,635,002 4.07 $ 0.19 1,635,002 $ 0.19
$0.25 - $0.44 863,921 1.81 $ 0.27 863,921 $ 0.27
$0.50 - $0.90 1,998,987 3.00 $ 0.76 1,998,987 $ 0.76
-------------- ---------------
4,497,910 4,497,910
============== ===============
F-41
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
OPTIONS
At March 31, 2007 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.
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, 2007, 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 forty 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.
On September 9, 2005, the Company granted 2,857,143 options to James A. Joyce,
its Chief Executive Officer, in exchange for $300,000 of accrued related-party
liabilities. The fair value of such options approximated the value of the
accrued related-party liability.
F-42
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
7. EQUITY TRANSACTIONS (continued)
OPTIONS (continued)
The following is a summary of the stock options outstanding at March 31, 2007
and 2006 and the changes during the two years then ended:
Year Ended March 31,
-----------------------------------------------------
2007 2006
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 9,012,785 $ 0.38 6,679,390 $ 0.80
Granted 500,000 0.27 3,357,143 0.21
Exercised -- -- -- --
Cancelled/Forfeited (308,725) 2.74 (1,023,748) --
----------- ----------- ----------- ----------
Outstanding, end of year 9,204,060 $ 0.38 9,012,785 $ 0.38
=========== =========== =========== ==========
Exercisable, end of year 8,369,060 $ 0.39 7,135,518 $ 0.39
=========== =========== =========== ==========
Weighted average estimated fair
value of options granted $ 0.23 $ 0.12
=========== ==========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented utilizing the Binomial Lattice
option pricing model for the years ended March 31, 2007 and March 31, 2006:
Years Ended March 31,
2007 2006
----------- -----------
Risk free interest rate 4.84% 4.18%
Average expected life 10 years 4.7 years
Expected volatility 92% 72%
Expected dividends None None
The detail of the options outstanding and exercisable as of March 31, 2007 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 - $0.23 3,357,143 7.39 years $ 0.21 3,022,143 $ 0.21
$0.38 5,494,550 4.15 years $ 0.37 4,994,550 $ 0.38
$1.78 - $3.75 352,367 4.57 years $ 2.02 352,367 $ 2.02
----------- ----------
9,204,060 8,369,060
=========== ==========
F-43
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
8. 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 financial statements.
Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.
9. INCOME TAX PROVISION
Income tax expense for the years ended March 31, 2007 and 2006 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 percent to
the loss from continuing operations before provision for income taxes as a
result of the following:
2007 2006
---------- ----------
Computed "expected" tax benefit $(2,048,000) $ (993,000)
Reduction in income taxes resulting from:
Derivative expense 718,000 122,000
Debt extinguishment 414,000 --
Change in deferred tax assets valuation
allowance 1,078,000 1,024,000
State and local income taxes,
net of federal benefit (162,000) (153,000)
Other -- --
----------- -----------
$ -- $ --
=========== ===========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at March 31, 2007 are presented below:
Deferred tax assets:
Net operating loss carryforwards $ 5,210,000
Capitalized research and development 2,670,000
Other 136,000
-----------
Total gross deferred tax assets 8,016,000
Less valuation allowance (8,016,000)
-----------
Net deferred tax assets $ --
===========
The valuation allowance increased by $1,078,000 and $1,024,000 during the years
ended March 31, 2007 and 2006, respectively. The current provision for income
taxes for the years ended March 31, 2007 and 2006 is not significant and due
primarily to certain state taxes. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the history of
operating losses, management believes it is more likely than not the Company
will not realize the benefits of these deductible differences. A full reduction
allowance has been recorded to offset 100% of the deferred tax asset.
As of March 31, 2007, the Company had tax net operating loss carryforwards of
approximately $13,600,000 and $8,307,000 available to offset future taxable
Federal and state income, respectively. The carryforward amounts expire in
various years through 2026. In the event the Company were to experience a
greater than 50% change in ownership as defined in Section 382 of the Internal
Revenue Code, the utilization of the Company's tax net operating loss
carryforwards could be severely restricted.
F-44
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2007
--------------------------------------------------------------------------------
10. 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.
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 under an
operating lease agreement which expires in July 2006. The Company signed an 12
month extension of its existing lease on substantially the same terms as its
present lease. Minimum monthly payments under the new extension approximate
$7,700.
Rent expense approximated $105,000 and $126,000 for the years ended March 31,
2007 and 2006, respectively.
F-45