AETHLON MEDICAL, INC. AND SUBSIDIARY
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
December 31, 2012
NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
Aethlon Medical, Inc. ("Aethlon", the "Company",
"we" or "us") is a medical device company focused on creating innovative devices that address unmet medical
needs in cancer, infectious disease and other life-threatening conditions. At the core of our developments is the Aethlon ADAPT™
(Adaptive Dialysis-Like Affinity Platform Technology) system, a medical device platform that converges single or multiple affinity
drug agents with advanced plasma membrane technology to create therapeutic filtration devices that selectively remove harmful particles
from the entire circulatory system without loss of essential blood components. Approval to embark on human trials is still needed
to reach commercial viability of the Hemopurifier® and approval by the U.S. Food and Drug Administration ("FDA").
Successful outcomes of human trials will be required by the regulatory agencies of certain foreign countries where we intend to
sell this device. We have submitted an Investigational Device Exemption ("IDE") to the FDA. Some of our patents may expire
before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications
and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier(R) treatment technology.
Our common stock is quoted on the Over-the-Counter Bulletin
Board administered by the Financial Industry Regulatory Authority ("OTCBB") under the symbol "AEMD.OB."
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United
States
(“GAAP”) for interim financial information and with the instructions to Form 10-Q and applicable
sections of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments necessary to make the financial statements not misleading
have been included. The condensed consolidated balance sheet as of March 31, 2012 was derived from our audited financial statements.
Operating results for the nine months ended December 31, 2012 are not necessarily indicative of the results that may be expected
for the year ending March 31, 2013. For further information, refer to our Annual Report on Form 10-K for the year ended March 31,
2012, which includes audited financial statements and footnotes as of March 31, 2012 and for the years ended March 31, 2012 and
2011.
NOTE 2. LIQUIDITY
The accompanying unaudited condensed consolidated financial
statements have been prepared on a going concern basis, which contemplates, among other things, the realization of assets and the
satisfaction of liabilities in the ordinary course of business. We have experienced continuing losses from operations, are in default
on certain debt, have negative working capital of approximately $7,456,000, recurring losses from operations and an accumulated
deficit of approximately $58,708,000 at December 31, 2012, which among other matters, raises significant doubt about our ability
to continue as a going concern. We have not generated significant revenue or any profit from operations since inception. A significant
amount of additional capital will be necessary to advance the development of our products to the point at which they may become
commercially viable. Our current financial resources are insufficient to fund our capital expenditures, working capital and other
cash requirements (consisting of accounts payable, accrued liabilities, amounts due to related parties and amounts due under various
notes payable) for the fiscal year ending March 31, 2013 ("fiscal 2013"). Therefore we will be required to seek additional
funds through debt and/or equity financing arrangements to finance our current and long-term operations.
We are currently addressing our liquidity needs by exploring
investment capital opportunities through the private placement of common stock or issuance of additional debt. We believe that
our access to additional capital, together with existing cash resources and anticipated receipts under the Defense Advanced Research
Projects Agency (DARPA) contract, as discussed in Note 12, will be sufficient to meet our liquidity needs for fiscal 2013. However,
no assurance can be given that we will receive any funds in connection with our capital raising efforts.
The unaudited condensed consolidated financial statements do
not include any adjustments relating to the recoverability of assets that might be necessary should we be unable to continue as
a going concern.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of our significant accounting policies presented
below is designed to assist the reader in understanding our condensed consolidated financial statements. Such financial statements
and related notes are the representations of our management, who are responsible for their integrity and objectivity. These accounting
policies conform to GAAP in all material respects, and have been consistently applied in preparing the accompanying condensed
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying condensed consolidated financial statements
include the accounts of Aethlon Medical, Inc. and its wholly-owned subsidiary, Exosome Sciences, Inc. (collectively hereinafter
referred to as the "Company" or "Aethlon"). There exist no material intercompany transactions or
balances between Aethlon and its subsidiary.
INCOME (LOSS) PER COMMON SHARE
Basic loss per common share is computed by dividing net loss
available to common stockholders by the weighted average number of common shares assumed to be outstanding during the period of
computation. Diluted loss per common share is computed similar to basic loss per share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential common shares had been issued,
and if the additional common shares were dilutive. As we had net losses for all three of the four periods presented, basic and
diluted loss per common share are the same since additional potential common shares have been excluded as their effect would be
antidilutive.
In the three month period ended December 31, 2012, we recorded
net income primarily due to a significant gain from the change in the fair value of our derivative liabilities. Since that gain
from the change in the fair value of our derivative liabilities is not expected to be ongoing, we have presented the basic and
diluted income per common share for that period in the condensed consolidated statement of operations as noted above since the
basic and diluted income per share are the same as shown below:
The basic and diluted income per share for the three month period
ended December 31, 2012 is as follows:
Net income
|
|
$
|
313,944
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.00
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.00
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
158,759,162
|
|
|
|
|
|
|
Diluted average number of common shares outstanding
|
|
|
294,265,098
|
|
The potentially dilutive common shares outstanding at December
31, 2012 and 2011, which include common shares underlying outstanding stock options, warrants and convertible debentures, were
135,505,936 and 114,215,775, respectively.
REVENUE RECOGNITION
With respect to revenue recognition, we entered into a government
contract with DARPA and revenue reported for all periods presented relates to such contract. We adopted the Milestone method of
revenue recognition for the DARPA contract under ASC 605-28 “Revenue Recognition – Milestone Method” and we believe
we meet the requirements under ASC 605-28 for reporting contract revenue under the Milestone Method.
In order to account for this contract, the Company identifies
the deliverables included within the contract and evaluates which deliverables represent separate units of accounting based on
if certain criteria are met, including whether the delivered element has standalone value to the collaborator. The consideration
received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each
of the separate units.
A milestone is an event having all of the following characteristics:
(1) There is substantive uncertainty at the date the arrangement
is entered into that the event will be achieved. A vendor’s assessment that it expects to achieve a milestone does not necessarily
mean that there is not substantive uncertainty associated with achieving the milestone.
(2) The event can only be achieved based in whole or in part
on either: (a) the vendor’s performance; or (b) a specific outcome resulting from the vendor’s performance.
(3) If achieved, the event would result in additional payments
being due to the vendor.
A milestone does not include events for which the occurrence
is either: (a) contingent solely upon the passage of time; or (b) the result of a counterparty’s performance.
The policy for recognizing deliverable consideration contingent
upon achievement of a milestone must be applied consistently to similar deliverables.
The assessment of whether a milestone is substantive is performed
at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following
for the milestone to be considered substantive:
(1) The consideration is commensurate with either: (a) the vendor’s
performance to achieve the milestone; or (b) the enhancement of the value of the delivered item or items as a result of a specific
outcome resulting from the vendor’s performance to achieve the milestone;
(2) The consideration relates solely to past performance; and
(3) The consideration is reasonable relative to all of the deliverables
and payment terms (including other potential milestone consideration) within the arrangement.
A milestone is not considered substantive if any portion of
the associated milestone consideration relates to the remaining deliverables in the unit of accounting (i.e., it does not relate
solely to past performance). To recognize the milestone consideration in its entirety as revenue in the period in which the milestone
is achieved, the milestone must be substantive in its entirety. Milestone consideration cannot be bifurcated into substantive and
nonsubstantive components. In addition, if a portion of the consideration earned from achieving a milestone may be refunded or
adjusted based on future performance, the related milestone is not considered substantive.
PATENTS
We capitalize the cost of patents, some of which were acquired,
and amortize such costs over the estimated useful life, upon issuance or acquisition of the patent, not to exceed the remaining
legal life.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses during the three
and nine month periods ended December 31, 2012 and 2011, which are included in various operating expense line items in the accompanying
condensed consolidated statements of operations. Our research and development expenses in those periods were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
$
|
371,212
|
|
|
$
|
536,079
|
|
Nine months ended
|
|
$
|
1,034,294
|
|
|
$
|
864,443
|
|
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of certain convertible notes and related warrants
at December 31, 2012 and March 31, 2012 are $1,810,138 and $3,588,615, respectively, based upon a third party valuation report
that we commissioned. Warrants classified as derivative liabilities are reported at their estimated fair value, with changes in
fair value being reported in current period results of operations.
EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY PARTIES OTHER THAN
EMPLOYEES
We account for transactions involving goods and services provided
by third parties where we issue equity instruments as part of the total consideration using the fair value of the consideration
received (i.e., the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably
measurable.
In transactions, when the value of the goods and/or services
is not readily determinable and (1) the fair value of the equity instruments is more reliably measurable and (2) the counterparty
receives equity instruments in full or partial settlement of the transactions, we use the following methodology:
(a) For transactions where goods have already
been delivered or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued
on the date of issuance).
(b) For transactions where the instruments
are issued on a fully vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.
(c) For any transactions not meeting the criteria
in (a) or (b) above, we re-measure the consideration at each reporting date based on its then current stock value.
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
We review our long-lived assets 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. We believe
that no impairment occurred at or during the three and nine months ended December 31, 2012 and 2011.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for
a rate of conversion that is below the market value of our common stock. Such feature is normally characterized as a "Beneficial
Conversion Feature" ("BCF"). We record the estimated fair value of the BCF, when applicable, in the condensed consolidated
financial statements as a discount from the face amount of the notes. Such discounts are accreted to interest expense over the
term of the notes using the effective interest method.
DERIVATIVE LIABILITIES AND CLASSIFICATION
We evaluate free-standing derivative instruments (or embedded
derivatives) to properly classify such instruments within equity or as liabilities in our financial statements. Our policy is to
settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative instrument is reassessed
at each balance sheet date. If the classification changes as a result of events during a reporting period, the instrument is reclassified
as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may be reclassified.
On April 1, 2009, we adopted new guidance, as codified in Financial
Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 815-40,
Derivatives and
Hedging
,
Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock
(previously EITF 07-5), that requires us to apply a two-step model in determining whether a financial instrument or an embedded
feature is indexed to our own stock and thus enables it to qualify for equity classification. We have identified several convertible
debt or warrant agreements in which the embedded conversion feature or exercise price contains certain provisions that may result
in an adjustment of the conversion or exercise price, which results in the failure of the these instruments to be considered to
be indexed to our stock. Accordingly, under this guidance, we are required to record the estimated fair value of these instruments
as derivative liabilities (see Note 9).
We re-measure the estimated fair value of derivative liabilities
at each reporting period and record changes in fair value in other expense (income) in the current statement of operations.
REGISTRATION PAYMENT ARRANGEMENTS
We account for contingent obligations to make future payments
or otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction
agreements, and any such contingent obligations are recognized only when it is determined that it is probable that the Company
will become obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated
(see Note 7).
STOCK-BASED COMPENSATION
Employee stock options and rights to purchase shares under stock
participation plans are accounted for under the fair value method. Accordingly, share-based compensation is measured when all granting
activities have been completed, generally the grant date, based on the fair value of the award. The exercise price of options is
generally equal to the market price of the Company's common stock (defined as the closing price as quoted on the OTCBB) on the
date of grant. Compensation cost recognized by the Company includes (a) compensation cost for all equity incentive awards granted
prior to, but not yet vested as of April 1, 2006, based on the grant-date fair value estimated in accordance with the original
provisions of the then current accounting standards, and (b) compensation cost for all equity incentive awards granted subsequent
to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent accounting standards.
We use a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 10).
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the difference between the consolidated financial statements and their respective tax basis. Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is
more likely than not that some portion of the deferred tax assets may not be realized.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
There were no recent accounting pronouncements issued by
the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, or the Securities
and Exchange Commission during the nine months ended December 31, 2012 or that were issued in prior periods but do not become effective
until future periods that in the opinion of management had, or are expected to have a material impact on our present
or future consolidated financial statements.
NOTE 4. NOTES PAYABLE
Notes payable consist of the following:
|
|
December 31, 2012
|
|
|
March 31, 2012
|
|
|
|
Principal Balance
|
|
|
Accrued Interest
|
|
|
Principal Balance
|
|
|
Accrued Interest
|
|
12% Notes payable, past due
|
|
$
|
185,000
|
|
|
$
|
319,125
|
|
|
$
|
185,000
|
|
|
$
|
298,312
|
|
10% Note payable, past due
|
|
|
5,000
|
|
|
|
5,750
|
|
|
|
5,000
|
|
|
|
5,375
|
|
IP Law Firm Note, past due
|
|
|
–
|
|
|
|
–
|
|
|
|
29,610
|
|
|
|
986
|
|
Law Firm Note
|
|
|
–
|
|
|
|
–
|
|
|
|
75,000
|
|
|
|
104
|
|
Tonaquint Note
|
|
|
180,025
|
|
|
|
2,083
|
|
|
|
360,186
|
|
|
|
1,835
|
|
Total
|
|
$
|
370,025
|
|
|
$
|
326,958
|
|
|
$
|
654,796
|
|
|
$
|
306,612
|
|
During the nine month period ended December 31, 2012, we recorded
interest expense of $47,447 related to the contractual interest terms of our notes payable.
12% NOTES
From August 1999 through May 2005, we entered into various borrowing
arrangements for the issuance of notes payable from private placement offerings (the "12% Notes"). On April 21, 2010,
a holder of $100,000 of the 12% Notes converted his principal balance and $71,758 of accrued interest into 687,033 shares of common
stock at an agreed conversion price of $0.25 per share. We incurred a loss upon this conversion of $68,703 since the closing price
of our common stock was $0.35 at the date of conversion. At December 31, 2012, 12% Notes with a principal balance of $185,000 are
outstanding, all of which are past due, in default, and bearing interest at the default rate of 15%. At December 31, 2012, interest
payable on the 12% Notes totaled $319,125 and we are recording interest at the default rate of 15%.
10% NOTES
At December 31, 2012, one 10% Note in the amount of $5,000,
which is past due and in default, remained outstanding. At December 31, 2012, interest payable on this note totaled $5,750 and
we are recording interest at the default rate of 15%.
Management's plans to satisfy the remaining outstanding balance
on these 12% and 10% Notes include converting the notes to common stock at market value or repayment with available funds.
IP LAW FIRM NOTE
On August 2, 2011, we entered into a Promissory Note with our
intellectual property law firm for the amount of $49,610, which represented the amount we owed to that firm. The Promissory Note
called for monthly payments of $5,000 from August 2011 through December 2011 and bore interest at 10% per annum. We
paid off this note and related accrued interest with cash in Ap
ril 2012.
LAW FIRM NOTE
On March 22, 2012, we
entered into a Promissory Note with our corporate law firm for the amount of $75,000, which represented the majority of the amount
we owed to that firm. The Promissory Note has a maturity date of December 31, 2012 and bears interest at five percent per annum. The
note is convertible at the option of the holder into shares of our common stock at a 10% discount to the market price of the common
stock on the date prior to conversion with a floor price on such conversions of $0.08 per share. This ability of the
holder to convert became exercisable upon the amendment of the Articles of Incorporation increasing the authorized shares of our
common stock to a number greater than 250,000,000. As that increase in the authorized number of shares of our common
stock was approved by our stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible
note as of June 30, 2012 (see Note 5).
TONAQUINT NOTE
On June 28, 2011, we entered
into a Termination Agreement with Tonaquint, Inc. (see Note 5) under which both parties agreed that in consideration of the termination
of a warrant, the waiving of all fees, penalties, the creation of the selling program and other factors, we agreed to issue an
unsecured non-convertible promissory note (the "New Note") in the principal amount of $360,186, which provides for annual
interest at a rate of 6%, payable monthly in either cash or our stock, at our option. The New Note originally had a maturity date
of April 30, 2012. We subsequently extended the note initially to July 31, 2012 and then to July 31, 2013 and subsequently
to August 31, 2013 (see Note 14) and converted $182,662 of the principal and $7,910 of the accrued interest related to the note
into common stock (see Note 6). We also recorded into principal $2,500 of the lender’s legal fees related to documentation
of the extension agreement. We recorded a loss on conversion of $50,262 on those partial conversions. At December 31, 2012, the
balance of this note was $180,025 and accrued interest totaled $2,083.
NOTE 5. CONVERTIBLE NOTES
PAYABLE
Convertible Notes Payable
consisted of the following
at December 31, 2012:
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Net
Amount
|
|
|
Accrued
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated Series A 12% Convertible Notes, past due
|
|
$
|
885,000
|
|
|
$
|
–
|
|
|
$
|
885,000
|
|
|
$
|
354,000
|
|
2008 10% Convertible Notes, past due
|
|
|
25,000
|
|
|
|
–
|
|
|
|
25,000
|
|
|
|
14,479
|
|
December 2006 10% Convertible Notes, past due
|
|
|
17,000
|
|
|
|
–
|
|
|
|
17,000
|
|
|
|
15,250
|
|
October & November 2009 10% Convertible Notes
|
|
|
50,000
|
|
|
|
(1,540
|
)
|
|
|
48,460
|
|
|
|
18,750
|
|
April 2010 10% Convertible Note
|
|
|
75,000
|
|
|
|
(5,501
|
)
|
|
|
69,499
|
|
|
|
22,063
|
|
September 2010 10% Convertible Notes, past due
|
|
|
308,100
|
|
|
|
–
|
|
|
|
308,100
|
|
|
|
40,839
|
|
April 2011 10% Convertible Notes, past due
|
|
|
400,400
|
|
|
|
–
|
|
|
|
400,400
|
|
|
|
85,085
|
|
July and August 2011 10% Convertible Notes, $257,656 past due
|
|
|
357,655
|
|
|
|
–
|
|
|
|
357,655
|
|
|
|
55,557
|
|
September 2011 Convertible Notes, past due
|
|
|
208,760
|
|
|
|
–
|
|
|
|
208,760
|
|
|
|
–
|
|
Law Firm Note
|
|
|
75,000
|
|
|
|
–
|
|
|
|
75,000
|
|
|
|
2,917
|
|
Total – Convertible Notes
|
|
$
|
2,401,915
|
|
|
$
|
(7,041
|
)
|
|
$
|
2,394,874
|
|
|
$
|
608,940
|
|
All but two of the Convertible Notes Payable in the above table
are presently past due or will be due within one year of the December 31, 2012 balance sheet date. As a result, we expect to amortize
all but $2,820 of the remaining discounts during the fiscal year ending March 31, 2013.
During the nine months ended December 31, 2012, we recorded
interest expense of $370,581 related to the contractual interest rates of our convertible notes and interest expense of $464,401
related to the amortization of debt discounts on the convertible notes for a total of $835,252.
Convertible Notes Payable consisted of the following at March
31, 2012:
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Net
Amount
|
|
|
Accrued
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated Series A 12% Convertible Notes, past due
|
|
$
|
900,000
|
|
|
$
|
–
|
|
|
$
|
900,000
|
|
|
$
|
168,750
|
|
2008 10% Convertible Notes, past due
|
|
|
25,000
|
|
|
|
–
|
|
|
|
25,000
|
|
|
|
11,667
|
|
December 2006 10% Convertible Notes, past due
|
|
|
17,000
|
|
|
|
–
|
|
|
|
17,000
|
|
|
|
13,246
|
|
October & November 2009 10% Convertible Notes, $25,000 past due
|
|
|
75,000
|
|
|
|
(4,833
|
)
|
|
|
70,167
|
|
|
|
22,500
|
|
April 2010 10% Convertible Note
|
|
|
75,000
|
|
|
|
(10,107
|
)
|
|
|
64,893
|
|
|
|
16,438
|
|
September 2010 10% Convertible Notes
|
|
|
338,100
|
|
|
|
–
|
|
|
|
338,100
|
|
|
|
70,804
|
|
April 2011 10% Convertible Notes
|
|
|
400,400
|
|
|
|
–
|
|
|
|
400,400
|
|
|
|
40,040
|
|
July and August 2011 10% Convertible Notes
|
|
|
357,655
|
|
|
|
(109,911
|
)
|
|
|
247,744
|
|
|
|
24,262
|
|
September 2011 Convertible Notes
|
|
|
238,760
|
|
|
|
(106,932
|
)
|
|
|
131,828
|
|
|
|
–
|
|
November 2011 Convertible Notes
|
|
|
525,000
|
|
|
|
(51,220
|
)
|
|
|
473,780
|
|
|
|
39,177
|
|
February 2012 Convertible Notes
|
|
|
525,000
|
|
|
|
(188,439
|
)
|
|
|
336,561
|
|
|
|
12,120
|
|
Total – Convertible Notes
|
|
$
|
3,476,915
|
|
|
$
|
(471,442
|
)
|
|
$
|
3,005,473
|
|
|
$
|
419,004
|
|
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated 12% Series
A Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of certain promissory notes previously
issued by the Company (“Amended Series A 10% Convertible Notes” or the "Prior Notes"), and all amendments
to the Prior Notes.
The Amended and Restated Notes, in the principal amount of $900,000
matured on December 31, 2010. In connection with the restructuring we paid $54,001 of accrued and default interest through the
date of the restructuring, liquidated damages of $205,000 and $54,003 of prepaid interest through the expiration date in the aggregate
amount of $313,004 through the issuance of units ("Units") at a fixed rate of $0.20 per Unit, each Unit consisting of
one share of our common stock and one common stock purchase warrant to purchase one share of our common stock at a fixed exercise
price of $0.20 per share as prescribed in the Amended and Restated Note Agreement. The noteholders have antidilution price
protection on the Amended and Restated Notes.
In addition to the extension of the expiration date of the Amended
and Restated Notes to December 31, 2010, we agreed to increase the annual interest rate from ten percent to twelve percent.
We also agreed to change the exercise prices on all of the warrants held by the noteholders to $0.20 per share, to change certain
formerly contingent warrants to non-contingent warrants and to extend the expiration date of their warrants to February 2016.
As of December 31, 2010, the Amended and Restated Notes matured
and as of December 31, 2012 remain in default. We are accruing interest at the revised default rate of 20% following the expiration
date of December 31, 2010.
In June 2012, the holder of $15,000 of the Amended and Restated
Notes converted his principal and related accrued interest into common stock per the conversion formula.
We have begun discussions with the noteholders regarding an
extension to the notes but there can be no assurance that we will be able to do so on terms that we deem acceptable or at all. At
December 31, 2012, the balance of the Amended and Restated Notes was $885,000 and interest payable on the Amended and Restated
Notes totaled $354,000.
2008 10% CONVERTIBLE NOTES
One 2008 10% Convertible Note in the amount of $25,000 which
matured in January 2010 remained outstanding at September 30, 2012. This note is convertible into our common stock at $0.50 per
share. At December 31, 2012, the $25,000 principal balance was in default and interest payable on the remaining note totaled $14,479
and we are recording interest at the default rate of 15%.
DECEMBER 2006 10% CONVERTIBLE NOTES
At December 31, 2012, $17,000 of the December 2006 10% Notes
remained outstanding and in default. These notes are convertible into our common stock at $0.17 per share. At December 31, 2012,
the $17,000 balance of the notes was in default and interest payable on those notes totaled $15,250 and we are recording interest
at the default rate of 15%.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale
to accredited investors of 10% convertible notes ("October & November 2009 10% Convertible Notes"). The October &
November 2009 10% Convertible Notes matured at various dates between April 2011 and May 2011 and are convertible into our common
stock at a fixed conversion price of $0.25 per share prior to maturity. The investors also received matching three year warrants
to purchase unregistered shares of our common stock at a price of $0.25 per share. We measured the fair value of the
warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing this discount using the effective interest method over the term of the notes.
OCTOBER & NOVEMBER 2009 10% CONVERTIBLE NOTES
In October and November 2009, we raised $430,000 from the sale
to accredited investors of 10% convertible notes ("October & November 2009 10% Convertible Notes"). The October &
November 2009 10% Convertible Notes matured at various dates between April 2011 and May 2011 and are convertible into our common
stock at a fixed conversion price of $0.25 per share prior to maturity. The investors also received matching three year warrants
to purchase unregistered shares of our common stock at a price of $0.25 per share. We measured the fair value of the
warrants and the beneficial conversion feature of the notes and recorded a 100% discount against the principal of the notes. We
are amortizing this discount using the effective interest method over the term of the notes.
Deferred financing costs of $20,250 incurred in connection with
this financing were issued in the form of a convertible note with warrants on the same terms as those received by the investors. We
capitalized the $20,250 of deferred financing costs and amortized them over the term of the notes using the effective interest
method.
Prior to March 31, 2012, $355,000 of the October and November
2009 financing had been converted to common stock. On March 31, 2012, we agreed to extend the expiration date and to change the
exercise price of certain warrants of one of the note holders by two years in exchange for the extension of $50,000 of the October
& November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note (see below) by that same two year period. We
recorded a charge of $77,265 relating to this modification.
In July 2012, we issued 461,409 shares of common stock to the
holder of the $25,000 note in exchange for the value of the principal and related accrued interest of $8,000 under the same terms
that we used to sell units consisting of one share of common stock and one-half of a stock purchase warrant on June 29, 2012 (see
Note 6). As part of that structure, the noteholder also received seven year warrants to purchase 230,705 share of common stock
at a price of $0.107 per share. We recorded a loss on conversion of $45,796 on the conversions.
At December 31, 2012, there was one note remaining for $50,000
and interest payable on that note was $18,750.
APRIL 2010 10% CONVERTIBLE NOTE
In April 2010, we raised $75,000 from the sale to an accredited
investor of a 10% convertible note. The convertible note matures in October 2011 and is convertible into our common stock at a
fixed conversion price of $0.25 per share prior to maturity. The investor also received three year warrants to purchase 300,000
unregistered shares of our common stock at a price of $0.25 per share.
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a 100% discount against the principal of the notes. We amortized this discount using
the effective interest method over the term of the note.
On March 31, 2012, we agreed to extend the expiration date and
to change the exercise price of certain warrants of the note holder by two years in exchange for his extension of $50,000 of the
October & November 2009 10% Convertible Notes and the $75,000 April 2010 10% Convertible Note by that same two year period. We
recorded a charge of $77,265 relating to this modification.
At December 31, 2012, the remaining outstanding principal balance
is $75,000 and interest payable on this note totaled $22,063.
JULY 2010 6% CONVERTIBLE NOTES
In July 2010, we entered into a Note and Warrant Purchase Agreement
(the "Purchase Agreement") with Tonaquint, Inc., a Utah corporation (the "Investor"), whereby we issued and
sold, and the Investor purchased: (i) a Convertible Promissory Note of the Company in the principal amount of $890,000 (the "Company
Note") and (ii) a Warrant to purchase common stock of the Company (the "Warrant"). As consideration for the issuance
and sale of the Company Note and Warrant, the Investor paid cash in the amount of $400,000 and issued two Secured Trust Deed Notes
to us (the "Trust Notes") each in the principal amount of $200,000. The variance of $90,000 represents fees and expenses
paid by us and an original issue discount which was recorded as deferred offering costs.
Over the term of the Tonaquint Convertible Note, all of the
principal and accrued interest was converted to common stock per the terms of the Convertible Note. On June 28, 2011, we entered
into a Termination Agreement with Tonaquint under which both parties agreed to terminate the warrant to prevent continuing dilution
of our common stock and to eliminate confusion or disagreement as to the number of shares of common stock available for issuance
under the warrant in the future. Accordingly, under the Termination Agreement we issued 3,599,913 shares of common stock upon the
final exercise of the warrant, whereupon the warrant was terminated and is of no further force or effect. The Termination
Agreement also provides for a "Common Stock Sale Limitation" on all of our common stock held by Tonaquint, Inc. Under
the "Common Stock Sale Limitation", the daily limitation on the number of shares of common stock which Tonaquint, Inc.
may sell into the market on any trading day is limited to the greater of (i) $5,000 of sales amount, or (ii) 10% of the Average
Daily Volume of our common stock sold on the Over The Counter Bulletin Board, where the Average Daily Volume shall mean the average
daily volume for the prior three month period as reported on each trading day on Yahoo Finance with respect to our common stock.
Under the terms of the Termination Agreement, Tonaquint, Inc. has waived and released us from any obligation to pay or perform
any fees, penalties, costs, or assessments that were or are due, or would have become due, under the convertible note, the warrant
and the note purchase agreement. In consideration of the termination of the warrant, the waiving of all fees, penalties, the creation
of the selling program and other factors, we agreed to issue an unsecured non-convertible promissory note (the "New Note")
in the principal amount of $360,185, which provides for annual interest at a rate of 6%, payable monthly in either cash or our
stock, at our option. The New Note originally had a maturity date of April 30, 2012 and was subsequently extended to August 31,
2013. At December 31, 2012, the balance of this note was $180,025 and interest payable totaled $2,083 (see Note 4 and Note 14).
SEPTEMBER 2010 10% CONVERTIBLE NOTES
On September 3, 2010, we entered into a Subscription Agreement
with three accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory
notes and corresponding warrants in the aggregate principal amount of $1,430,000. The initial closing under the Subscription Agreement
resulted in the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $743,600, (ii) five-year
warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of $0.31125 per share, and (iii)
five-year warrants to purchase an aggregate of 3,718,000 shares of our common stock at an exercise price of $0.43575 per share.
The convertible promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on September
3, 2011. The aggregate gross cash proceeds were $650,000, the balance of the principal amount representing a due diligence fee
and an original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of
our common stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the
common stock as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10)
trading days preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may
not be more than $0.30 nor less than $0.20. There are no registration requirements with respect to the shares of common stock underlying
the notes or the warrants.
The following conversions of the September 2010 10% Convertible
Note have taken place during the fiscal year ended March 31, 2012 and the nine months ended December 31, 2012:
|
|
Nine Months Ended December 31, 2012
|
|
|
Fiscal Year Ended
March 31, 2012
|
|
Principal converted
|
|
$
|
30,000
|
|
|
$
|
405,500
|
|
Accrued interest converted
|
|
$
|
64,164
|
|
|
$
|
19,255
|
|
At December 31, 2012, the remaining principal balance of $308,100
was in default and interest payable on these notes totaled $40,839 and we are recording interest at the default rate of 15%.
APRIL 2011 10% CONVERTIBLE NOTES
In April 2011, we entered into a Subscription Agreement with
two accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory notes and
corresponding warrants in the aggregate principal amount of $385,000. The closing under the Subscription Agreement resulted in
the issuance and sale by us of (i) convertible promissory notes in the aggregate principal amount of $385,000, (ii) five-year warrants
to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.125 per share, and (iii) five-year
warrants to purchase an aggregate of 4,004,000 shares of our common stock at an exercise price of $0.175 per share. The convertible
promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and matured on April 1, 2012. The
aggregate gross cash proceeds to us were $350,000, the balance of the principal amount representing a due diligence fee and an
original issuance discount. The convertible promissory notes are convertible at the option of the holders into shares of our common
stock at a price per share equal to eighty percent (80%) of the average of the three lowest closing bid prices of the common stock
as reported by Bloomberg L.P. for the principal market on which the common stock trades or is quoted for the ten (10) trading days
preceding the proposed conversion date. Subject to adjustment as described in the notes, the conversion price may not be more than
$0.20 nor less than $0.10. There are no registration requirements with respect to the shares of common stock underlying the notes
or the warrants.
In addition, we issued (i) five-year warrants to purchase an
aggregate of 812,500 shares of our common stock at an exercise price of $0.125 per share, and (ii) five-year warrants to purchase
an aggregate of 812,500 shares of our common stock at an exercise price of $0.175 per share to the Purchasers. These warrants
were issued as an antidilution adjustment under certain common stock purchase warrants held by the Purchasers that were acquired
from us in September 2010.
At December 31, 2012, the outstanding principal balance was
$400,400 and was in default and interest payable on these notes totaled $85,085 and we are recording interest at the default rate
of 15%.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised
$357,656 in 10% convertible notes. Those notes had a fixed conversion price of $0.09 per share and carried an interest
rate of 10%. The convertible notes matured in July and August 2012. We also issued those investors five year
warrants to purchase 3,973,957 shares of common stock at $0.125 per share.
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a $257,926 discount against the principal of the notes. We amortized this discount
using the effective interest method over the term of the note.
Effective July 14, 2011 holders of three notes totaling $100,000
agreed to extend the expiration date of their notes to July 13, 2013.
At December 31, 2012, the outstanding principal balance was
$357,655, of which $257,655 was in default and interest payable on these notes totaled $55,557. Following the expiration of the
maturity dates on the $257,655 of notes that are now in default, we began to accrue interest at the default interest rate of 15%.
SEPTEMBER 2011 CONVERTIBLE NOTES
On September 23, 2011, we entered into a Subscription Agreement
with two accredited investors (the “Purchasers”) providing for the issuance and sale of convertible promissory
notes and corresponding warrants in the aggregate principal amount of $253,760. The warrants carried a five-year
term to purchase an aggregate of 3,625,143 shares of our common stock at an exercise price of $0.10 per share. The convertible
promissory notes do not bear an interest rate and mature on September 23, 2012. The aggregate net cash proceeds to us
were $175,000, the balance of the principal amount representing a due diligence fee and an original issuance discount. The convertible
promissory notes are convertible at the option of the holders into shares of our common stock at a price per share equal to $0.07. Subject
to adjustments as described in the notes, the conversion price may not be more than $0.07. There are no registration
requirements with respect to the shares of common stock underlying the notes or the warrants.
We measured the fair value of the warrants and the beneficial
conversion feature of the notes and recorded a $168,804 discount against the principal of the notes. We amortized this discount
using the effective interest method over the term of the note.
In March 2012, following the six month anniversary of the note
funding, one of the note holders converted $15,000 of principal into common stock and in the nine months ended December 31, 2012,
that note holder converted an additional $30,000 of principal into common stock.
At December 31, 2012, the outstanding principal balance was
$208,760 and was in default and there was no accrued interest as these notes do not bear interest.
NOVEMBER 2011 CONVERTIBLE NOTES
In November 2011, we raised $525,000 in 5% Original Issue Discount
Unsecured Convertible Debentures from five accredited investors pursuant to which the investors purchased an aggregate principal
amount of $525,000 for an aggregate purchase price of $500,000. The debentures bear interest at 20% per annum and matured on April
20, 2012. The debentures will be convertible at the option of the holders at any time into shares of our common stock, at a conversion
price equal to $0.0779, subject to adjustment. In connection with the debentures, the purchasers received warrants to purchase
3,369,706 shares of our common stock. The warrants are exercisable for a period of five years from the date of issuance at an exercise
price of $0.11, subject to adjustment.
Until December 31, 2012, upon any proposed issuance by us of
our common stock or equivalents (or a combination thereof as defined in the subscription agreement) for cash consideration, the
purchasers may elect, in their sole discretion, to exchange all or some of the debentures then held by such purchaser for any securities
issued in a subsequent financing on a $1.00 for $1.00 basis, provided, however , this right shall not apply with respect to (i)
an Exempt Issuance (as defined in the debenture) or (ii) an underwritten public offering of our common stock.
A Financial Industry Regulatory Authority (FINRA) registered
broker-dealer was engaged as placement agent in connection with the transaction. We paid the placement agent a cash
fee in the amount of $50,000 (representing a 8% sales commission and a 2% unaccountable expense allowance) and issued the placement
agent or its designees warrants to purchase an aggregate of 808,729 shares of common stock at $0.11 per share. The warrants
issued to the placement agent may be exercised on a cashless basis. In the event the placement agent exercises the warrants on
a cashless basis, we will not receive any proceeds.
During the nine months ended December 31, 2012, all of the outstanding
principal balances on these notes and all related accrued interest of $53,803 were converted into common stock.
FEBRUARY 2012 CONVERTIBLE NOTES
In February 2012, we entered into a subscription agreement with
five accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased an aggregate principal amount
of $525,000 of 5% Original Issue Discount Unsecured Convertible Debentures for an aggregate purchase price of $500,000 (the “Debenture”).
These subscriptions represent the completion of the $1,000,000 securities offering that was initiated and priced in November 2011
(see above).
The Debentures bear interest at 20% per annum and matured on
April 20, 2012. The Debentures will be convertible at the option of the holders at any time into shares of our common stock, at
a conversion price equal to $0.0779, subject to adjustment. In connection with the subscription agreement, the Purchasers received
warrants to purchase 3,369,707 shares of our common stock (the “Warrants”). The Warrants are exercisable for a period
of five years from the date of issuance at an exercise price of $0.11 per share, subject to adjustment. Each Purchaser may exercise
such Purchaser’s Warrant on a cashless basis if the shares of common stock underlying the Warrant are not then registered
pursuant to an effective registration statement. In the event the Purchasers exercise the Warrants on a cashless basis, we will
not receive any proceeds. The conversion price of the Debenture and the exercise price of the Warrants are subject to customary
adjustment provisions for stock splits, stock dividends, recapitalizations and the like.
Until December 31, 2012, upon any proposed issuance by us of
our Common Stock or Common Stock Equivalents (or a combination thereof as defined in the subscription agreement) for cash consideration
(the “Subsequent Financing”), a Purchaser may elect, in its sole discretion, to exchange all or some of the Debenture
then held by such Purchaser for any securities issued in a Subsequent Financing on a $1.00 for $1.00 basis, provided, however,
this right shall not apply with respect to (i) an Exempt Issuance (as defined in the Debenture) or (ii) an underwritten public
offering of our common stock.
Each Purchaser has contractually agreed to restrict its ability
to exercise the Warrant and convert the Debenture such that the number of shares of our common stock held by the Purchaser and
its affiliates after such conversion or exercise does not exceed 4.99% of our then issued and outstanding shares of common stock.
The full principal amount of the Debenture is due upon a default
under the terms of the Debenture. The Debenture is a general unsecured debt obligation of ours arising other than in the ordinary
course of business which constitutes a direct financial obligation of the Company.
A FINRA registered broker-dealer was engaged as placement agent
in connection with the transaction. We paid the placement agent a cash fee in the amount of $50,000 (representing an
8% sales commission and a 2% unaccountable expense allowance) and issued the placement agent or its designees warrants to purchase
an aggregate of 815,774 shares of common stock at $0.11 per share. The warrants issued to the placement agent may be exercised
on a cashless basis. In the event the placement agent exercises the warrants on a cashless basis, we will not receive any proceeds.
During the nine months ended December 31, 2012, all of the outstanding
principal balances on these notes and all related accrued interest of $55,432 were converted into common stock.
LAW FIRM NOTE
On March 22, 2012, we entered into a Promissory Note with our
corporate law firm for the amount of $75,000, which represented the majority of the amount we owed to that firm. The Promissory
Note has a maturity date of December 31, 2012 and bears interest at five percent per annum. The note is convertible
at the option of the holder into shares of our common stock at a 10% discount to the market price of the common stock on the date
prior to conversion with a floor price on such conversions of $0.08 per share. This ability of the holder to convert
became exercisable upon the amendment of the Articles of Incorporation increasing the authorized shares of our common stock to
a number greater than 250,000,000. As that increase in the authorized number of shares of our common stock was approved
by our stockholders at a Special Stockholders Meeting on June 4, 2012, this note was reclassified to a convertible note as of June
30, 2012 (see Note 4). The parties have agreed to extend the Maturity Date of the Note to February 28, 2013 (see Note 14).
At December 31, 2012, the outstanding principal balance on this
note was $75,000 and the interest payable on this note totaled $2,917.
NOTE 6. EQUITY TRANSACTIONS
On April 5, 2012, we completed a unit subscription agreement
with one accredited investor (the “Purchaser”) pursuant to which the Purchaser purchased $200,000 of units
(the "Units" and each a "Unit"), with each Unit consisting of (i) one share of Common Stock, par value $0.001
per share (the “Common Stock”) at a price per share of $0.08 and (ii) a warrant to purchase such number of shares of
Common Stock as shall equal (a) fifty percent of the Subscription Amount
divided by
(b) $0.08 (the "Warrant Shares")
at an exercise price of $0.125 per Warrant Share, (each, a “Warrant” and collectively, the “Warrants”).
Based on the foregoing, Units consisting of 2,500,000 shares of Common Stock and Warrants to purchase 1,250,000 shares of Common
Stock were issued on April 5, 2012.
The Warrants are exercisable for a period of seven years from
the date of issuance at an exercise price of $0.125, subject to adjustments for stock splits, stock dividends, recapitalizations
and the like. The Purchaser may exercise the Warrant on a cashless basis if the shares of common stock underlying the Warrant are
not then registered pursuant to an effective registration statement. In the event the Purchaser exercises the Warrant on a cashless
basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or the Warrant
Shares.
On June 19, 2012, we completed a
unit subscription agreement with seven accredited investors
(the “Purchasers”)
pursuant
to which the Purchasers purchased $592,000 of units (the "Units" and each a "Unit"), with each Unit consisting
of (i) one share of Common Stock at a price per share of $0.072 and (ii) a warrant to purchase such number of shares of Common
Stock as shall equal (a) fifty percent of the Subscription Amount
divided by
(b) $0.072 (the "Warrant Shares")
at an exercise price of $0.108 per Warrant Share.
On June 26, 2012, we completed a unit subscription agreement
with one accredited investor pursuant to which the Purchaser purchased $10,000 of units (the "Units" and each a "Unit"),
with each Unit consisting of (i) one share of Common Stock at a price per share of $0.072 and (ii) a warrant to purchase such number
of shares of Common Stock as shall equal (a) fifty percent of the Subscription Amount
divided by
(b) $0.072 (the "Warrant
Shares") at an exercise price of $0.107 per Warrant Share.
On August 29, 2012, we completed a unit
subscription agreement with seven accredited investors (the “Purchasers”) pursuant to which the Purchasers purchased
an aggregate of $271,000 (the "Subscription Amount") of restricted Common Stock at a price of $0.08 per share. The Common
Stock purchase price under the Subscription Agreement was determined to be 80% of the average closing price of the our Common Stock
for the five-day period immediately preceding the date of the Subscription Agreement, resulting in the issuance of 3,387,500 shares
of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant
for each two shares of Common Stock purchased under the Subscription Agreement. The Warrant exercise price was calculated to be
$0.12 per share based upon 120% of the average of the closing prices of our Common Stock for the five-day period immediately preceding
the parties entering into the Subscription Agreement.
The Warrants are exercisable for a period of seven years from
the date of issuance at an exercise price of $0.12, subject to adjustments for stock splits, stock dividends, recapitalizations
and the like. The Purchasers may exercise the Warrants on a cashless basis if the shares of Common Stock underlying the Warrants
are not then registered pursuant to an effective registration statement. In the event that a Purchaser exercises the Warrant on
a cashless basis, we will not receive any proceeds. There are no registration rights with respect to the Warrants or the Common
Stock underlying the Warrants.
During the nine months ended December 31, 2012, we issued 21,884,428
shares of restricted common stock to holders of notes issued by the Company in exchange for the partial or full conversion of principal
and interest of several notes payable in an aggregate amount of $1,617,052 at an average conversion price of $0.07 per share based
upon the conversion formulae in the respective notes.
During the nine months ended December 31, 2012, we issued 116,000
shares of restricted common stock to settle past due accrued interest that we recorded as non-cash interest expense of $11,846.
During the nine months ended December 31, 2012, we issued 1,553,803
restricted shares of common stock to service providers for investor relations and business development services valued at $139,182
based upon the fair value of the shares issued. The average issuance price on the restricted share issuances was approximately
$0.09 per share.
During the nine months ended December 31, 2012, we issued 466,690
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $0.10
per share in payment for scientific consulting services valued at $46,669 based on the value of the services provided .
In July 2012, we filed a registration statement on Form S-8
for the purpose of registering 5,000,000 common shares issuable under the 2010 Stock Plan under the Securities Act of 1933.
On July 24, 2012, we expanded our Board of Directors by an additional
two seats and appointed two new outside directors to fill those seats.
In July 2012, our Board of Directors approved a new Board Compensation
Program (the “New Program”), which modifies and supersedes the 2005 Directors Compensation Program (the “2005
Program”) that was previously in effect. Under the New Program, in which only non-employee Directors may participate, an
eligible Director will receive a grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued
at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the
first day of the fiscal year; however for the new non-employee directors, the exercise price for this initial grant, $0.076 per
share, is based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date of their
appointment (July 24, 2012). These options will have a term of ten years and will be fully vested upon grant. In addition, each
existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of Common Stock, with such
grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading
days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be
made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading
days preceding the date (July 24, 2012) of the appointment of two new directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible
to participate in the New Program also will receive a grant of $20,000 worth of options valued at the exercise price based on the
average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year. In
addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each committee meeting attended
and $1,000 for each formal Board meeting attended.
The New Program eliminates the following features of the 2005
Program: (1) the annual payment of $10,000 in cash compensation and (2) the granting of options to Directors based on a percentage
of our issued and outstanding common stock.
In October 2012,
we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant to which
the Purchasers purchased an aggregate of $135,000 (the "Subscription Amount") of restricted Common Stock at an average
price of $0.07 per share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of the average
closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription Agreement, resulting
in the issuance of 1,823,412 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant
for each two shares of Common Stock purchased under the Subscription Agreement. The Warrant exercise price was calculated based
upon 120% of the average of the closing prices of our Common Stock for the five-day period immediately preceding the parties entering
into the Subscription Agreement.
In November
2012,
we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant
to which the Purchasers purchased an aggregate of $213,000 (the "Subscription Amount") of restricted Common Stock at
an average price of $0.06 per share. The Common Stock purchase price under the Subscription Agreement was determined to be 80%
of the average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription Agreement,
resulting in the issuance of 3,435,484 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant
for each two shares of Common Stock purchased under the Subscription Agreement. The Warrant exercise price was calculated based
upon 120% of the average of the closing prices of our Common Stock for the five-day period immediately preceding the parties entering
into the Subscription Agreement.
In December
2012,
we completed a unit subscription agreement with four accredited investors (the “Purchasers”) pursuant
to which the Purchasers purchased an aggregate of $150,000 (the "Subscription Amount") of restricted Common Stock at
an average price of $0.06 per share. The Common Stock purchase price under the Subscription Agreement was determined to be 80%
of the average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription Agreement,
resulting in the issuance of 2,619,684 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant
for each two shares of Common Stock purchased under the Subscription Agreement. The Warrant exercise price was calculated based
upon 120% of the average of the closing prices of our Common Stock for the five-day period immediately preceding the parties entering
into the Subscription Agreement.
NOTE 7. ACCRUED LIQUIDATED DAMAGES
We account for contingent obligations to make future payments
or otherwise transfer consideration under a registration payment arrangement separately from any related financing transaction
agreements, and any such contingent obligations are recognized only when it is determined that it is probable that we will become
obligated for future payments and the amount, or range of amounts, of such future payments can be reasonably estimated.
We have entered into registration payment arrangements in connection
with certain financing arrangements, pursuant to which we raised an approximate aggregate amount of $2,020,000, that require us
to register the shares of common stock underlying the convertible debt and warrants issued in these financing transactions. Under
these agreements we are liable for liquidated damages to the investors if we fail to file and/or maintain effective registration
statements covering the specified underlying shares of common stock as noted below:
|
•
|
With respect to a $1,000,000 financing agreement – damages accrue at a rate of 1% - 1.5% per month until such time as the underlying shares of common stock would have been eligible for sale under Rule 144.
|
|
•
|
With respect to financing agreements totaling $715,000 – damages accrue at a rate of 2% per month, subject to an aggregate maximum liquidated damages amount of $150,000.
|
|
•
|
With respect to equity investments totaling $305,000 – damages accrue at a rate of 2% per month until the expiration dates of warrants issued in connection with this financing, which range from December 31,2010 through February 8, 2011 and are payable in common stock.
|
Since we have either failed to file, or failed to maintain the
registration obligations under these agreements, as of December 31, 2012 and March 31, 2012, we have accrued estimated aggregate
liquidated damages of $437,800 in connection with the liquidated damage provisions of these agreements, which we believe represents
our maximum exposure under these provisions. Accordingly, we do not expect to accrue any further liquidated damages
in connection with these agreements. The actual amount of liquidated damages paid, if any, may differ from our estimates
as it is our intention to negotiate with the investors the settlement of liquidated damages due and, as such, the ultimate amounts
we may actually pay may be less than the amount currently accrued.
NOTE 8. OTHER CURRENT LIABILITIES
At December 31, 2012 and March 31, 2012, our other current liabilities
were comprised of the following items:
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2012
|
|
|
2012
|
|
Accrued interest
|
|
$
|
941,794
|
|
|
$
|
725,616
|
|
Accrued legal fees
|
|
|
179,465
|
|
|
|
179,465
|
|
Deferred rent
|
|
|
5,445
|
|
|
|
5,607
|
|
Other
|
|
|
100,650
|
|
|
|
220,533
|
|
Total other current liabilities
|
|
$
|
1,227,354
|
|
|
$
|
1,131,221
|
|
As of the date of this report, various promissory and convertible
notes payable in the aggregate principal amount of $2,291,916 (as identified in Notes 4 and 5 above) have reached maturity and
are past due. We are continually reviewing other financing arrangements to retire all past due notes. At December 31, 2012, we
had accrued interest in the amount of $875,488 associated with these defaulted notes in accrued liabilities payable (see Notes
4 and 5).
NOTE 9. FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES"
(“ASC 820”) in connection with assets and liabilities measured at fair value on a recurring basis subsequent to initial
recognition. The guidance applies to our derivative liabilities. We had no assets or liabilities measured at fair value on a non-recurring
basis for any period reported.
ASC 820 requires that assets and liabilities carried at fair
value will be classified and disclosed in one of the following three categories: We measure the fair value of applicable financial
and non-financial assets based on the following fair value hierarchy:
Level 1: Quoted market prices in active markets for identical
assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs
that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market
data.
The hierarchy noted above requires us to minimize the use of
unobservable inputs and to use observable market data, if available, when determining fair value.
The fair value of our recorded derivative liabilities is determined
based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We record derivative
liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of operations.
Our fair value measurements at the December 31, 2012 reporting
date are classified based on the valuation technique level noted in the table below (there were no transfers in or out of level
3 for all periods presented):
|
|
|
|
|
Quoted Prices
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Markets for
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
December 31,
|
|
|
Identical Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
2012
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
Derivative Liabilities
|
|
$
|
1,810,138
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
1,810,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following outlines
the significant weighted average assumptions used to estimate the fair value information presented, in connection with our warrant
and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
|
Nine Months Ended December 31, 2012
|
Risk free interest rate
|
0.05% - 0.60%
|
Average expected life
|
0.02 – 4.2 years
|
Expected volatility
|
76.0% - 107.1%
|
Expected dividends
|
None
|
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the nine months ended December 31, 2012:
|
|
April 1,
|
|
|
Recorded New Derivative
|
|
|
Change in estimated fair value recognized in results
|
|
|
Reclassification of Derivative Liability to Paid in
|
|
|
December 31,
|
|
|
|
2012
|
|
|
Liabilities
|
|
|
of operations
|
|
|
capital
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
3,588,615
|
|
|
$
|
–
|
|
|
($
|
1,745,718
|
)
|
|
($
|
32,759
|
)
|
|
$
|
1,810,138
|
|
The fair value of derivative liabilities that we recorded in
the nine months ended December 31, 2012 was related to our April 2011 convertible note, July & August 2011 10% convertible
notes and the September 2011 convertible note offerings (see Note 5) and was based upon an independent valuation report.
Th
e table below
sets forth a summary of changes in the fair value of our Level 3 financial instruments for the nine months ended December 31, 2011:
|
|
|
|
|
|
|
|
Change in
|
|
|
Reclassification
|
|
|
|
|
|
|
|
|
|
|
|
|
estimated fair
|
|
|
of Derivative
|
|
|
|
|
|
|
|
|
|
Recorded
|
|
|
value recognized
|
|
|
Liability to
|
|
|
|
|
|
|
April 1,
|
|
|
New Derivative
|
|
|
in results
|
|
|
Paid in
|
|
|
December 31,
|
|
|
|
2011
|
|
|
Liabilities
|
|
|
of operations
|
|
|
capital
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
2,002,896
|
|
|
$
|
1,107,940
|
|
|
($
|
1,596,442
|
)
|
|
($
|
263,689
|
)
|
|
$
|
1,250,705
|
|
The fair value of derivative liabilities that we recorded in
the nine months ended December 31, 2011 was related to our April 2011 convertible note, July & August 2011 10% convertible
notes and the September 2011 convertible note offerings (see Note 5) and was based upon an independent valuation report.
NOTE 10. STOCK COMPENSATION
The following table summarizes share-based compensation expenses
relating to shares and options granted and the effect on basic and diluted loss per common share during the three and nine months
ended December 31, 2012 and 2011:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 30, 2012
|
|
|
December 30, 2011
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
175,045
|
|
|
$
|
161,440
|
|
|
$
|
570,540
|
|
|
$
|
609,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense included in net loss
|
|
$
|
175,045
|
|
|
$
|
161,440
|
|
|
$
|
570,540
|
|
|
$
|
609,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
The following table breaks out the components of our share-based
compensation expenses relating to shares and options granted and the effect on basic and diluted loss per common share during the
three and nine months ended December 31, 2012 and 2011.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Vesting of stock options
|
|
$
|
77,421
|
|
|
$
|
64,773
|
|
|
$
|
258,468
|
|
|
$
|
319,503
|
|
Incremental fair value of option modifications
|
|
|
957
|
|
|
|
–
|
|
|
|
22,071
|
|
|
|
–
|
|
Vesting expense associated with CEO restricted stock grant
|
|
|
96,667
|
|
|
|
96,667
|
|
|
|
290,001
|
|
|
|
290,000
|
|
Direct stock grants
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Total share-based compensation expense
|
|
$
|
175,045
|
|
|
$
|
161,440
|
|
|
$
|
570,540
|
|
|
$
|
609,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense included in net loss
|
|
$
|
175,045
|
|
|
$
|
161,440
|
|
|
$
|
570,540
|
|
|
$
|
609,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
All of the stock-based compensation expense recorded during
the nine months ended December 31, 2012 and 2011, which totaled $570,540 and $609,503, respectively, is included in payroll and
related expense in the accompanying condensed consolidated statements of operations. Stock-based compensation expense recorded
during the three months ended December 31, 2012 and 2011 had no impact on basic and diluted loss per common share. Stock-based
compensation expense recorded during the nine months ended December 31, 2012 had no impact on basic and diluted loss per common
share and the stock-based compensation expense recorded during the nine months ended December 31, 2011 increased basic and diluted
loss per common share by $0.01.
In July 2012, our Board of Directors approved a new Board Compensation
Program (the “New Program”), which modifies and supersedes the 2005 Directors Compensation Program (the “2005
Program”) that was previously in effect. Under the New Program, in which only non-employee Directors may participate, an
eligible Director will receive a grant of $15,000 worth of options to acquire shares of Common Stock, with such grant being valued
at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading days preceding the
first day of the fiscal year; however for the new non-employee directors, the exercise price for this initial grant, $0.076 per
share, is based on the average of the closing bid prices of the Common Stock for the five trading days preceding the date of their
appointment (July 24, 2012). These options will have a term of ten years and will be fully vested upon grant. In addition, each
existing eligible Director will receive the same grant of $15,000 worth of options to acquire shares of Common Stock, with such
grant being valued at the exercise price based on the average of the closing bid prices of the Common Stock for the five trading
days preceding the first day of the fiscal year; provided however that for this current grant only, all of such grants shall be
made at an exercise price of $0.076 per share based on the average of the closing bid prices of the Common Stock for the five trading
days preceding the date (July 24, 2012) of the appointment of two new directors to our Board of Directors.
At the beginning of each fiscal year, each Director eligible
to participate in the New Program also will receive a grant of $20,000 worth of options valued at the exercise price based on the
average of the closing bid prices of the Common Stock for the five trading days preceding the first day of the fiscal year. In
addition, under the New Program eligible Directors will receive cash compensation equal to $500 for each committee meeting attended
and $1,000 for each formal Board meeting attended.
In the nine months ended December 31, 2012, our Board of Directors
granted, to our four outside directors, ten year options to acquire an aggregate of 1,667,105 shares of our common stock, all with
an exercise price of $0.076 per share.
In March 2012, our Chief Executive Officer and our Chief Financial
Officer agreed to suspend the exercise of up to 12,588,243 of their stock options, which allowed us to utilize the shares underlying
those stock options in capital raising activities while we presented our stockholders with a proposal to increase the number of
authorized shares from 250,000,000 to 500,000,000. That proposal was approved by our stockholders at our Special Stockholders’
Meeting on June 4, 2012. Following that approval we extended their stock options by the 70 days, which equaled the number of days
that they had unreserved their shares. We valued the change in fair value of their vested stock options due to this extension,
and based on the change in fair value, recorded an increase to our stock based compensation expense in the quarter ended June 30,
2012 of $19,838. For their unvested options, we recorded an increase to fair value of $5,100, which will be expensed over the remaining
vesting period of those options.
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, with respect to stock option grants utilizing the Binomial Lattice option
pricing models at, and during the nine months ended December 31, 2012:
Risk free interest rate
|
1.44%
|
Average expected life
|
10 years
|
Expected volatility
|
117.5%
|
Expected dividends
|
None
|
We review share-based compensation on a quarterly basis for
changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting
the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments for the six months ended September 30, 2012 was insignificant.
The expected volatility is based on the historic volatility.
The expected life of options granted is based on the "simplified method" as described in the SEC's guidance due to changes
in the vesting terms and contractual life of current option grants compared to our historical grants.
Options outstanding that have vested and are expected to vest
as of December 31, 2012 are as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term in Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
19,079,126
|
|
|
$
|
0.29
|
|
|
|
3.87
|
|
Expected to vest
|
|
|
2,016,672
|
|
|
$
|
0.17
|
|
|
|
7.72
|
|
Total
|
|
|
21,095,798
|
|
|
$
|
0.28
|
|
|
|
4.24
|
|
A summary of stock option activity during the nine months ended
December 31, 2012 is presented below:
|
|
Amount
|
|
|
Range of Exercise
Price
|
|
Weighted Average
Exercise
Price
|
Stock options outstanding at March 31, 2012
|
|
|
19,428,693
|
|
|
$0.21 - $0.41
|
|
$0.31
|
Exercised
|
|
|
–
|
|
|
$ --
|
|
|
Issued
|
|
|
1,667,105
|
|
|
$0.076
|
|
$0.076
|
Cancelled/Expired
|
|
|
–
|
|
|
$ --
|
|
|
Stock options outstanding at December 31, 2012
|
|
|
21,095,798
|
|
|
$0.076 - $0.41
|
|
$0.28
|
Stock options exercisable at December 31, 2012
|
|
|
19,079,126
|
|
|
$0.076 - $0.41
|
|
$0.29
|
At December 31, 2012, there was approximately $399,488 of unrecognized
compensation cost related to share-based payments, including our Chief Executive Officer’s restricted stock grant, which
is expected to be recognized over a weighted average period of 0.57 years.
On December 31, 2012, our stock options had a negative intrinsic
value since the closing price on that date of $0.10 per share was below the weighted average exercise price of our stock options
NOTE 11. WARRANTS
A summary of warrant activity during the nine months ended December
31, 2012 is presented below:
|
|
Amount
|
|
|
Range of Exercise
Price
|
|
Weighted Average
Exercise
Price
|
Warrants outstanding at March 31, 2012
|
|
|
59,807,849
|
|
|
$0.07 - $0.25
|
|
$0.14
|
Exercised
|
|
|
–
|
|
|
$ --
|
|
|
Issued
|
|
|
12,912,227
|
|
|
$0.09 - $0.11
|
|
$0.09
|
Cancelled/Expired
|
|
|
(871,000
|
)
|
|
$ 0.25
|
|
$0.25
|
Warrants outstanding at December 31, 2012
|
|
|
71,849,076
|
|
|
$0.07 - $0.25
|
|
$0.13
|
Warrants exercisable at December 31, 2012
|
|
|
71,849,076
|
|
|
$0.07 - $0.25
|
|
$0.13
|
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models
at, and during the nine months ended December 31, 2012:
Risk free interest rate
|
0.086% - 1.56%
|
Average expected life
|
5 - 7 years
|
Expected volatility
|
91.5 – 94.3%
|
Expected dividends
|
None
|
NOTE 12. DARPA CONTRACT AND RELATED REVENUE RECOGNITION
As discussed in Note 1, we entered into a government contract
with DARPA on September 30, 2011 and commenced work on such contract in October 2011. Originally, only the base year
(year one contract) was effective for the parties, however, effective August 16, 2012, DARPA exercised the option on the second
year of the contract. Years three through five are subject to DARPA exercising their option to enter into contracts
for those years. The year one contract contains eight milestones of which five were achieved during the fiscal year
ended March 31, 2012. In June 2012, we invoiced the US Government for the sixth milestone under our DARPA contract in the amount
of $216,747 and received that payment. In the September 2012 quarter, we invoiced the US government for the seventh and eighth
milestones. In the December 2012 quarter, we invoiced the US government for the first milestone under the second year of the contract.
The details of the four milestones achieved during the nine month period ended December 31, 2012 were as follows:
Milestone 2.2.2.3 – Perform preliminary quantitative real time
PCR to measure viral load, and specific DNA or RNA targets. The milestone payment was $216,747. Management considers this milestone
to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We
demonstrated that we were able to measure viral load of one or more targets as part of our submission for approval. The
report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.2.1.4 – Obtain all necessary IRB documentation and
obtain both institutional and Government approval in accordance with IRB documentation submission guidance prior to conducting
human or animal testing. The milestone payment was $183,367. Management considers this milestone to be substantive as it was not
dependent on the passage of time nor was it based solely on another party's efforts. We obtained all of the required
documentation from both institutional and Government authorities. The report was accepted by the contracting officer's representative
and the invoice was submitted thereafter.
Milestone M2 – Target capture > 50% in 24 hours for
at least one target in blood or blood components. The milestone payment was $216,747. Management considers this milestone to be
substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated
that we were able to capture > 50% in 24 hours of one of the agreed targets in blood or blood components. The report was accepted
by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.3.3.1 – Build the ADAPT capture cartridges
with the identified affinity agents. Measure the rate of capture of the specific targets from in ex vivo recirculation experiments
from cell culture and blood. The milestone payment was $208,781. Management considers this milestone to be substantive as it was
not dependent on the passage of time nor was it based solely on another party's efforts. We demonstrated that we were
able build the ADAPT capture cartridges with the identified affinity agents and to measure the rate of capture of the specific
targets from in ex vivo recirculation experiments from cell culture and blood. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter.
NOTE 13. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
From time to time, claims are made against us in the ordinary
course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or
more products or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period
could have a material adverse effect on our results of operations for that period or future periods. Other than as mentioned here,
we are not presently a party to any pending or threatened legal proceedings.
On July 5, 2012, Gemini Master Fund, Ltd., a Cayman Islands
company ("Gemini"), filed a complaint against the Company in the Supreme Court of the State of New York, County of New
York, entitled Gemini Master Fund Ltd. v. Aethlon Medical, Inc., Index No. 652358/2012 (the "Complaint"). In
the Complaint, Gemini is seeking relief both in the form of money damages and delivery of shares of the Company's common stock.
The Complaint alleges, among other things, that the Company is in default of a certain promissory note originally issued to Gemini
on February 12, 2010 by failing to pay the note in full and by failing to honor certain requests by Gemini to convert principal
and interest under the note into shares of the Company's common stock. Complaint also includes allegations that the
Company has failed to issue shares upon the presentation of an exercise notice under a warrant originally issued to Gemini on November
22, 2010. The lawsuit also alleges that the Company should have issued shares pursuant to the exercise of two other warrants. The
Company believes that it has defenses to the claims asserted and it intends to vigorously defend the lawsuit. There can be no assurances,
however, that the litigation will be decided in the Company's favor as to all, or any part, of Gemini's Complaint. An adverse decision
in the litigation could have an adverse effect on the Company's operations and could be dilutive to the Company's shareholders.
LEASES
We currently rent approximately 2,300 square feet of executive
office space at 8910 University Center Lane, Suite 660, San Diego, CA 92122 at the rate of $6,475 per month on a four year lease
that expires in September 2013. We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road,
Suite 109, San Diego, California 92121 at the rate of $2,917 per month on a two year lease that expires in October 2014.
NOTE 14. SUBSEQUENT EVENTS
Management has evaluated events subsequent to December 31, 2012
through the date that the accompanying condensed consolidated financial statements were filed with the Securities and Exchange
Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
On January 4, 2013, the Depository Trust Company (DTC) informed
our counsel that DTC determined to lift the deposit transaction restriction (DTC Chill) imposed on our common stock and will resume
accepting deposits of our common stock for depository and book-entry transfer services.
In January 2013, we issued
150,542 shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price
of $0.08 per share in payment for scientific and legal consulting services valued at $11,667 based on the value of the services
provided.
In January 2013, we issued 246,429
shares of restricted common stock to the owner of a patent as a patent license payment valued at $17,250 per the terms of the patent
license.
In January 2013,
we issued 379,005
restricted shares of common stock to a consultant for investor relations services valued at $31,667, or an average of $0.84 cents
per share, based upon the fair value of the shares issued.
In January 2013, we extended the expiration date of the Tonaquint
Note by one month to August 31, 2013 (see Note 4).
In February 2013, we issued 101,250 shares of common stock pursuant
to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $0.08 per share in payment for internal
controls consulting services valued at $8,100 based on the value of the services provided.
In February 2013, we issued 454,483 shares of restricted common
stock to the holder of a note issued by the Company in exchange for the partial conversion of principal and interest in an aggregate
amount of $30,000 at an average conversion price of $0.07 per share.
In February 2013, we invoiced the US Government for the second
milestone in the second year under our DARPA contract in the amount of $195,581.
In February 2013, we extended the expiration date of the Law
Firm Note by two months to February 28, 2013 (see Note 5).
In February
2013,
we completed unit subscription agreements with six accredited investors (the “Purchasers”) pursuant to
which the Purchasers purchased an aggregate of $205,000 (the "Subscription Amount") of restricted Common Stock at an
average price of $0.064 per share. The Common Stock purchase price under the Subscription Agreement was determined to be 80% of
the average closing price of our Common Stock for the five-day period immediately preceding the date of the Subscription Agreement,
resulting in the issuance of 3,203,125 shares of Common Stock.
Each Purchaser also received one Common Stock Purchase Warrant
for each two shares of Common Stock purchased under the Subscription Agreement. The Warrant exercise price was calculated based
upon 120% of the average of the closing prices of our Common Stock for the five-day period immediately preceding the parties entering
into the Subscription Agreement.