ITEM 1. CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
June 30, 2013
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. On June 25, 2013, the United States Food and Drug
Administration (FDA) approved an Investigational Device Exemption (IDE) that allows us to initiate human feasibility studies of
the Aethlon Hemopurifier® in the United States. Under the feasibility study protocol, we will enroll ten end-stage renal disease
patients who are infected with the Hepatitis C virus (HCV) to demonstrate the safety of Hemopurifier therapy. Successful completion
of this study will allow us the opportunity to initiate pivotal studies that are required for market clearance to treat HCV and
other disease conditions in the United States.
Successful outcomes of human trials will also be required by
the regulatory agencies of certain foreign countries where we intend to sell this device. 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 Generally Accepted Accounting Principles in the United States of America (“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, 2013 was derived from our audited financial statements. Operating results for the three months ended
June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending March 31, 2014. For further
information, refer to our Annual Report on Form 10-K for the year ended March 31, 2013, which includes audited financial statements
and footnotes as of March 31, 2013 and for the years ended March 31, 2013 and 2012.
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 $8,950,000, recurring losses from operations and an accumulated
deficit of approximately $61,779,000 at June 30, 2013, 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.
We intend to fund operations, working capital and other cash requirements (consisting
of accounts payable, accrued liabilities, amounts due to related parties and amounts due under various notes payable) for the fiscal
year ending March 31, 2014 through debt and/or equity financing arrangements as well as through the receipts under our original
DARPA contract and the related subcontract with Battelle (See Note 12).
We are currently addressing our liquidity issue by seeking additional
investment capital through private placements of common stock and debt and by applying for additional grants issued by government
agencies in the United States.
We recently signed an agreement with a broker-dealer to raise
operating capital to cover near term operating requirements and the expected costs of our US safety trial. The agreement also
calls for the broker-dealer to raise additional working capital in a larger transaction for future growth initiatives (see note
2). Any securities offered will not be registered under the Securities Act and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements. The engagement agreement is on a best efforts basis
and there can be no assurance that the broker-dealer can raise working capital for us on acceptable terms or at all.
We believe that our cash on hand and funds expected to be received
from additional private investment and/or government grants will be sufficient to meet our liquidity needs for fiscal 2014. However,
no assurance can be given that we will receive any funds in addition to the funds we have received to date.
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.
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 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.
The potentially dilutive common shares outstanding for the quarters
ended June 30, 2013 and 2012, which include common shares underlying outstanding stock options, warrants and convertible debentures,
were 138,279,424 and 135,921,754, respectively.
PATENTS
We capitalize the cost of patents, some of which were acquired,
and amortize such costs over the estimated useful life, upon issuance of the patent.
RESEARCH AND DEVELOPMENT EXPENSES
We incurred research and development expenses during the three
month periods ended June 30, 2013 and 2012, 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:
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2013
|
|
|
2012
|
|
Three months ended
|
|
$
|
337,920
|
|
|
$
|
291,866
|
|
|
|
|
|
|
|
|
|
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of certain convertible notes and related warrants
at June 30, 2013 and March 31, 2013 are $2,886,257 and $3,588,239, 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 months ended June 30, 2013 and 2012.
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 three months ended June 30, 2013 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:
|
|
June 30, 2013
|
|
|
March 31, 2013
|
|
|
|
Principal Balance
|
|
|
Accrued Interest
|
|
|
Principal Balance
|
|
|
Accrued Interest
|
|
12% Notes payable, past due
|
|
$
|
185,000
|
|
|
$
|
333,000
|
|
|
$
|
185,000
|
|
|
$
|
326,062
|
|
10% Note payable, past due
|
|
|
5,000
|
|
|
|
6,000
|
|
|
|
5,000
|
|
|
|
5,875
|
|
Tonaquint Note
|
|
|
45,296
|
|
|
|
543
|
|
|
|
131,381
|
|
|
|
1,629
|
|
Total
|
|
$
|
235,296
|
|
|
$
|
339,543
|
|
|
$
|
321,381
|
|
|
$
|
333,566
|
|
During the three month periods ended June 30, 2013 and 2012,
we recorded interest expense of $9,891 and $13,029, respectively, related to the contractual interest rates 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 June 30, 2013, the 12% Notes were past due, in default, and bearing
interest at the default rate of 15%.
10% NOTES
At June 30, 2013, one 10% Note in the amount of $5,000,
which is past due and in default, remained outstanding and it bears 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.
TONAQUINT NOTE
On June 28, 2011, in conjunction with our satisfying all balances
owed under a convertible note, we entered into a Termination Agreement with Tonaquint, Inc. 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 $236,305
of the principal of the note into common stock (see Note 6). We also recorded into principal $7,500 of the lender’s legal
fees related to documentation of the extension agreement. During the three months ended June 30, 2013, we recorded a loss on conversion
of $22,789 on those partial conversions.
NOTE 5. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consist of the following at June 30,
2013:
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Net
Amount
|
|
|
Accrued
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated Series A 12% Convertible Notes, past due
|
|
$
|
885,000
|
|
|
$
|
–
|
|
|
$
|
885,000
|
|
|
$
|
442,500
|
|
December 2006 10% Convertible Notes, past due
|
|
|
17,000
|
|
|
|
–
|
|
|
|
17,000
|
|
|
|
16,525
|
|
2008 10% Convertible Notes, past due
|
|
|
25,000
|
|
|
|
–
|
|
|
|
25,000
|
|
|
|
16,354
|
|
October & November 2009 10% Convertible Notes, past due
|
|
|
50,000
|
|
|
|
–
|
|
|
|
50,000
|
|
|
|
21,722
|
|
April 2010 10% Convertible Note
|
|
|
75,000
|
|
|
|
(2,251
|
)
|
|
|
72,749
|
|
|
|
25,823
|
|
September 2010 10% Convertible Notes, past due
|
|
|
308,100
|
|
|
|
–
|
|
|
|
308,100
|
|
|
|
63,946
|
|
April 2011 10% Convertible Notes, past due
|
|
|
400,400
|
|
|
|
–
|
|
|
|
400,400
|
|
|
|
115,115
|
|
July and August 2011 10% Convertible Notes, $257,656 past due
|
|
|
357,655
|
|
|
|
–
|
|
|
|
357,655
|
|
|
|
80,867
|
|
September 2011 Convertible Notes, past due
|
|
|
22,260
|
|
|
|
–
|
|
|
|
22,260
|
|
|
|
–
|
|
Law Firm Note Number 1
|
|
|
75,000
|
|
|
|
–
|
|
|
|
75,000
|
|
|
|
4,792
|
|
Law Firm Note Number 2
|
|
|
47,000
|
|
|
|
–
|
|
|
|
47,000
|
|
|
|
170
|
|
Total – Convertible Notes
|
|
$
|
2,262,415
|
|
|
$
|
(2,251
|
)
|
|
$
|
2,260,164
|
|
|
$
|
787,814
|
|
All of the convertible notes payable in the above table are
presently past due or will be due within one year of the June 30, 2013 balance sheet date. As a result, we expect to amortize all
of the remaining discounts during the fiscal year ending March 31, 2014.
During the three months ended June 30, 2013, we recorded interest
expense of $89,260 related to the contractual interest rates of our convertible notes and interest expense of $2,033 related to
the amortization of debt discounts on the convertible notes for a total of $91,293.
Convertible notes payable consisted of the following at March
31, 2013:
|
|
Principal
|
|
|
Unamortized
Discount
|
|
|
Net
Amount
|
|
|
Accrued
Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated Series A 12% Convertible Notes, past due
|
|
$
|
885,000
|
|
|
$
|
–
|
|
|
$
|
885,000
|
|
|
$
|
398,250
|
|
2008 10% Convertible Notes, past due
|
|
|
25,000
|
|
|
|
–
|
|
|
|
25,000
|
|
|
|
15,417
|
|
December 2006 10% Convertible Notes, past due
|
|
|
17,000
|
|
|
|
–
|
|
|
|
17,000
|
|
|
|
15,888
|
|
October & November 2009 10% Convertible Notes
|
|
|
50,000
|
|
|
|
(389
|
)
|
|
|
49,611
|
|
|
|
20,000
|
|
April 2010 10% Convertible Note
|
|
|
75,000
|
|
|
|
(3,895
|
)
|
|
|
71,105
|
|
|
|
23,938
|
|
September 2010 10% Convertible Notes, past due
|
|
|
308,100
|
|
|
|
–
|
|
|
|
308,100
|
|
|
|
52,393
|
|
April 2011 10% Convertible Notes, past due
|
|
|
400,400
|
|
|
|
–
|
|
|
|
400,400
|
|
|
|
100,100
|
|
July and August 2011 10% Convertible Notes, $257,656 past due
|
|
|
357,655
|
|
|
|
–
|
|
|
|
357,655
|
|
|
|
68,704
|
|
September 2011 Convertible Notes, past due
|
|
|
178,760
|
|
|
|
–
|
|
|
|
178,760
|
|
|
|
–
|
|
Law Firm Note
|
|
|
75,000
|
|
|
|
–
|
|
|
|
75,000
|
|
|
|
3,854
|
|
Total – Convertible Notes
|
|
$
|
2,371,915
|
|
|
$
|
(4,284
|
)
|
|
$
|
2,367,631
|
|
|
$
|
698,544
|
|
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 March 31, 2013 remain in default. We are accruing interest at the revised default rate of 20% following the expiration
date of December 31, 2010.
During the fiscal year ended March 31, 2013, the holders of
$15,000 of the Amended and Restated Notes converted their 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. We
are recording interest at the default rate of 20%.
DECEMBER 2006 10% CONVERTIBLE NOTES
At June 30, 2013, one note representing $17,000 of the December
2006 10% Notes remained outstanding and in default. This note is convertible into our common stock at $0.17 per share. We are recording
interest at the default rate of 15%.
2008 10% CONVERTIBLE
NOTES
One 2008 10% Convertible Note in the amount of $25,000 which
matured in January 2010 remained outstanding at June 30, 2013. This note is convertible into our common stock at $0.50 per share.
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.
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). The 461,409 share issuance was priced based on 80% of the trailing five day average before
issuance to be consistent with the equity unit structure. 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. The $16,149 value of the warrant was
calculated using the binomial lattice valuation methodology. We recorded a loss on conversion of $45,796 on the conversions
in the quarter ended September 30, 2012.
We are recording interest at the default rate of 15%.
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 matured 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 in the quarter ended March 31, 2012.
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.
There were no conversions on the September 2010 10% Convertible
Notes during the three months ended June 30, 2013. 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.
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, 2012, holders of three notes totaling $100,000
agreed to extend the expiration date of their notes to July 13, 2013. Subsequent to June 30, 2013, the holders of the three notes
agreed to extend their notes to July 16, 2014.
At June 30, 2013, the outstanding principal balance was $357,655,
of which $257,655 was in default. 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.
The following conversions of the September 2011 Convertible
Notes have taken place during the fiscal years ended March 31, 2013 and 2012:
|
|
Fiscal Year Ended
March 31, 2013
|
|
|
Fiscal Year Ended
March 31, 2012
|
|
Principal converted
|
|
$
|
60,000
|
|
|
$
|
15,000
|
|
|
|
|
|
|
|
|
|
|
During the three months
ended June 30, 2013, $156,500 of the September 2011 Convertible Notes were converted into our common stock per the conversion
formulae in the notes.
At June 30, 2013, the outstanding principal balance was in default
and there was no accrued interest as these notes do not bear interest.
LAW FIRM NOTE NUMBER 1
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 originally had 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. During the quarter ended June 30, 2013, the parties agreed to extend the Maturity Date
of the Note to October 1, 2013.
LAW FIRM NOTE NUMBER 2
On June 4, 2013, we entered into a Promissory Note with our
corporate law firm for the amount of $47,000, which represented approximately 50% of the amount we owed to that firm for services
in 2012. The Promissory Note has a maturity date of October 1, 2014 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 $0.07 per share.
NOTE 6. EQUITY TRANSACTIONS
In May 2013, we issued to a scientific advisory board member
and a scientific consultant a three year option to purchase 125,000 shares of our common stock at a price of $0.11 per share.
In June 2013, we completed a unit
subscription agreement with three accredited investors
(the “Purchasers”)
pursuant
to which the Purchasers purchased $128,000 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 $0.081 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) $0.081 (the "Warrant Shares") at an
exercise price of $0.121 per Warrant Share. This resulted in the issuance of 1,580,248 shares of Common Stock and 790,124 Warrant
Shares.
In June 2013, we issued to our CEO the remaining 3,400,000 shares
under his restricted share grant, all of which were vested.
During the three months ended June
30 2013, we issued 3,448,337
shares of restricted common stock to the holders of three notes issued by the Company in exchange
for the partial conversion of principal and interest in an aggregate amount of $246,500 at an average conversion price of $0.07
per share.
During the three months ended June 30, 2013, we issued 222,734 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 legal services valued at $21,750 based on the value of the services provided.
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 June 30, 2013 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 June 30, 2013 and March 31, 2013, our other current liabilities
were comprised of the following items:
|
|
June 30,
2013
|
|
|
March 31,
2013
|
|
Accrued interest
|
|
$
|
1,127,357
|
|
|
$
|
1,032,110
|
|
Accrued legal fees
|
|
|
179,465
|
|
|
|
179,465
|
|
Other
|
|
|
117,964
|
|
|
|
155,610
|
|
Total other current liabilities
|
|
$
|
1,424,786
|
|
|
$
|
1,367,185
|
|
As of the date of this report, various promissory and convertible
notes payable in the aggregate principal amount of $2,155,415 (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 June 30, 2013, we had
accrued interest in the amount of $1,076,433 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 June 30, 2013 reporting date
are classified based on the valuation technique level noted in the table below:
Description
|
|
June 30,
2013
|
|
|
Quoted Prices
in Active Markets for
(Level 1)
|
|
|
Significant Other Observable
(Level 2)
|
|
|
Significant
Unobservable
(Level 3)
|
|
Derivative Liabilities
|
|
$
|
2,886,257
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,886,257
|
|
Total Assets
|
|
$
|
2,886,257
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
2,886,257
|
|
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:
|
Three Months Ended June 30, 2013
|
Risk free interest rate
|
0.04% - 0.75%
|
Average expected life
|
0.25 – 3.2 years
|
Expected volatility
|
58.0% - 102.8%
|
Expected dividends
|
None
|
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the three months ended June 30, 2013:
|
|
April 1,
2013
|
|
|
Recorded New Derivative
Liabilities
|
|
|
Change in estimated fair value recognized in results of operations
|
|
|
Reclassification
of Derivative
Liability to Paid
in capital
|
|
|
June 30,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
3,588,239
|
|
|
$
|
–
|
|
|
$
|
(609,125
|
)
|
|
$
|
(92,857
|
)
|
|
$
|
2,886,257
|
|
The table below sets forth a summary of changes in the fair
value of our Level 3 financial instruments for the three months ended June 30, 2012:
|
|
April 1,
2012
|
|
|
Recorded New Derivative
Liabilities
|
|
|
Change in estimated fair value recognized in results of operations
|
|
|
Reclassification
of Derivative
Liability to Paid
in capital
|
|
|
June 30,
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
3,588,615
|
|
|
$
|
–
|
|
|
$
|
(687,600
|
)
|
|
$
|
(26,543
|
)
|
|
$
|
2,874,472
|
|
NOTE 10. STOCK COMPENSATION
The following tables summarize share-based compensation expenses
relating to shares and options granted and the effect on basic and diluted loss per common share during the three months ended
June 30, 2013 and 2012:
|
|
June 30, 2013
|
|
|
June 30, 2012
|
|
Vesting of stock options
|
|
$
|
50,387
|
|
|
$
|
52,794
|
|
Incremental fair value of option modifications
|
|
|
957
|
|
|
|
19,838
|
|
Vesting expense associated with CEO restricted stock grant
|
|
|
64,444
|
|
|
|
96,667
|
|
Total stock-based compensation expense
|
|
$
|
115,788
|
|
|
$
|
169,299
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per common share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
All of the stock-based compensation expense recorded during
the three months ended June 30, 2013 and 2012, which totaled $115,788 and $169,299, 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 June 30, 2013 had no impact on basic and diluted loss per common share and the stock-based compensation
expense recorded during the three months ended June 30, 2012 also had no impact on basic and diluted loss per common share .
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 three months ended June 30, 2013 was insignificant.
In the three months ended June 30, 2013,
In
May 2013, we granted to a scientific advisory board member and a scientific consultant a three year option to purchase 125,000
shares of our common stock at a price of $0.11 per share.
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 three months ended June 30, 2013:
Risk free interest rate
|
0.38%
|
Average expected life
|
3 years
|
Expected volatility
|
94.6%
|
Expected dividends
|
None
|
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.
We did not issue any stock option grants in the three months
ended June 30, 2012.
Options outstanding that have vested and are expected to vest
as of June 30, 2013 are as follows:
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Term in Years
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
20,204,123
|
|
|
$
|
0.28
|
|
|
|
3.86
|
|
Expected to vest
|
|
|
1,016,675
|
|
|
$
|
0.25
|
|
|
|
7.88
|
|
Total
|
|
|
21,220,798
|
|
|
|
|
|
|
|
|
|
A summary of stock option activity during the three months ended
June 30, 2013 is presented below:
|
|
Amount
|
|
|
Range of
Exercise
Price
|
|
|
Weighted Average
Exercise
Price
|
|
Stock options outstanding at March 31, 2013
|
|
|
21,095,798
|
|
|
|
$0.076 - $0.41
|
|
|
$
|
0.28
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Granted
|
|
|
125,000
|
|
|
|
0.11
|
|
|
$
|
0.11
|
|
Cancelled/Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Stock options outstanding at June 30, 2013
|
|
|
21,220,798
|
|
|
|
$0.076 - $0.41
|
|
|
$
|
0.28
|
|
Stock options exercisable at June 30, 2013
|
|
|
20,204,123
|
|
|
|
$0.076 - $0.41
|
|
|
$
|
0.28
|
|
At June 30, 2013, there was approximately $97,091 of unrecognized
compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 0.21 years.
On June 30, 2013, 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 three months ended
June 30, 2013 is presented below:
|
|
Amount
|
|
|
Range of
Exercise Price
|
|
|
Weighted Average
Exercise Price
|
|
Warrants outstanding at March 31, 2013
|
|
|
75,647,294
|
|
|
|
$0.07 - $0.25
|
|
|
$
|
0.11
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Issued
|
|
|
790,124
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
Cancelled/Expired
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
Warrants outstanding at June 30, 2013
|
|
|
76,437,418
|
|
|
|
$0.07 - $0.25
|
|
|
$
|
0.11
|
|
Warrants exercisable at June 30, 2013
|
|
|
76,437,418
|
|
|
|
$0.07 - $0.25
|
|
|
$
|
0.11
|
|
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 three months ended June 30, 2013:
Risk free interest rate
|
1.53%
|
Average expected life
|
7 years
|
Expected volatility
|
91.2%
|
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.
As a result of achieving
five contract milestones between October 1, 2011 and March 31, 2012, we reported $1,358,189 in contract revenue for the fiscal
year ended March 31, 2012. As a result of achieving six milestones in the fiscal year ended March 31, 2013, we reported $1,230,004
in contract revenue for that fiscal year.
Originally, only the
base year (year one contract covering October 1, 2011 through September 30, 2012) 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.
In the quarter ended June 30, 2013, we invoiced the US Government
for the twelfth milestone under our DARPA contract in the amount of $195,596 and received that payment. The details of that milestone
were as follows:
Milestone 2.3.2.2 – Formulate initial design based on
work from previous phase. Begin to build and test selected instrument design and tubing sets. The milestone payment was $195,596.
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 build and test selected instrument design and tubing sets. The report
was accepted by the contracting officer's representative and the invoice was submitted thereafter.
In the quarter ended June 30, 2012, we invoiced the US Government
for the sixth milestone under our DARPA contract in the amount of $216,747 and received that payment. The details of that milestone
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.
In a related matter, DARPA recently awarded a related contract
for $22,830,840 to Battelle Memorial Institute (“Battelle”) to be the systems integrator for the various components
being developed under the original contract, including our two components of the project. We agreed to become a subcontractor to
Battelle under that systems integrator contract. That subcontract will be under a time and materials basis and we expect to begin
generating revenues under the subcontract during the fiscal year ending March 31, 2014. We did not record any revenue from that
subcontract in the three months ended June 30, 2013. Our expected revenue from the subcontract will be at the discretion of Battelle.
We have not placed a reserve for doubtful accounts on receivables
under our DARPA contract since they represent a credit risk related to the U.S. government.
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. The Complaint also alleges that the Company
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 a warrant issued in 2009.
The Company believes that it has defenses to the claims asserted and it continues to vigorously defend the lawsuit, which is in
the late discovery stage. No trial date has yet been set. 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 June 30, 2013
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.
In July 2013, we invoiced DARPA for milestones 13 and 14 under
our contract for a total of $404,362 and collected that amount.
In July 2013, we borrowed
$400,000 from two of our directors under 90 day notes bearing 10% interest (the “Notes”). If we do not pay back those
loans by October 9, 2013, then the notes will bear interest at a penalty rate of 12% and the noteholders will have the right at
their discretion (i) to convert their principal and accrued interest into shares of common stock at $0.088 per share (the “Conversion
Price”) and (ii) receive warrants to purchase common stock equal to 50% of the principal converted under the Notes, with
an exercise price of $0.132 per share. That potential conversion price and warrant exercise price were based on the same pricing
mechanism that we have used in prior equity unit financings since March 2012 (see Note 6) which are based on 80% of the then current
market price of our common stock and with the warrant exercise price based on 120% of the same then current market price. We have
reserved 6,931,818 shares of common stock to support the conversion in full of the Notes and accrued interest as well as the exercise
in full of the warrants (should such conversion and/or issuance occur).
Subsequent to June 30,
2013
, we issued 2,795,367
shares of restricted common stock to the holders of five notes issued
by the Company in exchange for the partial conversion of principal and interest in an aggregate amount of $173,960 at an average
conversion price of $0.06 per share.
Subsequent to June 30,
2013, our compensation committee approved the issuance of four stock option grants to four of our executives. The options carried
an exercise price of $0.10 per share, have a ten year life and vest over the following schedule: 25% on July 1, 2014, 25% on July
1, 2015, 25% on July 1, 2016 and 25% on July 1, 2017. The numbers of shares underlying each of the stock option grants were as
follows: 2,000,000 shares to our chief executive officer and 500,000 shares each to our president, chief science officer and chief
financial officer.
Subsequent to June 30,
2013, we invoiced Battelle for $20,340 under our subcontract.
In July 2013, we issued
514,453 shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an
average price of $0.11 per share in payment for legal and internal controls services valued at $54,256 based on the value of the
services provided.
In August 2013,
we completed a unit
subscription agreement with four accredited investors
(the “Purchasers”)
pursuant
to which the Purchasers purchased $100,000 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 $0.111 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) $0.111 (the "Warrant Shares") at an
exercise price of $0.167 per Warrant Share. This resulted in the issuance of 900,901 shares of Common Stock and 450,451 Warrant
Shares.
In August 2013, 13 warrant holders exercised 6,274,394 warrants
to receive 3,248,601 shares in cashless transactions.