UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2015
OR
[_] TRANSITION REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
COMMISSION FILE NUMBER 000-21846
AETHLON MEDICAL, INC.
(Exact name of registrant as specified in its
charter)
NEVADA |
13-3632859 |
(State or other jurisdiction of |
(I.R.S. Employer |
incorporation or organization) |
Identification No.) |
9635 Granite Ridge Drive, Suite 100 |
|
San Diego, California |
92123 |
(Address of principal executive office) |
(Zip Code) |
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA
CODE (858) 459-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE EXCHANGE ACT:
TITLE OF EACH CLASS
NONE |
NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE |
SECURITIES REGISTERED UNDER SECTION 12(g) OF
THE ACT:
COMMON STOCK–$.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Act. Yes [_] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [_]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and
post such files). Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large
accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [_] |
Accelerated filer [_] |
Non accelerated filer [_] |
Smaller reporting company [X] |
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of the common stock held by non-affiliates
of the registrant as of September 30, 2014 was approximately $29 million, computed by reference to the closing sale price of the
common stock of $6.08 per share on the OTC Bulletin Board on September 30, 2014. Shares of common stock held by each executive
officer and director and by each person who owns 10% or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares of the common stock of the registrant outstanding
as of June 25, 2015 was 7,610,344.
Explanatory Note: On April 14, 2015, the registrant completed a
1-for-50 reverse stock split. Accordingly, the registrant’s authorized common stock was reduced from 500,000,000 shares to
10,000,000 shares, and each 50 shares of outstanding common stock held by stockholders were combined into one share of common stock.
This Form 10-K reflects, and the accompanying consolidated financial statements and accompanying notes have been retroactively
revised to reflect, such reverse stock split as if it had occurred on April 1, 2013. All shares and per share amounts have been
revised accordingly.
TABLE OF CONTENTS
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PAGE |
PART I. |
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Item 1. |
Description of Business |
1 |
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Item 1A. |
Risk Factors |
12 |
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Item 1B. |
Unresolved Staff Comments |
31 |
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Item 2. |
Properties |
31 |
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Item 3. |
Legal Proceedings |
31 |
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Item 4. |
Mine Safety Disclosures |
31 |
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PART II. |
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Item 5. |
Market for Registrant's Common Equity and Related Stockholder Matters and Issuer Purchases
of Equity Securities |
32 |
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Item 6. |
Selected Financial Data |
37 |
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Item 7. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
37 |
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Item 7A |
Quantitative and Qualitative Disclosures about Market Risk |
48 |
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Item 8. |
Financial Statements |
48 |
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Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
49 |
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Item 9A. |
Controls and Procedures |
49 |
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Item 9B. |
Other Information |
44 |
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PART III. |
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Item 10. |
Directors, Executive Officers and Corporate Governance |
50 |
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Item 11. |
Executive Compensation |
51 |
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Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
59 |
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Item 13. |
Certain Relationships and Related Transactions and Director Independence |
60 |
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Item 14. |
Principal Accountant Fees and Services |
61 |
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PART IV. |
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Item 15. |
Exhibits, Financial Statements |
62 |
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Signatures |
68 |
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Certifications |
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview and Corporate History
We create medical devices to address unmet therapeutic
needs in infectious disease, cancer and other life-threatening conditions. Our lead product is the Aethlon Hemopurifier®, a
device that selectively targets the rapid elimination of circulating viruses and tumor-secreted exosomes that promote cancer progression.
Through our majority-owned subsidiary, Exosome Sciences, Inc., or Exosome, we are also developing exosome-based products
to diagnose and monitor neurological disorders and cancer. In addition, we operate under a Department of Defense contract through
the Defense Advanced Research Projects Agency, or DARPA, related to the development of a sepsis treatment device. We also operate
under a second Department of Defense contract as a subcontractor.
On March 10, 1999, Aethlon, Inc., a California
corporation, Hemex, Inc., a Delaware corporation and the accounting predecessor to Aethlon, Inc., and Bishop Equities, Inc., a
publicly traded Nevada corporation, completed an Agreement and Plan of Reorganization structured to result in Bishop Equities,
Inc.'s acquisition of all of the outstanding common shares of Aethlon, Inc. and Hemex, Inc. Under the plan's terms, Bishop Equities,
Inc. issued shares of its common stock to the stockholders of Aethlon, Inc. and Hemex, Inc. such that Bishop Equities, Inc. then
owned 100% of each company. Upon completion of the transaction, Bishop Equities, Inc. was renamed Aethlon Medical, Inc. Our executive
offices are located at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800.
All references to “us” or “we” are references to Aethlon Medical, Inc., combined with its subsidiary.
Target Market and Strategy
Our business is divided into three areas. First,
we are advancing our lead product, the Aethlon Hemopurifier, which targets the removal of circulating viruses and shed glycoproteins
to treat infectious viral pathogens. In oncology indications, the Hemopurifier targets the removal of circulating exosomes, which
are secreted by tumors to prevent the immune system from rejecting the tumors.
The second focus is government contracting.
We operate under two Department of Defense contracts related to a program entitled “Dialysis-Like Therapeutics.” One
is a contract with DARPA, and the other is a subcontract with Battelle Memorial Institute, or Battelle. Under these contracts,
our tasks include the development of a dialysis-like device to prevent sepsis, a fatal bloodstream infection that is often the
cause of death in combat-injured soldiers.
The third facet is conducted through Exosome,
which is developing exosome-based products to diagnose and monitor neurological disorders and cancer.
We have developed the Hemopurifier primarily
for use as an adjunct therapy to improve the benefit of infectious disease and cancer therapies marketed by pharmaceutical organizations.
For example, a clinical trial protocol administered at the Medanta Medicity Institute in India was designed to treat Hepatitis
C patients as they began their standard of care drug regimen as a means to reduce the time it normally takes for the virus to become
undetectable in the patient’s blood. At completion of the Medanta Medicity study, we reported
that patients who received the Hemopurifier therapy protocol had higher rapid virologic response and sustained virologic response
rates as compared to what would normally be expected for Hepatitis C virus infected individuals who receive standard of care interferon-ribavirin
drug therapy alone. We are also studying the use of our Hemopurifier as a first-line therapeutic solution against viral pathogens
that are not treatable with antiviral drugs as well as viral pathogens that have evolved to become drug resistant.
Our Lead Device: The Aethlon Hemopurifier
The Aethlon Hemopurifier is a device that
selectively targets the rapid elimination of circulating viruses and tumor-secreted exosomes that promote cancer progression. More
specifically, the Hemopurifier addresses antiviral drug-resistance in Hepatitis C virus and Human Immunodeficiency Virus-infected
individuals; serves as a countermeasure against viral pathogens not addressed by drug or vaccine therapies; and, we believe, represents
the first therapeutic strategy to address cancer promoting exosomes. In clinical studies conducted in India, safety and efficacy
observations of Hemopurifier therapy have been observed in both Hepatitis C virus and Human Immunodeficiency Virus-infected individuals.
We have recently initiated patient recruitment for the first U.S. Food and Drug Administration, or FDA, approved studies of Hemopurifier
therapy in the U.S.
The Scientific Mechanism of the Hemopurifier
The Hemopurifier is an extracorporeal device
designed for the single-use removal of viruses, viral toxins, and deleterious exosomes from the circulatory system of treated patients.
Delivery of Hemopurifier therapy can occur through the established infrastructure of continuous renal replacement therapy and dialysis
instruments routinely found in hospitals and clinics worldwide. Many extracorporeal techniques, such as dialysis or plasmapheresis,
are designed to remove circulating particles solely by molecule size. However, the Hemopurifier incorporates a lectin affinity
agent that is designed to bind to a unique high mannose signature that is abundant on the surface of tumor-derived exosomes and
glycoproteins that reside on the outer membrane of infectious viruses. The Hemopurifier is designed to provide a broad-spectrum
mechanism to inhibit the presence of certain cancer and infectious disease related particles. A single treatment with the Hempurifier
can last from three to six and one half hours in duration.
The Hemopurifier - Antiviral Drug-Resistance; Planned U.S. Clinical
Trials
The Hemopurifier provides a novel methodology
to target mutant viral strains that trigger antiviral drug resistance in both Human Immunodeficiency Virus and Hepatitis C virus
infections. In Hepatitis C virus care, we believe the Hemopurifier is positioned to address drug resistance associated with emerging
all-antiviral therapies and also to accelerate Hepatitis C virus depletion at the outset of peginterferon+ribavirin therapy.
Based on previous studies we conducted in India,
safety and efficacy observations of Hemopurifier therapy have been observed in both disease conditions. As a result of these outcomes,
we have received an opportunity to initiate the first FDA-approved feasibility study of Hemopurifier therapy in the U.S. The feasibility
study is now enrolling Hepatitis C virus-infected patients to be treated at DaVita MedCenter Dialysis in Houston, Texas. There
is one patient enrolled in the study, who enrolled in February 2015. The principal investigator for the study will be Dr. Stephen
Z. Fadem, who is co-medical director of DaVita MedCenter Dialysis.
Successful completion of this study will permit
us to initiate further stage studies that are required for market clearance to treat Hepatitis C virus and other viral pathogens
in the U.S. Our feasibility study protocol calls for the enrollment of ten Hepatitis C virus-infected end stage renal disease patients
who have not received any pharmaceutical therapy for their Hepatitis C virus infection for at least 30 days. The protocol will
consist of a control phase of three consecutive standard dialysis treatments during week one followed by the inclusion of our Hemopurifier
during a total of six dialysis sessions conducted during weeks two and three. The rate of adverse events observed during the Hemopurifier
therapy phase will be compared to the rate experienced during the control phase. Per-treatment changes of viral load will be observed
through quantitative polymerase chain reaction analysis. Additionally, we plan to measure the number of viral copies of Hepatitis
C virus captured within the Hemopurifier during each treatment session.
On February 14, 2014, we entered into an agreement
with Total Renal Research, Inc. (dba DaVita Clinical Research). Pursuant to the agreement, Da Vita Clinical Research is conducting
site management administrative services for a study. The agreement with DaVita Clinical Research requires us to pay certain expenses
related to the study protocol projected to be less than $200,000, including certain start-up and close-out costs, patient compensation
and project management fees. Additional activities and completion of this clinical trial will require us to pay additional costs
estimated to be $650,000. We will also be responsible for the fees for any third-party consulting physicians, including Dr. Fadem,
utilized in connection with the study and other pass-through expenses if incurred. The work order under this agreement was effective
as of May 16, 2014 and will continue in effect until completion of the services being provided by DaVita Clinical Research.
The Hemopurifier - Antiviral Studies in India
Previously, we conducted Hepatitis C virus treatment
studies at the Apollo Hospital, Fortis Hospital, and most recently the Medanta Medicity Institute in India.
In the Medanta Medicity Institute study, twelve
Hepatitis C virus-infected individuals were enrolled to receive three six-hour Hemopurifier treatments during the first three days
of a 48-week peginterferon+ribavirin treatment regimen. The study was conducted under the leadership of Dr. Vijay Kher at the Medanta
Medicity Institute, a multi-specialty medical institute established to be a premier center for medical tourism in India. Dr. Kher’s
staff reported that Hemopurifier therapy was well tolerated and without device-related adverse events in the twelve treated patients.
Of these twelve patients, ten completed the
Hemopurifier-peginterferon+ribavirin treatment protocol, including eight genotype-1 patients and two genotype-3 patients. Eight
of the ten patients achieved a sustained virologic response, which is the clinical definition of treatment cure and is defined
as undetectable Hepatitis C virus in the blood 24 weeks after the completion of the 48-week peginterferon+ribavirin drug regimen.
Both genotype-3 patients achieved a sustained virologic response, while six of the eight genotype-1 patients achieved a sustained
virologic response.
Of the ten patients who completed the full treatment
protocol, five also achieved a rapid virologic response, defined as undetectable Hepatitis C virus in the blood at day 30 of therapy.
Rapid virologic response represents the clinical endpoint that best predicts sustained virologic response cure rates resulting
from peginterferon+ribavirin therapy. As a point of reference, the landmark Individualized Dosing Efficacy vs Flat Dosing to Assess
Optimal Pegylated Interferon Therapy study of 3,070 Hepatitis C virus genotype-1 patients documented that 10.35% (n=318/3070) of
peginterferon+ribavirin-treated patients achieved a rapid virologic response. Patients who achieved a rapid virologic response
had sustained virologic response rates of 86.2% (n=274/318) versus sustained virologic response rates of 32.5% (n=897/2752) in
non-rapid virologic response patients. Two of the genotype-1 patients who achieved a rapid virologic response also achieved
an immediate virologic response, defined as undetectable Hepatitis C virus in the blood seven days after initiation of Hemopurifier-peginterferon+ribavirin
treatment protocol. The earliest measured report of undetectable Hepatitis C virus in blood in the Individualized Dosing Efficacy
vs Flat Dosing to Assess Optimal Pegylated Interferon Therapy study was on day 14 of the study.
Data from two patients was not included in the
reported Hemopurifier-peginterferon+ribavirin dataset. One of these patients was a genotype-5 patient who discontinued peginterferon+ribavirin
therapy at day 180, yet still achieved a sustained virologic response. The second patient was a genotype-3 patient who also achieved
a sustained virologic response, yet was unable to tolerate peginterferon+ribavirin therapy and discontinued therapy at day 90.
Overall, ten of the twelve patients who enrolled in the study achieved a sustained virologic response and seven of the twelve patients
achieved a rapid virologic response.
Hemopurifier - Human Immunodeficiency Virus; Single Proof Study
In addition to treating Hepatitis C virus-infected
individuals, we have conducted a single proof-of-principle treatment study related to the treatment of Human Immunodeficiency Virus.
In the study, Hemopurifier therapy reduced viral load by 93% in a Human Immunodeficiency Virus-Acquired Immunodeficiency Syndrome-infected
individual without the administration of antiviral drug therapy. The study protocol provided for 12 Hemopurifier treatments,
each four hours in duration, which were administered over the course of one month.
Researchers at the Morehouse School of Medicine
have since discovered that the Hemopurifier is able to capture exosomes that transport negative regulatory factor protein, which
is reported to suppress the immune response in Human Immunodeficiency Virus-infected individuals.
The Hemopurifier - Viral Pathogens Not Addressed by Drug Therapies
The protocol design of our forthcoming FDA-approved
study was originally designed as a human safety challenge and model for addressing drug and vaccine resistant bioterror and emerging
pandemic threats. In vitro studies conducted by leading government and non-government researchers have demonstrated that
the Hemopurifier is able to capture a broad spectrum of some of the world’s deadliest viral pathogens. These include: Dengue
hemorrhagic fever, Ebola hemorrhagic fever, Lassa hemorrhagic fever, H5N1 avian influenza, H1N1 swine flu virus, the reconstructed
1918 influenza virus, West Nile virus and Vaccinia and Monkeypox, which serve as models for human smallpox infection. Human efficacy
studies are not permissible against high-threat bioterror and pandemic threats.
The following table lists some of the key viral
pathogens captured during in vitro studies and the name of the research institute that ran the study.
Virus Type |
Collaborator |
Ebola Virus |
United States Army Medical Research Institute of Infectious Diseases/Centers for Disease Control |
Dengue Fever |
National Institute of Virology/World Health Organization |
Lassa Hemorrhagic Fever |
Southwest Foundation for Biomedical Research |
West Nile Virus |
Battelle |
H5N1 Avian Flu |
Battelle |
1918-r Spanish Flu |
Battelle |
2009 H1N1 Swine Flu |
Battelle |
The Hemopurifier - Candidate to Treat Cancer
In “Extracellular Vesicles: Emerging Targets
for Cancer Therapy,” a review article sponsored by the National Cancer Institute and published in the July 2014 issue of
Trends in Molecular Medicine, we were the sole organization referenced to have a therapeutic candidate to address tumor-secreted
exosomes, which have been discovered to suppress the immune system of cancer patients, seed the creation and spread of metastasis,
promote angiogenesis, trigger resistance to chemotherapy, and transport primary cancer therapeutic targets of the biopharmaceutical
industry. To date, we have received an issued patent that protects the use of our Hemopurifier to remove immunosuppressive extracellular
vesicles or exosomes from the blood of cancer patients. Through internal research and external research collaborations, we have
demonstrated that the affinity lectin immobilized in our Hemopurifier is able to bind exosomes underlying a broad spectrum of disease
indications including cancer.
We believe that Hemopurifier therapy could play
a role in the emerging immuno-oncology industry as an adjunct that can combine with established and emerging cancer therapies without
adding drug toxicity. More specifically, we believe that a mechanism to inhibit exosome immune suppression should be clinically
tested in combination with drugs designed to stimulate the immune response.
On April 9, 2015, we entered into an investigator-initiated
clinical trial agreement with the University of California, Irvine, or UCI, pursuant to which UCI will conduct a five-year clinical
study protocol entitled “Plasma Exosome Concentration in Cancer Patients Undergoing Treatment.” The protocol will seek
to enroll five individuals in each of nine defined tumor types for a total study population of up to 45 subjects. The tumor types
include the following forms of cancer: breast adenocarcinoma, colorectal, gastric and gastroesophageal, pancreatic, cholangiocarcinoma,
lung, head and neck, melanoma and ovarian adenocarcinoma. The principal investigator of the study is Edward Nelson, M.D. The budget
for the protocol provides for (i) $19,032 in startup charges; (ii) $8,039 in protocol-related variable pass-through charges; and
(iii) per subject visit charges of $3,359 per subject, for a total subject visit charge of $151,155 for 45 subjects. We will bear
these costs. UCI may disseminate the results of the clinical trial through presentation and publication but may not disclose any
of our confidential information.
Exosome Sciences, Inc. - Diagnostic Candidates
Through our majority-owned subsidiary Exosome,
we are developing exosome-based product candidates to diagnose and monitor neurological disorders and cancer. Since it began operations
in 2013, Exosome researchers have disclosed that they have isolated brain-specific biomarkers associated with Alzheimer's Disease
and Chronic Traumatic Encephalopathy. Specific to Chronic Traumatic Encephalopathy, Exosome is participating in a research
collaboration with The Boston University CTE Center to study the correlation of a biomarker known as tausome with Chronic Traumatic
Encephalopathy. On April 16, 2015, Boston University School of Medicine announced preliminary, unpublished findings related to
the study, which showed that researchers were able to isolate and quantify the presence of tausomes in the blood. The results are
preliminary and additional research is required. Researchers at Exosome are also studying lectin-based affinity techniques to isolate
cancer-related exosomes.
Exosome researchers have demonstrated the ability
to identify, quantify, and characterize circulating Glioblastoma multiforme exosomes, which hold promise as a disease biomarker
to identify the early detection of this aggressive form of cancer and monitor response to therapy. We believe that the discovery
of circulating glioblastoma multiforme exosomes may offer a potential new paradigm in glioblastoma multiforme exosomes clinical
management through a platform technology to predict tumor regression or progression.
U.S. Government Contract with the Defense Advanced Research Projects
Agency
On September 30, 2011, we entered into a $6.8
million multi-year contract with the Defense Advanced Research Projects Agency, or DARPA, part of the Department of Defense, resulting
from our response to a program entitled “Dialysis-Like Therapeutics.” Under this contract, our tasks include
the development of a dialysis-like device to prevent sepsis, a fatal bloodstream infection that is often the cause of death in
combat-injured soldiers.
The initial award from DARPA was a fixed-price
contract with potential total payments to us of $6,794,389 over the course of five years. As noted below, such contract was subsequently
reduced by $858,469. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award
during each year of the contract. Under the terms of the contract, we are required to perform certain incremental work towards
the achievement of specific milestones against which we will invoice the government for fixed payment amounts.
Originally, only the base year (year one of
the contract) was effective for the parties, however, DARPA subsequently exercised the option on the second, third and fourth years
of the contract. DARPA has the option to enter into the contract for year five. The milestones are comprised of planning, engineering
and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants
under the contract. We cannot assure you that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the remaining contract term. We cannot assure you that DARPA will exercise its option to continue the contract
for year five. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of
our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and
blood processing instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years
three through five.
The DARPA contract requires us to perform certain
scientific research and development activities geared toward the achievement of specific milestones set forth in the contract.
During the fiscal years ended March 31, 2014 and March 31, 2015, we recognized revenue of $1,466,482 and $630,887, respectively,
under the DARPA contract. Based on the DARPA contract, as now in force, we may achieve up to an additional $1,154,293 in revenue
under the DARPA contract during the fiscal years ending March 31, 2016 and March 31, 2017.
Subcontract with Battelle Memorial Institute
We entered into a subcontract agreement with
Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the DARPA
contract, and we are one of several subcontractors on that systems integration project. We began generating revenues under the
subcontract in the three months ended September 30, 2013. During the fiscal years ended March 31, 2014 and March 31, 2015, we recognized
revenue of $157,287 and $131,530, respectively, under the Battelle subcontract. Our expected future revenue from the subcontract
will be at the discretion of Battelle. The Battelle subcontract is our first cost-reimbursable contract.
Our revenue under this contract is a function
of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates
for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost
of any consultants hired by us to perform work on the project. Each payment will require approval by the program manager at Battelle.
Research and Development Costs
A substantial portion of our operating budget
is used for research and development activities. The cost of research and development, all of which has been charged to operations,
amounted to approximately $1,028,000 and $1,509,000 in the fiscal years ended March 31, 2015 and 2014, respectively.
Intellectual Property
We currently own or have license rights to a
number of U.S. and foreign patents and patent applications and endeavor to continually improve our intellectual property position.
We consider the protection of our technology, whether owned or licensed, to the exclusion of use by others, to be vital to our
business. While we intend to focus primarily on patented or patentable technology, we may also rely on trade secrets, unpatented
property, know-how, regulatory exclusivity, patent extensions and continuing technological innovation to develop our competitive
position. We also own certain trademarks.
Patents
We have been exclusively assigned all rights
and title to and interest in an invention and related worldwide patent rights for a method to treat cancer under an assignment
agreement with the London Health Science Center Research, Inc. The invention provides for the "Depression of anticancer immunity
through extracorporeal removal of microvesicular particles" (including exosomes) for which the U.S. Patent and Trademark Office
issued a patent in 2012 (patent #8,288,172) and for which we have filed additional patent applications domestically and abroad
(patent applications #US13/623662, #US14/180093, #US14/185033, #EP7,752,778.6, #HK9,104,740.6, #IN8139/DELNP/2008 and #CA2644855).
Please see the tables below for more information regarding these patents and patent applications.
The agreement provides for an upfront payment
of 800 shares of restricted common stock and a 2% royalty on any future net sales. We are also responsible for paying certain patent
application and filing costs. Under the assignment agreement, the London Health Science Center Research, Inc. sold and assigned
all of its rights, title and interest in the worldwide patents to us.
The following table lists all of our issued
patents and patent applications, including their ownership status:
Patents Issued in the United States
PATENT # |
PATENT NAME |
ISSUANCE
DATE |
OWNED OR
LICENSED |
EXPIRATION
DATE |
8,288,172 |
Extracorporeal removal of microvesicular particles (exosomes) (method patent) |
10/16/12 |
Owned |
3/30/29 |
7,226,429 |
Method for removal of viruses from blood by lectin affinity hemodialysis |
6/5/07 |
Owned |
1/20/25 |
6,528,057 |
Method for removal of HIV and other viruses from blood |
3/4/03 |
Licensed |
8/30/19 |
Patent Applications in the United States
APPLICATION # |
APPLICATION NAME |
FILING
DATE |
OWNED OR
LICENSED |
14/490,418 |
Method for removal of viruses from blood by lectin affinity hemodialysis |
9/18/14 |
Owned |
12/600236 |
Device and method for purifying virally infected blood |
5/12/11 |
Owned |
14/512129 |
Affinity capture of circulating biomarkers |
10/10/14 |
Owned |
13/623662 |
Extracorporeal removal of microvesicular particles |
9/20/12 |
Owned |
13/808561 |
Methods and compositions for quantifying exosomes |
8/14/13 |
Owned |
14/180093 |
Extracorporeal removal of microvesicular particles |
2/13/14 |
Owned |
14/185033 |
Extracorporeal removal of microvesicular particles |
2/20/14 |
Owned |
61/982190 |
Methods for delivering regional citrate anticoagulation during extracorporeal blood treatments |
4/21/14 |
Owned |
PCT/US2015/
017800 |
Brain specific exosome based diagnostics and extracorporeal therapies |
2/26/15 |
Owned |
Foreign Patents
PATENT # |
PATENT NAME |
ISSUANCE
DATE |
OWNED OR
LICENSED |
EXPIRATION
DATE |
2,353,399 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Russia) |
4/27/09 |
Owned |
1/20/24 |
770,344 |
Method for removal of HIV and other viruses from blood (Australia) |
6/3/04 |
Licensed |
8/30/19 |
DE69929986 |
Method for removal of HIV and other viruses from blood (Germany) |
2/22/06 |
Licensed |
8/30/19 |
1,109,564 |
Method for removal of HIV and other viruses from blood (France) |
2/22/06 |
Licensed |
8/30/19 |
1,109,564 |
Method for removal of HIV and other viruses from blood (Great Britain) |
2/22/06 |
Licensed |
8/30/19 |
1,109,564 |
Method for removal of HIV and other viruses from blood (Italy) |
2/22/06 |
Licensed |
8/30/19 |
2342203 |
Method for removal of HIV and other viruses from blood (Canada) |
3/1/11 |
Licensed |
8/30/19 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Belgium) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Ireland) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Italy) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Great Britain) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (France) |
7/17/13 |
Owned |
1/20/24 |
1624785 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Germany) |
7/17/13 |
Owned |
1/20/24 |
2,516,403 |
Method for removal of viruses from blood by lectin affinity hemodialysis (Canada) |
8/12/14 |
Owned |
1/20/24 |
Foreign Patent Applications
|
|
FILING |
OWNED OR |
APPLICATION # |
APPLICATION NAME |
DATE |
LICENSED |
EP20070752778 |
Extracorporeal removal of microvesicular particles (exosomes) (Europe) |
3/9/07 |
Owned |
9,104,740.6 |
Extracorporeal removal of microvesicular particles (exosomes) (Hong Kong) |
3/9/07 |
Owned |
8139/DELNP/2008 |
Extracorporeal removal of microvesicular particles (exosomes) (India) |
3/9/07 |
Owned |
2644855 |
Extracorporeal removal of microvesicular particles (Canada) |
3/9/07 |
Owned |
EP20110804372 |
Methods and compositions for quantifying exosomes (Europe) |
7/7/11 |
Owned |
_______________
We expect that our ability to enforce our patents
and proprietary rights in many countries will be adversely impacted due to possible changes in law, our lack of familiarity with
foreign law, or our lack of professional resources in jurisdictions outside the U.S. We cannot guarantee that any patents issued
or licensed to us, including within the U.S., will provide us with competitive advantages or will not be challenged by others,
or will not expire prior to our successful commercialization of our products. Furthermore, we cannot be certain that others will
not independently develop similar products or will not design around patents issued or licensed to us. We cannot guarantee that
patents that are issued will not be challenged, invalidated or infringed upon or designed around by others, or that the claims
contained in such patents will not infringe the patent claims of others, or provide us with significant protection against competitive
products, or otherwise be commercially valuable. We may need to acquire licenses under patents belonging to others for technology
potentially useful or necessary to us. If any such licenses are required, we cannot be certain that they will be available on
terms acceptable to us, if at all. To the extent that we are unable to obtain patent protection for our products or technology,
our business may be materially adversely affected by competitors who develop substantially equivalent technology.
Trademarks
We have obtained registered trademarks in the
U.S. for the marks Exosome Sciences®, Hemopurifier and Aethlon Medical, Inc. and have applied for the Tausome trademark in
the U.S., which application is currently pending. We have applied for trademark protection on Hemopurifier in India and that application
is currently pending. We also have common law trademark rights in Aethlon ADAPT™ and ELLSA™.
Licensing and Assignment Agreements
Effective January 1, 2000, we entered into an
agreement with a related party under which an invention and related patent rights for a method of removing Human Immunodeficiency
and other viruses from the blood using the Hemopurifier were assigned to us by the inventors in exchange for an 8.75% royalty to
be paid on future net sales of the patented product or process and shares of our common stock. On March 4, 2003, the related patent
(patent #6,528,057) was issued and we issued 3,922 shares of restricted common stock to that related party. The license runs for
the life of the patent, which expires in August 2019.
On November 7, 2006, we entered into an exclusive
assignment agreement with the London Health Science Center Research, Inc. under which an invention and related patent rights for
a method to treat cancer were assigned to us. The invention provides for the "Extracorporeal removal of microvesicular particles"
for which the U.S. Patent and Trademark Office allowed a patent (patent #8,288,172) in the U.S. as of October 2012. The agreement
provides for an upfront payment of 800 shares of restricted common stock and a 2% royalty on any future net sales. We are also
responsible for paying certain patent application and filing costs. Under the assignment agreement, we own the patents outright
for the life of the patent, which expires in March 2029. Under certain circumstances, ownership of the patents may revert back
to the London Health Science Center Research, Inc. if there is an uncured substantial breach of the assignment agreement.
Industry
The industry for treating infectious disease
and cancer is extremely competitive, and companies developing new treatment procedures face significant capital and regulatory
challenges. Additionally, as the Hemopurifier is a new device, we have the additional challenge of establishing medical industry
support, which will be driven by treatment data resulting from clinical studies of each disease condition that we pursue. The industry
includes pharmaceutical companies and medical device companies competing to treat illnesses on a worldwide basis.
Competition
We are advancing our Hemopurifier as a treatment
strategy to enhance and prolong current drug therapies by removing the viral strains that cause drug resistance. We are also advancing
the Hemopurifier as a tool for cancer treatment in conjunction with existing, and to be developed, cancer therapies. The Hemopurifier
also may prolong life for infected patients who have become drug resistant or have been infected with a viral pathogen for which
there is no drug or vaccine therapy. We believe our Hemopurifier augments the benefit of drug therapies and should not be considered
a competitor to such treatments. However, if the industry considered the Hemopurifier to be a potential replacement for drug therapy,
or a device that limited the need or volume of existing drug therapies, then the marketplace for the Hemopurifier would be extremely
competitive. We believe our Hemopurifier is the sole therapeutic device able to selectively remove viruses and immunosuppressive
proteins from circulation. However, we are aware that Asahi Kasei Kurary Medical based in Japan has created a double filtration
plasmapheresis system that indiscriminately removes particles from blood in a certain molecule range that includes Hepatitis C
virus. Asahi Kasei Kurary Medical is now marketing this device in Japan as an adjunct therapy for Hepatitis C virus. We may also
face competition from producers of antiviral drugs and vaccines.
Government Regulation of Medical Devices
The Hemopurifier is subject to regulation by
numerous regulatory bodies, primarily the FDA, and comparable international regulatory agencies. These agencies require manufacturers
of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling,
marketing, storage, distribution, advertising and promotion, and post-marketing surveillance reporting of medical devices. Devices
are generally subject to varying levels of regulatory control, the most comprehensive of which requires that a clinical evaluation
program be conducted before a device receives approval for commercial distribution. Failure to obtain approval or clearance to
market our product and products under development and to meet the ongoing requirements of these regulatory authorities could prevent
us from commercializing the Hemopurifier and future products in the U.S. and elsewhere.
Hemopurifier Investigational Device Exemption and Supplement
In 2013, the FDA approved our investigational
device exemption to initiate human clinical studies in the U.S. as a feasibility study. We were required to reach agreement with
the internal review board of DaVita MedCenter Dialysis prior to beginning our U.S. clinical trial. We are also required to obtain
patients' informed consent that complies with both FDA requirements and state and federal privacy regulations. We, the FDA or the
internal review board at each site at which a clinical trial is being performed may suspend a clinical trial at any time for various
reasons, including a belief that the risks to study subjects outweigh the benefits. Even if a trial is completed, the results of
clinical testing may not demonstrate the safety and efficacy of the device, may be equivocal or may otherwise not be sufficient
to obtain approval of the product. The investigational device exemption is part of the FDA’s clearance process. This process
is discussed in detail in the “Pre-Marketing Regulations in the U.S.” section below.
In December 2014, the FDA approved our request
for a supplement to our investigational device exemption to establish a protocol to clinically investigate the use of the Hemopurifier
for the treatment of Ebola-infected patients in the U.S. Under the supplement, we may treat up to 20 Ebola-infected persons, at
no more than 10 institutions in the U.S., using the supplement protocol; however, this is not a clinical trial. We must clearly
distinguish data collected in the supplement protocol from data collected in our chronic Hepatitis C virus clinical trial (discussed
above). Prior to treating Ebola-infected patients, we must comply with specified patient protection procedures established by the
applicable institution including its institutional review board. Also, we must report any unanticipated adverse events resulting
from the supplement protocol to the FDA within 10 working days. Even if the protocol is established, and patients are treated,
the results of such treatments may not demonstrate the safety and efficacy of the device. In addition, we cannot assure you that
any Ebola-infected individuals will be treated under this protocol.
Pre-Marketing Regulations in the U.S.
Unless an exemption applies, each medical device
distributed commercially in the U.S. requires either prior 510(k) clearance or premarket approval, or PMA, from the FDA. The FDA
classifies medical devices into one of three classes. Class I devices are subject to only general controls, such as establishment
registration and device listing, labeling, medical device reporting, and prohibitions against adulteration and misbranding. Class
II medical devices generally require prior 510(k) clearance before they may be commercially marketed in the U.S. Devices deemed
by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially
equivalent to a predicate device, are placed in Class III, generally requiring submission of a PMA supported by clinical trial
data. Our Hemopurifier is a Class III product, and we believe that products utilizing our Aethlon ADAPT™ system will be considered
to be Class III products and thus will require submission and approval of a PMA. In the future, we may develop new products that
are considered to be Class II and require the clearance of a 510(k).
510(k) Clearance Pathway
To obtain 510(k) clearance, a premarket notification
must be submitted to FDA demonstrating that the proposed device is substantially equivalent to a previously cleared 510(k) device
or a device that was in commercial distribution before May 28, 1976 for which the FDA has not yet called for the submission of
premarket approval applications. FDA’s 510(k) clearance pathway usually takes from three to twelve months, but it can take
significantly longer. The FDA may require additional information, including clinical data, to make a determination regarding substantial
equivalence.
After a device receives 510(k) clearance, any
modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its
intended use, will require a new 510(k) clearance or, depending on the modification, require premarket approval. The FDA requires
each manufacturer to determine whether the proposed change requires submission of a 510(k), or a premarket approval, but the FDA
can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a manufacturer’s
determination, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance
or premarket approval is obtained. If the FDA requires a 510(k) holder to seek 510(k) clearance or premarket approval for any modifications
to a previously cleared product, the 510(k) holder also may be required to cease marketing or recall the modified device until
this clearance or approval is obtained.
Premarket Approval Pathway
A PMA must be supported by extensive data, including
but not limited to data obtained from technical, preclinical and clinical studies and relating to manufacturing and labeling to
demonstrate to the FDA’s satisfaction the safety and effectiveness of the device.
After a PMA submission is sufficiently complete,
the FDA will accept the application and begin an in-depth review, which generally takes between one and three years, but may take
significantly longer. During this review period, the FDA will typically request additional information or clarification of the
information already provided. Also, an advisory panel of experts from outside the FDA may be convened to review and evaluate the
application and provide recommendations to the FDA as to the approvability of the device. The FDA may or may not accept the panel’s
recommendation. In addition, the FDA will conduct a pre-approval inspection of the manufacturing facility to ensure compliance
with Quality System Regulation, or QSR. New PMA applications or PMA supplements are required for modifications that affect the
safety or effectiveness of the device, including, for example, certain types of modifications to the device’s indication
for use, manufacturing process, labeling and design. PMA supplements often require submission of the same type of information as
a PMA application, except that the supplement is limited to information needed to support any changes from the device covered by
the original PMA application and may not require as extensive clinical data or the convening of an advisory panel.
Clinical Trials
Clinical trials are almost always required to
support a PMA. To perform a clinical trial in the U.S. for a significant risk device, FDA requires the device sponsor to file an
Investigational Device Exemption, or IDE, application with the FDA and obtain IDE approval prior to commencing the human clinical
trial. An IDE amendment or supplement must also be submitted before initiating a significant change to the clinical protocol or
device under an existing IDE. The IDE application must be supported by appropriate data, such as animal and laboratory testing
results, and any available data on human clinical experience, showing that it is safe to test the device in humans and that the
testing protocol is scientifically sound.
The IDE must be approved in advance by the FDA
for a specific number of patients. Clinical trials conducted in the U.S. for significant risk devices may begin once the IDE application
is approved by the FDA and the appropriate institutional review boards, or IRBs, overseeing the welfare of the research subjects
and responsible for that particular clinical trial. Under its regulations, the FDA responds to an IDE or an IDE amendment within
30 days. The FDA may approve the IDE or amendment, grant an approval with certain conditions, or identify deficiencies and request
additional information. It is common for the FDA to require additional information before approving an IDE or amendment for a new
trial, and thus final FDA approval on a submission may require more than the initial 30 days. The FDA may also require that a small-scale
feasibility study be conducted before a pivotal trial may commence. In a feasibility trial, the FDA limits the number of patients,
sites and investigators that may participate. Feasibility trials are typically structured to obtain information on safety and to
help determine how large a pivotal trial should be to obtain statistically significant results.
Clinical trials are subject to extensive recordkeeping
and reporting requirements. Our clinical trials must be conducted under the oversight of an IRB for the relevant clinical trial
sites and must comply with FDA regulations, including but not limited to those relating to good clinical practices. We are also
required to obtain the patients’ informed consent in form and substance that complies with both FDA requirements and state
and federal privacy and human subject protection regulations. We, the FDA or the IRB may suspend a clinical trial at any time for
various reasons, including a belief that the risks to study subjects outweigh the anticipated benefits. Even if a trial is completed,
the results of clinical testing may not adequately demonstrate the safety and effectiveness of the device or may otherwise not
be sufficient to obtain FDA approval to market the product in the U.S.
Post-Marketing Regulations in the U.S.
Should our Hemopurifier device be cleared for
market use in the U.S. by the FDA, numerous regulatory requirements continue to apply. These include:
|
· |
the FDA's Quality System Regulation which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process; |
|
· |
labeling regulations and FDA prohibitions against the promotion of products for un-cleared, unapproved or off-label uses; |
|
· |
clearance or approval of product modifications that could significantly affect safety or efficacy or that would constitute a major change in intended use; |
|
· |
medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if the malfunction were to recur; |
|
· |
product listing and establishment registration, which helps facilitate FDA inspections and other regulatory action; and |
|
· |
post-market surveillance regulations, which apply when necessary to protect the public health or to provide additional safety and effectiveness data for the device. |
The regulations also require that we report
to the FDA any incident in which our product may have caused or contributed to a death or serious injury or in which our product
malfunctioned and, if the malfunction were to recur, would likely cause or contribute to death or serious injury.
We will also be required to register with FDA
as a medical device manufacturer within 30 days of commercial distribution of our products and must obtain all necessary state
permits or licenses to operate our business. As a manufacturer, we are subject to announced and unannounced inspections by FDA
to determine our compliance with quality system regulation and other regulations, and these inspections may include the manufacturing
facilities of our suppliers. Failure by us or by our suppliers to comply with applicable regulatory requirements can result in
enforcement action by the FDA or state authorities, which may include any of the following sanctions:
|
· |
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
|
· |
unanticipated expenditures to address or defend such actions; |
|
· |
customer notifications for repair, replacement, refunds; |
|
· |
recall, detention or seizure of our products; |
|
· |
operating restrictions or partial suspension or total shutdown of production; |
|
· |
refusing or delaying our requests for premarket approval of new products or modified products; |
|
· |
operating restrictions; |
|
· |
withdrawing PMA approvals that have already been granted; |
|
· |
refusal to grant export approval for our products; or |
|
· |
criminal prosecution. |
Compliance with U.S. Health Care Laws
Should our Hemopurifier device be cleared for
market use in the U.S. by the FDA, we must comply with various U.S. federal and state laws, rules and regulations pertaining to
healthcare fraud and abuse, including anti-kickback regulations, as well as other healthcare laws in connection with the commercialization
of our products. Fraud and abuse laws are interpreted broadly and enforced aggressively by various state and federal agencies,
including the U.S. Department of Justice, the U.S. Office of Inspector General for the Department of Health and Human Services
and various state agencies.
The U.S. federal Anti-Kickback Statute, 42 U.S.C.
§ 1320a-7b, prohibits persons, including a medical device manufacturer (or a party acting on its behalf), from knowingly or
willfully soliciting, receiving, offering or paying remuneration, directly or indirectly, in exchange for or to induce either the
referral of an individual for a service or product or the purchasing, ordering, arranging for, or recommending the ordering of,
any service or product for which payment may be made by Medicare, Medicaid or any other federal healthcare program. This statute
has been interpreted to apply to arrangements between medical device manufacturers on one hand and healthcare providers on the
other. The term “remuneration” is not defined in the federal Anti-Kickback Statute and has been broadly interpreted
to include anything of value, such as cash payments, gifts or gift certificates, discounts, waiver of payments, credit arrangements,
ownership interests, the furnishing of services, supplies or equipment, and the provision of anything at less than its fair market
value. Courts have broadly interpreted the scope of the law, holding that it may be violated if merely one purpose of an arrangement
is to induce referrals, irrespective of the existence of other legitimate purposes. The Anti-Kickback Statute prohibits many arrangements
and practices that are lawful in businesses outside of the healthcare industry. Although there are a number of statutory exemptions
and regulatory safe harbors protecting certain business arrangements from prosecution, the exemptions and safe harbors are drawn
narrowly, and practices that involve remuneration intended to induce prescribing, purchasing or recommending may be subject to
scrutiny if they do not qualify for an exemption or safe harbor. Our practices may not in all cases meet all of the criteria for
safe harbor protection from federal Anti-Kickback Statute liability. The reach of the Anti-Kickback Statute was broadened by the
recently enacted Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Affordability Reconciliation
Act of 2010, collectively, the Affordable Care Act or ACA, which, among other things, amends the intent requirement of the federal
Anti-Kickback Statute such that a person or entity no longer needs to have actual knowledge of the statute or specific intent to
violate it in order to have committed a violation. In addition, the ACA provides that the government may assert that a claim including
items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes
of the federal False Claims Act (discussed below) or the civil monetary penalties statute, which imposes fines against any person
who is determined to have presented or caused to be presented claims to a federal healthcare program that the person knows or should
know is for an item or service that was not provided as claimed or is false or fraudulent. In addition to the federal Anti-Kickback
Statute, many states have their own anti-kickback laws. Often, these laws closely follow the language of the federal law, although
they do not always have the same scope, exceptions, safe harbors or sanctions. In some states, these anti-kickback laws apply not
only to payments made by government healthcare programs but also to payments made by other third-party payors, including commercial
insurance companies.
We may also be subject to various federal and
state marketing laws, such as the federal Physician Payments Sunshine Act, which generally require certain types of expenditures
in the U.S. and the particular states to be tracked and reported. The federal Physician Payment Sunshine Act, being implemented
as the Open Payments Program, requires certain pharmaceutical and medical device manufacturers to engage in extensive tracking
of payments or transfers of value to physicians and teaching hospitals, maintenance of a payments database, and public reporting
of the payment data. Device manufacturers with products for which payment is available under Medicare, Medicaid or the State Children’s
Health Insurance Program are required to track and report such payments. Moreover, several states have enacted legislation requiring
pharmaceutical and medical device companies to establish marketing compliance programs or even prohibit providing meals to prescribers
or other marketing related activities. Compliance with such requirements may require investment in infrastructure to ensure that
tracking and reporting is performed properly. Although compliance programs can mitigate the risk of investigation and prosecution
for violations of these laws, the risks cannot be entirely eliminated.
International Regulation
International development and sales of medical
devices are subject to foreign government regulations, which vary substantially from country to country. The time required to obtain
approval by a foreign country may be longer or shorter than that required for FDA approval, and the requirements may differ. For
example, the primary regulatory authority with respect to medical devices in Europe is that of the European Union. The unification
of these countries into a common market has resulted in the unification of laws, standards and procedures across these countries,
which may expedite the introduction of medical devices like those we are offering and developing.
The European Union has adopted numerous directives
and standards regulating the design, manufacture, clinical trials, labeling and adverse event reporting for medical devices. Devices
that comply with the requirements of relevant directives will be entitled to bear CE Conformity Marking, indicating that the device
conforms to the essential requirements of the applicable directives and, accordingly, can be commercially distributed throughout
the European Union. Actual implementation of these directives, however, may vary on a country-by-country basis.
To date, we have not begun any process to obtain
the CE Mark and have no immediate plans to test or commercialize the Hemopurifier in any European Union countries.
Manufacturing
Manufacturing of our Hemopurifier occurs in
collaboration with a contract manufacturer based in San Diego, California that is compliant with the Good Manufacturing Practice
regulations promulgated by the FDA. Our contract manufacturer is registered with the FDA. We also have received an export
license from the FDA that allows the export our Hemopurifier for commercial purposes to India. To date, our manufacture of the
Hemopurifier has been limited to quantities necessary to support our clinical studies.
Sources and Suppliers
We are not dependent on any specific vendors
for the materials used in our Hemopurifier. The key raw materials in the Hemopurifier include the affinity lectin Galanthus nivalis
agglutinin, pharmaceutical grade diatomaceous earth, plasmapheresis cartridges and certain chemical binding agents. The affinity
lectin is available from several life science supply companies in the U.S. Diatomaceous earth is available from several life science
supply companies in the U.S. To date, we have purchased plasmapheresis cartridges from one vendor in Europe however similar cartridges
are commercially available from vendors on a worldwide basis should that European vendor cease to be available for any reason,
including prohibitive pricing. The chemical binding agents are available from a number of life science supply companies on a worldwide
basis. We typically purchase our raw materials on purchase order basis. Therefore, we remain subject to risks of supply shortages
and price increases that potentially could materially adversely affect our financial condition and operating results if and when
we begin large scale manufacture of the Hemopurifier.
The key raw materials used by Exosome Sciences,
Inc. in its research are blood samples supplied by research partners and a number of chemical and lab products commercially available
from vendors on a worldwide basis. Exosome Sciences, Inc. is not dependent on any specific vendors for the materials used in its
research activities.
Sales and Marketing
We do not currently have any sales and marketing
capability. With respect to commercialization efforts in the future, we intend to build or contract for distribution, sales and
marketing capabilities for any product candidate that is approved. From time to time, we have had and are having strategic discussions
with potential collaboration partners for our product candidates, although no assurance can be given that we will be able to enter
into one or more collaboration agreements for our product candidates on acceptable terms, if at all.
Product Liability
The risk of product liability claims, product
recalls and associated adverse publicity is inherent in the testing, manufacturing, marketing and sale of medical products. We
have limited clinical trial liability insurance coverage. We cannot assure you that future insurance coverage will be adequate
or available. We may not be able to secure product liability insurance coverage on acceptable terms or at reasonable costs when
needed. Any liability for mandatory damages could exceed the amount of our coverage. A successful product liability claim against
us could require us to pay a substantial monetary award. Moreover, a product recall could generate substantial negative publicity
about our products and business and inhibit or prevent commercialization of other future product candidates.
Employees
We have five full-time employees consisting
of our Chief Executive Officer, our President, our Chief Science Officer, our Chief Financial Officer, and an executive assistant.
Exosome has three additional full-time employees, consisting of its Chief Science Officer, its Clinical Research Director, and
a research scientist. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
We believe our employee relations are good.
None of our employees are represented by a labor union or are subject to collective-bargaining agreements.
ITEM 1A. RISK FACTORS
An investment in our securities involves
a high degree of risk. You should carefully consider the risks described below as well as the other information in this Annual
Report before deciding to invest in or maintain your investment in our company. The risks described below are not intended to be
an all-inclusive list of all of the potential risks relating to an investment in our securities. Any of the risk factors described
below could significantly and adversely affect our business, prospects, financial condition and results of operations. Additional
risks and uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely
affect our business. As a result, the trading price or value of our securities could be materially adversely affected and you may
lose all or part of your investment.
Risks Relating to Our Financial Position and Need for Additional
Capital
We have incurred significant losses and expect to continue
to incur losses for the foreseeable future.
We have never been profitable. We have generated
revenues during the fiscal years ended March 31, 2015 and March 31, 2014, in the amounts of $762,417, and $1,623,769, respectively,
primarily from our contract with the Defense Advanced Research Projects Agency, or DARPA. However, our revenues continue to be
insufficient to cover our cost of operations. Future profitability, if any, will require the successful commercialization
of our Hemopurifier technology, other products that may emerge from our Aethlon ADAPT platform or from additional government contract
or grant income. We cannot assure you when or if we will be able to successfully commercialize one or more of our products, or
if commercialization is successful, whether we will ever be profitable.
Our internal control over financial reporting does not currently
meet the standards required by Section 404 of the Sarbanes-Oxley Act of 2002, and failure to achieve and maintain effective
internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could result in
material misstatements of our annual or interim financial statements and have a material adverse effect on our business and share
price.
We are not currently required to make a formal
assessment of the effectiveness of our internal control over financial reporting for purposes of compliance with the Securities
and Exchange Commission’s rules that implement Section 404 of the Sarbanes-Oxley Act of 2002. We are, however, required
to comply with certain of these rules, which require management to certify financial and other information in our quarterly and
annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. This
assessment must include the disclosure of any material weaknesses or significant deficiencies in our internal control over financial
reporting identified by our management or our independent registered public accounting firm. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that
a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant
deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe
than a material weakness, yet important enough to merit attention by those responsible for oversight of our financial reporting,
including the audit committee of the Board of Directors.
In connection with our audits for the years
ended March 31, 2015 and 2014, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such
periods, due to the material weaknesses in our internal controls over financial reporting identified below, our disclosure controls
and procedures are not effective in recording, processing, summarizing and reporting, on a timely basis, information required to
be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, or Exchange Act, and are not
effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange
Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate
to allow timely decisions regarding required disclosure.
In assessing our internal controls and procedures
for fiscal 2015, our management identified a material weakness relating to a lack of sufficient segregation of duties, particularly
in cash disbursements. Specifically, this material weakness is such that the design of controls over the area of cash disbursements
relies primarily on detective controls and could be strengthened by adding preventative controls to properly safeguard company
assets.
Our management has also identified a material
weakness relating to a lack of sufficient personnel in the accounting function, due to our limited resources, with appropriate
skills, training and experience to perform the review processes to ensure the complete and proper application of generally accepted
accounting principles. Specifically, this material weakness led to segregation of duties issues and resulted in audit adjustments
to the annual consolidated financial statements and revisions to related disclosures.
We are in the process of developing and implementing
remediation plans to address these material weaknesses. We cannot assure you that our plans will sufficiently address the identified
deficiencies, nor can we assure you that there will not be material weaknesses or significant deficiencies in our internal controls
in the future. Additionally, in the event that our internal control over financial reporting is perceived as inadequate, or that
we are unable to produce timely or accurate financial statements, investors may lose confidence in our operating results and the
trading price of our common stock could decline.
We will require additional financing to sustain our operations,
and without it, we will not be able to continue operations.
We recently raised $5,591,988 in net proceeds
from a financing. That amount, coupled with previously existing funds on hand and expected revenues from our government contracts,
should finance our operations for the fiscal year ending March 31, 2016 including the cost of our current clinical trials. However,
we will require significant additional financing to complete additional future clinical trials in the U.S., as well as fund all
of our continued research and development activities for the Hemopurifier and products on our Aethlon ADAPT platform beyond the
fiscal year ending March 31, 2016. In addition, as we expand our activities, our overhead costs to support personnel, laboratory
materials and infrastructure will increase. Should the financing we require to sustain our working capital needs be unavailable
to us on reasonable terms, if at all, when we require it, we may be unable to support our research and U.S. Food and Drug Administration,
or FDA, clearance activities including our planned clinical trials. The failure to implement our research and clearance activities
would have a material adverse effect on our ability to commercialize our products.
We will need to raise additional funds through debt or equity
financings in the future to achieve our business objectives and to satisfy our cash obligations, which would dilute the ownership
of our existing stockholders.
We will need to raise additional funds through
debt or equity financings in order to complete our ultimate business objectives, including funding working capital to support
development and regulatory clearance of our products. We also may choose to raise additional funds in debt or equity financings
if they are available to us on reasonable terms to increase our working capital and to strengthen our financial position. Any
sales of additional equity or convertible debt securities would result in dilution of the equity interests of our existing stockholders,
which could be substantial. Also, new investors may require that we and certain of our stockholders enter into voting arrangements
that give them additional voting control or representation on our Board of Directors.
We have a limited number of shares of common stock that
we may issue, or reserve for issuance, under our Articles of Incorporation; as a result we will need to increase the number of
shares of authorized common stock in order to raise any significant amount of capital in the future or issue stock options, or
pursue acquisitions using our common stock as consideration.
We are currently unable to raise any significant
amount of working capital through the issuance of common stock or securities, including debt securities, convertible into or exercisable
for, common stock. Under our Articles of Incorporation, we are authorized to issue 10,000,000 shares of common stock. As of June
25, 2015, we have either issued, or reserved for issuance, nearly all of the 10,000,000 authorized shares. As a result, we cannot
raise any significant amount of working capital through the issuance of securities, including debt securities that are convertible
into, or exercisable for, common stock until we increase the number of shares of common stock available for issuance. Upon increasing
our authorized common stock to a number greater than 10,000,000, we will be able to use such newly authorized shares for issuance
in capital raising transactions, or in connection with acquisitions, or for the granting of incentive equity including stock options.
However, we cannot assure you that we will be able to increase our authorized shares prior to the need to raise additional capital
or utilize our common stock for strategic or incentive purposes, if at all. If we are unable to raise additional working capital
when needed, we may be unable to support our research and U.S. Food and Drug Administration, or FDA, clearance activities including
our planned clinical trials. The failure to implement our research and clearance activities would have a material adverse effect
on our ability to commercialize our products. If we are unable to utilize our common stock for strategic purposes we may not be
able to take advantage of acquisition opportunities when they arise. If we are unable to utilize our common stock for incentive
purposes, we may not be able to retain key persons or we may be unable to attract new employees if the need should arise.
Risks Related to Our Business Operations
We face intense competition in the medical device industry.
We compete with numerous U.S. and foreign companies
in the medical device industry, and many of our competitors have greater financial, personnel and research and development resources
than we do. Our competitors are developing vaccine candidates, which could compete with the Hemopurifier medical device candidates
we are developing. Our commercial opportunities will be reduced or eliminated if our competitors develop and market products for
any of the diseases we target that:
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have fewer or less severe adverse side effects; |
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are more adaptable to various modes of dosing; |
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are easier to administer; or |
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are less expensive than the products or product candidates we are developing. |
Even if we are successful in developing the
Hemopurifier and other Aethlon ADAPT based-products, and obtain FDA and other regulatory approvals necessary for commercializing
them, our products may not compete effectively with other successful products. Researchers are continually learning more about
diseases, which may lead to new technologies for treatment. Our competitors may succeed in developing and marketing products that
are either more effective than those that we may develop, alone or with our collaborators, or that are marketed before any products
we develop are marketed. Our competitors include fully integrated pharmaceutical companies and biotechnology companies as well
as universities and public and private research institutions. Many of the organizations competing with us have substantially greater
capital resources, larger research and development staffs and facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do. If our competitors develop more effective pharmaceutical treatments
for infectious disease or cancer, or bring those treatments to market before we can commercialize the Hemopurifier for such uses,
we may be unable to obtain any market traction for our products, or the diseases we seek to treat may be substantially addressed
by competing treatments. If we are unable to successfully compete against larger companies in the pharmaceutical industry, we may
never generate significant revenue or be profitable.
We have limited experience in identifying and working with
large scale contracts with medical device manufacturers; manufacture of our devices must comply with good manufacturing practices
in the U.S.
To achieve the levels of production necessary
to commercialize our Hemopurifier and other future Aethlon ADAPT-based products, we will need to secure large scale manufacturing
agreements with contract manufacturers which comply with good manufacturing practice standards and other standards prescribed by
various federal, state and local regulatory agencies in the U.S. and any other country of use. We have limited experience coordinating
and overseeing the manufacture of medical device products on a large scale. We cannot assure you that manufacturing and control
problems will not arise as we attempt to commercialize our products or that such manufacturing can be completed in a timely manner
or at a commercially reasonable cost. In addition, we cannot assure you that we will be able to adequately finance the manufacture
and distribution of our products on terms acceptable to us, if at all. If we cannot successfully oversee and finance the manufacture
of our products when they have obtained regulatory clearances, we may never generate revenue from product sales and we may never
be profitable.
Our Aethlon ADAPT technology may become obsolete.
Our Aethlon ADAPT products may be made unmarketable
by new scientific or technological developments where new treatment modalities are introduced that are more efficacious and/or
more economical than our Aethlon ADAPT products. The homeland security industry is growing rapidly with many competitors that are
trying to develop products or vaccines to protect against infectious disease. Any one of our competitors could develop a more effective
product which would render our technology obsolete. Further, our ability to achieve significant and sustained penetration of our
key target markets will depend upon our success in developing or acquiring technologies developed by other companies, either independently,
through joint ventures or through acquisitions. If we fail to develop or acquire, and manufacture and sell, products that satisfy
our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by quickly introducing
competitive products, then market acceptance of our products could be reduced and our business could be adversely affected. We
cannot assure you that our products will remain competitive with products based on new technologies.
Our use of hazardous materials, chemicals and viruses exposes
us to potential liabilities for which we may not have adequate insurance.
Our research and development involves the controlled
use of hazardous materials, chemicals and viruses. The primary hazardous materials include chemicals needed to construct the Hemopurifier
cartridges and the infected plasma samples used in preclinical testing of the Hemopurifier. All other chemicals are fully inventoried
and reported to the appropriate authorities, such as the fire department, who inspect the facility on a regular basis. We are subject
to federal, state, local and foreign laws governing the use, manufacture, storage, handling and disposal of such materials. Although
we believe that our safety procedures for the use, manufacture, storage, handling and disposal of such materials comply with the
standards prescribed by federal, state, local and foreign regulations, we cannot completely eliminate the risk of accidental contamination
or injury from these materials. We have had no incidents or problems involving hazardous chemicals or biological samples. In the
event of such an accident, we could be held liable for significant damages or fines.
We currently carry a limited amount of insurance
to protect us from damages arising from hazardous materials. Our product liability policy has a $3,000,000 limit of liability that
would cover certain releases of hazardous substances away from our facilities. For our facilities, our property policy provides
$25,000 in coverage for contaminant clean-up or removal and $50,000 in coverage for damages to the premises resulting from contamination.
Should we violate any regulations concerning the handling or use of hazardous materials, or should any injuries or death result
from our use or handling of hazardous materials, we could be the subject of substantial lawsuits by governmental agencies or individuals.
We may not have adequate insurance to cover all or any of such claims, if any. If we were responsible to pay significant damages
for violations or injuries, if any, we might be forced to cease operations since such payments could deplete our available resources.
Our success is dependent in part on a few key executive officers.
Our success depends to a critical extent on
the continued services of our Chief Executive Officer, James A. Joyce, our Chief Science Officer, Richard H. Tullis, and our President,
Rodney S. Kenley. If one or more of these key executive officers were to leave us, we would be forced to expend significant time
and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the
diversion of limited working capital. The unique knowledge and expertise of these individuals would be difficult to replace within
the biotechnology field. We can give you no assurances that we can find satisfactory replacements for these key executive officers
at all, or on terms that are not unduly expensive or burdensome to us. Although Mr. Joyce and Dr. Tullis have signed employment
agreements providing for their continued service to us, these agreements will not preclude them from leaving us should we be unable
to compete with offers for employment they may receive from other companies. We do not currently carry key man life insurance policies
on any of our key executive officers which would assist us in recouping our costs in the event of the loss of those officers. If
any of our key officers were to leave us, it could make it impossible, if not cause substantial delays and costs, to implement
our long term business objectives and growth.
Our inability to attract and retain qualified personnel could
impede our ability to achieve our business objectives.
We have five full-time employees consisting
of our Chief Executive Officer, our President, our Chief Science Officer, our Chief Financial Officer, and an executive assistant.
Exosome has three additional full-time employees, consisting of its Chief Science Officer, its Clinical Research Director, and
a research scientist. We utilize, whenever appropriate, consultants in order to conserve cash and resources.
Although we believe that these employees and
consultants will be able to handle most of our additional administrative, research and development and business development in
the near term, we will nevertheless be required over the longer-term to hire highly skilled managerial, scientific and administrative
personnel to fully implement our business plan and growth strategies, including to mitigate the material weakness in our internal
controls over financial reporting described above. Due to the specialized scientific nature of our business, we are highly dependent
upon our ability to attract and retain qualified scientific, technical and managerial personnel. Competition for these individuals,
especially in San Diego, California, where many biotechnology companies are located, is intense and we may not be able to attract,
assimilate or retain additional highly qualified personnel in the future. We cannot assure you that we will be able to engage the
services of such qualified personnel at competitive prices or at all, particularly given the risks of employment attributable to
our limited financial resources and lack of an established track record. Also, if we are required to attract personnel from other
parts of the U.S. or abroad, we may have significant difficulty doing so due to the high cost of living in the Southern California
area and due to the costs incurred with transferring personnel to the area. If we cannot attract and retain qualified staff and
executives, we will be unable to develop our products and achieve regulatory clearance, and our business could fail.
We plan to grow rapidly which will strain our resources; our
inability to manage our growth could delay or derail implementation of our business objectives.
We will need to significantly expand our operations
to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships with
various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties.
This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational
and financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage,
train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain
on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees
that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements
to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels
of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and
retain our anticipated increased employee base. If we cannot manage our growth initiatives, we will be unable to commercialize
our products on a large scale in a timely manner, if at all, and our business could fail.
As a public company with limited financial resources undertaking
the launch of new medical technologies, we may have difficulty attracting and retaining executive management and directors.
The directors and management of publicly traded
corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well
as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing
additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management
are also becoming increasingly concerned with the availability of directors’ and officers’ liability insurance to pay
on a timely basis the costs incurred in defending such claims. While we currently carry directors’ and officers’ liability
insurance, such insurance is expensive and difficult to obtain. If we are unable to continue or provide directors’ and officers’
liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside
directors to serve on our Board of Directors. We may lose potential independent board members and management candidates to other
companies in the biotechnology field that have greater directors’ and officers’ liability insurance to insure them
from liability or to biotechnology companies that have revenues or have received greater funding to date which can offer greater
compensation packages. The fees of directors are also rising in response to their increased duties, obligations and liabilities.
In addition, our products could potentially be harmful to users, and we are exposed to claims of product liability including for
injury or death. We have limited insurance and may not be able to afford robust coverage even as our products are introduced into
the market. As a company with limited resources and potential exposures to management, we will have a more difficult time attracting
and retaining management and outside independent directors than a more established public or private company due to these enhanced
duties, obligations and potential liabilities.
If we fail to comply with extensive regulations of U.S. and
foreign regulatory agencies, the commercialization of our products could be delayed or prevented entirely.
Our Hemopurifier products are subject to extensive
government regulations related to development, testing, manufacturing and commercialization in the U.S. and other countries. The
determination of when and whether a product is ready for large-scale purchase and potential use will be made by the U.S. Government
through consultation with a number of governmental agencies, including the FDA, the National Institutes of Health, the Centers
for Disease Control and Prevention and the Department of Homeland Security. Our product candidates are in the pre-clinical and
clinical stages of development and have not received required regulatory approval from the FDA, or any foreign regulatory agencies,
to be commercially marketed and sold. The process of obtaining and complying with FDA and other governmental regulatory approvals
and regulations in the U.S. and in foreign countries is costly, time consuming, uncertain and subject to unanticipated delays.
Obtaining such regulatory approvals, if any, can take several years. Despite the time and expense exerted, regulatory approval
is never guaranteed. We also are subject to the following risks and obligations, among others:
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the FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied; |
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the FDA may require additional testing for safety and effectiveness; |
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the FDA may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them; |
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if regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and |
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the FDA may change their approval policies and/or adopt new regulations. |
Failure to comply with these or other regulatory
requirements of the FDA may subject us to administrative or judicially imposed sanctions, including:
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product seizure or detention; |
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total or partial suspension of productions. |
Delays in successfully completing our planned clinical trials
could jeopardize our ability to obtain regulatory approval.
Our business prospects will depend on our ability
to complete studies, clinical trials, obtain satisfactory results, obtain required regulatory approvals and successfully commercialize
our Hemopurifier product candidates. Completion of our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons, including:
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serious adverse events related to our medical device candidates; |
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unsatisfactory results of any clinical trial; |
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the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules; and |
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different interpretations of our pre-clinical and clinical data, which could initially lead to inconclusive results. |
Our development costs will increase if we have
material delays in any clinical trial or if we need to perform more or larger clinical trials than planned. If the delays are significant,
or if any of our product candidates do not prove to be safe or effective or do not receive required regulatory approvals, our financial
results and the commercial prospects for our product candidates will be harmed. Furthermore, our inability to complete our clinical
trials in a timely manner could jeopardize our ability to obtain regulatory approval.
If we or our suppliers fail to comply with ongoing FDA or
other foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could
be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance or
approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such
product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign
regulatory bodies. In particular, we and our third-party suppliers may be required to comply with the FDA’s Quality System
Regulation, or QSR. These FDA regulations cover the methods and documentation of the design, testing, production, control, quality
assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements
is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers,
fail to adhere to QSR requirements in the U.S., this could delay production of our products and lead to fines, difficulties in
obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences,
which could, in turn, have a material adverse effect on our financial condition or results of operations.
In addition, the FDA assesses compliance with
the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by us or one
of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately
respond to any adverse inspectional observations or product safety issues, could result in any of the following enforcement actions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; |
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unanticipated expenditures to address or defend such actions; |
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customer notifications or repair, replacement, refunds, recall, detention or seizure of our products; |
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operating restrictions or partial suspension or total shutdown of production; |
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refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products; |
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withdrawing 510(k) clearances or premarket approvals that have already been granted; |
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refusal to grant export approval for our products; or |
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criminal prosecution. |
Any of these sanctions could have a material
adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers
may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in
our failure to produce our products on a timely basis and in the required quantities, if at all.
If our products, or malfunction of our products, cause or
contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary
corrective actions or agency enforcement actions.
Under the FDA medical device reporting regulations,
medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed
to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if
the malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within
the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event involving our products
also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as
inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a
lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our
reputation and financial results.
Our products may in the future be subject to product recalls.
A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, including a third-country
authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.
The FDA and similar foreign governmental authorities
have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design
or manufacture. In this case, the FDA, the authority to require a recall must be based on an FDA finding that there is reasonable
probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to
require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may,
under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications
of recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or voluntary recall
by us or one of our international distributors could occur as a result of an unacceptable risk to health, component failures, malfunctions,
manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert
managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition,
which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’
demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative
impact on our future sales and our ability to generate profits. Companies are required to maintain certain records of recalls,
even if they are not reportable to the FDA or another third-country competent authority. We may initiate voluntary recalls involving
our products in the future that we determine do not require notification of the FDA or another third-country competent authority.
If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement
could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for
failing to report the recalls when they were.
We are also required to follow detailed recordkeeping
requirements for all firm-initiated medical device corrections and removals. In addition, in December of 2012, the FDA issued a
draft guidance intended to assist the FDA and industry in distinguishing medical device recalls from product enhancements. Per
the guidance, if any change or group of changes to a device addresses a violation of the Federal Food, Drug, and Cosmetic Act,
that change would generally constitute a medical device recall and require submission of a recall report to the FDA.
We outsource almost all of our operational and development
activities, and if any party to which we have outsourced certain essential functions fails to perform its obligations under agreements
with us, the development and commercialization of our lead product candidate and any future product candidates that we may develop
could be delayed or terminated.
We generally rely on third-party consultants
or other vendors to manage and implement the day-to-day conduct of our operations, including conducting clinical trials and manufacturing
our current product candidates and any future product candidates that we may develop. Accordingly, we are and will continue to
be dependent on the timeliness and effectiveness of their efforts. Our dependence on third parties includes key suppliers and third
party service providers supporting the development, manufacture and regulatory approval of our products as well as support for
our information technology systems and other infrastructure. While our management team oversees these vendors, failure of any of
these third parties to meet their contractual, regulatory and other obligations or the development of factors that materially disrupt
the performance of these third parties could have a material adverse effect on our business. For example, all of the key oversight
responsibilities for the development and manufacture of our lead product candidate are conducted by our management team but all
activities are the responsibility of third party vendors.
If a clinical research organization, or CRO,
that we utilize is unable to allocate sufficient qualified personnel to our studies in a timely manner or if the work performed
by it does not fully satisfy the requirements of the FDA or other regulatory agencies, we may encounter substantial delays and
increased costs in completing our development efforts. Any manufacturer that we select may encounter difficulties in the manufacture
of new products in commercial quantities, including problems involving product yields, product stability or shelf life, quality
control, adequacy of control procedures and policies, compliance with FDA regulations and the need for further FDA approval of
any new manufacturing processes and facilities. If any of these occur, the development and commercialization of our product candidates
could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such
development and commercialization on our own. If we rely on only one source for the manufacture of the clinical or commercial supplies
of any of our product candidates or products, any production problems or supply constraints with that manufacturer could adversely
impact the development or commercialization of that product candidate or product.
If we or our contractors or service providers fail to comply
with regulatory laws and regulations, we or they could be subject to regulatory actions, which could affect our ability to develop,
market and sell our product candidates and any other or future product candidates that we may develop and may harm our reputation.
If we or our manufacturers or other third party
contractors fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to regulatory actions,
which could affect our ability to develop, market and sell our current product candidates or any future product candidates under
development successfully and could harm our reputation and lead to reduced or non-acceptance of our proposed product candidates
by the market. Even technical recommendations or evidence by the FDA through letters, site visits, and overall recommendations
to academia or biotechnology companies may make the manufacturing of a clinical product extremely labor intensive or expensive,
making the product candidate no longer viable to manufacture in a cost efficient manner. The mode of administration may make the
product candidate not commercially viable. The required testing of the product candidate may make that candidate no longer commercially
viable. The conduct of clinical trials may be critiqued by the FDA, or a clinical trial site’s Institutional Review Board
or Institutional Biosafety Committee, which may delay or make impossible clinical testing of a product candidate. The Institutional
Review Board for a clinical trial may stop a trial or deem a product candidate unsafe to continue testing. This may have a material
adverse effect on the value of the product candidate and our business prospects.
We will need to outsource and rely on third parties for the
clinical development and manufacture, sales and marketing of our current product candidates or any future product candidates that
we may develop, and our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.
We do not have the required financial and human
resources to carry out on our own all the pre-clinical and clinical development for our current product candidates or any other
or future product candidates that we may develop, and do not have the capability and resources to manufacture, market or sell our
current product candidates or any future product candidates that we may develop. Our business model calls for the partial or full
outsourcing of the clinical and other development and manufacturing, sales and marketing of our product candidates in order to
reduce our capital and infrastructure costs as a means of potentially improving our financial position. Our success will depend
on the performance of these outsourced providers. If such providers fail to perform adequately, our development of product candidates
may be delayed and any delay in the development of our product candidates would have a material and adverse effect on our business
prospects.
We are and will be exposed to product liability risks, and
clinical and preclinical liability risks, which could place a substantial financial burden upon us should we be sued.
Our business exposes us to potential product
liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical devices. We cannot
be sure that claims will not be asserted against us. A successful liability claim or series of claims brought against us could
have a material adverse effect on our business, financial condition and results of operations.
We cannot give assurances that we will be able
to continue to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will
provide adequate coverage against potential liabilities. Claims or losses in excess of any product liability insurance coverage
that we may obtain could have a material adverse effect on our business, financial condition and results of operations.
Our Hemopurifier products may be used in connection
with medical procedures in which it is important that those products function with precision and accuracy. If our products do not
function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products from the market.
In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to function as designed,
or our products are designed inappropriately, we may be subject to lawsuits seeking significant compensatory and punitive damages.
The risk of product liability claims, product recalls and associated adverse publicity is inherent in the testing, manufacturing,
marketing and sale of medical products. We have recently obtained general clinical trial liability insurance coverage. We cannot
give assurances that our insurance coverage will to be adequate or available. We may not be able to secure product liability insurance
coverage on acceptable terms or at reasonable costs when needed. Any product recall or lawsuit seeking significant monetary damages
may have a material effect on our business and financial condition. Any liability for mandatory damages could exceed the amount
of our coverage. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit
or prevent commercialization of other future product candidates.
We have not received, and may never receive, approval from
the FDA to market a medical device in the United States.
Before a new medical device can be marketed
in the U.S., it must first receive either premarket approval, or a PMA, or 510(k) clearance from the FDA, unless an exemption exists.
A PMA submission, which is a higher standard than a 501(k) clearance, is used to demonstrate to the FDA that a new or modified
device is safe and effective. The 510(k) is used to demonstrate that a device is “substantially equivalent” to a predicate
device (one that has been cleared by the FDA). We expect that any product we seek regulatory approval for will require a PMA. The
FDA approval process involves, among other things, successfully completing clinical trials and filing for and obtaining a PMA.
The PMA process requires us to prove the safety and effectiveness of our products to the FDA’s satisfaction. This process,
which includes preclinical studies and clinical trials, can take many years and requires the expenditure of substantial resources
and may include post-marketing surveillance to establish the safety and efficacy of the product. Notwithstanding the effort and
expense incurred, the process may never result in the FDA granting a PMA. Data obtained from preclinical studies and clinical trials
are subject to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be
encountered based upon changes in governmental policies for medical devices during the period of product development. The FDA can
delay, limit or deny approval of a PMA application for many reasons, including:
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our inability to demonstrate safety or effectiveness to the FDA’s satisfaction; |
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insufficient data from our preclinical studies and clinical trials to support approval; |
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failure of the facilities of our third-party manufacturer or suppliers to meet applicable requirements; |
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inadequate compliance with preclinical, clinical or other regulations; |
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our failure to meet the FDA’s statistical requirements for approval; and |
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changes in the FDA’s approval policies, or the adoption of new regulations that require additional data or additional clinical studies. |
Modifications to products that are approved
through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared through a 510(k)
may require a new 510(k). The FDA’s 510(k) clearance process usually takes from three to 12 months, but may last longer.
The process of obtaining a PMA is much more costly and uncertain than the 510(k) clearance process and generally takes from one
to three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained. Any of our
products considered to be a class III device, which are considered to pose the greatest risk and the approval of which is governed
by the strictest guidelines, will require the submission and approval of a PMA in order for us to market it in the U.S. We also
may design new products in the future that could require the clearance of a 510(k).
Although we have received approval to proceed
with clinical trials in the U.S. under the investigational device exemption, we cannot assure you that the current approval from
the FDA to proceed will not be revoked, that the study will be successful, or that the FDA PMA approval will eventually be obtained
and not revoked. Even if we obtain approval, the FDA or other regulatory authorities may require expensive or burdensome post-market
testing or controls. Any delay in, or failure to receive or maintain, clearance or approval for our future products could prevent
us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities
have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some physicians
from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.
The approval requirements for medical products used to fight
bioterrorism are still evolving, and we cannot be certain any products we develop for such uses would meet these requirements.
We are advancing product candidates under governmental
policies that regulate the development and commercialization of medical treatment countermeasures against bioterror and pandemic
threats. While we intend to pursue FDA market clearance to treat infectious bioterror and pandemic threats, it is often not
feasible to conduct human studies against these deadly high threat pathogens. Thus, we may not be able to demonstrate the effectiveness
of our treatment countermeasures through controlled human efficacy studies. Additionally, a change in government policies could
impair our ability to obtain regulatory approval and there is no assurance that the FDA will approve any of our product candidates.
The Hemopurifier was used to treat one patient suffering from
Ebola, and we have received a supplement to our investigational device exemption to establish protocols to treat Ebola patients
in the U.S.; however you should not construe these events as demonstrating that the device is effective in treating Ebola.
In October 2014, physicians at the Frankfurt
University Hospital in Frankfurt, Germany administered Hemopurifier therapy in a 6.5-hour treatment session to a patient infected
with Ebola. This treatment was made on an emergency basis. The patient was administered Hemopurifier therapy through special approval
from The Federal Institute for Drugs and Medical Devices (Bundesinstitut fur Arzneimittel und Medizinprodukte, BfArM), an independent
federal higher authority within the portfolio of the Federal Ministry of Health of Germany. While we believe the results of the
treatment of the Ebola patient in Germany to be positive with respect to the usage of the Hemopurifier to combat Ebola, no medical
organization or regulatory organization, inside or outside the U.S., has cleared the use of the device for Ebola treatment on a
commercial basis.
In addition, although the FDA approved a supplement
to our investigational device exemption to establish a protocol for the treatment of Ebola patients in the U.S., this approval
is very limited and the results of such protocol and potential treatments, if any, cannot be predicted. The usefulness of the Hemopurifier
in treating Ebola is still unproven in any clinical or regulatory process in the U.S. or elsewhere. Even if we enroll patients
in the Ebola protocol, the results of such treatments may not demonstrate the safety and efficacy of the device, may be equivocal
or may otherwise not be sufficient to obtain approval of the Hemopurifier for any uses associated with Ebola. In addition, the
approval of the supplement to our investigational device exemption does not in any way ensure clearance or approval of the Hemopurifier
device for any purpose. In April 2015, we submitted a Humanitarian Use Devise submission to the FDA to support market clearance
of the Hemopurifier as a treatment for Ebola virus. If the application is designated by the FDA, we then may submit a Humanitarian
Device Exemption marketing application to the Center for Devices and Radiological Health for marketing review. We cannot assure
you that the Hemopurifier will be proven to be useful in the treatment of Ebola or that it will ever be approved by U.S. or foreign
regulatory agencies for such use, or if approved, successfully commercialized by us for such use. We may never commercialize the
Hemopurifier specifically for use in treating Ebola.
The results of our clinical trials may not support our product
candidate claims or may result in the discovery of adverse side effects.
Any research and development, pre-clinical testing
and clinical trial activities involving any products that we are or may develop will be subject to extensive regulation and review
by numerous governmental authorities both in the U.S. and abroad. In the future we may conduct clinical trials to support approval
of new products. Clinical studies must be conducted in compliance with FDA regulations or the FDA may take enforcement action.
The data collected from these clinical studies may ultimately be used to support market clearance for these products. Even if our
clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or
that the FDA will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not
ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of
prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe
and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of
others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability
to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will
experience adverse side effects that are not currently part of the product candidate’s profile.
U.S. legislative or FDA regulatory reforms may make it more
difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our
products after approval is obtained.
From time to time, legislation is drafted and
introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture
and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or
reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions
or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition,
FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business
and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations
changed, and what the impact of such changes, if any, may be.
Should our products be approved for commercialization, lack
of third-party coverage and reimbursement for our devices could delay or limit their adoption.
In both the U.S. and international markets,
the use of medical devices is dependent in part on the availability of reimbursement from third-party payors, such as government
and private insurance plans. Healthcare providers that use medical devices generally rely on third-party payors to pay for all
or part of the costs and fees associated with the medical procedures being performed or to compensate them for their patient care
services. Should our products be approved for commercialization by the FDA, we cannot assure you that our future products will
be considered cost-effective, that reimbursement will be available in other sites or in other countries, including the U.S., if
approved, or that reimbursement will be sufficient to allow sales of our future products on a profitable basis. The coverage decisions
of third-party payors will be significantly influenced by the assessment of our future products by health technology assessment
bodies. Such assessments are outside our control and t we cannot assure you that such evaluations will be conducted or that they
will have a favorable outcome.
If approved for use in the U.S., we expect that
any products that we develop will be purchased primarily by medical institutions, which will in turn bill various third-party payors
for the health care services provided to patients at their facility. Payors may include the Centers for Medicare & Medicaid
Services, or CMS, which administers the Medicare program and works in partnership with state governments to administer Medicaid,
other government programs and private insurance plans. The process involved in applying for coverage and incremental reimbursement
from CMS is lengthy and expensive. Further, Medicare coverage is based on our ability to demonstrate the treatment is “reasonable
and necessary” for Medicare beneficiaries. Even if products utilizing our Aethlon ADAPT™ system receive FDA and other
regulatory clearance or approval, they may not be granted coverage and reimbursement by any payor, including by CMS. For some governmental
programs, such as Medicaid, coverage and reimbursement differ from state to state and some state Medicaid programs may not pay
adequate amounts for the procedure necessary to utilize products utilizing our Aethlon ADAPT™ system, or any payment at all.
Moreover, many private payors use coverage decisions and payment amounts determined by CMS as guidelines in setting their coverage
and reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for
doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.
Should our products be approved for commercialization, adverse
changes in reimbursement policies and procedures by payors may impact our ability to market and sell our products.
Healthcare costs have risen significantly over
the past decade, and there have been and continue to be proposals by legislators, regulators and third-party payors to decrease
costs. Third-party payors are increasingly challenging the prices charged for medical products and services and instituting cost
containment measures to control or significantly influence the purchase of medical products and services.
For example, in the U.S., the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, PPACA, among
other things, reduced and/or limited Medicare reimbursement to certain providers. The Budget Control Act of 2011, as amended by
subsequent legislation, further reduces Medicare’s payments to providers by 2 percent through fiscal year 2024. These reductions
may reduce providers’ revenues or profits, which could affect their ability to purchase new technologies. Furthermore, the
healthcare industry in the U.S. has experienced a trend toward cost containment as government and private insurers seek to control
healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers. Legislation could
be adopted in the future that limits payments for our products from governmental payors. In addition, commercial payors such as
insurance companies, could adopt similar policies that limit reimbursement for medical device manufacturers’ products. Therefore,
we cannot be certain that our product or the procedures or patient care performed using our product will be reimbursed at a cost-effective
level. We face similar risks relating to adverse changes in reimbursement procedures and policies in other countries where we may
market our products. Reimbursement and healthcare payment systems vary significantly among international markets. Our inability
to obtain international reimbursement approval, or any adverse changes in the reimbursement policies of foreign payors, could negatively
affect our ability to sell our products and have a material adverse effect on our business and financial condition.
Should our products be approved for commercialization, our
financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.
PPACA currently imposes, among other things,
an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the U.S. Under these provisions,
the Congressional Research Service predicts that the total cost to the medical device industry may be up to $20 billion over the
next decade. The Internal Revenue Service issued final regulations implementing the tax in December 2012, which requires, among
other things, bi-monthly payments and quarterly reporting. Once we market products, we will be subject to this or any future excise
tax on our sales of certain medical devices in the U.S. We anticipate that primarily all of our sales, once commenced, of medical
devices in the U.S. will be subject to this 2.3% excise tax.
Risks Related to Our Intellectual Property and Related Litigation
We rely upon licenses and patent rights from third parties
which are subject to termination or expiration.
We rely upon third party licenses and ownership
rights assigned from third parties for the development of specific uses for our Hemopurifier devices. For example, we are researching,
developing and testing cancer-related applications for our devices under patents assigned from the London Health Science Center
Research, Inc. Should any of our licenses be prematurely terminated for any reason, or if the patents and intellectual property
assigned to us or owned by such entities that we have licensed should be challenged or defeated by third parties, our research
efforts could be materially and adversely affected. We cannot assure you that any of our licenses or patents assigned to us will
continue in force for as long as we require for our research, development and testing of cancer treatments. We cannot assure you
that, should our licenses terminate, should the underlying patents and intellectual property be challenged or defeated, or should
patents and intellectual property assigned to us be challenged or defeated, suitable replacements can be obtained or developed
on terms acceptable to us, if at all. There is also the related risk that we may not be able to make the required payments under
any patent license or assignment agreement, in which case we may lose to ability to use one or more of the licensed or assigned
patents.
We could become subject to intellectual property litigation
that could be costly, result in the diversion of management’s time and efforts, require us to pay damages, prevent us from
selling our commercially available products and/or reduce the margins we may realize from our products.
The medical devices industry is characterized
by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes
a patent involves complex legal and factual issues, and the determination is often uncertain. There may be existing patents of
which we are unaware that our products under development may inadvertently infringe. The likelihood that patent infringement claims
may be brought against us increases as the number of participants in the infectious market increases and as we achieve more visibility
in the market place and introduce products to market.
Any infringement claim against us, even if without
merit, may cause us to incur substantial costs, and would place a significant strain on our financial resources, divert the attention
of management from our core business, and harm our reputation. In some cases, litigation may be threatened or brought by a patent
holding company or other adverse patent owner who has no relevant product revenues and against whom our patents may provide little
or no deterrence. If we were found to infringe any patents, we could be required to pay substantial damages, including triple damages
if an infringement is found to be willful. We also could be required to pay royalties and could be prevented from selling our products
unless we obtain a license or are able to redesign our products to avoid infringement. We may not be able to obtain a license enabling
us to sell our products on reasonable terms, or at all, and we cannot assure you that we would be able to redesign our products
in a way that would not infringe those patents. If we fail to obtain any required licenses or make any necessary changes to our
technologies or the products that incorporate them, we may be unable to commercialize one or more of our products or may have to
withdraw products from the market, all of which would have a material adverse effect on our business, financial condition and results
of operations.
If the combination of patents, trade secrets and contractual
provisions upon which we rely to protect our intellectual property is inadequate, our ability to commercialize our products successfully
will be harmed.
Our success depends significantly on our ability
to protect our proprietary rights to the technologies incorporated in our products. We currently have three issued U.S. patents
and nine pending U.S. patent applications. We also have fourteen issued foreign patents and have applied for five additional foreign
patents. Our issued patents begin to expire in 2019, with the last of these patents expiring in 2029, although terminal disclaimers,
patent term extension or patent term adjustment can shorten or lengthen the patent term. We rely on a combination of patent protection,
trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology.
However, these may not adequately protect our rights or permit us to gain or keep any competitive advantage.
The issuance of a patent is not conclusive as
to its scope, validity or enforceability. The scope, validity or enforceability of our issued patents can be challenged in litigation
or proceedings before the U.S. Patent and Trademark Office or foreign patent offices where our applications are pending. The U.S.
Patent and Trademark Office or foreign offices may deny or require significant narrowing of claims in our pending patent applications.
Patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection
or be issued in a form that is advantageous to us. Proceedings before the U.S. Patent and Trademark Office or foreign offices could
result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents.
The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S.,
if at all. Some of our patents may expire before we receive FDA approval to market our products in the U.S. or we receive approval
to market our products in a foreign country. Although we believe that certain patent applications and/or other patents issued more
recently will help protect the proprietary nature of the Hemopurifier treatment technology, we cannot assure you that this protection
will be sufficient to protect us during the development of that technology.
Our competitors may successfully challenge and
invalidate or render unenforceable our issued patents, including any patents that may issue in the future, which could prevent
or limit our ability to market our products and could limit our ability to stop competitors from marketing products that are substantially
equivalent to ours. In addition, competitors may be able to design around our patents or develop products that provide outcomes
that are comparable to our products but that are not covered by our patents.
We have also entered into confidentiality and
assignment of intellectual property agreements with all of our employees, consultants and advisors directly involved in the development
of our technology as one of the ways we seek to protect our intellectual property and other proprietary technology. However, these
agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information
in the event of unauthorized use or disclosure or other breaches of the agreements.
In the event a competitor infringes upon any
of our patents or other intellectual property rights, enforcing our rights may be difficult, time consuming and expensive, and
would divert management’s attention from managing our business. We cannot assure you that we will be successful on the merits
in any enforcement effort. In addition, we may not have sufficient resources to litigate, enforce or defend our intellectual property
rights.
We may rely on licenses for new technology, which may affect
our continued operations with respect thereto.
As we develop our technology, we may need to
license additional technologies to optimize the performance of our products. We may not be able to license these technologies on
commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed
products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies
can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon
a particular development path, which could seriously harm our business, financial position and results of our operations.
New technology may lead to our competitors developing superior
products which would reduce demand for our products.
Research into technologies similar to ours is
proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the development
of products similar to ours. These new technologies may, if successfully developed, offer significant performance or price advantages
when compared with our technologies. There is no assurance that our existing patents or our pending and proposed patent applications
will offer meaningful protection if a competitor develops a novel product based on a new technology.
If we are unable to protect our proprietary technology and
preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact our ability
to remain in business.
Our ability to successfully commercialize our
products will depend on our ability to protect those products and our technology with domestic and foreign patents. We will also
need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable
scope of the claims of the patent. The patent positions of technology companies, including us, are uncertain and involve complex
legal and factual issues. We cannot assure you that our patents will prevent other companies from developing similar products
or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that
may prevent the sale of our products or require us to pay significant licensing fees in order to market our products.
From time to time, we may need to obtain licenses
to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are
unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may
be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or
that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore,
we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured
for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.
If we are required to engage in expensive and lengthy litigation
to enforce our intellectual property rights, such litigation could be very costly and the results of such litigation may not be
satisfactory.
Although we have entered into invention assignment
agreements with our employees and with certain advisors, and we routinely enter into confidentiality agreements with our contract
partners, if those employees, advisors or contract partners develop inventions or processes independently that may relate to products
or technology under development by us, disputes may arise about the ownership of those inventions or processes. Time-consuming
and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements. In addition,
we may be required to commence litigation to enforce such agreements if they are violated, and it is certainly possible that we
will not have adequate remedies for breaches of our confidentiality agreements as monetary damages may not be sufficient to compensate
us. In addition, we may be unable to fund the costs of such litigation to a satisfactory conclusion, which could leave us without
recourse to enforce contracts that protect our intellectual property rights.
Other companies may claim that our technology infringes on
their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive
and could result in our being prohibited from developing, marketing, selling or distributing our products.
Because of the complex and difficult legal and
factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not
be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products
or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development
or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation,
which will divert the attention of management away from the development of new products and the operation of our business. We cannot
assure investors that we would prevail in any such litigation. If we are found to have infringed on a third party’s intellectual
property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded
from manufacturing particular products or using particular technology.
Other parties may challenge certain of our foreign
patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection
afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents
in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability
to maintain patent protection for the same technology in other jurisdictions.
Risks Related to U.S. Government Contracts
Our revenues are almost entirely derived from one U.S. Government
contract.
We have derived and expect for the near future
to continue to derive substantially all of our revenue under our DARPA contract. If DARPA chooses not to continue our
contract in year five (commencing October 1, 2015 through September 30, 2016) of the contract, our revenues could be substantially
reduced. In addition, if we are unable to meet any of the DARPA contract milestones to the satisfaction of DARPA, if
at all, we may not earn payments under the contract. Any reduction in our revenues, or the termination of the DARPA contract for
any reason, could have a material and adverse effect on our business and operations. In addition, DARPA has the right to unilaterally
cancel the contract at any time.
We may not obtain additional U.S. Government contracts to
further develop our technology.
We can give no assurances that we will be successful
in obtaining additional government grants or contracts. The process of obtaining government contracts is lengthy with
the uncertainty that we will be successful in obtaining announced grants or contracts for therapeutics as a medical device technology.
Accordingly, we cannot be certain that we will be awarded any additional U.S. Government grants or contracts utilizing our Hemopurifier
platform technology.
U.S. Government agencies have special contracting requirements
including a right to audit us which create additional risks; a negative audit would be detrimental to us.
Our business plan to utilize the Aethlon ADAPT
system is likely to involve contracts with the U.S. Government. Such contracts typically contain unfavorable termination provisions
and are subject to audit and modification by the government at its sole discretion, which subjects us to additional risks. These
risks include the ability of the U.S. Government to unilaterally:
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suspend or prevent us for a period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations; |
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audit and object to our contract-related costs and fees, including allocated indirect costs; |
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control and potentially prohibit the export of our products; and |
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change certain terms and conditions in our contracts. |
As a U.S. Government contractor, we are required
to comply with applicable laws, regulations and standards relating to our accounting practices and would be subject to periodic
audits and reviews. As part of any such audit or review, the U.S. Government may review the adequacy of, and our compliance with,
our internal control systems and policies, including those relating to our purchasing, property, estimating, compensation and management
information systems. Based on the results of its audits, the U.S. Government may adjust our contract-related costs and fees, including
allocated indirect costs. In addition, if an audit or review uncovers any improper or illegal activity, we would possibly be subject
to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension
of payments, fines and suspension or prohibition from doing business with the U.S. Government. We could also suffer serious harm
to our reputation if allegations of impropriety were made against us. Although we have not had any government audits and reviews
to date, future audits and reviews could cause adverse effects. In addition, under U.S. Government purchasing regulations, some
of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs,
and some marketing expenses, would possibly not be reimbursable or allowed under such contracts. Further, as a U.S. Government
contractor, we would be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits
and other legal actions and liabilities to which purely private sector companies are not.
Our Defense Advanced Research Projects Agency Contract is
a fixed price contract, which may not adequately cover our costs in performance should those costs increase.
Our contract with DARPA is on a firm fixed price
basis, which means that we are required to deliver our products at a fixed price regardless of the actual costs we incur and to
absorb any costs in excess of the fixed price. If we have not accurately estimated the costs of expenses to perform the contract,
we may not have positive revenue and we may incur losses to cover our costs. We expect that our future contracts, if any,
with the U.S. Government also may be fixed price contracts. Estimating costs that are related to performance in accordance with
contract specifications is difficult, particularly where the period of performance is over several years. Our failure to anticipate
technical problems, estimate costs accurately or control costs during performance of a fixed price contract could reduce the profitability
of a fixed price contract or cause a loss, which could in turn harm our operating results.
As a U.S. Government contractor, we are subject to a number
of procurement rules and regulations.
Government contractors must comply with specific
procurement regulations and other requirements. These requirements, although customary in government contracts, impact our performance
and compliance costs. In addition, current U.S. Government budgetary constraints could lead to changes in the procurement environment,
including the Department of Defense’s recent initiative focused on efficiencies, affordability and cost growth and other
changes to its procurement practices. If and to the extent such changes occur, they could impact our results of operations and
liquidity, and could affect whether and, if so, how we pursue certain opportunities and the terms under which we are able to do
so.
In addition, failure to comply with these regulations
and requirements could result in reductions of the value of contracts, contract modifications or termination, and the assessment
of penalties and fines, which could negatively impact our results of operations and financial condition. Our failure to comply
with these regulations and requirements could also lead to suspension or debarment, for cause, from government contracting or subcontracting
for a period of time. Among the causes for debarment are violations of various statutes, including those related to procurement
integrity, export control, government security regulations, employment practices, protection of the environment, accuracy of records
and the recording of costs, and foreign corruption. The termination of our government contract as a result of any of these acts
could have a negative impact on our results of operations and financial condition and could have a negative impact on our reputation
and ability to procure other government contracts in the future.
In fulfilling our U.S. Government contract we depend on a
predictable supply of raw materials and components.
We are dependent upon the delivery by suppliers
of materials and the assembly by subcontractors of major components and subsystems used in our products in a timely and satisfactory
manner and in full compliance with applicable terms and conditions. Some products require relatively scarce raw materials. We are
generally subject to specific procurement requirements, which may, in effect, limit the suppliers and subcontractors we may utilize.
In some instances, we are dependent on sole-source suppliers. If any of these suppliers or subcontractors fails to meet our needs,
we may not have readily available alternatives. In addition, some of our suppliers or subcontractors may be impacted by the recent
global financial crisis, which could impair their ability to meet their obligations to us. If we experience a material supplier
or subcontractor problem, our ability to satisfactorily and timely complete our clinical trial or delivery obligations could be
negatively impacted which could result in reduced sales, termination of contracts and damage to our reputation and relationships
with clinical trial providers and if applicable, the U.S. Government. We could also incur additional costs in addressing such a
problem. Any of these events could have a negative impact on our results of operations and financial condition.
Risks Relating to Our Common Stock and Our Corporate Governance
Historically we have not paid dividends
on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.
We have never paid cash dividends on our common
stock. We intend to retain our future earnings, if any, to fund operational and capital expenditure needs of our business, and
we do not anticipate paying any cash dividends in the foreseeable future. Furthermore, future financing instruments may do the
same. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our common stockholders
in the foreseeable future.
Our stock price is speculative, and
there is a risk of litigation.
The trading price of
our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:
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revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community; |
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reduced investor confidence in equity markets, due in part to corporate collapses in recent years; |
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speculation in the press or analyst community; |
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wide fluctuations in stock prices, particularly with respect to the stock prices for other medical device companies; |
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announcements of technological innovations by us or our competitors; |
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new products or the acquisition of significant customers by us or our competitors; |
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changes in interest rates; |
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changes in investors’ beliefs as to the appropriate price-earnings ratios for us and our competitors; |
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changes in recommendations or financial estimates by securities analysts who track our common stock or the stock of other medical device companies; |
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sales of common stock by directors and executive officers; |
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rumors or dissemination of false or misleading information, particularly through Internet chat rooms, instant messaging, and other rapid-dissemination methods; |
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conditions and trends in the medical device industry generally; |
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the announcement of acquisitions or other significant transactions by us or our competitors; |
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adoption of new accounting standards affecting our industry; |
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general market conditions; |
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domestic or international terrorism and other factors; and |
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the other factors described in this section. |
Fluctuations in the price of our common stock
may expose us to the risk of securities class action lawsuits. Although no such lawsuits are currently pending against us and we
are not aware that any such lawsuit is threatened to be filed in the future, there is no assurance that we will not be sued based
on fluctuations in the price of our common stock. Defending against such suits could result in substantial cost and divert management’s
attention and resources. In addition, any settlement or adverse determination of such lawsuits could subject us to significant
liability.
If at any time our common stock is subject
to the Securities and Exchange Commission’s penny stock rules, broker-dealers may experience difficulty in completing customer
transactions and trading activity in our securities may be adversely affected.
If at any time our common stock is not listed
on a national securities exchange or we have net tangible assets of $5,000,000 or less and our common stock has a market price
per share of less than $5.00, transactions in our common stock will be subject to the Securities and Exchange Commission’s,
or SEC’s, “penny stock” rules. If our common stock is subject to the “penny stock” rules promulgated
under the Exchange Act, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities
may be adversely affected. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks; and |
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and |
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior
to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in
highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and |
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute
transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose
of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks
of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer
and the registered representative, current quotations for the securities and the rights and remedies available to an investor in
cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for
the penny stock held in the account and information on the limited market in penny stocks.
Our common stock has had an unpredictable trading volume which
means you may not be able to sell our shares at or near asking prices or at all.
Trading in our common shares in the over-the-counter
market historically has been volatile and often has been thin, meaning that the number of persons interested in purchasing our
common shares at or near ask prices at any given time may be relatively small or non-existent. This situation is attributable to
a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or influence sales volume, and that even if we came
to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours
or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there
may be periods of several days or more when trading activity in our shares is minimal, as compared to a seasoned issuer which has
a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price.
We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained,
or that current trading levels will be sustained.
The market price for our common stock is volatile; you may
not be able to sell our common stock at or above the price you have paid for them, which may result in losses to you.
The market for our common shares is characterized
by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more
volatile than a seasoned issuer for the indefinite future. In fact, during the 52-week period ended March 31, 2015, the high and
low closing sale prices of a share of our common stock were $28.50 and $5.00, respectively. The volatility in our share price is
attributable to a number of factors. First, as noted above, trading in our common shares often has been thin. As a consequence
of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence
the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event
that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which
could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative investment due to our
limited operating history, limited amount of revenue, lack of profit to date, and the uncertainty of future market acceptance for
our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or
most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market
more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add
to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results;
acceptance of our proprietary technology as a viable method of augmenting the immune response of clearing viruses and toxins from
human blood; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our capital
commitments and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the
market price of our common shares regardless of our operating performance. We cannot make any predictions or projections as to
what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain
their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time
will have on the prevailing market price.
The NASDAQ Capital Market may not list our common stock, which
could limit investors’ ability to effect transactions in our securities and subject us to additional trading restrictions.
We have applied to list our common stock
on the NASDAQ Capital Market, a national securities market. Based, in part, on capital we raised in a June 2015 financing, we expect
to meet, on a pro forma basis, the NASDAQ Capital Market minimum initial listing standards, which generally mandate that we meet
certain requirements relating to shareholders’ equity, market capitalization, aggregate market value of publicly held shares,
distribution requirements and corporate governance standards, we cannot assure you that we will be able to meet those initial listing
requirements. If NASDAQ does not approve our application, our securities will continue to trade on the OTCQB and we could continue
to face significant material adverse consequences, including:
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a limited availability of market quotations for our securities; |
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reduced liquidity with respect to our securities; |
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a limited amount of news and analyst coverage for our company; and |
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a decreased ability to issue additional securities or obtain additional financing in the future. |
The National Securities Markets Improvement
Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which
are referred to as “covered securities.” Because we expect that our common stock will be listed on the NASDAQ Capital
Market, we believe such securities will be covered securities. Although the states would be preempted from regulating the sale
of our securities, in that event, the federal statute does allow the states to investigate companies if there is a suspicion of
fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in
a particular case. Further, our common stock is not listed on the NASDAQ Capital Market, our securities would not be covered securities
and we would be subject to regulation in each state in which we offer our securities.
Even if our application for listing of our common stock on
the NASDAQ Capital Market is approved, we cannot assure you that we will be able to comply with the continued listing standards
of the NASDAQ Capital Market.
Even if our application for listing of our common
stock on the NASDAQ Capital Market is approved, we cannot assure you that we will be able to comply with the listing standards
that we are required to meet in order to maintain a listing of our common stock on the NASDAQ Capital Market. Our failure to meet
those requirements may result in our common stock being delisted from the NASDAQ Capital Market.
The Depository Trust Company imposed restrictions upon electronic
trading of our common stock, which negatively affected liquidity of the stock and our ability to raise capital.
In September 2011, The Depository Trust Company
placed a "chill" on the electronic clearing of trades in our shares which led to some brokerage firms being unwilling
to accept certificates and/or electronic deposits of our stock. We have since been successful in lifting the restrictions and our
shares now clear electronically making more brokers willing to trade in our common stock. We cannot assure you that The Depository
Trust Company will not again place a chill on our common stock. A chill, if placed on our common stock, would affect the liquidity
of our shares which may make it difficult to purchase or sell shares in the open market. It may also have an adverse effect on
our ability to raise capital since investors may be unable to resell shares into the market. Our inability to raise capital on
terms acceptable to us, if at all, could have a material and adverse effect on our business and operations.
Our directors and officers own or control approximately
7% of our outstanding common shares which may limit your ability to propose new management or influence the overall direction of
the business; this concentration of control may also discourage potential takeovers that could otherwise provide a premium to you.
As of June 25, 2015, our officers and directors
beneficially own or control approximately 7% of our outstanding common shares (assuming the exercise of all outstanding options
and warrants held by our officers and directors). These persons will have the ability to substantially influence all matters submitted
to our stockholders for approval and to control our management and affairs, including extraordinary transactions such as mergers
and other changes of corporate control, and going private transactions.
A large number of our common shares are issuable upon
exercise of outstanding convertible securities which, if exercised or converted, would be dilutive to your holdings.
As of March 31, 2015, there are outstanding
purchase options and warrants entitling the holders to purchase 1,932,405 common shares at a weighted average exercise price of
$7.92 per share. This includes 26,105 warrants that are conditional upon the exercise of other warrants. As of March 31, 2015,
there are 98,043 shares underlying promissory notes convertible into common stock at a weighted average exercise price of $5.60.
As a result of our June 2015 financing,
and as of June 25, 2015, there are outstanding purchase options and warrants entitling the holders to purchase 2,771,127 common
shares at a weighted average exercise price of $7.44 per share. This includes 26,105 warrants that are conditional upon the exercise
of other warrants and includes the 402,318 purchase options and warrants that were suspended by certain of our officers and directors
in June 2015.
The exercise price for all of our outstanding
options and warrants, or the conversion price of our convertible notes, may be less than your cost to acquire our common shares.
In the event of the exercise or conversion of these securities, you could suffer substantial dilution of your investment in terms
of your percentage ownership in us as well as the book value of your common shares. In addition, the holders of the convertible
notes, common share purchase options or warrants may sell common shares in tandem with their exercise or conversion of those securities
to finance that exercise or conversion, or may resell the shares purchased in order to cover any income tax liabilities that may
arise from their exercise of the options or warrants or conversion of the notes.
Our issuance of additional common shares, or convertible securities,
would be dilutive to your holdings.
We are entitled under our Articles of Incorporation
to issue up to 10,000,000 shares of common stock. We have reserved for issuance 2,030,448 shares of common stock for existing options,
warrants and convertible notes. As of March 31, 2015, we have issued and outstanding 6,657,046 shares of common stock. As a result,
as of March 31, 2015 we had 1,312,506 common shares available for issuance to new investors or for use to satisfy indebtedness
or pay service providers.
Our Board of Directors may generally issue shares
of common stock, or options or warrants to purchase those shares, without further approval by our stockholders based upon such
factors as our Board of Directors may deem relevant at that time. It is likely that we will be required to issue a large amount
of additional securities to raise capital to further our development. It is also likely that we will be required to issue a large
amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their
services, both in the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we will not issue
additional shares of common stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate
at the time.
However, as of June 25, 2015, and as a result of our June 2015 financing, substantially all 10,000,000
shares of common stock are either issued or reserved for issuance upon the conversion or exercise of outstanding securities including
options, warrants and convertible notes and we cannot issue any meaningful amount of shares of common stock, or options or warrants,
or convertible notes until we increase the number of authorized shares to a number above 10,000,000, or unless outstanding warrants,
options or convertible notes expire or are surrendered back to us before they are exercised or converted.
Our issuance of additional shares of common stock in satisfaction
of services, or to repay indebtedness, would be dilutive to your holdings.
Our Board of Directors may generally issue shares
of common stock to pay for debt or services, without further approval by our stockholders based upon such factors that our Board
of Directors may deem relevant at that time. For the past four fiscal years (ending March 31, 2015), we issued a total of 2,602,909
shares for debt to reduce our obligations. The average price discount of common stock issued for debt in this period, weighted
by the number of shares issued for debt in such period was 76% and 43% for the years ended March 31, 2015 and 2014, respectively.
For the past four fiscal years (ending March
31, 2015), we issued a total of 216,032 shares as payment for services. The average price discount (premium) of common stock issued
for services during this period, weighted by the number of shares issued was (6.6)% and 16.0% for the years ended March 31, 2015
and 2014, respectively. It is likely that we will issue additional securities to pay for services and reduce debt in the future,
after we increase our authorized shares. We cannot give you any assurance that we will not issue additional shares of common stock
at various discounts under circumstances we may deem appropriate at the time. However, as of June 25, 2015, and as a result of
our June 2015 financing, substantially all 10,000,000 shares of common stock are either issued or reserved for issuance upon the
conversion or exercise of outstanding securities including options, warrants and convertible notes and we cannot issue any meaningful
amount of shares of common stock, or options or warrants, or convertible notes until we increase the number of authorized shares
to a number above 10,000,000, or unless outstanding warrants, options or convertible notes expire or are surrendered back to us
before they are exercised or converted.
Our officers and directors are entitled to indemnification
from us for liabilities under our articles of incorporation, which could be costly to us and may discourage the exercise of stockholder
rights.
Our Articles of Incorporation contains provisions
which eliminate the liability of our directors for monetary damages to our company and stockholders. Our by-laws also require us
to indemnify our officers and directors. We may also have contractual indemnification obligations under our agreements with our
directors, officers and employees. The foregoing indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors, officers and employees that we may be unable to
recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers
and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders
against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and
stockholders.
Our by-laws and Nevada law may discourage, delay or prevent
a change of control of our company or changes in our management, would have the result of depressing the trading price of our common
stock.
Provisions of Nevada anti-takeover law (NRS
78.378 et seq.) could have the effect of delaying or preventing a third party from acquiring us, even if the acquisition
arguably could benefit our stockholders. Various provisions of our by-laws may delay, defer or prevent a tender offer or takeover
attempt of us that a stockholder might consider in his or her best interest. Our by-laws may be adopted, amended or repealed by
the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the
election of directors, and except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal
the by-laws by a vote of not less than a majority of our directors. The interests of these stockholders and directors may not be
consistent with your interests, and they may make changes to the by-laws that are not in line with your concerns.
Our authorized but unissued shares of common
stock are available for our Board or Directors to issue without stockholder approval. We may use these additional shares for a
variety of corporate purposes, however, faced with an attempt to obtain control of us by means of a proxy context, tender offer,
merger or other transaction our Board of Directors acting alone and without approval of our stockholders can issue large amounts
of capital stock as part of a defense to a take-over challenge.
The existence of the foregoing provisions and
other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of
our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive
a premium for your common stock in an acquisition.
We incur substantial costs as a result of being a public company
and our management expects to devote substantial time to public company compliance programs.
As a public company, we incur significant legal,
insurance, accounting and other expenses, including costs associated with public company reporting. We intend to invest resources
to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative
expenses and may divert management’s time and attention from product development and commercialization activities. If our
efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies
due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may
be harmed. These laws and regulations could make it more difficult and costly for us to obtain director and officer liability insurance
for our directors and officers, and we may be required to accept reduced coverage or incur substantially higher costs to obtain
coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified
members of our Board of Directors, particularly to serve on our audit and compensation committees. In addition, if we are unable
to continue to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain
the quotation of our common stock OTCQB Marketplace or any senior market to which we may apply for listing, which would likely
have a material adverse effect on the trading price of our common stock.
If securities or industry analysts do not publish research
or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading
volume could decline.
The trading market for our common stock will
be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage
by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts
who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
As a Smaller Reporting Company, we are not required to furnish information
under this Item 1B.
ITEM 2. PROPERTIES
We currently lease approximately 2,576 square
feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 under a 39-month gross plus utilities
lease that commenced on December 1, 2014 with an initial rental rate of $6,054 per month. Such lease expires in March 2018. We
believe this new leased facility will be satisfactory for our office needs over the term of the lease.
We also lease approximately 1,667 square feet
of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $3,917 per month under
a one-year gross plus utilities lease that previously was scheduled to expire in October 2014 and was recently extended to expire
in October 2015. We believe this leased facility will be satisfactory for our laboratory needs over the term of the lease
Our Exosome Sciences, Inc. subsidiary leases
approximately 2,055 square feet of office and laboratory space at 11 Deer Park Drive, South Brunswick, NJ at the rate of $3,596
per month under a one-year gross plus utilities lease that previously was scheduled to expire in October 2014 and was recently
extended to expire in October 2015. We believe this leased facility will be satisfactory for Exosome Sciences, Inc.’s operational
needs over the term of the lease.
ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various
claims, lawsuits, and/or disputes with third parties or breach of contract actions incidental to the normal course of our business
operations. We are currently not involved in any litigation or any pending legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
We have no disclosure applicable to this item.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET PRICE FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is quoted on the OTCQB Marketplace
under the trading symbol "AEMD." Trading in our common stock historically has been volatile and often has been thin.
The following table sets forth for the calendar
periods indicated the quarterly high and low bid prices for our common stock as reported by the OTCQB Marketplace. The prices represent
quotations between dealers, without adjustment for retail markup, mark down or commission, and do not necessarily represent actual
transactions.
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BID PRICE | |
PERIOD | |
HIGH | | |
LOW | |
| |
| | |
| |
Calendar 2015: | |
| | | |
| | |
First Quarter | |
$ | 19.50 | | |
$ | 8.50 | |
| |
| | | |
| | |
Calendar 2014: | |
| | | |
| | |
Fourth Quarter | |
| 36.00 | | |
| 5.50 | |
Third Quarter | |
| 9.50 | | |
| 5.00 | |
Second Quarter | |
| 11.50 | | |
| 7.00 | |
First Quarter | |
| 13.50 | | |
| 8.00 | |
| |
| | | |
| | |
Calendar 2013: | |
| | | |
| | |
Fourth Quarter | |
| 9.00 | | |
| 6.50 | |
Third Quarter | |
| 14.50 | | |
| 5.00 | |
Second Quarter | |
| 7.00 | | |
| 4.00 | |
First Quarter | |
| 7.50 | | |
| 3.00 | |
There were approximately 186 record holders
of our common stock at June 23, 2015. The number of registered stockholders includes any beneficial owners of common shares held
in street name.
The transfer agent and registrar for our common
stock is Computershare Investor Services, located at 350 Indiana Street, Suite 800, Golden, Colorado 80401.
We have not paid any dividends on our common
stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash dividends on our
common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition,
our anticipated capital requirements and other factors that the board of directors may think are relevant. However, we currently
intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion
of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
We have sold or issued the following equity
securities not registered under the Securities Act of 1933, or Securities Act, in reliance upon the exemption from registration
pursuant to Section 4(a)(2) of the Securities Act or Regulation D of the Securities Act during the fiscal year ended March 31,
2015 and subsequent thereto through the date of filing this report. Except as stated below, no underwriting discounts or commissions
were payable with respect to any of the following transactions.
Aethlon Medical, Inc. Equity Transactions in the Fiscal Year
Ended March 31, 2015.
On May 20, 2014, May 23, 2014, June 6, 2014,
June 11, 2014 and June 26, 2014, we sold seven accredited investors 43,849 shares of restricted common stock for an aggregate purchase
price of $320,800 and an average price of $7.50 per share. The common stock purchase price was calculated as 80% of the average
closing price of our common stock for the five-day period immediately preceding the date of each subscription agreement.
On June 24, 2014, we issued the holder of a
convertible note 466,365 shares of restricted common stock and five-year warrants to acquire up to 136,190 shares of common stock
at an exercise price of $2.10 per share and up to 7,944 shares of common stock at an exercise price of $5.40 per share. We issued
the stock and warrants upon the conversion of a combined principal and interest balance of $1,003,200 due under the note. We also
issued the holder 1,500 shares of common stock as a service fee for converting the note in full and for agreeing to waive anti-dilution
price protection in certain warrants previously issued to the holder by us.
On July 8, 2014, we issued the holder of a convertible
note 51,837 shares of restricted common stock and five-year warrants to acquire up to 46,429 shares of common stock at an exercise
price of $2.10 per share and up to 2,708 shares of common stock at an exercise price of $5.40 per share. We issued the stock and
warrants upon the conversion of the interest balance of $116,970 due under the note and for the holder’s agreement to extend
the expiration date of the note. We also issued the holder 500 shares of common stock as a service fee for extending the note,
for converting the interest due under the note and for agreeing to waive anti-dilution price protection in certain warrants previously
issued to the holder by us.
On August 6, 2014, we issued 7,806 shares of
restricted common stock at an average price of $12.00 per share to a consultant in payment for investor relations consulting services
valued at $75,000 based on the value of the services provided.
On July 15, 2014, we issued 38,750 shares of
restricted common stock to the holders of three convertible notes in exchange for the partial or full conversion of principal and
interest in the aggregate amount of $81,375 at a conversion price of $2.10 per share.
On July 24, 2014, we issued an aggregate of
50,079 shares of restricted common stock and a seven-year warrant to issue up to 25,040 shares of common stock at an exercise price
of $6.60 per share to Dr. Chetan Shah, one of our directors. We issued the common stock and warrant to Dr. Shah upon the conversion
of an aggregate of $220,349 of unpaid principal and accrued interest due under a 10% Convertible Note previously issued to Dr.
Shah by us on July 9, 2013.
On September 17, 2014, we issued to the holder
of the remaining 2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit
warrants to acquire up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share. The units were
issued to the note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due under the
promissory note, which represented the entire amount outstanding under the note.
On July 29, 2014, August 4, 2014 and August
6, 2014, we issued to four investors 53,465 shares of restricted common stock through the cash exercise of eight warrants for $259,474
of cash at an average exercise price of approximately $5.00 per share. As an inducement to those investors, we issued them replacement
warrants to acquire up to an aggregate of 53,465 shares of common stock on the same terms as the warrants they exercised.
On August 29, 2014, September 2, 2014 and September
22, 2014, we issued and sold to three accredited investors units consisting of (a) 2,000 restricted shares of our common stock
at prices per share ranging from $4.55 to $4.70 and (b) a five-year warrant to purchase 1,000 shares of common stock at exercise
prices ranging from $6.80 to $7.15 per share. In total, the investors purchased for cash an aggregate of $90,000 of units. The
investors acquired an aggregate of 19,500 shares of common stock and warrants to acquire up to an aggregate of 9,750 shares of
common stock.
On November 7, 2014, we issued 3,400 shares
of restricted common stock at price of $10.25 per share, along with a cash payment of $50,000, in full repayment of the outstanding
principal balance and interest balance on the Law Firm Note.
On October 10, 2014, October 14, 2014 and October
15, 2014, we issued and sold to eight accredited investors units consisting of (a) 2,000 restricted shares of common stock at prices
per share ranging from $5.25 to $5.70 and (b) a five-year warrant to purchase 1,000 shares of common stock at exercise prices ranging
from $7.70 to $8.35 per share. In total, the investors purchased for cash an aggregate of $502,700 of units. The investors acquired
an aggregate of 90,125 shares of common stock and warrants to acquire up to an aggregate of 45,063 shares of common stock.
On October 9, 2014, we issued to an accredited
investor units consisting of an aggregate of 36,716 shares of restricted common stock and warrants to acquire up to an aggregate
of 18,358 shares of common stock at an exercise price of $7.70 per share. We issued the units to the investor upon the conversion
of an aggregate of $189,087 of unpaid principal and accrued interest due under two promissory notes (the remaining October and
November 2009 10% Convertible Note and the April 2010 10% Convertible Note) previously issued to the investor by us. The amounts
converted represented the entire principal and interest outstanding under the notes and the notes held by that holder were retired.
On October 17, 2014 and October 20, 2014, we
issued an aggregate of 113,422 shares of restricted common stock and seven-year warrants to issue up to an aggregate of 113,422
shares of common stock at exercise prices ranging from $4.30 to $6.25 per share to eight accredited investors. One of the investors
is Dr. Shah. The common stock and warrants were issued to the investors upon the cash exercise of previously issued warrants held
by them. The investors paid an aggregate of $579,251 upon exercise of the previously outstanding warrants at exercise prices ranging
from $4.30 to $6.25 per share.
On October 15, 2014, we issued an aggregate
of 70,460 shares of restricted common stock to two accredited investors upon the conversion of an aggregate of $147,965 of unpaid
principal and accrued interest due under promissory notes previously issued to the investors by us. The conversion price per share
was $2.10.
On November 6, 2014, we sold two accredited
investors (i) convertible promissory notes in the aggregate principal amount of $527,780 and (ii) five year warrants to purchase
up to 47,123 shares of common stock at a fixed exercise price of $8.40 per share. The convertible promissory notes bear interest
at the annual rate of 10% and mature on April 1, 2016. The aggregate gross cash proceeds to us were $415,000 after subtracting
legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 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 fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of common stock.
On October 21, 2014, we issued an aggregate
of 328,463 shares of restricted common stock to three accredited investors upon the cashless exercise of warrants previously issued
to the investors by us with an exercise price of $2.10 per share.
On November 12, 2014, we issued 780 shares of
restricted common stock to a consultant in payment for investor relations services valued at $8,000 based on the value of the services
provided.
On November 18, 2014, we issued an aggregate
of 112,500 shares of restricted common stock to two investors upon the conversion of an aggregate of $236,250 of unpaid principal
and accrued interest under a promissory note previously issued by us. The conversion price was $2.10 per share.
On November 19, 2014 we issued 285 shares of
restricted common stock to an investor upon the cashless exercise of warrants previously issued by us with an exercise price of
$5.50 per share.
On November 25, 2014, we issued an aggregate
of 214,286 shares of restricted common stock to two accredited investors upon the conversion of an aggregate of $450,000 of unpaid
principal and accrued interest due under promissory notes previously issued by us with a conversion price of $2.10 per share.
On November 26, 2014, we authorized the issuance
of an aggregate of 88,165 shares of restricted common stock to 38 accredited investors upon the cashless exercise of warrants previously
issued to the investors by us with an exercise price of $11.00 per share.
On November 26, 2014, we authorized the issuance
of 9,921 shares of restricted common stock to an accredited investor upon the cashless exercise of warrants previously issued by
us with an exercise price of $5.50 per share.
On December 2, 2014, we sold $3,300,000 of units,
comprised of common stock and warrants, to three affiliated institutional investors at a price of $15.00 per unit. Each unit consisted
of one share of common stock and five-year warrants to purchase 1.2 shares of common stock at an exercise price of $15.00 per share.
Accordingly, we issued a total of 220,000 shares of restricted common stock and warrants to purchase 264,000 shares of common stock.
For its services as sole placement agent for the financing, we paid Roth Capital Partners, LLC a cash fee of $231,000 and expense
reimbursement of $25,000 and we issued it a five-year warrant to purchase 11,000 shares of common stock at an exercise price of
$15.00 per share.
On December 5, 2014, we issued an aggregate
of 3,500 shares of restricted common stock to two affiliated accredited investors upon the cashless exercise of warrants previously
issued by us with an exercise price of $2.10 per share.
On January 2, 2015, we issued 47,619 shares
of common stock to an accredited investor upon the conversion of $100,000 of unpaid principal due under a promissory note we previously
issued to the investor. The conversion price per share was $2.10.
On January 14, 2015, we authorized the issuance
of 3,574 shares of common stock to an accredited investor upon the cashless exercise of warrants previously issued by us with an
exercise price of $5.50 per share.
On March 16, 2015, we issued 37,265 shares of
common stock to an accredited investor upon the conversion of an aggregate of $78,257 of unpaid principal and accrued interest
due under a promissory note we previously issued to the investor. The conversion price per share was $2.10.
On March 30, 2015, we issued 13,803 shares
of common stock to an accredited investor upon the conversion of an aggregate of $28,988 of unpaid principal and accrued interest
due under a promissory note we previously issued to the investor. The conversion price per share was $2.10.
Aethlon Medical, Inc. Equity Transactions Subsequent to the
Fiscal Year Ended March 31, 2015.
On June 25, 2015, we sold $6,000,000 of
units, comprised of common stock and warrants, to 18 accredited investors at a price of $6.30 per unit. Each unit consisted of
one share of common stock and .75 of a five-year warrant to purchase one share of common stock at an exercise price of $6.30 per
share. Accordingly, we issued a total of 952,383 shares of restricted common stock and warrants to purchase 714,286 shares of common
stock. For its services as sole placement agent for the financing, we paid Roth Capital Partners, LLC a cash fee of $285,512 and
expense reimbursement of $75,000 and we issued it a five-year warrant to purchase 32,371 shares of common stock at an exercise
price of $6.30 per share.
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
Equity Compensation Plans
Summary equity compensation plan data
The following table sets forth information,
as of March 31, 2015, about our equity compensation plans (including the potential effect of debt instruments convertible into
common stock) in effect as of that date:
Plan category |
|
(a)
Number of securities
to be issued
upon exercise
of outstanding
options, warrants
and rights
(1)(2) |
|
|
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights |
|
|
(c)
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a)) |
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans approved by security holders |
|
|
– |
|
|
$ |
– |
|
|
|
9,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by security holders (1)(3)(4) |
|
|
501,690 |
|
|
$ |
11.00 |
|
|
|
28,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
501,690 |
|
|
$ |
11.00 |
|
|
|
38,645 |
|
(1) The description of the material terms of non-plan issuances
of equity instruments is discussed in Note 6 to the accompanying consolidated financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
(3) On June 8, 2009, our Board of Directors approved the grant to
Mr. James A. Joyce, our Chief Executive Officer, of 80,000 shares of restricted common stock. The market price of our stock on the
grant date was $12.00 per share and the shares vested in equal installments over a thirty-six-month period that commenced on June
30, 2010.
(4) On March 31, 2015 we had 28,845 shares available under our 2010
Stock Incentive Plan.
2000 Stock Option Plan
Our 2000 Stock Option Plan provides for the
grant of incentive stock options to our full-time employees (who may also be directors) and nonstatutory stock options to non-employee
directors, consultants, customers, vendors or providers of significant services. The exercise price of any incentive stock option
may not be less than the fair market value of the common stock on the date of grant or, in the case of an optionee who owns more
than 10% of the total combined voting power of all classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any nonstatutory stock option, must not be less than 75% of the fair market
value of the common stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is 10,000 options.
At March 31, 2015, all of the grants previously
made under the 2000 Stock Option Plan had expired and 200 restricted shares had been issued under the plan, with 9,800 available
for future issuance.
2003 Consultant Stock Plan
Our 2003 Consultant Stock Plan advances our
interests by helping us obtain and retain the services of persons providing consulting services upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or providing those persons with incentives or inducements
affording such persons an opportunity to become owners of our capital stock. Consultants or advisors are eligible to receive grants
under the plan only if they are natural persons providing bona fide consulting services to us, with the exception of any services
they may render in connection with the offer and sale of our securities in a capital-raising transaction, or which may directly
or indirectly promote or maintain a market for our securities. The plan provides for the grant of common stock. No awards may be
issued after the ten-year anniversary of the date we adopted the plan, the termination date for the plan. We have periodically
amended the plan to increase the number of shares available for issuance under the plan with the approval of our Board of Directors.
We filed registration statements on Form S-8
with the Securities and Exchange Commission to register under the Securities Act the common shares issuable under this plan as
follows:
Date of Filing |
Number of Shares Registered |
March 29, 2004 |
20,000 |
August 29, 2005 |
40,000 |
August 9, 2007 |
40,000 |
July 10, 2009 |
20,000 |
February 17, 2010 |
30,000 |
We discontinued using this plan in October 2012.
2010 Stock Incentive Plan
In August 2010, we adopted the 2010 Stock Incentive
Plan, which provides incentives to attract, retain and motivate employees and directors whose present and potential contributions
are important to our success by offering them an opportunity to participate in our future performance through awards of options,
the right to purchase common stock, stock bonuses and stock appreciation rights and other awards. A total of 70,000 common shares
were initially reserved for issuance under the 2010 Stock Incentive Plan.
In August 2010, we filed a registration statement
on Form S-8 for the purpose of registering 70,000 common shares issuable under this plan under the Securities Act, and in July
2012, we filed a registration statement on Form S-8 for the purpose of registering 100,000 common shares issuable under this plan
under the Securities Act.
At March 31, 2015, we had 28,845 shares available
under this plan.
2012 Directors Compensation Program
In July 2012, our Board of Directors approved
a board compensation program that modifies and supersedes the 2005 Directors Compensation Program, which was previously in effect.
Under the 2012 program, in which only non-employee directors may participate, an eligible director will receive a grant of $35,000
worth of ten-year 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. In addition,
under this 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 fiscal year ended March 31, 2013, our
Board of Directors granted ten-year options to acquire an aggregate of 33,342 shares of our common stock, all with an exercise
price of $3.80 per share, to our four outside directors under the 2012 program.
In the fiscal year ended March 31, 2014, our
Board of Directors granted ten-year options to acquire an aggregate of 31,911 shares of our common stock, all with an exercise
price of $4.10 per share, to our five outside directors under the 2012 program.
In the fiscal year ended March 31, 2015, our
Board of Directors granted ten-year options to acquire an aggregate of 11,053 shares of our common stock, all with an exercise
price of $9.50 per share, to our three outside directors under the 2012 program.
At March 31, 2015 we had issued 26,757 options
under the old 2005 program to outside directors and 79,309 options to employee-directors, 21,756 outside directors’ options
had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-directors’ options had been
forfeited and no options under the old 2005 program remained outstanding.
On June 6, 2014, our Board of Directors approved
certain changes to the 2012 program. Under this modified program, a new eligible director will receive an initial grant of $50,000
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. These options
will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant.
In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program
also will receive a grant of $35,000 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. Such options will vest on the first anniversary
of the date of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The
modified 2012 program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee
chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.
Stand-alone grants
From time to time our Board of Directors grants
restricted stock or common share purchase options or warrants to selected directors, officers, employees and consultants as equity
compensation to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually
negotiated.
On June 8, 2009, our Board of Directors approved
the grant to Mr. Joyce of 80,000 shares of restricted common stock at a price per share of $12.00, the vesting and issuance of
which occurred in equal installments over a thirty-six-month period that commenced on June 30, 2010.
As of March 31, 2015, we had issued 499,763
options (of which 146,810 have been exercised or cancelled) and authorized the issuance of 80,000 shares of restricted stock outside
of the 2005 Directors Compensation Plan, the 2012 Directors Compensation Plan, the 2000 Stock Option Plan, the 2003 Consultant
Stock Plan and the 2010 Incentive Stock Plan.
ITEM 6. SELECTED FINANCIAL DATA
As a Smaller Reporting Company, we are not required to furnish information
under this Item 6.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should
be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report.
Overview
We are 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 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.
In June 2013, the U.S. Food and Drug Administration,
or FDA, approved our investigational device exemption application to initiate a ten-patient human clinical trial in one location
in the U.S. to treat dialysis patients who are infected with the Hepatitis C virus. The principal investigator of that clinical
trial recently began recruiting patients. Successful outcomes of that human trial as well as at least one follow-on human trial
will be required by the FDA in order to commercialize our products in the U.S. The regulatory agencies of certain foreign countries
where we intend to sell this device will also require one or more human clinical trials.
Some of our patents may expire before we receive
FDA approval to market our products in the U.S. or we receive approval to market our products in a foreign country. However, we
believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of
the Hemopurifier treatment technology.
Through our majority-owned subsidiary, Exosome
Sciences, Inc., or Exosome, we are also studying potential diagnostic techniques for identifying and monitoring neurological conditions
and cancer. We consolidate Exosome’s activities in our consolidated financial statements.
Fiscal Years Ended March 31, 2015 and 2014
Results of Operations
Revenues
We recorded government contract revenue in the
fiscal years ended March 31, 2015 and 2014. This revenue arose from work performed under our government contract with
the Defense Advanced Research Projects Agency, or DARPA, and our subcontract with Battelle Memorial Institute, or Battelle, as
follows:
| |
Fiscal Year Ended 3/31/15 | | |
Fiscal year Ended 3/31/14 | | |
Change in Dollars | |
DARPA contract | |
$ | 630,887 | | |
$ | 1,466,482 | | |
$ | (835,595 | ) |
Battelle subcontract | |
| 131,530 | | |
| 157,287 | | |
| (25,757 | ) |
Total government contract revenue | |
$ | 762,417 | | |
$ | 1,623,769 | | |
$ | (861,352 | ) |
DARPA Contract
We entered into a contract with DARPA on September
30, 2011. Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal
bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a fixed-price contract
with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement
of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract,
we will perform certain incremental work towards the achievement of specific milestones against which we will invoice the government
for fixed payment amounts.
Originally, only the base year (year one of
the contract) was effective for the parties; however, DARPA subsequently exercised the option on the second, third and fourth years
of the contract. DARPA has the option to enter into the contract for year five. The milestones are comprised of planning, engineering
and clinical targets, the achievement of which in some cases will require the participation and contribution of third party participants
under the contract. We cannot assure you that we alone, or with third party participants, will meet such milestones to the satisfaction
of the government and in compliance with the terms of the contract or that we will be paid the full amount of the contract revenues
during any year of the contract term. We commenced work under the contract in October 2011.
In February 2014, DARPA reduced the scope of
our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and
blood processing instrumentation. This scope reduction will reduce the possible payments under the contract by $858,469 over years
three through five.
In the fiscal year ended March 31, 2015, we
reported $630,887 in contract revenue for that fiscal year and in the fiscal year ended March 31, 2014, we reported $1,466,482
in contract revenue for that fiscal year.
As of March 31, 2015, we had invoiced DARPA
for contract payments totaling $4,685,562 over the course of the contract.
Battelle Subcontract
We entered into a subcontract agreement with
Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original
DARPA contract, and we are one of several subcontractors on that systems integration project. The Battelle subcontract is under
a time and materials basis and we began generating revenues under the subcontract in the three months ended September 30, 2013.
Our expected future revenue from the subcontract will be at the discretion of Battelle. The Battelle subcontract is our first cost-reimbursable
contract.
Our revenue under this contract is a function
of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates
for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost
of any consultants hired by us to perform work on the project. Each payment will require approval by the program manager at Battelle.
Operating Expenses
Consolidated operating expenses were $4,755,270
for the fiscal year ended March 31, 2015 compared to $4,679,697 in the fiscal year ended March 31, 2014, an increase of $75,573.
The net increase of $75,573 was due to increases in professional fees of $50,799 and in payroll and related expenses of $48,765,
which were partially offset by a decrease in general and administrative expense of $23,991.
The $50,799 increase in our professional fees
primarily arose from $303,170 in expenses related to our U.S. clinical trial and a $103,888 increase in professional fees of Exosome
due to the commencement of its operations. Those increases were largely offset by a decrease in DARPA-related professional fees
of $292,106 due to decreased use of consultants and a decrease in non-DARPA-related professional fees of $64,153.
The $48,765 increase in payroll and related
expenses was principally driven by a $305,167 increase in the payroll and related expenses of Exosome due to the commencement
of its operations. That increase was partially offset by a $191,465 reduction in our stock-based compensation and a $64,937 decrease
in payroll and related expenses of Aethlon Medical due to headcount reductions.
The $23,991 decrease in general and administrative
expenses primarily arose from a $157,782 decrease in general and administrative expenses related to our government contracts, which
was partially offset by a $98,574 increase in general and administrative expenses at Exosome due to the commencement of its operations.
We also had a $35,217 increase in our other, non-DARPA-related general and administrative expenses.
Other Expense
In the fiscal year ended March 31, 2015, we
recognized other expenses of $2,986,641 compared to $10,383,034 of other expense in the fiscal year ended March 31, 2014. The following
table breaks out the various components of our other expense over the fiscal years ended March 31, 2015 and 2014:
| |
Components of Other Expense in Fiscal Year Ended | |
| |
March 31, 2015 | | |
March 31, 2014 | | |
Change | |
| |
| | |
| | |
| |
Loss on debt conversion | |
$ | 2,753,989 | | |
$ | 40,256 | | |
$ | 2,713,732 | |
| |
| | | |
| | | |
| | |
Change in fair value of derivative liability | |
| – | | |
| 8,547,015 | | |
| (8,547,015 | ) |
| |
| | | |
| | | |
| | |
Interest and other debt expenses | |
| 452,276 | | |
| 1,287,221 | | |
| (834,945 | ) |
| |
| | | |
| | | |
| | |
Loss on litigation settlement | |
| – | | |
| 583,601 | | |
| (583,601 | ) |
| |
| | | |
| | | |
| | |
Other (income) | |
| (219,624 | ) | |
| (75,059 | ) | |
| (144,564 | ) |
| |
| | | |
| | | |
| | |
Total other expense | |
$ | 2,986,641 | | |
$ | 10,383,034 | | |
$ | (7,396,393 | ) |
We recorded a loss on debt conversions of $2,753,989
and $40,257 in the fiscal years ended March 31, 2015 and 2014, respectively. In the both fiscal years, those losses arose from
the conversion to equity of principal and accrued interest on certain notes payable.
For the fiscal year ended March 31, 2014, we
recorded a change in the estimated fair value of derivative liability as a loss of $8,547,015. For the fiscal year ended March
31, 2015, we did not record any change in the estimated fair value of derivative liability as it was extinguished during that fiscal
year.
We also recorded litigation settlement expense
of $583,601 in the fiscal year ended March 31, 2014 with no comparable expense in the fiscal year ended March 31, 2015.
Other income for the fiscal year ended March
31, 2015 included a gain of $362,800 related to a reduction in our accrued damages due to various debt settlements over the fiscal
year and a charge of $143,176 for the change in fair value related to the extension of the warrants of a note holder in exchange
for a postponement in the agreed payment date of his notes. For the fiscal year ended March 31, 2014, other income included a gain
of $75,000 related to the extinguishment of accrued damages as a result of the litigation settlement in that fiscal year.
Our interest and other debt expense decreased
by $834,945 from the fiscal year ended March 31, 2014 to the fiscal year ended March 31, 2015. The following table breaks out the
various components of our interest expense over the fiscal years ended March 31, 2015 and 2014:
|
|
Components of Interest Expense and Other Debt
Expenses in Fiscal Year Ended |
|
|
|
March 31,
2015 |
|
|
March 31,
2014 |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
166,899 |
|
|
$ |
425,725 |
|
|
$ |
(258,826 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred financing costs |
|
|
118,147 |
|
|
|
863 |
|
|
|
117,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of note discounts |
|
|
155,230 |
|
|
|
4,284 |
|
|
|
150,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note restructuring expense |
|
|
12,000 |
|
|
|
856,349 |
|
|
|
(844,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and other debt expenses |
|
$ |
452,276 |
|
|
$ |
1,287,221 |
|
|
$ |
(834,945 |
) |
As a result of the above factors, our net loss
before noncontrolling interests decreased from $13,438,962 for the fiscal year ended March 31, 2014 to $6,979,494 for the fiscal
year ended March 31, 2015.
Liquidity and Capital Resources
At March 31, 2015, we had a cash balance of
$855,596 and working capital of $630,420. This compares to a cash balance of $1,250,279 and a working capital deficit of $14,169,471
at March 31, 2014. Between April 1, 2015 and June 22, 2015, we billed $192,508 and collected $384,882 under our government contracts.
Significant additional financing must be obtained in order to provide a sufficient source of operating capital and to allow the
Company to continue to operate as a going concern. In addition, we will need to raise capital to complete the recently approved
human clinical trial in the U.S.
In June 2015, we raised $5,591,988 in net
proceeds from a financing, which, coupled with previously existing funds on hand and expected revenues from our government contracts,
should finance our operations for the fiscal year ending March 31, 2016 including the cost of our current clinical trials.
However, we will require significant additional
financing to complete additional future clinical trials in the U.S., as well as fund all of our continued research and development
activities for the Hemopurifier and products on our Aethlon ADAPT platform beyond the fiscal year ending March 31, 2016.
Future capital requirements will depend
upon many factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical programs,
the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights,
the time and costs involved in obtaining regulatory approvals, competing technological and market developments, as well as our
ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We expect
to continue to incur increasing negative cash flows and net losses for the foreseeable future.
Cash Flows
Cash flows from operating, investing and financing
activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows (in thousands):
| |
(In thousands) For the year ended | |
| |
March 31, 2015 | | |
March 31, 2014 | |
Cash (used in) provided by: | |
| | | |
| | |
Operating activities | |
$ | (5,049 | ) | |
$ | (2,139 | ) |
Investing activities | |
| – | | |
| (96 | ) |
Financing activities | |
| 4,655 | | |
| 3,360 | |
Net increase (decrease) in cash | |
$ | (394 | ) | |
$ | 1,125 | |
Net Cash from Operating Activities.
We used cash in our operating activities due
to our losses from operations. Net cash used in operating activities was approximately $5,049,000 in fiscal 2015 compared to net
cash used in operating activities of approximately $2,139,000 in fiscal 2014, an increase of approximately $2,910,000. The $2,910,000
increase was primarily due to the use of approximately $1,802,000 to pay down accounts payable, related party payables and other
current liabilities and an increase in our net cash used in operating activities of approximately $1,108,000 primarily due to the
commencement of Exosome’s operations.
Net Cash from Investing Activities.
During the fiscal year ended March 31, 2015,
we did not use any cash for purchases of equipment while in the fiscal year ended March 31, 2014 we used approximately $96,000
in cash for purchases of equipment.
Net Cash from Financing Activities.
Net cash generated from financing activities
increased from approximately $3,360,000 in the fiscal year ended March 31, 2014 to approximately $4,655,000 in the fiscal year
ended March 31, 2015. Included in net cash provided by financing activities in fiscal 2015 were approximately $4,763,000 from the
issuance of common stock and $415,000 from the issuance of notes payable, which was partially offset by approximately $523,000
in repayments of notes payable in cash. Included in net cash provided by financing activities in fiscal 2014 were approximately
$3,177,000 from the issuance of common stock and $400,000 from the issuance of notes payable, which was partially offset by approximately
$217,000 in repayments of notes payable in cash.
At the date of this filing, we plan to invest
significantly into purchases of our raw materials and into our contract manufacturing arrangement.
Critical Accounting Policies
Use of Estimates
The preparation of consolidated financial statements
in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to
make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of expenses
during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various
other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual
results may differ from these estimates under different future conditions. We believe that the estimates and assumptions that are
most important to the portrayal of our financial condition and results of operations, in that they require the most difficult,
subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical accounting
estimates relate to revenue recognition, stock purchase warrants issued with notes payable, beneficial conversion feature of convertible
notes payable, impairment of intangible assets and long lived assets, stock compensation, deferred tax asset valuation allowance,
and contingencies.
Fair Value Measurements
We measure the fair value of applicable financial
and non-financial instruments 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 derivative liabilities was
determined based on unobservable inputs that are not corroborated by market data, which is a Level 3 classification. We recorded
derivative liabilities on our balance sheet at fair value with changes in fair value recorded in our consolidated statements of
operations. At March 31, 2015, we had no derivative liabilities.
Revenue Recognition
With respect to revenue recognition, we entered
into a government contract with DARPA and have recognized revenue during the fiscal years ended March 31, 2015 and 2014 of $630,887
and $1,466,482, respectively, under 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 for the fiscal years ended March 31, 2015 and 2014.
We also recognize revenue under for a secondary
smaller contract under a time and materials non-fixed price basis where we recognize revenue as the services are performed.
Stock Purchase Warrants
We grant warrants in connection with the issuance
of certain notes payable and other financing transactions. When such warrants are classified as equity, we measure the relative
estimated fair value of such warrants which represents a discount from the face amount of the notes payable. Such discounts are
amortized to interest expense over the term of the notes. We analyze such warrants for classification as either equity or derivative
liabilities and value them based on binomial lattice models.
Beneficial Conversion Feature of Notes Payable
The convertible feature of certain notes payable
provides for a rate of conversion that is below market value. Such feature is normally characterized as a "beneficial conversion
feature” of which we measure the estimated fair value in circumstances in which the conversion feature is not required to
be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements
as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.
Share-based Compensation
We account for share-based compensation awards
using the fair-value method and record such expense based on the grant date fair value in the consolidated financial statements
over the requisite service period.
Derivative Instruments
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 reporting 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.
Instruments classified as derivative liabilities
are remeasured each reporting period (or upon reclassification) and the change in fair value is recorded on our consolidated statement
of operations in other expense (income).
Deferred Tax Asset Valuation Allowance
Deferred tax assets 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.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to
investors.
Convertible Notes Payable and Warrants
NOVEMBER 2014 10% CONVERTIBLE NOTES
In November 2014, we entered into a Subscription
Agreement with two accredited investors providing for the issuance and sale of (i) convertible promissory notes (the “November
2014 10% Convertible Notes”) in the aggregate principal amount of $527,780 and (ii) five year warrants to purchase up to
47,123 shares of Common Stock at a fixed exercise price of $8.40 per share. The November 2014 10% Convertible Notes bear interest
at the annual rate of 10% and mature on April 1, 2016.
The aggregate gross cash proceeds to us were
$415,000 after subtracting legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 due diligence
fee and an original issuance discount. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence
fee and original issuance discount and will amortize those costs over the life of the notes using the effective interest method.
The estimated relative fair value of warrants
issued in connection with the November 2014 10% Convertible Notes is recorded as a debt discount and is amortized as additional
interest expense over the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value of
these warrants. In addition, as the effective conversion price of the debt was less than market price of the underlying common
stock on the date of issuance, we recorded an additional debt discount of $287,647 related to the beneficial conversion feature.
As of March 31, 2014, the $527,780 principal amount outstanding under this agreement is presented net of unamortized debt discount
of $372,551.
The November 2014 10% Convertible Notes are
convertible at the option of the holders into shares of our common stock at a fixed price of $5.60 per share, for up to an aggregate
of 94,246 shares of Common Stock. There are no registration requirements with respect to the shares of common stock underlying
the notes or the warrants.
The pricing on both the conversion price and
on the warrant exercise price reflected a negotiation that began in September 2014 and continued through funding in November 2014.
During that period of time the price of our common stock rose significantly, which complicated the pricing negotiations. We ended
up with pricing the notes and warrants at levels consistent with our prior equity unit issuances in October 2014.
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into
Amended and Restated Series A 12% Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of
certain promissory notes previously issued by us, extending the due date to December 31, 2010 on the aggregate principal balance
of $900,000. During the fiscal year ended March 31, 2013, the holders of $15,000 of the Notes converted their principal and related
accrued interest into common stock. During the fiscal year ended March 31, 2015, the holders of the remaining $885,000 of the Notes
converted their principal and related accrued interest into common stock. There was no balance remaining at March 31, 2015.
Weiner Note Conversion
On June 24, 2014, we entered into an
agreement with the Ellen R. Weiner Family Revocable Trust (the “Trust”), a holder of a Series A 12% Convertible Note
(the “Note”), which previously was classified as being in default. As per the agreement, the Trust converted past due
principal of $660,000 and accrued interest balance of $343,200 into restricted common stock.
Additionally, the Trust agreed to
waive anti-dilution price protection underlying warrants previously issued to the Trust. On June 26, 2014, three other parties
who held similar warrants also agreed to waive their anti-dilution price protection.
Under its agreement, the Trust
converted the entire $1,003,200 past due principal and interest balance on the Note, which previously was in default, into an aggregate
of 466,365 restricted shares of our common stock and five-year warrants to acquire up to 136,190 shares of our common stock at
an exercise price of $2.10 per share (which exercise price was the result of certain contractual price adjustments previously made
during 2011) and up to 7,944 shares of our common stock at an exercise price of $5.40 per share (collectively, the “Conversion
Securities”). Based on the fair value of the warrants and shares issued to the Trust for the accrued interest, we recorded
a loss on settlement of notes of $1,791,421.
In exchange for the Trust’s conversion
in full of the Note and accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants,
in addition to the Conversion Securities, we issued to the Trust 1,500 restricted shares of common stock as a service fee, changed
the exercise price of all of the previously issued warrants to $2.10 per share and extended the expiration date of all of the
previously issued warrants to July 1, 2018. We valued the 1,500 share service fee at $12,000 based on our closing price on the
date of the agreement and recorded that value as interest expense during the June 2014 period.
Bird Estate Extension
On July 8, 2014, we executed a written
restructuring agreement (the “Agreement”) with the Estate of Allan Bird (the “Estate”), a holder of a Series
A 12% Convertible Note (the “Note”), which previously was classified as being in default. Since the negotiations for
the Agreement were completed in the month of June, we recorded the impact of the Agreement as of June 30, 2014. In the Agreement,
the Estate agreed to extend the expiration date of the Note to April 1, 2016, to convert approximately $116,970 of accrued interest
to equity, and to waive anti-dilution price protection underlying the Note and warrants previously issued to the Estate.
Under the Agreement, the Estate converted
the entire $116,970 past due interest balance on the Note, which previously was in default, into an aggregate of 51,837 restricted
shares of our common stock. The Estate received five-year warrants to acquire up to 46,429 shares of our common stock at an exercise
price of $2.10 per share (which exercise price was the result of certain contractual price adjustments previously made during 2011).
Based on our common stock prices during a period of negotiation with the Estate including during calendar year 2013, the Estate
also received five- year warrants to acquire up to 2,708 shares of our common stock at an exercise price of $5.40 (collectively
known as the “Conversion Securities”). Based on the fair value of the warrants and shares issued to the Estate for
the accrued interest, we recorded a loss on settlement of notes of $663,209.
In exchange for the Estate’s
extension of the Note, conversion of accrued interest and for the waivers of anti-dilution price protection in the previously
issued warrants, in addition to the Conversion Securities, we also issued to the Estate 500 restricted shares of common stock
as an extension fee and extended the expiration date of all of the previously issued warrants to July 1, 2018. We valued the 500
share extension fee at $4,500 based on our closing price and recorded that value as a deferred financing cost, which we will amortize
over the extended two year life of the note.
Bird Estate Conversion
In November 18, 2014, we issued an aggregate
of 112,500 shares of common stock to the Estate upon the conversion of an aggregate of $236,250 representing all $225,000 of unpaid
principal and $11,250 of unpaid accrued interest due under the Note. The conversion price per share was $2.10.
2008 10% CONVERTIBLE NOTES
In September 2014, we issued to the holder
of the remaining 2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit
warrants to acquire up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share. The units were
issued to the Note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due under the
Note, which represented the entire amount outstanding under the Note and the Note was retired. We recorded a loss on debt conversion
of $65,493 on this transaction.
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 $12.50 per share. The investors also received matching three
year warrants to purchase unregistered shares of our common stock at an exercise price of $12.50 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. Such discount was fully amortized at March 31, 2014.
In July 2012, we issued 9,228 shares
of common stock and 4,614 warrants to purchase common stock to the holder of a $25,000 note in this grouping in exchange for the
conversion of such note and related accrued interest of $8,000 (for a total of $33,000). The warrants are exercisable at $5.35
per share. We recorded a loss on conversion of $45,796.
The following table shows the conversions
into principal of the October and November 2009 10% Convertible Notes by fiscal year:
Activity in October & November 2009 10% Convertible Notes |
Initial principal balance |
|
$ |
450,250 |
|
Conversions during the fiscal year ended March 31, 2010 |
|
|
(70,000 |
) |
Conversions during the fiscal year ended March 31, 2011 |
|
|
(175,000 |
) |
Conversions during the fiscal year ended March 31, 2012 |
|
|
(130,250 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(25,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
– |
|
Conversions into equity unit structure during the fiscal year ended March 31, 2015 |
|
|
(50,000 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the
above table, the balance of the September 2011 Convertible Notes was converted into equity during the fiscal year ended March 31,
2015 and there is no remaining balance.
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 September 2013, we agreed to extend the expiration
date 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. Management
assessed the change in the value of the notes and related warrants before and after that extension and determined that the change
in value related to the change in terms was not significant.
In October 2014, we issued to the holder of
the remaining October & November 2009 10% Convertible Note and the April 2010 10% Convertible Note units consisting of an
aggregate of 36,716 shares of common stock and unit warrants to acquire up to an aggregate of 18,358 shares of common stock at
an exercise price of $7.70 per share. The units were issued to the note holder upon the conversion of an aggregate of $189,087
of unpaid principal and accrued interest due under two promissory notes (the remaining October & November 2009 10% Convertible
Note and the April 2010 10% Convertible Note). The amounts converted represented the entire principal and interest outstanding
under the notes and the notes held by that holder were retired. We recorded a loss on debt conversion of $92,811 during the fiscal
year ended March 31, 2015 related to the conversion of the remaining October & November 2009 10% Convertible Note.
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 was originally scheduled to mature 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.
In September 2013, we agreed to extend the
expiration date 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.
Management assessed the change in the value of the notes and related warrants before and after that extension and determined that
the change in value related to the change in terms was not significant.
In October 2014, we issued to the holder of
the remaining October & November 2009 10% Convertible Note and the April 2010 10% Convertible Note units consisting of an
aggregate of 36,716 shares of common stock and unit warrants to acquire up to an aggregate of 18,358 shares of common stock at
an exercise price of $7.70 per share. The units were issued to the note holder upon the conversion of an aggregate of $189,087
of unpaid principal and accrued interest due under two promissory notes (the remaining October & November 2009 10% Convertible
Note and the April 2010 10% Convertible Note). The amounts converted represented the entire principal and interest outstanding
under the notes and the notes held by that holder were retired. We recorded a loss on debt conversion of $130,128 during the fiscal
year ended March 31, 2015 related to the conversion of the April 2010 10% Convertible Note.
SEPTEMBER 2010 12% 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 74,360 shares of our common stock at an exercise price of $15.56 per share, and (iii) five-year
warrants to purchase an aggregate of 74,360 shares of our common stock at an exercise price of $21.79 per share. The convertible
promissory notes bear interest compounded monthly at the annual rate of ten percent (10%) and mature on April 1, 2016 (see below).
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
$15.00 nor less than $10.00. There are no registration requirements with respect to the shares of common stock underlying the notes
or the warrants.
On March 31, 2014, we entered into separate
Amendments to Convertible Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively,
the “Investors”) who own certain convertible promissory notes (collectively, the “Notes”) and warrants
(collectively, the “Warrants”) previously issued by us on various dates between December 5, 2007 and September 23,
2011, including the September 2010 Convertible Notes.
Prior to the Amendments, the Notes were past
maturity and were in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended
the maturity date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result
of the Amendments, the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per
annum, which represents a reduction from the default interest rates of fifteen percent at which interest had been accruing. By
entering into the Amendments, we also agreed to increase the currently outstanding principal amount of the Notes by 12% from a
total of $693,260 to a total of $776,451.
During the period from October 2011 to February
2014, the Investors had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding
under the Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions
applicable to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly,
pursuant to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which
represents the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected
at $2.10 per share.
The Amendments also set the conversion price
of the Notes, as well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per
share. By virtue of the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015
and September 23, 2016 to January 1, 2017.
The following table shows the activity in the
September 2010 12% Convertible Notes by fiscal year:
Activity in the September 2010 10% Convertible Notes |
Initial principal balance |
|
$ |
743,600 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(405,500 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(30,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(25,000 |
) |
Increase in principal balance due to 12% extension fee |
|
|
33,972 |
|
Conversions during the fiscal year ended March 31, 2015 |
|
|
(317,072 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the
above table, the balance of the September 2011 Convertible Notes was converted into equity during the fiscal year ended March
31, 2015 and there is no remaining balance.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30,
2011, we raised $357,656 in five separate 10% convertible notes. Those notes had a fixed conversion price of $4.50 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 79,479 shares of common stock at $6.25 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 March 31, 2014, the holders of three
of the five notes totaling $100,000 converted all of their principal and accrued interest into 28,774 shares of our common stock
at the contractual conversion price of $4.50 per share.
In September 2014, we entered into a forbearance
agreement with the holder of the remaining two notes in which we agreed to repay his notes by October 31, 2014 and in which we
also agreed to extend his warrants by two years. We recorded a charge of $143,363 in the September 2014 period related to this
warrant extension due to the change in the fair value of the warrants.
In October 2014, we paid off in full the remaining
outstanding principal balance and interest balances on the two remaining notes with cash payments of $382,748.
APRIL 2011 12% 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 80,080 shares of our common stock at an exercise
price of $6.25 per share, and (iii) five-year warrants to purchase an aggregate of 80,080 shares of our common stock at an
exercise price of $8.75 per share. The convertible promissory notes bear interest compounded monthly at the annual rate of
10% and mature on April 1, 2016 (see below). 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 $10.00 nor less than $5.00. 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 16,250 shares of our common stock at an exercise price of $6.25 per share, and (ii) five-year warrants
to purchase an aggregate of 16,250 shares of our common stock at an exercise price of $8.75 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.
On March 31, 2014, we entered into separate
Amendments to Convertible Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively,
the “Investors”) who own certain convertible promissory notes (collectively, the “Notes”) and warrants
(collectively, the “Warrants”) previously issued by us on various dates between December 5, 2007 and September 23,
2011, including the April 2011 Convertible Notes.
Prior to the Amendments, the Notes were past
maturity and were in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended
the maturity date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result
of the Amendments, the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per
annum, which represents a reduction from the default interest rates of 15% at which interest had been accruing. By entering into
the Amendments, we also agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260
to a total of $776,451.
During the period from October 2011 to February
2014, the Investors had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding
under the Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions
applicable to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly,
pursuant to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which
represents the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected
at $2.10 per share.
The Amendments also set the conversion price
of the Notes, as well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per
share. By virtue of the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015
and September 23, 2016 to January 1, 2017.
The following table shows the conversions into
principal of the April 2011 12% Convertible Notes by fiscal year:
Activity in the April 2011 12% Convertible Notes |
Initial principal balance |
|
$ |
400,400 |
|
Increase in principal balance due to extension fee |
|
|
48,048 |
|
Conversions during the fiscal year ended March 31, 2015 |
|
|
(448,448 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the
above table, the balance of the April 2011 Convertible Notes was converted into equity during the fiscal year ended March 31, 2015
and there is no remaining balance.
SEPTEMBER 2011 CONVERTIBLE NOTES
In September 2011, we issued $253,760 of convertible
notes, convertible at $3.50 per share. Such notes originally matured in September 2012.
On March 31, 2014, we entered into separate
Amendments to Convertible Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively,
the “Investors”) who own certain convertible promissory notes (collectively, the “Notes”) and warrants
(collectively, the “Warrants”) previously issued by us on various dates between December 5, 2007 and September 23,
2011, including the September 2011 Convertible Notes.
Prior to the Amendments, the Notes were past
maturity and were in default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended
the maturity date of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result
of the Amendments, the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per
annum, which represents a reduction from the default interest rates of 15% at which interest had been accruing. By entering into
the Amendments, we also agreed to increase the currently outstanding principal amount of the Notes by 12%, which in the case of
the September 2011 Notes, they increased from $9,760 to $10,931
During the period from October 2011 to February
2014, the Investors had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding
under the Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions
applicable to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly,
pursuant to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which
represents the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected
at $2.10 per share.
The Amendments also set the conversion price
of the Notes, as well as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per
share. By virtue of the Amendments, the expiration dates of the Warrants also were extended to January 1, 2017.
The following table shows the conversions into
principal of the September 2011 Convertible Notes by fiscal year:
Activity in the September 2011 Convertible Notes |
Initial principal balance |
|
$ |
253,760 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(15,000 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(60,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(169,000 |
) |
Increase in principal balance due to extension fee |
|
|
1,171 |
|
Conversions during the fiscal year ended March 31, 2015 |
|
|
(10,931 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the above table, the balance of
the September 2011 Convertible Notes was converted into equity during the fiscal year ended March 31, 2015 and there is no remaining
balance.
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 at
that time. The Promissory Note originally had a maturity date of December 31, 2012 and bore interest at 5% per annum. The note
was 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 $4.00 per share. The holder subsequently agreed
to extend the Maturity Date of the Note first to October 1, 2013, then to September 30, 2013, and then the expiration date of this
note was again extended to October 1, 2014.
In November 2014, we paid off in full the Law
Firm Note with a cash payment of $50,000 and an issuance of 3,400 common shares.
Securities Issued for Services
We have issued securities in payment of services
to reduce our obligations and to avoid using our cash resources. In the fiscal year ended March 31, 2015 we issued 27,654 common
shares for services of which 8,587 were restricted and were for investor relations services and corporate communications services.
Included in the 27,654 common shares issued for services are 19,068 shares, registered under Form S-8 registration statements,
which were issued as follows: 693 for financial consulting, 6,425 for scientific consulting and 11,950 for legal services. The
average price (premium) discount of common shares issued for these services, weighted by the number of shares issued for services
in this period, was approximately (6.6)%.
Securities Issued for Debt
We have also issued securities for debt to reduce
our obligations to avoid using our cash resources. In the fiscal year ended March 31, 2015 we issued 948,728 restricted common
shares for repayment in full of notes, including accrued interest, in the aggregate amount of $2,273,032. The average price discount
of the common stock issued for debt was approximately 75.6%.
Subsequent Events
Reverse Split
On April 14, 2015, we completed a 1-for-50 reverse
stock split. Accordingly, authorized common stock was reduced from 500,000,000 shares to 10,000,000 shares, and each 50 shares
of outstanding common stock held by stockholders were combined into one share of common stock. The accompanying consolidated financial
statements and accompanying notes have been retroactively revised to reflect such reverse stock split as if it had occurred on
April 1, 2013. All share and per share amounts have been revised accordingly.
Government Contracts
Subsequent to March 31, 2015, we billed
$186,164 under our DARPA contract and billed $6,344 under the Battelle subcontract and we collected $384,882 under both
contracts.
Common Stock Issuances
Subsequent to March 31, 2015, we issued 951
shares of common stock as the result of rounding up of fractional shares that arose due to our reverse stock split.
June 2015 Financing
In June 2015, we sold $6,000,000 of units,
comprised of common stock and warrants, at a price of $6.30 per unit. Each unit consisted of one share of common stock and .75
of a five-year warrant to purchase one share of common stock at an exercise price of $6.30 per share. Accordingly, we issued a
total of 952,383 shares of restricted common stock and warrants to purchase 714,286 shares of common stock. We raised $5,591,988
in net proceeds from the financing, which coupled with previously existing funds on hand and expected revenues from our government
contracts, should finance our operations for the fiscal year ending March 31, 2016 and the cost of our current clinical trials.
The June 2015 financing consumed substantially
all of our available authorized shares. In order to complete that financing, two of our officers and one of our directors agreed
to waive their rights to exercise certain stock options and warrants held by them representing the right to acquire 402,318 shares
of common stock in the aggregate. Those waivers were required in order to make a sufficient number of shares of common stock available
for completion of that financing. The waivers will expire when we amend our Articles of Incorporation to increase sufficiently
the number of authorized shares of common stock available for issuance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
As a Smaller Reporting Company, we are not required to furnish information
under this Item 7A.
ITEM 8. FINANCIAL STATEMENTS
The consolidated financial statements listed in the accompanying
Index to Financial Statements are attached hereto and filed as a part of this Report under Item 15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the
period covered by this Report.
Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of such period, due to the material weaknesses in our internal controls over financial
reporting identified below, our disclosure controls and procedures are not effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange
Act and are not effective in ensuring that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
(a) Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control
over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles.
A material weakness is a deficiency, or combination of deficiencies,
in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the registrant's
annual or interim financial statements will not be prevented or detected on a timely basis.
Our management, with the participation of our Chief Executive Officer,
assessed the effectiveness of our internal control over financial reporting as of March 31, 2015. In making this assessment, we
used the criteria set forth by the Committee of Sponsoring Organizations of The Treadway Commission in Internal Control-Integrated
Framework. Based on that assessment under such criteria, management concluded that our internal control over financial reporting
was not effective as of March 31, 2015 due to control deficiencies that constituted material weaknesses.
Management in assessing its internal controls and procedures for
fiscal 2015 identified a material weakness relating to a lack of sufficient segregation of duties, particularly in cash disbursements.
Specifically, this material weakness is such that the design of controls over the area of cash disbursements relies primarily on
detective controls and could be strengthened by adding preventative controls to properly safeguard company assets.
Management has also identified a material weakness relating to a
lack, due to our limited resources, of sufficient personnel in the accounting function with appropriate skills, training and experience
to perform the review processes to ensure the complete and proper application of generally accepted accounting principles. Specifically,
this material weakness led to segregation of duties issues and resulted in audit adjustments to the annual consolidated financial
statements and revisions to related disclosures.
We are in the process of developing and implementing remediation
plans to address our material weaknesses.
Management has identified specific remedial actions to address the
material weaknesses described above:
|
· |
Improve the effectiveness of the accounting group by continuing to augment our existing resources with additional consultants or employees to improve segregation procedures and to assist in the analysis and recording of complex accounting transactions and preparation of tax disclosures. We plan to mitigate the segregation of duties issues by hiring additional personnel in the accounting department once we have achieved commercialization of our products and are generating more significant levels of revenue, or have raised significant additional working capital. |
|
· |
Improve segregation procedures by strengthening cross approval of various functions including cash disbursements and quarterly internal audit procedures where appropriate. We expect this to occur after we have achieved commercialization of our products and are generating revenue, or have raised significant additional working capital. |
Due to its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore,
even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation
and presentation.
(b) Changes in Internal Control over Financial Reporting
There were no changes made in our internal controls over financial
reporting during the quarter ended March 31, 2015 that have materially affected or are reasonably likely to materially affect these
controls.
ITEM 9B. OTHER INFORMATION
During the fourth quarter of the year ended March 31, 2015, we issued
the following securities that were not registered under the Securities Act and have not been included previously in a Current Report
on Form 8-K. We did not employ any form of general solicitation or advertising in connection with the offer and sale of the securities
described below. In addition, we believe the recipients of the securities are "accredited investors" as defined in Rule
501(a) of the Securities Act. For these reasons, among others, the offer and sale of the following securities were made in reliance
on the exemption from registration provided by Section 4(a)(2) of the Securities Act or Regulation D promulgated by the SEC under
the Securities Act:
On March 30, 2015, we issued 13,803 shares of restricted common
stock to a note holder in exchange for the conversion of accrued interest on a convertible note payable in an aggregate amount
of $28,988 at a conversion price of $2.10 per share based upon the conversion formula in the note.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors, and persons who own more than 10% of a registered class of our equity securities to file reports of ownership
and changes in ownership with the SEC. Officers, directors, and greater than 10% beneficial owners are required by SEC regulation
to furnish the Company with copies of all Section 16(a) forms they file. Based solely on our review of copies of the Section 16(a)
reports filed for the fiscal year ended March 31, 2015, we believe that all filing requirements applicable to our officers, directors,
and greater than 10% beneficial owners were complied with except as follows:
Mr. James A. Joyce, our Chief Executive Officer,
did not timely file one report on Form 4 pertaining to one late reported transaction. The date of the transaction was June 6, 2014.
The relevant report was filed on August 1, 2014.
Mr. Rodney S. Kenley, our President, did not
timely file one report on Form 4 pertaining to one late reported transaction. The date of the transaction was June 6, 2014. The
relevant report was filed on August 1, 2014.
Dr. Richard H. Tullis, our Chief Science Officer,
did not timely file one report on Form 4 pertaining to one late reported transaction. The date of the transaction was June 6, 2014.
The relevant report was filed on August 1, 2014.
Mr. Franklyn S. Barry, Jr., one of our directors,
did not timely file one report on Form 4 pertaining to one late reported transaction. The date of the transaction was June 6, 2014.
The relevant report was filed on August 1, 2014.
Mr. Edward G. Broenniman, one of our directors,
did not timely file one report on Form 4 pertaining to one late reported transaction. The date of the transaction was June 6, 2014.
The relevant report was filed on August 1, 2014.
Mr. James B. Frakes, our Chief Financial Officer,
did not timely file one report on Form 4 pertaining to one late reported transaction. The date of the transaction was June 6, 2014.
The relevant report was filed on August 1, 2014.
Dr. Chetan S. Shah, one of our directors, did
not timely file two reports on Form 4 pertaining to two late reported transactions. The dates of the transactions were June 6,
2014 and July 24, 2014. The relevant reports were filed on August 1, 2014 and July 30, 2014, respectively.
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of our directors
and executive officers as of June 23, 2015 are listed below:
NAMES |
TITLE OR POSITION |
AGE |
James A. Joyce (1) |
Chairman, Chief Executive Officer and Secretary |
53 |
|
|
|
Richard H. Tullis, PhD (2) |
Vice President and Chief Science Officer
|
70 |
|
|
|
Rodney S. Kenley (3) |
President and Director |
65 |
|
|
|
James B. Frakes (4) |
Chief Financial Officer and Senior Vice President - Finance |
58 |
|
|
|
Franklyn S. Barry, Jr. |
Director |
75 |
|
|
|
Edward G. Broenniman |
Director |
79 |
|
|
|
Chetan S. Shah, MD |
Director |
46 |
_______________
(1) Effective June 1, 2001, Mr. Joyce was appointed our President
and Chief Executive Officer, replacing Mr. Barry, who continues as a member of the Board of Directors. Mr. Joyce resigned from
the position of President upon the appointment of Mr. Kenley to such position on October 27, 2010.
(2) Effective June 1, 2001, Dr. Tullis was appointed as our
Chief Science Officer. Dr. Tullis resigned from the Board of Directors effective June 5, 2015.
(3) Effective October 27, 2010, Mr. Kenley was appointed as our
President.
(4) Effective September 27, 2010, Mr. Frakes was appointed as our
Chief Financial Officer.
Certain additional information concerning the
individuals named above is set forth below. This information is based on information furnished us by each individual noted.
James A. Joyce, Chairman, CEO and Secretary.
Mr. Joyce is the founder of Aethlon Medical,
Inc. and has been the Chairman of the Board and Secretary since March 1999. On June 1, 2001, our Board of Directors appointed Mr.
Joyce to the additional role of CEO. Mr. Joyce also serves as the Executive Chairman of Exosome Sciences, Inc. In 1992, Mr. Joyce
founded and was the sole stockholder of James Joyce & Associates, an organization that provided management consulting and corporate
finance advisory services to CEOs and CFOs of publicly traded companies. Previously, from 1989 to 1991, Mr. Joyce was Chairman
and Chief Executive Officer of Mission Labs, Inc. Prior to that Mr. Joyce was a principal in charge of U.S. operations for London
Zurich Securities, Inc. Mr. Joyce is a graduate of the University of Maryland. We believe that Mr. Joyce is qualified to serve
as our director because of his role in founding our company and his prior experience, including his experience in the extracorporeal
industry and in the financial markets.
Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
and Director
Dr. Tullis has been Vice President of our
company since January 2000 and Chief Science Officer since June 2001. Dr. Tullis was a director of our company from January 2000
until June 2015. Dr. Tullis has extensive biotechnology management and research experience, and is the founder of Syngen Research,
formerly a wholly owned subsidiary of Aethlon Medical, Inc. Previously, Dr. Tullis co-founded Molecular Biosystems, Inc., a former
NYSE company. At Molecular Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization, Senior Research Scientist and
Member of the Board of Directors. In research, Dr. Tullis developed and patented the first application of oligonucleotides to antisense
antibiotics and developed new methods for the chemical synthesis of DNA via methoxy-hosphorochloridites. Dr. Tullis also co-developed
the first applications of covalently coupled DNA-enzyme conjugates using synthetic oligonucleotides during his tenure at Molecular
Biosystems. In 1985, Dr. Tullis founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer in custom DNA synthesis,
which was sold to Molecular Biology Resources in 1991. Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a company that was eventually acquired by Genetic Vectors.
Dr. Tullis received his Ph.D. in Biochemistry and Cell Biology from the University of California at San Diego, and has done extensive
post-doctoral work at UCSD, USC, and the University of Hawaii.
Rodney S. Kenley, President and Director
Mr. Kenley has been President and a Director
since October 2010. He has 38 years of experience in healthcare, most of which have been spent in the extracorporeal blood purification
arena. Mr. Kenley held several positions at Baxter Healthcare (Travenol) from 1977 through 1990 including International Marketing
Manager, Business Unit Manager for Peritoneal and Hemodialysis products, Manager of New Business Development, Director of Worldwide
Product Planning, Director of Advanced Product Development, and VP of Electronic Drug Infusion. Mr. Kenley founded Aksys Ltd. in
January 1991 to develop and commercialize his concept of a daily home hemodialysis system which was commercially launched in 2002
as the PHD system. In 2004, Mr. Kenley initiated the development of a second-generation home hemodialysis system in partnership
with DEKA Research & Development Corporation in Manchester, New Hampshire. In 2007, the assets of Aksys Ltd. were acquired
by DEKA, where Mr. Kenley was employed prior to joining Aethlon Medical, Inc. Mr. Kenley received his Bachelor of Arts degree in
Biology and Chemistry from Wabash College, a Master’s of Science degree in Molecular Biology from Northwestern University
and a Masters of Management from the Kellogg School of Management, also at Northwestern University. We believe that Mr. Kenley
is qualified to serve as our director as a result of his experience in developing extracorporeal blood purification products.
James B. Frakes, Chief Financial Officer and Senior Vice President
– Finance
Mr. Frakes joined Aethlon Medical, Inc. in January
2008 and brought 16 consecutive years of financial responsibility for publicly traded companies, as well as specific knowledge
and experience in equity and debt transactions, acquisitions, public reporting and Sarbanes-Oxley Section 404 internal control
requirements. Mr. Frakes also serves as the Chief Financial Officer of Exosome Sciences, Inc. He previously served as the CFO for
Left Behind Games Inc., a start-up video game company. Prior to 2006, he served as CFO of NTN Buzztime, Inc., an interactive entertainment
company. Mr. Frakes received an MBA from the University of Southern California and completed his BA with Honors at Stanford
University.
Franklyn S. Barry, Jr., Director
Mr. Barry was President and Chief Executive
Officer of Hemex, Inc. from April 1997 through May 31, 2001 and our President and CEO from March 10, 1999 to May 31, 2001, when
he returned to consulting until he retired in 2013. He became a director of Aethlon Medical, Inc. on March 10, 1999. From 1994
to April 1997, Mr. Barry was a private consultant. Included among his prior experiences are tenures as President of Fisher-Price
and as co-founder and CEO of Software Distribution Services, which today operates as Ingram Micro-D, an international distributor
of personal computer products. Mr. Barry serves on the Board of Directors of Merchants Mutual Insurance Company. We believe that
Mr. Barry is qualified to serve as our director because of his extensive management experience.
Edward G. Broenniman, Director
Mr. Broenniman became a director of Aethlon
Medical, Inc. in March 1999. He has been the Managing Director of The Piedmont Group, LLC, a venture advisory firm, since 1978.
Mr. Broenniman recently served on the Board of Directors of publicly traded QuesTech (acquired by CACI International), and currently
serves on the Boards of two privately held firms. His nonprofit Boards are the Dingman Center for Entrepreneurship's Board of Advisors
at the University of Maryland, the National Association of Corporate Directors, National Capital Chapter and the Board of the Association
for Corporate Growth, National Capital Chapter. We believe that Mr. Broenniman is qualified to serve as our director because of
his extensive management experience.
Chetan S. Shah, MD, Director
Dr. Shah became a director of Aethlon Medical,
Inc. in June 2013. Dr. Shah is a board certified Otolaryngologist. He is an Advisory Board Member at The Bank of Princeton, and
a partner and Board member of the Surgery Center at Hamilton as well as Physician Management Systems and Princeton Eye & Ear,
which he founded in 2009. Dr. Shah serves on the board of two other private companies. He holds teaching positions and serves on
multiple hospital committees in the area and is on the Audiology and Speech Language Pathology Committee for the State of New Jersey.
He also is a member of the Board of Medical Examiners for the State of New Jersey. Dr. Shah received his Bachelor’s degree
and Medical Degree from Rutgers University and Robert Wood Johnson Medical School. We believe that Dr. Shah is qualified to serve
as our director because of his medical background as both a board certified Otolaryngologist and a member of various medical boards
and hospital committees in New Jersey.
Board of Directors
Our Board of Directors has the responsibility
for establishing broad corporate policies and for overseeing our overall performance. Members of the Board of Directors are kept
informed of our business activities through discussions with the CEO, President and other officers, by reviewing analyses and reports
sent to them, and by participating in Board and committee meetings. Our bylaws provide that each of the directors serves for a
term that extends to our next annual meeting of stockholders. Our Board of Directors presently has an Audit Committee and a Compensation
Committee, on each of which Messrs. Barry and Broenniman and Dr. Shah serve. Mr. Barry is Chairman of the Audit Committee, and
Dr. Shah is Chairman of the Compensation Committee.
In July 2012, our Board of Directors approved
a board compensation program that modifies and supersedes the 2005 Directors Compensation Program, which was previously in effect.
Under the 2012 program, in which only non-employee directors may participate, an eligible director will receive a grant of $35,000
worth of ten-year 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. In addition,
under this 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 fiscal year ended March 31, 2013, our
Board of Directors granted ten-year options to acquire an aggregate of 33,342 shares of our common stock, all with an exercise
price of $3.80 per share, to our four outside directors under the 2012 program.
In the fiscal year ended March 31, 2014, our
Board of Directors granted ten-year options to acquire an aggregate of 31,911 shares of our common stock, all with an exercise
price of $4.10 per share, to our five outside directors under the 2012 program.
In the fiscal year ended March 31, 2015, our
Board of Directors granted ten-year options to acquire an aggregate of 11,053 shares of our common stock, all with an exercise
price of $9.50 per share, to our three outside directors under the 2012 program.
At March 31, 2015 we had issued 26,757 options
under the old 2005 program to outside directors and 79,309 options to employee-directors, 21,756 outside directors’ options
had been forfeited, 5,000 outside directors’ options had been exercised, 79,309 employee-directors’ options had been
forfeited and no options under the old 2005 program remained outstanding.
On June 6, 2014, our Board of Directors approved
certain changes to the 2012 program. Under this modified program, a new eligible director will receive an initial grant of $50,000
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. These options
will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant.
In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program
also will receive a grant of $35,000 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. Such options will vest on the first anniversary
of the date of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The
modified 2012 program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee
chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.
Family Relationships
There are no family relationships between or
among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.
There are no arrangements or understandings
between any two or more of our directors or executive officers or between any of our directors or executive officers and any other
person pursuant to which any director or officer was or is to be selected as a director or officer, and there is no arrangement,
plan or understanding as to whether non-management stockholders will exercise their voting rights to continue to elect the current
Board of Directors. There are also no arrangements, agreements or understandings between non-management stockholders that may directly
or indirectly participate in or influence the management of our affairs.
Involvement in Legal Proceedings
To the best of our knowledge, during the past
ten years, none of the following occurred with respect to a present or former director or executive officer of our company: (1)
any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive
officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding
or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to
any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of any competent jurisdiction, permanently
or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking
activities; (4) being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or
the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment
has not been reversed, suspended or vacated; and (5) being the subject of, or a party to, any federal or state judicial or administrative
order, judgment, decree or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal
or state securities or commodities law or regulation, law or regulation respecting financial institutions or insurance companies
or law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of,
or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as
defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the
Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its
members or associated persons.
Code of Ethics
On February 23, 2005, the Board of Directors
approved a "Code of Business Conduct and Ethics,” which applies to our principal executive officer, our principal financial
officer, our principal accounting officer and persons performing similar tasks. Our Code of Business Conduct and Ethics is available
on our company website at www.aethlonmedical.com.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors formed an Audit Committee
in May of 1999. Mr. Franklyn S. Barry, Jr. (the Chairman of the Audit Committee), Mr. Edward Broenniman and Dr. Chetan S. Shah
serve as members of the Audit Committee. The Board of Directors has determined that each of Mr. Broenniman and Mr. Barry is an
"audit committee financial expert" as that term is defined by Item 407 of Regulation S-K. Each of Mr. Broenniman, Mr.
Barry and Dr. Shah meets the NASDAQ Stock Market's independence standards for members of such audit committees.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following executive compensation disclosure
reflects all compensation awarded to, earned by or paid to the executive officers below for the fiscal years ended March 31, 2015
and March 31, 2014. The following table summarizes all compensation for fiscal years 2015 and 2014 received by our Chief Executive
Officer, and our three most highly compensated executive officers who earned more than $100,000 in fiscal year 2015.
SUMMARY COMPENSATION TABLE FOR 2015 AND 2014
FISCAL YEARS
NAMED EXECUTIVE OFFICER AND PRINCIPAL POSITION |
|
YEAR |
|
|
SALARY
($) |
|
|
BONUS
($) |
|
|
STOCK
AWARDS ($) |
|
|
OPTION
AWARDS ($)(5) |
|
|
NON-
EQUITY
INCENTIVE PLAN
COMPEN-
SATION
($) |
|
|
NON- QUALIFIED DEFERRED COMPEN-
SATION
EARNINGS
($) |
|
|
ALL
OTHER COMP.
($) |
|
|
TOTAL ($) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James A. Joyce (1) |
|
|
2015 |
|
|
$ |
347,500 |
|
|
$ |
95,000 |
|
|
$ |
– |
|
|
$ |
246,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
688,500 |
|
CHIEF EXECUTIVE OFFICER |
|
|
2014 |
|
|
$ |
330,000 |
|
|
$ |
70,000 |
|
|
$ |
– |
|
|
$ |
180,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
580,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard H. Tullis, PhD (2) |
|
|
2015 |
|
|
$ |
195,000 |
|
|
$ |
5,000 |
|
|
$ |
– |
|
|
$ |
8,200 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
208,200 |
|
VICE PRESIDENT AND CHIEF SCIENCE OFFICER |
|
|
2014 |
|
|
$ |
195,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
45,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James B. Frakes (3) |
|
|
2015 |
|
|
$ |
206,250 |
|
|
$ |
31,500 |
|
|
$ |
– |
|
|
$ |
41,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
278,750 |
|
CHIEF FINANCIAL OFFICER AND SVP-FINANCE |
|
|
2014 |
|
|
$ |
180,000 |
|
|
$ |
3,000 |
|
|
$ |
– |
|
|
$ |
45,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
228,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rodney S. Kenley (4) |
|
|
2015 |
|
|
$ |
257,500 |
|
|
$ |
15,000 |
|
|
$ |
– |
|
|
$ |
41,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
313,500 |
|
PRESIDENT |
|
|
2014 |
|
|
$ |
240,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
45,000 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
285,000 |
|
_______________
(1) The aggregate number of stock awards and stock option awards
issued to Mr. Joyce and outstanding as of March 31, 2015 is 68,000 (see share restricted stock grant below) and 217,143, respectively.
Mr. Joyce received a $5,000 salary increase from $325,000 to $330,000 effective July 1, 2013. In June 2014, Mr. Joyce received
a $20,000 salary increase from $330,000 to $350,000.
Mr. Joyce was granted 80,000 shares of restricted common stock,
at a price per share of $12.00, which vested in equal installments over a thirty-six month period that commenced on June 30, 2010.
Mr. Joyce has accepted all 80,000 shares of the grant and all such shares have vested. Of these shares, Mr. Joyce currently owns
68,000 shares.
(2) The aggregate number of stock awards and stock option awards
issued to Dr. Tullis and outstanding as of March 31, 2015 is zero and 46,000, respectively. On November 7, 2014, we paid Dr. Tullis
$5,000 for accrued expenses reimbursable to him. In January 2015, we paid Dr. Tullis $93,377 in payment of accrued salary.
(3) Mr. Frakes was appointed as Chief Financial Officer on September
27, 2010 after previously serving as Senior Vice President-Finance on a part-time basis. The aggregate number of stock awards and
stock option awards issued to Mr. Frakes and outstanding as of March 31, 2015 is zero and 25,000, respectively. In June 2014, Mr.
Frakes received a $30,000 salary increase from $180,000 to $210,000.
(4) Mr. Kenley was appointed President on October 27, 2011. The
aggregate number of stock awards and stock option awards issued to Mr. Kenley and outstanding as of March 31, 2015 is zero and
35,000, respectively. In June, 2014, Mr. Kenley received a $20,000 salary increase from $240,000 to $260,000.
(5) See note 6 to our financial statements for the years ended March
31, 2015 and 2014 regarding the assumptions made in valuing the stock option awards in the above table.
Employment Agreements
We entered into an employment agreement with
Mr. Joyce effective April 1, 1999. Effective June 1, 2001, Mr. Joyce was appointed President and Chief Executive Officer and
his base annual salary was increased from $120,000 to $180,000. Effective January 1, 2005, Mr. Joyce's salary was increased from
$180,000 to $205,000 per year. Under the terms of the agreement, his employment continues at a salary of $205,000 per year for
successive one-year periods, unless given notice of termination 60 days prior to the anniversary of his employment agreement. Effective
April 1, 2006. Mr. Joyce's salary was increased from $205,000 to $240,000. His salary was subsequently increased to $265,000 per
year and effective May 1, 2008, his salary was increased from $265,000 to $290,000 per year. Effective April 1, 2010, his salary
was increased from $290,000 to $325,000 per year. Effective July 2013, his salary was increased from $325,000 to $330,000 per year.
In June 2014, his salary was increased from $330,000 to $350,000 per year.
During the fiscal year ended March 31, 2015,
Mr. Joyce earned bonuses totaling $50,000 from us and bonuses totaling $45,000 from Exosome Sciences, Inc. All of those bonuses
were based upon targets established by our compensation committee.
We entered into an employment agreement with
Dr. Tullis effective January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief Science Officer. His compensation
under the agreement was modified in June 2001 from $80,000 to $150,000 per year. Effective January 1, 2005, Dr. Tullis' salary
was increased from $150,000 to $165,000 per year. Under the terms of the agreement, his employment continues at a salary of $165,000
per year for successive one-year periods, unless given notice of termination 60 days prior to the anniversary of his employment
agreement. Dr. Tullis was granted 5,000 stock options to purchase our common stock in connection the completing certain milestones,
such as the initiation and completion of certain clinical trials, the submission of proposals to the U.S. Food and Drug Administration,
or FDA, and the filing of a patent application. Effective April 1, 2006, Dr. Tullis’ salary was increased to $180,000 per
year. Effective April 1, 2010, his salary was increased from $180,000 to $195,000 per year.
During the fiscal year ended March 31, 2015,
Dr. Tullis earned a bonus of $5,000 from us. The bonus was based upon targets established by our compensation committee.
Both Mr. Joyce's and Dr. Tullis' agreements
provide for medical insurance and disability benefits, and one year of severance pay if their employment is terminated by us without
cause or due to change in our control before the expiration of their agreements, and allow for bonus compensation and stock option
grants as determined by our Board of Directors. Both agreements also contain restrictive covenants preventing competition with
us and the use of confidential business information, except in connection with the performance of their duties for us, for a period
of two years following the termination of their employment with us.
On September 27, 2010, Mr. Frakes was appointed
our Chief Financial Officer. We have not entered into a written employment agreement with Mr. Frakes. As Chief Financial Officer,
Mr. Frakes receives an annual salary initially set at $180,000 and medical insurance benefits. In June 2014, his salary was increased
from $180,000 to $210,000 per year. During the fiscal year ended March 31, 2015, Mr. Frakes earned bonuses totaling $30,000 from
us and a bonus of $1,500 from Exosome Sciences, Inc. All of those bonuses were based upon targets established by our compensation
committee.
Mr. Kenley was appointed our President on October
27, 2010. Pursuant to a written offer of employment executed by us and Mr. Kenley, he receives an annual salary initially set at
$240,000 and medical insurance benefits. In June 2014, his salary was increased from $240,000 to $260,000 per year. During the
fiscal year ended March 31, 2015, Mr. Kenley earned bonuses totaling $15,000 from us. All of those bonuses were based upon targets
established by our compensation committee.
Outstanding Equity Awards at 2015 Fiscal Year-End
The following table sets forth certain information
concerning stock option awards granted to our named executive officers.
OUTSTANDING EQUITY AWARDS AT 2015 FISCAL YEAR
END
|
|
OPTIONS AWARDS |
NAME |
|
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
EXERCISABLE
(#) |
|
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS
UNEXERCISABLE
(#) |
|
EQUITY
INCENTIVE PLAN AWARDS
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
UNEARNED
OPTIONS
UNEXERCISABLE
(#) |
|
OPTION
EXERCISE
PRICE
($) |
|
DATE OF
OPTION
EXPIRATION |
James A. Joyce |
|
57,143(1) |
|
– |
|
– |
|
$10.50 |
|
12/18/15 |
|
|
50,000(2) |
|
– |
|
– |
|
$18.00 |
|
09/21/17 |
|
|
40,000(3) |
|
– |
|
– |
|
$12.50 |
|
02/21/19 |
|
|
50,000(4) |
|
– |
|
– |
|
$12.50 |
|
09/27/20 |
|
|
10,000(5) |
|
30,000 |
|
– |
|
$5.00 |
|
07/01/23 |
|
|
10,000(10) |
|
30,000 |
|
|
|
$9.50 |
|
06/06/24 |
|
|
|
|
|
|
|
|
|
|
|
Richard H. Tullis |
|
15,000(6) |
|
– |
|
– |
|
$20.50 |
|
06/14/18 |
|
|
20,000(7) |
|
– |
|
– |
|
$12.50 |
|
09/27/20 |
|
|
2,500(5) |
|
7,500 |
|
– |
|
$5.00 |
|
07/01/23 |
|
|
333(10) |
|
667 |
|
|
|
$9.50 |
|
06/06/24 |
|
|
|
|
|
|
|
|
|
|
|
James B. Frakes |
|
10,000(8) |
|
– |
|
– |
|
$12.50 |
|
09/27/20 |
|
|
2,500(5) |
|
7,500 |
|
– |
|
$5.00 |
|
07/01/23 |
|
|
1,667(10) |
|
3,333 |
|
|
|
$9.50 |
|
06/06/24 |
|
|
|
|
|
|
|
|
|
|
|
Rodney S. Kenley |
|
17,083(9) |
|
2,917 |
|
– |
|
$12.50 |
|
10/27/20 |
|
|
2,500(5) |
|
7,500 |
|
– |
|
$5.00 |
|
7/01/23 |
|
|
1,667(10) |
|
3,333 |
|
|
|
$9.50 |
|
06/06/24 |
Note: We have omitted the stock awards columns of the above table
because we have no disclosure applicable to those columns.
The above table excludes the impact of
the waiver of the right to exercise certain stock options and warrants held by Mr. James Joyce, our Chief Executive Officer, Mr.
James Frakes, our Chief Financial Officer and Dr. Chetan Shah, a director of our company. Messrs. Joyce and Frakes and Dr. Shah
agreed to waive their rights to acquire an aggregate of 402,318 shares of common stock. Of that total, 299,663 shares of common
stock underlie stock options set forth in the table above. Those waivers were required in order to make a sufficient number of
shares of common stock available for issuance upon the exercise of the warrants issued in our June 2015 financing. Those waivers
will expire when we amend our Articles of Incorporation to increase sufficiently the number of authorized shares of common stock
available for issuance.
(1) This option was fully vested as of March 31, 2010 and as a result
of an Option Suspension Agreement with us, the expiration date was extended by 100 days. Subsequent to March 31, 2010, the expiration
date of this option was extended to December 18, 2015 (see Item 13 to the Financial Statements).
(2) The option vested 20,000 shares at grant, with 10,000 shares
vesting each annual anniversary date through June 13, 2010 and as a result of an Option Suspension Agreement with us, the expiration
date was extended by 100 days.
(3) The option vested 20,000 at grant, with 10,000 shares vesting
on December 31, 2009 and December 31, 2010 and as a result of an Option Suspension Agreement with us, the expiration date was extended
by 100 days.
(4) The option vested 20,000 at grant, with 10,000 vesting on each
anniversary date through September 27, 2013.
(5) This option vests ratably on July 1, 2014, July 1, 2015 and
July 1, 2016.
(6) This option was fully vested as of December 15, 2011.
(7) The option was fully vested as of September 27, 2011.
(8) The option was fully vested as of September 27, 2011.
(9) The option vested 5,000 on October 27, 2011 and the remaining
15,000 vested over the 36 months following that date.
(10) This option vests ratably on June 6, 2014, June 6, 2015 and
June 6, 2016.
Director Compensation for 2015 Fiscal Year
The following director compensation disclosure
reflects all compensation awarded to, earned by or paid to the directors below for the fiscal year ended March 31, 2015.
|
|
Fees Earned
or Paid in Cash
($) |
|
|
Stock
Awards
($) |
|
|
Option
Awards
($) |
|
|
Non-Equity
Incentive
Plan
Compensation
($) |
|
|
Nonqualified
Deferred
Compensation
Earnings
($) |
|
|
All
Other
Compensation
($) |
|
|
Total
($) |
|
James A. Joyce (1) |
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
– |
|
Richard H. Tullis (2) |
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
– |
|
Rodney S. Kenley (3) |
|
$ |
– |
|
|
|
– |
|
|
$ |
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
– |
|
Edward G. Broenniman (4) |
|
$ |
38,000 |
|
|
|
– |
|
|
$ |
30,211 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
68,211 |
|
Franklyn S. Barry, Jr. (5) |
|
$ |
39,000 |
|
|
|
– |
|
|
$ |
30,211 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
69,211 |
|
Chetan S. Shah, MD (6) |
|
$ |
39,000 |
|
|
|
– |
|
|
$ |
30,211 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
$ |
69,211 |
|
(1) All compensation received by Mr. Joyce in fiscal year 2015 is
disclosed in the Summary Compensation Table above. Mr. Joyce received no compensation as a director in fiscal year 2015.
(2) All compensation received by Dr. Tullis in fiscal year 2015
is disclosed in the Summary Compensation Table above. Dr. Tullis received no compensation as a director in fiscal year 2015. Dr.
Tullis resigned from the Board of Directors effective June 5, 2015.
(3) All compensation received by Mr. Kenley in fiscal year 2015
is disclosed in the Summary Compensation Table above. Mr. Kenley received no compensation as a director in fiscal year 2015.
(4) The aggregate number of stock awards and options awards issued
and outstanding as of March 31, 2015 are 0 and 43,431. Mr. Broenniman received stock option grants of 3,684 shares on June 6, 2014,
8,537 shares on March 14, 2014, and 9,211 shares on July 24, 2012 for his service as an outside director. The June 2014 option
vested 3,684 shares on March 31, 2015, the March 2014 option vested all 8,537 shares at grant and the 2012 option vested 3,961
at grant, with 5,250 vesting in the June 2013 quarter. On October 21, 2014 and November 7, 2014, we paid Mr. Broenniman an aggregate
of $10,063 for accrued Board of Directors fees and expenses reimbursable to him. In January 2015, we paid $84,500 to Mr. Broenniman
in payment of accrued Board of Directors fees and amounts accrued for services rendered to us by him prior to the 1999 reorganization
among Aethlon, Inc., Hemex, Inc. and us.
(5) The aggregate number of stock awards and options awards issued
and outstanding as of March 31, 2015 are 0 and 41,431. Mr. Barry received stock option grants of 3,684 shares on June 6, 2014,
8,537 shares on March 14, 2014 and 9,211 shares on July 24, 2012 for his service as an outside director. The June 2014 option vested
3,684 shares on March 31, 2015, the March 2014 option vested all 8,537 shares at grant and the 2012 option vested 3,961 at grant,
with 5,250 vesting in the June 2013 quarter. On October 21, 2014 and November 7, 2014, we paid Mr. Barry an aggregate of $10,944
for accrued Board of Directors fees and expenses reimbursable to him. In January 2015, we paid $271,810 to Mr. Barry in payment
of accrued director fees and amounts accrued for services rendered to us by him prior to the 1999 reorganization among Aethlon,
Inc., Hemex, Inc. and us.
(6) The aggregate number of stock awards and options awards issued
and outstanding as of March 31, 2015 are 0 and 11,205. Dr. Shah received stock option grants of 3,684 on June 6, 2014 and 7,520
shares on July 24, 2012 for his service as an outside director. The June 2014 option vested 3,684 shares on March 31, 2015, and
the 2014 option vested all 7,520 shares at grant. In January 2015, we paid $14,500 to Dr. Shah in payment of accrued director fees.
Directors Compensation Program
We maintain a board compensation program, in
which only non-employee directors may participate. Please see the “Equity Compensation Plans – 2012 Directors Compensation
Program” section of this Report for more information on the program.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as
of June 23, 2015, with respect to the ownership of our common stock, by (i) each person known by us to be the beneficial owner of
more than five percent (5%) of the outstanding shares of each class of our capital stock, (ii) each of our directors and director
nominees (if any), (iii) each of our named executive officers and (iv) all of our executive officers and directors as a group.
The term "executive officer" is defined as the President/Chief Executive Officer, Secretary, Chief Financial Officer/Treasurer,
any vice-president in charge of a principal business function (such as administration or finance), or any other person who performs
similar policy making functions for us. We believe that each individual or entity named has sole investment and voting power with
respect to shares of common stock indicated as beneficially owned by them, subject to community property laws where applicable,
excepted where otherwise noted:
TITLE OF CLASS |
|
NAME AND ADDRESS |
|
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP (1)(2) |
|
PERCENT OF
BENEFICIAL OWNERSHIP |
|
Common Stock |
|
James A. Joyce, Chief Executive Officer and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
76,000 shares (3) |
|
|
1% |
|
Common Stock |
|
Richard H. Tullis, PhD, Chief Scientific Officer
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
48,208 shares (4) |
|
|
* |
|
Common Stock |
|
Rodney S. Kenley, President and Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
24,567 shares (5) |
|
|
* |
|
Common Stock |
|
James B. Frakes, Chief Financial Officer
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
200 shares (6) |
|
|
* |
|
Common Stock |
|
Franklyn S. Barry, Jr., Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
43,553 shares (7) |
|
|
* |
|
Common Stock |
|
Edward G. Broenniman, Director
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
49,075 shares (8) |
|
|
* |
|
Common Stock |
|
Chetan Shah, MD, Director (11)
9635 Granite Ridge Drive, Suite 100
San Diego, CA 92123 |
|
277,651 shares (9) |
|
|
3.6% |
|
Common Stock |
|
Ellen R Weiner Family Revocable Trust (11)
10645 N. Tatum Blvd., Suite 200-166
Phoenix, AZ 85028 |
|
809,405 shares (10) |
|
|
11.6% |
|
Common Stock |
|
Estate of Allen S. Bird
9960 West Cheyenne Avenue, Suite 110
Las Vegas, NV 89129 |
|
294,612 shares (10) |
|
|
4.4% |
|
Common Stock |
|
All Current Directors and Executive Officers as a Group (7 members) |
|
519,254 shares |
|
|
6.7% |
|
* Less than 1%
(1) Based on 7,610,344 shares of common stock outstanding
on our transfer records as of June 23, 2015.
(2) Calculated pursuant to Rule 13d-3(d)(1) of the Securities
Exchange Act of 1934. Under Rule 13d-3(d)(1), shares not outstanding that are subject to options, warrants, rights or conversion
privileges exercisable by a person within 60 days are deemed outstanding for the purpose of calculating the number and percentage
owned by such person but not deemed outstanding for the purpose of calculating the percentage owned by each other person listed.
Except where otherwise noted, we believe that each individual or entity named has sole investment and voting power with respect
to the shares of common stock indicated as beneficially owned by such person, subject to community property laws, where applicable.
(3) Mr. Joyce agreed to waive his right to exercise 267,143
stock options held by him in order to make a sufficient number of shares of common stock available for issuance upon the exercise
of the warrants issued in our June 2015 financing. Accordingly, none of those stock options are included in the above table. The
waiver will expire when we amend our Articles of Incorporation to increase sufficiently the number of authorized shares of our
common stock available for issuance.
(4) Includes 15,000 stock options exercisable at $20.50 per
share, 20,000 stock options exercisable at $12.50 per share 2,500 stock options exercisable at $5.00 per share and 333 stock options
exercisable at $9.50 per share.
(5) Includes 20,000 stock options exercisable at $12.50 per
share, 2,500 stock options exercisable at $5.00 per share and 1,667 stock options exercisable at $9.50 per share.
(6) Mr. Frakes agreed to waive his right to exercise 25,000
stock options held by him in order to make a sufficient number of shares of common stock available for issuance upon the exercise
of the warrants issued in our June 2015 financing. Accordingly, none of those stock options are included in the above table. The
waiver will expire when we amend our Articles of Incorporation to increase sufficiently the number of authorized shares of our
common stock available for issuance.
(7) Includes 10,000 stock options exercisable at $20.50 per
share, 10,000 stock options exercisable at $12.50 per share, 9,211 stock options exercisable at $3.80 per share, 8,537 stock options
exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(8) Includes 10,000 stock options exercisable at $20.50 per
share, 12,000 stock options exercisable at $12.50 per share, 9,211 stock options exercisable at $3.80 per share, 8,537 stock options
exercisable at $4.10 per share and 3,684 stock options exercisable at $9.50 per share.
(9) Includes warrants to purchase 6,665 shares of common
stock at exercise prices ranging from $4.65 per share to $6.60 per share, and 3,684 stock options exercisable at $9.50 per share.
Dr. Shah agreed to waive his right to exercise 7,520 stock options and 102,655 warrants held by him in order to make a sufficient
number of shares of common stock available for issuance upon the exercise of the warrants issued in our June 2015 financing. Accordingly,
none of those stock options and warrants are included in the above table. The waiver will expire when we amend our Articles of
Incorporation to increase sufficiently the number of authorized shares of our common stock available for issuance.
(10) Includes common stock issuable upon exercise of warrants
held by the Ellen R. Weiner Family Revocable Trust and common stock issuable upon exercise of warrants held by the Estate of Allan
S. Bird. The trust owns 319,533 warrants to purchase common shares at prices ranging from $2.10 to $5.40 per share. The estate
owns 103,098 warrants to purchase common shares at prices ranging from $2.10 to $5.40 per share. Mr. Bird was Ms. Weiner's father-in-law.
The Ellen R. Weiner Family Trust disclaims any beneficial ownership of the estate's warrants and underlying common stock. The Estate
of Mr. Bird disclaims any beneficial ownership of the trust's warrants and underlying common stock.
(11) More-than-5% stockholder.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The following describes all transactions since
April 1, 2013, and all proposed transactions, in which we were or are to be a participant and the amount involved exceeds the lesser
of $120,000 or one percent of the average of our total assets at year-end for the last two completed fiscal years, and in which
any related person had or will have a direct or indirect material interest.
Between March 2012 and June 2013, Dr. Chetan
Shah, one of our directors, participated in several private equity placements with us under which he invested an aggregate amount
of $625,556 and in return received 170,000 restricted shares of our common stock and seven year warrants to purchase 85,000 shares
of our common stock.
In June 2013, we borrowed $80,000 at a 10% interest
rate from Mr. Phillip Ward, one of our former directors. We repaid that loan and paid accrued interest of $133 to Mr. Ward in June
2013.
In July 2013, we borrowed $400,000 from Mr.
Ward and Dr. Shah under 90-day notes bearing 10% interest. If we did not pay back those loans by October 9, 2013, then the notes
would bear interest at a penalty rate of 12% and the noteholders would have the right at their discretion (i) to convert their
principal and accrued interest into shares of common stock at $4.40 per share and (ii) to receive warrants to purchase common stock
equal to 50% of the principal converted under the notes, with an exercise price of $6.60 per share. We subsequently repaid Mr.
Ward’s note in cash. That repayment extinguished all potential common stock and warrant issuance provisions of Mr. Ward’s
note. On July 24, 2014, we issued to Dr. Shah an aggregate of 50,079 shares of restricted common stock and a seven-year warrant
to purchase up to 25,040 shares of common stock at an exercise price of $6.60 per share upon the conversion of an aggregate of
$220,349 of unpaid principal and accrued interest due under his note. The amount converted represented the entire amount outstanding
under Dr. Shah’s note.
On March 14, 2014, our Board of Directors granted
to our three outside directors ten-year options to acquire an aggregate of 31,911 shares of our common stock at an exercise price
of $4.10 per share.
On June 6, 2014, our Board of Directors granted
to our directors and our Chief Financial Officer ten-year options to acquire an aggregate of 52,053 shares of our common stock
at an exercise price of $9.50 per share.
In July 2014, Exosome Sciences, Inc. paid a
bonus of $15,000 to Mr. Joyce.
In October 2014, Exosome Sciences, Inc. paid
bonuses of $15,000 to Mr. Joyce and $1,500 to Mr. Frakes.
On October 20, 2014, we issued to Dr. Shah 42,222
shares of common stock and three-year warrants to acquire up to 42,222 shares of common stock with exercise prices ranging from
$4.65 to $5.50 per share. The common stock and warrants were issued to Dr. Shah upon his cash exercise, for an aggregate of $214,000,
of previously issued warrants for 42,222 shares held by him.
On October 21, 2014 and November 7, 2014, we
paid Mr. Franklyn Barry and Mr. Edward Broenniman, two of our outside directors, an aggregate of $10,944 and $10,063, respectively,
for accrued Board of Directors fees and expenses reimbursable to them. On November 7, 2014, we paid Dr. Tullis $5,000 for accrued
expenses reimbursable to him.
In December 2014, we paid bonuses of $25,000
to Mr. Joyce, $15,000 to Mr. Kenley, $15,000 to Mr. Frakes and $5,000 to Dr. Tullis.
In December 2014, Exosome Sciences, Inc. paid
Mr. Joyce a bonus of $15,000.
In January 2015, we made the following payments
to certain of our officers and directors:
|
· |
bonuses of $25,000 to Mr. Joyce and $15,000 to Mr. Frakes; |
|
· |
$93,377 to Dr. Tullis in payment of accrued salary; |
|
· |
$14,500 to Dr. Shah in payment of accrued director fees; |
|
· |
$84,500 to Mr. Broenniman in payment of accrued director fees and amounts accrued for services rendered to us prior to the 1999 reorganization among Aethlon, Inc., Hemex, Inc. and us; and |
|
· |
$271,810 to Mr. Barry in payment of accrued director fees and amounts accrued for services rendered to us prior to the 1999 reorganization among Aethlon, Inc., Hemex, Inc. and us. |
In June 2015, Mr. James
Joyce, our Chief Executive Officer, Mr. James Frakes, our Chief Financial Officer and Dr. Chetan Shah, a director of our company,
agreed to waive their rights to acquire an aggregate of 402,318 shares of common stock underlying certain stock options and warrants
held by them. Those waivers were required in order to make a sufficient number of shares of common stock available for issuance
upon the exercise of the warrants issued in our June 2015 financing. Those waivers will expire when we amend our Articles of Incorporation
to increase sufficiently the number of authorized shares of common stock available for issuance.
Director Independence
Each of Mr. Barry, Mr. Broenniman and Dr. Shah
is an independent director as that term is defined by NASDAQ Stock Market Rule 5605(a)(2). We currently have a compensation committee
and an audit committee. Of the members of our Board of Directors, each of Mr. Barry, Mr. Broenniman and Dr. Shah meets the NASDAQ
Stock Market's independence standards for members of such committees.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional
services billed by Squar, Milner, Peterson, Miranda & Williamson, LLP ("Squar Milner") for the fiscal years ended
March 31, 2015 and 2014:
| |
Fiscal Year | | |
Fiscal Year | |
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Audit Fees (1) | |
$ | 97,000 | | |
$ | 97,000 | |
Audit Related Fees (2) | |
| 72,840 | | |
| – | |
Tax Fees (3) | |
| 3,380 | | |
| 4,500 | |
All Other Fees (4) | |
| – | | |
| – | |
| |
$ | 173,220 | | |
$ | 101,500 | |
(1) Audit Fees include fees and expenses for professional services
rendered in connection with the audit of our financial statements for fiscal 2015 and 2014 and for reviews of the financial statements
included in each of our quarterly reports on Form 10-Q during fiscal 2015 and 2014.
(2) Audit Related Fees consist of fees billed for assurance and
related services that are reasonably related to the performance of the audit or review of our financial statements and are not
reported under “Audit Fees.” Included in Audit Related Fees for fiscal 2015 and 2014 are fees and expenses related
to reviews of registration statements and SEC filings other than Forms 10-K and 10-Q.
(3) Tax Fees include the aggregate fees billed during fiscal year
2015 and 2014 for professional services for preparation of income tax returns.
(4) All Other Fees consist of fees paid for products and services
other than the services reported above. No such fees were billed by Squar Milner for fiscal 2015 or 2014.
Policy on Audit Committee Pre-approval of Audit and Permissible
Non-audit Services of Independent Auditor
Our audit committee of the Board of Directors
is responsible for pre-approving all audit, audit-related, tax and other permitted non-audit services to be performed for us by
our independent auditor. The audit committee approved all of the services for which Squar Milner billed us as set
forth in the above table.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS
The following documents are filed as part of this report on Form
10-K:
1. Consolidated Financial Statements for the years ended March 31,
2015 and 2014:
Report of Independent Registered Public Accounting
Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Deficit
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Exhibits
2.1 |
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. (formerly, Bishop Equities, Inc.) and Aethlon, Inc. dated March 10, 1999 (1) |
|
|
2.2 |
Agreement and Plan of Reorganization Between Aethlon Medical, Inc. (formerly, Bishop Equities, Inc.) and Hemex, Inc. dated March 10, 1999 (1) |
|
|
3.1 |
Articles of Incorporation of Aethlon Medical, Inc., as amended (2) |
|
|
3.2 |
Bylaws of Aethlon Medical, Inc., as amended * |
|
|
4.1 |
Form of Common Stock Certificate (3) |
|
|
4.2 |
Form of Amended and Restated Convertible Note dated June 14, 2010 (12) |
|
|
4.3 |
Form of Amended and Restated Warrant dated June 14, 2010 (12) |
|
|
4.4 |
Form of Amended and Restated Warrant dated June 14, 2010 (QB) (12) |
|
|
4.5 |
Form of Common Stock Purchase Warrant dated March 29, 2012 and April 15, 2012 (14) |
|
|
4.6 |
Form of Common Stock Purchase Warrant dated June 19, 2012 (15) |
|
|
4.7 |
Form of Common Stock Purchase Warrant dated August 29, 2012 (16) |
|
|
4.8 |
Form of Common Stock Purchase Warrant dated October, November and December 2012 (17) |
|
|
4.9 |
Form of Common Stock Purchase Warrant dated June 14, 2013 (18) |
|
|
4.10 |
Form of Convertible Promissory Note dated July 9, 2013 (2) |
|
|
4.11 |
Form of Common Stock Purchase Warrant October 30, 2013 (19) |
|
|
4.12 |
Form of Exosome Sciences 10% Promissory Note dated October 2013 (19) |
|
|
4.13 |
Form of Common Stock Purchase Warrant November 12, 2013 (20) |
|
|
4.14 |
Form of Common Stock Purchase Warrant December 10, 2013 (22) |
|
|
4.15 |
Form of Common Stock Purchase Warrant December 30, 2013 (24) |
4.16 |
Form of Amendment to Notes and Warrants dated March 31, 2014 (26) |
|
|
4.17 |
Form of Common Stock Purchase Warrant dated June 24, 2014 (27) |
|
|
4.18 |
Form of Common Stock Purchase Warrant dated July 8, 2014 (28) |
|
|
4.19 |
Form of Common Stock Purchase Warrant dated July 24, 2014 (29) |
|
|
4.20 |
Form of Common Stock Purchase Warrant issued August and September 2014 (30) |
|
|
4.21 |
Form of Class A Common Stock Purchase Warrant dated November 6, 2014 (30) |
|
|
4.22 |
Form of Convertible Promissory Note dated November 6, 2014 (30) |
|
|
4.23 |
Form of Common Stock Purchase Warrant issued December 2, 2014 (32) |
|
|
4.24 |
Form of Purchase Agent Warrant dated December 2, 2014 (33) |
|
|
4.25 |
Form of Warrant to Purchase Common Stock issued June 25, 2015 (35) |
|
|
4.26 |
Form of Purchase Agent Warrant issued June 25, 2015 (36) |
|
|
10.1 |
2000 Stock Option Plan (2)++ |
|
|
10.2 |
Amended 2010 Stock Incentive Plan (4) |
|
|
10.3 |
2005 Directors Compensation Program (2)++ |
|
|
10.4 |
2012 Directors Compensation Program, as amended on June 6, 2014 (2)++ |
|
|
10.5 |
Employment Agreement between Aethlon Medical, Inc. and James A. Joyce dated April 1, 1999 (5)++ |
|
|
10.6 |
Patent License Agreement by and amongst Aethlon Medical, Inc., Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra (6) |
|
|
10.7 |
Employment Agreement by and between Aethlon Medical, Inc. and Dr. Richard H. Tullis dated January 10, 2000 (6)++ |
|
|
10.8 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A Joyce dated February 23, 2005 (7)++ |
|
|
10.9 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard Tullis dated February 23, 2005 (7)++ |
|
|
10.10 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry, Jr. dated February 23, 2005 (7)++ |
|
|
10.11 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Ed Broenniman dated February 23, 2005 (7)++ |
|
|
10.12 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated September 9, 2005 (8)++ |
|
|
10.13 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated June 13, 2007 (9)++ |
|
|
10.14 |
Stock Option Agreement by and between Aethlon Medical, Inc. and James A. Joyce dated December 15, 2008 (10)++ |
|
|
10.15 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Franklyn S. Barry dated December 15, 2008 (10)++ |
10.16 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Edward G. Broenniman dated December 15, 2008 (10)++ |
|
|
10.17 |
Stock Option Agreement by and between Aethlon Medical, Inc. and Richard H. Tullis dated December 15, 2008 (10)++ |
|
|
10.18 |
Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc. dated September 28, 2009 (11) |
|
|
10.19 |
Form of Amended and Restated Registration Rights Agreement dated February 2, 2009 (12) |
|
|
10.20 |
Offer of Employment by and between Aethlon Medical, Inc. and Rodney S. Kenley dated October 27, 2010 (13)++ |
10.21 |
Stock Option Agreement of Rodney S. Kenley dated October 27, 2010 (13)++ |
|
|
10.22 |
Unit Subscription Agreement dated March 29, 2012 and April 5, 2012 (14) |
|
|
10.23 |
Unit Subscription Agreement dated June 19, 2012 (15) |
|
|
10.24 |
Unit Subscription Agreement dated August 29, 2012 (16) |
|
|
10.25 |
Unit Subscription Agreement dated October, November and December 2012 (17) |
|
|
10.26 |
Unit Subscription Agreement dated June 14, 2013 (18) |
|
|
10.27 |
Form of Unit Purchase Agreement dated October 30, 2013 (19) |
|
|
10.28 |
Form of Subscription Agreement October 30, 2013 (19) |
|
|
10.29 |
Form of Unit Purchase Agreement dated November 12, 2013 (20) |
|
|
10.30 |
Form of Subscription Agreement November 12, 2013 (20) |
|
|
10.31 |
Form of Exosome Sciences Stock Purchase Agreement dated November 21, 2013 (21) |
|
|
10.32 |
Form of Unit Purchase Agreement dated December 10, 2013 (22) |
|
|
10.33 |
Form of Subscription Agreement December 10, 2013 (22) |
|
|
10.34 |
Form of Exosome Sciences Stock Purchase Agreement dated December 13, 2013 (23) |
|
|
10.35 |
Form of Unit Purchase Agreement dated December 30, 2013 (24) |
|
|
10.36 |
Form of Subscription Agreement December 30, 2013 (24) |
|
|
10.37 |
Settlement Agreement and General Release with Gemini Master Fund, Ltd. dated February 24, 2014 (25) |
|
|
10.38 |
Escrow Agreement dated February 24, 2014 (25) |
|
|
10.39 |
Form of Stipulation of Dismissal (25) |
10.40 |
Form of Restructuring Agreement dated June 24, 2014 (27) |
|
|
10.41 |
Form of Restructuring Agreement dated June 24, 2014 (27) |
|
|
10.42 |
Form of Restructuring Agreement dated July 8, 2014 (28) |
|
|
10.43 |
Second Amendment to Standard Industrial Net Lease by and between Sorrento Business Complex and Aethlon Medical, Inc. dated October 10, 2014 (3) |
|
|
10.44 |
Form of Subscription Agreement dated November 6, 2014 (30) |
|
|
10.45 |
Office Lease between T-C Stonecrest LLC and Aethlon Medical, Inc. dated November 13, 2014 (31) |
|
|
10.46 |
Securities Purchase Agreement dated November 26, 2014 (32) |
|
|
10.47 |
Registration Rights Agreement dated November 26, 2014 (32) |
|
|
10.48 |
DARPA Contract dated September 30, 2011 (3) (Portions of
this exhibit have been omitted pursuant to a request for confidential treatment.) |
|
|
10.49 |
DARPA Contract Extension dated August 8, 2012 (3) |
|
|
10.50 |
DARPA Contract Extension dated September 15, 2013 (3) |
|
|
10.51 |
DARPA Contract Extension dated September 29, 2014 (3) |
|
|
10.52 |
DARPA Contract Modification dated March 12, 2015 (2) (Portions
of this exhibit have been omitted pursuant to a request for confidential treatment.) |
|
|
10.53 |
UCI Clinical Trial Agreement signed April 9, 2015 (34) |
|
|
10.54 |
Protocol for UCI Clinical Trial (34) |
|
|
10.55 |
Budget for UCI Clinical Trial (34) |
|
|
10.56 |
DaVita Master Services Agreement * |
|
|
10.57 |
First Amendment to DaVita Master Services Agreement * |
|
|
10.58 |
Work Order #1 under DaVita Master Services Agreement * (Portions of this exhibit have been omitted pursuant to a request
for confidential treatment.) |
|
|
10.59 |
Securities Purchase Agreement dated June 23, 2015 (35) |
|
|
10.60 |
Registration Rights Agreement dated June 23, 2015 (35) |
|
|
14 |
Code of Ethics (29) |
|
|
21.1 |
List of subsidiaries (3) |
|
|
23.1 |
Consent of Independent Registered Public Accounting Firm
(Squar, Milner, Peterson, Miranda & Williamson, LLP) * |
|
|
31.1 |
Certification of our Chief Executive Officer, pursuant to Securities Exchange Act rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.* |
|
|
31.2 |
Certification of our Chief Financial Officer, pursuant to Securities Exchange Act rules 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley Act of 2002.* |
|
|
32.1 |
Statement of our Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)* |
|
|
32.2 |
Statement of our Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)* |
101.INS |
XBRL Instance Document* |
101.SCH |
XBRL Schema Document* |
101.CAL |
XBRL Calculation Linkbase Document* |
101.DEF |
XBRL Definition Linkbase Document* |
101.LAB |
XBRL Label Linkbase Document* |
101.PRE |
XBRL Presentation Linkbase Document* |
* Filed herewith
++ Indicates a management contract or compensatory plan or arrangement
(1) Filed with the Company's Current Report on Form 8-K/A dated
March 26, 1999 and incorporated by reference.
(2) Filed with the Company's Registration Statement on Form
S-1 (File No. 333-203487) filed on April 17, 2015 and incorporated by reference.
(3) Filed with the Company’s Registration Statement on Form
S-1 (File No. 333-201334) filed on December 31, 2014 and incorporated by reference.
(4) Filed with the Company’s Registration Statement on Form
S-8 (File No. 333-182902) filed on July 27, 2012 and incorporated by reference.
(5) Filed with the Company's Annual Report on Form 10-KSB filed
on July 15, 1999 for the year ended March 31, 1999 and incorporated by reference.
(6) Filed with the Company's Annual Report on Form 10-KSB/A filed
on September 10, 2004 for the year ended March 31, 2004 and incorporated by reference.
(7) Filed with the Company's Annual Report on Form 10-KSB filed
on July 14, 2005 for the year ended March 31, 2005 and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K filed on
September 12, 2005 and incorporated by reference.
(9) Filed with the Company’s Registration Statement on Form
S-8 (File No. 333-168483) filed on August 2, 2010 and incorporated by reference.
(10) Filed with the Company's Current Report on Form 8-K dated December
19, 2008 and incorporated by reference.
(11) Filed with the Company’s Quarterly Report on Form 10-Q
filed on November 16, 2009 for the period ended September 30, 2009 and incorporated by reference.
(12) Filed with the Company’s Annual Report on Form 10-K filed
on July 2, 2010 for the year ended March 31, 2010 and incorporated by reference.
(13) Filed with the Company’s Current Report on Form 8-K dated
November 1, 2010 and incorporated by reference.
(14) Filed with the Company’s Current Report on Form 8-K dated
April 6, 2012 and incorporated by reference.
(15) Filed with the Company’s Current Report on Form 8-K dated
June 27, 2012 and incorporated by reference.
(16) Filed with the Company’s Current Report on Form 8-K dated
September 6, 2012 and incorporated by reference.
(17) Filed with the Company’s Quarterly Report on Form 10-Q
filed on February 12, 2013 for the period ended December 31, 2012 and incorporated by reference.
(18) Filed with the Company’s Quarterly Report on
Form 10-Q filed on August 13, 2013 for the period ended June 30, 2013 and incorporated by reference.
(19) Filed with the Company’s Current Report on Form
8-K dated November 6, 2013 and incorporated by reference.
(20) Filed with the Company’s Current Report
on Form 8-K dated November 20, 2013 and incorporated by reference.
(21) Filed with the Company’s Current Report on Form
8-K dated November 21, 2013 and incorporated by reference.
(22) Filed with the Company’s Current Report on Form
8-K dated December 16, 2013 and incorporated by reference.
(23) Filed with the Company’s Current Report on Form
8-K/A dated December 19, 2013 and incorporated by reference.
(24) Filed with the Company’s Current Report on Form
8-K dated January 7, 2014 and incorporated by reference.
(25) Filed with the Company’s Current Report on Form
8-K dated February 27, 2014 and incorporated by reference.
(26) Filed with the Company’s Current Report on Form
8-K dated April 4, 2014 and incorporated by reference.
(27) Filed with the Company’s Current Report on Form
8-K dated June 30, 2014 and incorporated by reference.
(28) Filed with the Company’s Current Report on Form
8-K dated July 10, 2014 and incorporated by reference.
(29) Filed with the Company’s Current Report on Form 8-K
dated July 28, 2014 and incorporated by reference.
(30) Filed with the Company’s Quarterly Report on Form
10-Q filed on November 10, 2014 for the period ended September 30, 2014 and incorporated by reference.
(31) Filed with the Company’s Current Report on Form 8-K/A
dated November 19, 2014 and incorporated by reference.
(32) Filed with the Company’s Current Report on Form 8-K
dated November 28, 2014 and incorporated by reference.
(33) Filed with the Company’s Current Report on Form 8-K
dated December 3, 2014 and incorporated by reference.
(34) Filed with the Company’s Current Report on Form 8-K
dated April 15, 2015 and incorporated by reference.
(35) Filed with the Company’s Current Report on Form 8-K
dated June 24, 2015 and incorporated by reference.
(36) Filed with the Company’s Current Report on Form 8-K
dated June 26, 2015 and incorporated by reference.
SIGNATURES
Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on the 26th day of June, 2015.
|
|
|
|
|
|
|
|
By: |
/s/ JAMES A. JOYCE |
|
|
|
James A. Joyce |
|
|
|
Chairman, Chief Executive Officer |
|
|
|
|
|
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ JAMES A. JOYCE |
|
Chairman of the Board, Chief Executive Officer |
|
June 26, 2015 |
James A. Joyce |
|
and Principal Executive Officer |
|
|
|
|
|
|
|
/s/ JAMES B. FRAKES |
|
Chief Financial Officer and Principal Accounting Officer |
|
June 26, 2015 |
James B. Frakes |
|
|
|
|
|
|
|
|
|
/s/ FRANKLYN S. BARRY, JR. |
|
Director |
|
June 26, 2015 |
Franklyn S. Barry, Jr. |
|
|
|
|
|
|
|
|
|
/s/ EDWARD G. BROENNIMAN |
|
Director |
|
June 26, 2015 |
Edward G. Broenniman |
|
|
|
|
|
|
|
|
|
/s/ RODNEY S. KENLEY |
|
Director |
|
June 26, 2015 |
Rodney S. Kenley |
|
|
|
|
|
|
|
|
|
/s/ CHETAN S. SHAH |
|
Director |
|
June 26, 2015 |
Chetan S. Shah |
|
|
|
|
AETHLON MEDICAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page |
Audited Consolidated Financial Statements |
|
|
|
Report of Independent Registered Public Accounting Firm |
F-2 |
|
|
Consolidated Balance Sheets as of March 31, 2015 and 2014 |
F-3 |
|
|
Consolidated Statements of Operations for the Years Ended March 31, 2015 and 2014 |
F-4 |
|
|
Consolidated Statements of Equity (Deficit) for the Years Ended March 31, 2015 and 2014 |
F-5 |
|
|
Consolidated Statements of Cash Flows for the Years Ended March 31, 2015 and 2014 |
F-7 |
|
|
Notes to Consolidated Financial Statements |
F-9 |
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of
Aethlon Medical, Inc. and Subsidiary (the "Company") as of March 31, 2015 and 2014 and the related consolidated statements
of operations, equity (deficit) and cash flows for each of the years in the two-year period ended March 31, 2015. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the consolidated financial position of Aethlon Medical, Inc. and Subsidiary
as of March 31, 2015 and 2014 and the consolidated results of their operations and their cash flows for each of the years in the
two-year period ended March 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
As
more fully discussed in Note 1, the Company effected a 1-for-50 reverse stock split on April 14, 2015. All share and per share
amounts in the accompanying consolidated financial statements and related notes have been retroactively revised to reflect such
split as if it occurred on April 1, 2013.
During June 2015, as more fully discussed in Note 16, the Company
raised approximately $5,592,000 of cash in exchange for units, comprised of common stock and warrants. Due to the significance
of such subsequent event, the Company has included an unaudited pro forma balance sheet as of March 31, 2015 in its consolidated
balance sheets to present the effect of the subsequent event as if it had occurred on March 31, 2015.
/s/ SQUAR, MILNER, PETERSON, MIRANDA & WILLIAMSON, LLP
NEWPORT BEACH, CALIFORNIA
JUNE 25, 2015
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
| |
March 31, 2015 | | |
March 31, 2014 | | |
Pro Forma March 31, 2015 (Note 16) | |
| |
| | |
| | |
(unaudited) | |
ASSETS | |
| | | |
| | | |
| | |
CURRENT ASSETS | |
| | | |
| | | |
| | |
Cash | |
$ | 855,596 | | |
$ | 1,250,279 | | |
$ | 6,447,584 | |
Accounts receivable | |
| 193,341 | | |
| 95,177 | | |
| 193,341 | |
Deferred financing costs | |
| 82,324 | | |
| 83,191 | | |
| 82,324 | |
Prepaid expenses | |
| 73,135 | | |
| 50,699 | | |
| 73,135 | |
| |
| | | |
| | | |
| | |
TOTAL CURRENT ASSETS | |
| 1,204,396 | | |
| 1,479,346 | | |
| 6,796,384 | |
| |
| | | |
| | | |
| | |
NON-CURRENT ASSETS | |
| | | |
| | | |
| | |
Property and equipment, net | |
| 56,091 | | |
| 84,279 | | |
| 56,091 | |
Patents, net | |
| 103,325 | | |
| 112,489 | | |
| 103,325 | |
Deposits | |
| 16,776 | | |
| 18,988 | | |
| 16,776 | |
TOTAL NON-CURRENT ASSETS | |
| 176,192 | | |
| 215,756 | | |
| 176,192 | |
| |
| | | |
| | | |
| | |
TOTAL ASSETS | |
$ | 1,380,588 | | |
$ | 1,695,102 | | |
$ | 6,972,576 | |
| |
| | | |
| | | |
| | |
LIABILITIES AND EQUITY (DEFICIT) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
CURRENT LIABILITIES | |
| | | |
| | | |
| | |
Accounts payable | |
$ | 342,133 | | |
$ | 517,651 | | |
$ | 342,133 | |
Due to related parties | |
| 146,112 | | |
| 839,070 | | |
| 146,112 | |
Notes payable | |
| – | | |
| 390,000 | | |
| – | |
Convertible notes payable, current portion | |
| – | | |
| 1,367,655 | | |
| – | |
Derivative liabilities | |
| – | | |
| 10,679,067 | | |
| – | |
Other current liabilities | |
| 85,731 | | |
| 1,855,374 | | |
| 85,731 | |
| |
| | | |
| | | |
| | |
TOTAL CURRENT LIABILITIES | |
| 573,976 | | |
| 15,648,817 | | |
| 573,976 | |
| |
| | | |
| | | |
| | |
NONCURRENT LIABILITIES | |
| | | |
| | | |
| | |
Convertible notes payable, noncurrent portion | |
| 155,229 | | |
| 776,451 | | |
| 155,229 | |
TOTAL NONCURRENT LIABILITIES | |
| 155,229 | | |
| 776,451 | | |
| 155,229 | |
| |
| | | |
| | | |
| | |
TOTAL LIABILITIES | |
| 729,205 | | |
| 16,425,268 | | |
| 729,205 | |
| |
| | | |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES (Note 13) | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | |
STOCKHOLDERS’ EQUITY (DEFICIT) | |
| | | |
| | | |
| | |
Common stock, $0.001 par value, 10,000,000 shares authorized at March 31, 2015 and 2014; 6,657,046 and 4,499,480 issued and outstanding at March 31, 2015 and 2014, respectively | |
| 6,657 | | |
| 4,497 | | |
| 7,609 | |
Additional paid-in capital | |
| 82,238,507 | | |
| 59,879,624 | | |
| 87,829,543 | |
Accumulated deficit | |
| (81,629,714 | ) | |
| (74,832,557 | ) | |
| (81,629,714 | ) |
| |
| | | |
| | | |
| | |
TOTAL AETHLON MEDICAL, INC STOCKHOLDERS’ EQUITY (DEFICIT) | |
| 615,450 | | |
| (14,948,436 | ) | |
| 6,207,438 | |
| |
| | | |
| | | |
| | |
NONCONTROLLING INTERESTS | |
| 35,933 | | |
| 218,270 | | |
| 35,933 | |
| |
| | | |
| | | |
| | |
TOTAL EQUITY (DEFICIT) | |
| 651,383 | | |
| (14,730,166 | ) | |
| 6,243,371 | |
| |
| | | |
| | | |
| | |
TOTAL LIABILITIES AND EQUITY (DEFICIT) | |
$ | 1,380,588 | | |
$ | 1,695,102 | | |
$ | 6,972,576 | |
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2015 AND 2014
| |
Years Ended March 31, | |
| |
2015 | | |
2014 | |
REVENUES: | |
| | | |
| | |
Government contract revenue | |
$ | 762,417 | | |
$ | 1,623,769 | |
Total revenues | |
| 762,417 | | |
| 1,623,769 | |
| |
| | | |
| | |
OPERATING EXPENSES | |
| | | |
| | |
Professional fees | |
| 1,572,196 | | |
| 1,521,397 | |
Payroll and related | |
| 2,275,959 | | |
| 2,227,194 | |
General and administrative | |
| 907,115 | | |
| 931,106 | |
| |
| 4,755,270 | | |
| 4,679,697 | |
OPERATING LOSS | |
| (3,992,853 | ) | |
| (3,055,928 | ) |
| |
| | | |
| | |
OTHER (INCOME) EXPENSE | |
| | | |
| | |
Loss on debt conversion | |
| 2,753,989 | | |
| 40,256 | |
Change in fair value of derivative liabilities | |
| – | | |
| 8,547,015 | |
Loss on litigation settlement | |
| – | | |
| 583,601 | |
Other income | |
| (219,624 | ) | |
| (75,059 | ) |
Interest and other debt expenses | |
| 452,276 | | |
| 1,287,221 | |
| |
| 2,986,641 | | |
| 10,383,034 | |
| |
| | | |
| | |
NET LOSS BEFORE NONCONTROLLING INTERESTS | |
| (6,979,494 | ) | |
| (13,438,962 | ) |
| |
| | | |
| | |
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS | |
| (182,337 | ) | |
| (81,730 | ) |
| |
| | | |
| | |
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS | |
$ | (6,797,157 | ) | |
$ | (13,357,232 | ) |
| |
| | | |
| | |
Basic and diluted net loss per share available to common stockholders (Note 1) | |
$ | (1.22 | ) | |
$ | (3.44 | ) |
| |
| | | |
| | |
Weighted average number of common shares outstanding - basic and diluted (Note 1) | |
| 5,594,447 | | |
| 3,881,179 | |
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2015 AND 2014
|
|
ATTRIBUTABLE TO AETHLON MEDICAL, INC. |
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
ADDITIONAL PAID IN |
|
|
ACCUMULATED |
|
|
NON- CONTROLLING |
|
|
TOTAL
EQUITY |
|
|
|
SHARES |
|
|
AMOUNT |
|
|
CAPITAL |
|
|
DEFICIT |
|
|
INTERESTS |
|
|
(DEFICIT) |
|
BALANCE - MARCH 31, 2013 |
|
|
3,473,484 |
|
|
$ |
3,473 |
|
|
$ |
52,327,408 |
|
|
$ |
(61,475,325 |
) |
|
$ |
– |
|
|
$ |
(9,144,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock upon conversions of notes payable |
|
|
211,480 |
|
|
|
211 |
|
|
|
726,565 |
|
|
|
– |
|
|
|
– |
|
|
|
726,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash - Aethlon |
|
|
337,455 |
|
|
|
337 |
|
|
|
1,676,695 |
|
|
|
– |
|
|
|
– |
|
|
|
1,677,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash - ESI |
|
|
– |
|
|
|
– |
|
|
|
1,200,000 |
|
|
|
|
|
|
|
300,000 |
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
|
61,423 |
|
|
|
61 |
|
|
|
392,032 |
|
|
|
– |
|
|
|
– |
|
|
|
392,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under convertible debt restructuring |
|
|
90,142 |
|
|
|
90 |
|
|
|
856,259 |
|
|
|
– |
|
|
|
– |
|
|
|
856,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under stock option
exercises for accrued expenses |
|
|
3,171 |
|
|
|
3 |
|
|
|
12,997 |
|
|
|
– |
|
|
|
– |
|
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability into equity |
|
|
– |
|
|
|
– |
|
|
|
1,456,187 |
|
|
|
– |
|
|
|
– |
|
|
|
1,456,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under cashless warrant exercises |
|
|
254,325 |
|
|
|
254 |
|
|
|
(254 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued under restricted stock grant |
|
|
68,000 |
|
|
|
68 |
|
|
|
(68 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock on litigation settlement |
|
|
– |
|
|
|
– |
|
|
|
583,601 |
|
|
|
– |
|
|
|
– |
|
|
|
583,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt conversion |
|
|
– |
|
|
|
– |
|
|
|
40,256 |
|
|
|
– |
|
|
|
– |
|
|
|
40,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
– |
|
|
|
– |
|
|
|
607,946 |
|
|
|
– |
|
|
|
– |
|
|
|
607,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(13,357,232 |
) |
|
|
(81,730 |
) |
|
|
(13,438,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - MARCH 31, 2014 |
|
|
4,499,480 |
|
|
$ |
4,497 |
|
|
$ |
59,879,624 |
|
|
$ |
(74,832,557 |
) |
|
$ |
218,270 |
|
|
$ |
(14,730,166 |
) |
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
FOR THE YEARS ENDED MARCH 31, 2015 AND 2014
|
|
ATTRIBUTABLE TO AETHLON MEDICAL, INC. |
|
|
|
|
|
|
|
|
|
COMMON STOCK |
|
|
ADDITIONAL PAID IN |
|
|
ACCUMULATED |
|
|
NON- CONTROLLING |
|
|
TOTAL
EQUITY |
|
|
|
SHARES |
|
|
AMOUNT |
|
|
CAPITAL |
|
|
DEFICIT |
|
|
INTERESTS |
|
|
(DEFICIT) |
|
BALANCE - MARCH 31, 2014 |
|
|
4,499,480 |
|
|
$ |
4,497 |
|
|
$ |
59,879,624 |
|
|
$ |
(74,832,557 |
) |
|
$ |
218,270 |
|
|
$ |
(14,730,166 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of common stock upon conversions of notes payable and convertible notes payable and related accrued interest |
|
|
948,728 |
|
|
|
949 |
|
|
|
2,272,083 |
|
|
|
– |
|
|
|
– |
|
|
|
2,273,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for cash - Aethlon |
|
|
541,361 |
|
|
|
542 |
|
|
|
4,762,611 |
|
|
|
– |
|
|
|
– |
|
|
|
4,763,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for services |
|
|
27,654 |
|
|
|
28 |
|
|
|
225,130 |
|
|
|
– |
|
|
|
– |
|
|
|
225,158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extension of warrants |
|
|
– |
|
|
|
– |
|
|
|
143,363 |
|
|
|
– |
|
|
|
– |
|
|
|
143,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivative liability into equity |
|
|
– |
|
|
|
– |
|
|
|
10,679,067 |
|
|
|
– |
|
|
|
– |
|
|
|
10,679,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock under cashless warrant exercises |
|
|
433,907 |
|
|
|
434 |
|
|
|
(434 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt discount recorded in connection with beneficial conversion feature |
|
|
– |
|
|
|
– |
|
|
|
527,780 |
|
|
|
– |
|
|
|
– |
|
|
|
527,780 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for deferred financing costs |
|
|
500 |
|
|
|
1 |
|
|
|
4,499 |
|
|
|
– |
|
|
|
– |
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants related
to extinguishment of debt |
|
|
205,416 |
|
|
|
206 |
|
|
|
3,328,303 |
|
|
|
– |
|
|
|
– |
|
|
|
3,328,509 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
– |
|
|
|
– |
|
|
|
416,481 |
|
|
|
– |
|
|
|
– |
|
|
|
416,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(6,797,157 |
) |
|
|
(182,337 |
) |
|
|
(6,979,494 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE - MARCH 31, 2015 |
|
|
6,657,046 |
|
|
$ |
6,657 |
|
|
$ |
82,238,507 |
|
|
$ |
(81,629,714 |
) |
|
$ |
35,933 |
|
|
$ |
651,383 |
|
See accompanying notes to the consolidated
financial statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2015 AND 2014
| |
2015 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (6,979,494 | ) | |
$ | (13,438,962 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 37,352 | | |
| 21,087 | |
Debt restructuring cost | |
| – | | |
| 856,349 | |
Loss on extension of warrants | |
| 143,363 | | |
| – | |
Loss on litigation settlement | |
| – | | |
| 583,601 | |
Change in estimated fair value of derivative liabilities | |
| – | | |
| 8,547,015 | |
Loss on debt conversion | |
| 2,753,989 | | |
| 40,256 | |
Fair market value of equity instruments issued for services | |
| 225,158 | | |
| 392,093 | |
Stock based compensation | |
| 416,481 | | |
| 607,946 | |
Amortization of debt discount and deferred financing costs | |
| 273,377 | | |
| 5,147 | |
| |
| | | |
| | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (98,164 | ) | |
| 113,604 | |
Prepaid expenses | |
| (22,436 | ) | |
| (21,097 | ) |
Other assets | |
| 2,212 | | |
| (8,612 | ) |
Accounts payable and other current liabilities | |
| (1,108,294 | ) | |
| 46,602 | |
Due to related parties | |
| (692,958 | ) | |
| 116,000 | |
| |
| | | |
| | |
Net cash used in operating activities | |
| (5,049,414 | ) | |
| (2,138,971 | ) |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
Purchases of property and equipment | |
| – | | |
| (96,056 | ) |
| |
| | | |
| | |
Net cash used in investing activities | |
| – | | |
| (96,056 | ) |
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2015 AND 2014
| |
2015 | | |
2014 | |
Cash flows from financing activities: | |
| | | |
| | |
Principal repayments of notes payable | |
| (523,422 | ) | |
| (217,000 | ) |
Proceeds from the issuance of notes payable | |
| 415,000 | | |
| 400,000 | |
Net proceeds from the issuance of common stock | |
| 4,763,153 | | |
| 3,177,032 | |
| |
| | | |
| | |
Net cash provided by financing activities | |
| 4,654,731 | | |
| 3,360,032 | |
| |
| | | |
| | |
Net (decrease) increase in cash | |
| (394,683 | ) | |
| 1,125,005 | |
| |
| | | |
| | |
Cash at beginning of year | |
| 1,250,279 | | |
| 125,274 | |
| |
| | | |
| | |
Cash at end of year | |
$ | 855,596 | | |
$ | 1,250,279 | |
| |
| | | |
| | |
Supplemental disclosure of cash flow information - Cash paid during the year for: | |
| | | |
| | |
Interest | |
$ | 480,701 | | |
$ | 13,950 | |
Income taxes | |
$ | – | | |
$ | – | |
| |
| | | |
| | |
Supplemental information of non-cash investing and financing activities: | |
| | | |
| | |
| |
| | | |
| | |
Conversion of debt, accrued liabilities and accrued interest to common stock | |
$ | 2,273,032 | | |
$ | 726,776 | |
Reclassification of accounts payable to convertible notes payable | |
$ | – | | |
$ | 47,000 | |
Reclassification of accrued interest to convertible notes payable | |
$ | 25,766 | | |
$ | 20,027 | |
Recording deferred financing costs associated with notes payable and convertible notes payable | |
$ | 117,280 | | |
$ | 83,191 | |
Reclassification of warrant derivative liability into equity | |
$ | 10,679,067 | | |
$ | 1,456,187 | |
Issuance of shares under cashless warrant exercises | |
$ | 434 | | |
$ | 12,717 | |
Exercise of stock option for accrued expenses | |
$ | – | | |
$ | 13,000 | |
Creation of debt discount on convertible notes payable | |
$ | 527,780 | | |
$ | – | |
Stock issued under restricted stock grant | |
$ | – | | |
$ | 3,400 | |
See accompanying notes to the consolidated financial
statements.
Aethlon Medical, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. and subsidiary ("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 U.S. 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 U.S.
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.
In October 2013, our subsidiary, Exosome Sciences, Inc. (“ESI”),
commenced operations with a focus on advancing exosome-based strategies to diagnose and monitor the progression of cancer, infectious
disease and other life-threatening conditions.
Our common stock is quoted on the OTCQB marketplace administered
by the OTC Markets Group under the symbol "AEMD."
REVERSE STOCK SPLIT
On April 14, 2015, the Company completed a 1-for-50 reverse stock
split. Accordingly, authorized common stock was reduced from 500,000,000 shares to 10,000,000 shares, and each 50 shares of outstanding
common stock held by stockholders were combined into one share of common stock. The accompanying consolidated financial statements
and accompanying notes have been retroactively revised to reflect such reverse stock split as if it had occurred on April 1, 2013.
All shares and per share amounts have been revised accordingly.
UNAUDITED PRO FORMA BALANCE SHEET INFORMATION
During June 2015, as more fully discussed in Note 16, the
Company raised approximately $5,592,000 of cash in exchange for units, comprised of common stock and warrants. Due to the
significance of such subsequent event, the Company has included an unaudited pro forma balance sheet as of March 31, 2015 in
its consolidated balance sheets to present the effect of the subsequent event as if it had occurred on March 31, 2015.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its majority-owned and controlled subsidiary, ESI. All significant intercompany balances
and transactions have been eliminated in consolidation. The Company classifies the noncontrolling interests in ESI as part of consolidated
net loss in the fiscal years ended March 31, 2015 and 2014 and includes the accumulated amount of noncontrolling interests as part
of stockholders’ equity.
The losses at ESI during the fiscal year ended March 31, 2015
reduced the noncontrolling interests on our consolidated balance sheet by $182,337 from $218,270 at March 31, 2014 to $35,933 at
March 31, 2015.
RISKS AND UNCERTAINTIES
We operate in an industry that is subject to intense competition,
government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including
financial, operational, technological, regulatory, and including the potential risk of business failure.
RECLASSIFICATIONS
Certain reclassifications have been made to the
prior year’s consolidated financial statements to conform to the current year presentation. These reclassifications had
no effect on previously reported results of consolidated operations or equity.
USE OF ESTIMATES
We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods.
Significant estimates made by management include, among others, realization of long-lived assets, valuation of derivative liabilities,
estimating fair value associated with debt and equity transactions and valuation of deferred tax assets. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
Accounting standards define "cash and cash equivalents"
as any short-term, highly liquid investment that is both readily convertible to known amounts of cash and so near their maturity
that they present insignificant risk of changes in value because of changes in interest rates. For the purpose of financial statement
presentation, we consider all highly liquid investment instruments with original maturities of three months or less when purchased,
or any investment redeemable without penalty or loss of interest to be cash equivalents. As of March 31, 2015 and 2014,
we had no assets that were classified as cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of our cash, accounts receivable, accounts payable,
and other current liabilities approximates their estimated fair values due to the short-term maturities of those financial instruments.
The carrying amount of the notes payable approximates their fair value due to the short maturity of the notes and since the interest
rates approximate current market interest rates for similar instruments. Derivative liabilities recorded in connection with warrants
and embedded conversion features of certain convertible notes payable are reported at their estimated fair value, with changes
in fair value being reported in results of operations (see Note 10).
Management has concluded that it is not practical to determine the
estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated at arm's
length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent
valuation would not be practicable due to the lack of data regarding similar instruments, if any, and the associated potential
costs.
Other than our derivative liabilities, we do not have any assets
or liabilities that are measured at fair value on a recurring basis and, during the years ended March 31, 2015 and 2014, did not
have any assets or liabilities that were measured at fair value on a nonrecurring basis.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at two financial institutions in checking accounts
and related cash management accounts. Accounts at these institutions are secured by the Federal Deposit Insurance Corporation up
to $250,000. Our March 31, 2015 cash balances were approximately $471,000 over such insured amount.
We do not believe that the Company is exposed to any significant risk with respect to its cash.
All of our accounts receivable at March 31, 2015 and 2014 and all
of our revenue in the fiscal years ended March 31, 2015 and 2014 were directly from the U.S. Department of Defense or from a subcontract
under Battelle, which is a prime contractor with the U.S. Department of Defense.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related assets, which range from two to five years. Repairs
and maintenance are charged to expense as incurred while improvements are capitalized. Upon the sale or retirement of property
and equipment, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss included in
the consolidated statements of operations.
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.
LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is
greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. We believe no
impairment charges were necessary during the fiscal years ended March 31, 2015 and 2014.
LOSS PER SHARE
Basic loss per share is computed by dividing net income available
to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted loss
per 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 potential common shares had been issued, if such additional common shares were
dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential
common shares have been excluded as their effect would be antidilutive.
As of March 31, 2015 and 2014, a total of 2,030,448 and 2,861,492
potential common shares, consisting of shares underlying outstanding stock options, warrants and convertible notes payable were
excluded as their inclusion would be antidilutive.
SEGMENTS
Historically, we operated in one segment that was based on our development
of therapeutic devices. However in the December 2013 quarter, we initiated the operations of ESI to develop diagnostic tests. As
a result, we now operate in two segments, Aethlon for therapeutic applications and ESI for diagnostic applications (See Note 14).
DEFERRED FINANCING COSTS
Costs related to the issuance of debt are capitalized and amortized
to interest expense over the life of the related debt using the effective interest method. We recorded amortization
expense related to our deferred financing costs of $118,147 and $863 during the fiscal years ended March 31, 2015 and 2014, respectively.
REVENUE RECOGNITION
DARPA Contract -- With respect to revenue recognition, we entered
into a government contract with DARPA and have recognized revenue of $630,887 and $1,466,482 under that contract during the fiscal
years ended March 31, 2015 and 2014, respectively. 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 for the fiscal years ended March 31, 2015 and 2014.
In order to account for this contract, we identify the deliverables
included within the contract and evaluate 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 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.
See Note 11 for the additional disclosure information required under
ASC 605-28.
Battelle Subcontract -- We entered into a subcontract agreement
with Battelle Memorial Institute (“Battelle”) in March 2013. Battelle was chosen by DARPA to be the prime contractor
on the systems integration portion of the original DARPA contract and we are one of several subcontractors on that systems integration
project. The Battelle subcontract is cost-reimbursable under a time and materials basis. We began generating revenues under the
subcontract during the three months ended September 30, 2013 and for the fiscal years ended March 31, 2015 and 2014, we recorded
revenue of $131,530 and $157,287, respectively, under the Battelle subcontract.
Our revenue under this contract is a function of cost reimbursement
plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees).
Battelle engages us as needed. Each payment requires approval by the program manager at Battelle.
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 April 1, 2006, but not yet vested, 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 6).
The following table summarizes share-based compensation expenses
relating to shares and options granted and the effect on loss per common share during the years ended March 31, 2015 and 2014:
| |
March 31, 2015 | | |
March 31, 2014 | |
Vesting of Stock Options | |
$ | 416,481 | | |
$ | 541,588 | |
Incremental fair value of option Modifications | |
| – | | |
| 1,914 | |
Vesting Expense Associated with CEO Restricted Stock Grant | |
| – | | |
| 64,444 | |
Total Stock-Based Compensation Expense | |
$ | 416,481 | | |
$ | 607,946 | |
| |
| | | |
| | |
Weighted average number of common shares outstanding – basic and diluted | |
| 5,594,447 | | |
| 3,881,179 | |
| |
| | | |
| | |
Basic and diluted loss per common share | |
$ | (0.07 | ) | |
$ | (0.16 | ) |
We account for transactions involving 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 are not readily determinable and (1) the fair value of the equity
instruments is more reliably measurable and (2) the counterparty receives equity instruments in full or partial settlement of the
transactions, 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.
We review share-based compensation on a quarterly basis for changes
to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate
for all expense amortization after March 31, 2006 is recognized in the period the forfeiture estimate is changed. The effect of
forfeiture adjustments for the fiscal year ended March 31, 2015 was insignificant.
PATENTS
Patents include both foreign and domestic patents. There were several
patents pending at March 31, 2015. We capitalize the cost of patents and patents pending, some of which were acquired, and amortize
such costs over the shorter of the remaining legal life or their estimated economic life, upon issuance of the patent. The unamortized
costs of patents and patents pending are subject to our review for impairment under our long-lived asset policy above.
STOCK PURCHASE WARRANTS
We grant warrants in connection with the issuance of convertible
notes payable and the issuance of common stock for cash. When such warrants are classified as equity and issued in connection with
debt, we measure the relative estimated fair value of such warrants and record it as a discount from the face amount of the convertible
notes payable. Such discounts are amortized to interest expense over the term of the notes using the effective interest method.
Warrants issued in connection with common stock for cash, if classified as equity, are considered issued in connection with equity
transactions and the warrant fair value is recorded to additional paid-in-capital. Lastly, warrants not meeting equity classification
are recorded as derivative instruments.
DERIVATIVE INSTRUMENTS
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
reporting 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.
Instruments classified as derivative liabilities are remeasured
each reporting period (or upon reclassification) and the change in fair value is recorded on our consolidated statement of operations
in other (income) expense.
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable provides for a
rate of conversion that is below market value. Such feature is normally characterized as a "Beneficial Conversion Feature"
("BCF"). We measure the estimated fair value of the BCF in circumstances in which the conversion feature is not required
to be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements
as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development costs are expensed as incurred. We
incurred approximately $1,028,000 and $1,509,000 of research and development expenses for the years ended March 31, 2015 and 2014,
respectively, which are included in various operating expenses in the accompanying consolidated statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that
have or are reasonably likely to have a current or future material effect on our consolidated financial statements.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
Management
is evaluating significant recent accounting pronouncements that are not yet effective for us, including the new accounting standard
on revenue recognition, ASU 2014-09 (Topic 606), the new accounting standard related to presentation of financial statements -
going concern qualifications, ASU 2014-15, the new accounting standard on consolidation, ASU
2015-02, the new accounting standard on extraordinary and unusual items on income statements, ASU 2015-01, and the new accounting
standard on imputation of interest, simplifying the presentation of debt issuance costs, ASU 2015-03 and have not yet concluded
whether any such pronouncements will have a significant effect on our future consolidated financial statements.
2. PROPERTY AND EQUIPMENT
Property and equipment, net, consist of the following:
| |
March 31, 2015 | | |
March 31, 2014 | |
Furniture and office equipment, at cost | |
$ | 385,088 | | |
$ | 385,088 | |
Accumulated depreciation | |
| (328,997 | ) | |
| (300,809 | ) |
| |
$ | 56,091 | | |
$ | 84,279 | |
Depreciation expense for the years ended March 31, 2015 and 2014
approximated $28,000 and $12,000, respectively.
3. PATENTS
Patents consist of the following:
| |
March 31, 2015 | | |
March 31, 2014 | |
Patents | |
$ | 157,442 | | |
$ | 157,442 | |
Patents pending and trademarks | |
| 54,203 | | |
| 54,203 | |
Accumulated amortization | |
| (108,320 | ) | |
| (99,156 | ) |
| |
$ | 103,325 | | |
$ | 112,489 | |
Amortization expense for patents for the years ended March 31, 2015
and 2014 approximated $9,000. Future amortization expense on patents is estimated to be approximately $9,000 per year based on
the estimated life of the patents. The weighted average remaining life of our patents is approximately 5.5 years.
4. NOTES PAYABLE
Notes payable consist of the following:
|
|
March 31, 2015 |
|
|
March 31, 2014 |
|
|
|
Principal Balance |
|
|
Accrued Interest |
|
|
Principal Balance |
|
|
Accrued Interest |
|
12% Notes payable, past due |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
185,000 |
|
|
$ |
353,813 |
|
10% Note payable, past due |
|
|
– |
|
|
|
– |
|
|
|
5,000 |
|
|
|
6,375 |
|
Directors’ Note(s) |
|
|
– |
|
|
|
– |
|
|
|
200,000 |
|
|
|
14,516 |
|
Total |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
390,000 |
|
|
$ |
374,704 |
|
During the fiscal years ended March 31, 2015 and March 31, 2014,
we recorded interest expense of $34,515 and $59,901, respectively, related to the contractual interest rates of our notes payable.
That interest expense was included in interest and other debt expenses on our consolidated statements of operations.
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"). In December 2014 and
January 2015, we paid off in full the remaining eight 12% Notes with aggregate payments of $559,626, representing $185,000 in principal
and $374,626 of accrued interest.
10% NOTES
In December 2014, we paid off the remaining 10% Note with a payment
of $11,750 representing principal of $5,000 and accrued interest of $6,750.
DIRECTORS’ NOTES
In July 2013, we borrowed $400,000 from two of our directors under
two 90 day notes for $200,000 each bearing 10% interest (the “Notes”). At the discretion of the holders, if not paid
off by October 9, 2013, the noteholders were entitled to (i) convert the principal and accrued interest under the Notes into shares
of common stock at $4.40 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 $6.60 per share. Additionally, there was a provision
for a penalty interest rate of 12%.
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 initially reserved 138,636 shares of common stock to support the conversion of the Notes and accrued interest
in full as well as the exercise of the warrants in full (should such conversion and/or issuance occur).
During the fiscal year ended March 31, 2014, the principal of $200,000
and accrued interest of $9,367 were paid on one of the Notes, which extinguished all potential common stock and warrant issuance
provisions related to that Note.
During the fiscal year ended March 31, 2015, the holder of the
second note converted the principal of $200,000 and accrued interest of $20,349 into 50,079 shares of our common stock per the
conversion formula of the Note (see Note 6).
5. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable consisted of the following at March 31,
2015:
|
|
Principal |
|
|
Unamortized
Discount |
|
|
Net
Amount |
|
|
Accrued
Interest |
|
Convertible Notes Payable – Non-Current Portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 2014 10% Convertible Notes |
|
|
527,780 |
|
|
|
(372,551 |
) |
|
|
155,229 |
|
|
|
21,258 |
|
Total – Convertible Notes Payable – Non-Current Portion |
|
|
527,780 |
|
|
|
(372,551 |
) |
|
|
155,229 |
|
|
|
21,258 |
|
Total Convertible Notes Payable |
|
$ |
527,780 |
|
|
$ |
(372,551 |
) |
|
$ |
155,229 |
|
|
$ |
21,258 |
|
During the fiscal year ended March 31, 2015, we recorded interest
expense of $24,625 related to the contractual interest rates of our convertible notes, interest expense of $155,230 related to
the amortization of debt discounts on the convertible notes and interest expense of $118,147 related to the amortization of deferred
financing costs for a total of $298,002.
Convertible Notes Payable consisted of the following at March 31,
2014:
|
|
Principal |
|
|
Unamortized
Discount |
|
|
Net
Amount |
|
|
Accrued
Interest |
|
Convertible Notes Payable – Current Portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amended and Restated Series A 12% Convertible Notes, past due |
|
$ |
885,000 |
|
|
$ |
– |
|
|
$ |
885,000 |
|
|
$ |
575,250 |
|
2008 10% Convertible Notes, past due |
|
|
25,000 |
|
|
|
– |
|
|
|
25,000 |
|
|
|
19,167 |
|
October & November 2009 10% Convertible Notes |
|
|
50,000 |
|
|
|
– |
|
|
|
50,000 |
|
|
|
26,097 |
|
April 2010 10% Convertible Note |
|
|
75,000 |
|
|
|
– |
|
|
|
75,000 |
|
|
|
31,438 |
|
July and August 2011 10% Convertible Notes, past due |
|
|
257,655 |
|
|
|
– |
|
|
|
257,655 |
|
|
|
90,256 |
|
Law Firm Note |
|
|
75,000 |
|
|
|
– |
|
|
|
75,000 |
|
|
|
7,604 |
|
Total – Convertible Notes Payable – Current Portion |
|
|
1,367,655 |
|
|
|
– |
|
|
|
1,367,655 |
|
|
|
749,812 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Notes Payable – Non-Current Portion: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 2010 12% Convertible Notes |
|
|
317,072 |
|
|
|
– |
|
|
|
317,072 |
|
|
|
35,034 |
|
April 2011 12% Convertible Notes |
|
|
448,448 |
|
|
|
– |
|
|
|
448,448 |
|
|
|
12,117 |
|
September 2011 12% Convertible Notes |
|
|
10,931 |
|
|
|
– |
|
|
|
10,931 |
|
|
|
– |
|
Total – Convertible Notes Payable – Non-Current Portion |
|
|
776,451 |
|
|
|
– |
|
|
|
776,451 |
|
|
|
47,151 |
|
Total Convertible Notes Payable |
|
$ |
2,144,106 |
|
|
$ |
– |
|
|
$ |
2,144,106 |
|
|
$ |
796,963 |
|
There were no discounts remaining on any of our Convertible Notes
Payable as of March 31, 2014.
During the fiscal year ended March 31, 2014, we recorded interest
expense of $354,949 related to the contractual interest rates of our convertible notes and interest expense of $4,284 related to
the amortization of debt discounts on the convertible notes for a total of $359,233.
Maturities of Non-Current Portion of Convertible Notes
Payable – the November 2014 10% Convertible Notes mature on April 1, 2016, which based on the amount outstanding as of March
31, 2015 would be $527,780.
NOVEMBER 2014 10% CONVERTIBLE NOTES
In November 2014, we entered into a Subscription Agreement with
two accredited investors providing for the issuance and sale of (i) convertible promissory notes (the “November 2014 10%
Convertible Notes”) in the aggregate principal amount of $527,780 and (ii) five year warrants to purchase up to 47,123 shares
of Common Stock at a fixed exercise price of $8.40 per share. The November 2014 10% Convertible Notes bear interest at the annual
rate of 10% and mature on April 1, 2016.
The aggregate gross cash proceeds to us were $415,000 after subtracting
legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 due diligence fee and an original
issuance discount. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence fee and original issuance
discount and will amortize those costs over the life of the notes using the effective interest method.
The estimated relative fair value of warrants issued in connection
with the November 2014 10% Convertible Notes is recorded as a debt discount and is amortized as additional interest expense over
the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value of these warrants. In addition,
as the effective conversion price of the debt was less than market price of the underlying common stock on the date of issuance,
we recorded an additional debt discount of $287,647 related to the beneficial conversion feature. As of March 31, 2015, the $527,780
principal amount outstanding under this agreement is presented net of unamortized debt discount of $372,551.
The November 2014 10% Convertible Notes are convertible at the option
of the holders into shares of our common stock at a fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of
Common Stock. There are no registration requirements with respect to the shares of common stock underlying the notes or the warrants.
The pricing on both the conversion price and on the warrant exercise
price reflected a negotiation that began in September 2014 and continued through funding in November 2014. During that period of
time the price of our common stock rose significantly, which complicated the pricing negotiations. We ended up with pricing the
notes and warrants at levels consistent with our prior equity unit issuances in October 2014 (see Note 6).
AMENDED AND RESTATED SERIES A 12% CONVERTIBLE NOTES
In June 2010, we entered into Amended and Restated
Series A 12% Convertible Promissory Notes (the "Amended and Restated Notes") with the holders of certain promissory notes
previously issued by us, extending the due date to December 31, 2010 on the aggregate principal balance of $900,000. During the
fiscal year ended March 31, 2013, the holders of $15,000 of the Notes converted their principal and related accrued interest into
common stock. During the fiscal year ended March 31, 2015, the holders of the remaining $885,000 of the Notes converted their principal
and related accrued interest into common stock. There was no balance remaining at March 31, 2015.
Weiner Note Conversion
On June 24, 2014, we entered into an agreement with the
Ellen R. Weiner Family Revocable Trust (the “Trust”), a holder of a Series A 12% Convertible Note (the “Note”),
which previously was classified as being in default. As per the agreement, the Trust converted past due principal of $660,000 and
accrued interest balance of $343,200 into restricted common stock, representing all amounts outstanding to the Trust.
Additionally, the Trust agreed to waive anti-dilution
price protection underlying warrants previously issued to the Trust. On June 26, 2014, three other parties who held similar warrants
also agreed to waive their anti-dilution price protection.
Under its agreement, the Trust converted the entire
$1,003,200 past due principal and interest balance on the Note, which previously was in default, into an aggregate of 466,365 restricted
shares of our common stock and five-year warrants to acquire up to 136,190 shares of our common stock at an exercise price of $2.10
per share (which exercise price was the result of certain contractual price adjustments previously made during 2011) and up to
7,944 shares of our common stock at an exercise price of $5.40 per share (collectively, the “Conversion Securities”).
Based on the fair value of the warrants and shares issued to the Trust for the accrued interest, we recorded a loss on settlement
of notes of $1,791,421 during the fiscal year ended March 31, 2015.
In exchange for the Trust’s conversion
in full of the Note and accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants,
in addition to the Conversion Securities, we issued to the Trust 1,500 restricted shares of common stock as a service fee, changed
the exercise price of all of the previously issued warrants to $2.10 per share and extended the expiration date of all of the
previously issued warrants to July 1, 2018. We valued the 1,500 share service fee at $12,000 based on our closing price on the
date of the agreement and recorded that value as interest expense during the June 2014 period.
Bird Estate Extension
On July 8, 2014, we executed a written restructuring
agreement (the “Agreement”) with the Estate of Allan Bird (the “Estate”), a holder of a Series A 12% Convertible
Note (the “Note”), which previously was classified as being in default. Since the negotiations for the Agreement were
completed in the month of June, we recorded the impact of the Agreement as of June 30, 2014. In the Agreement, the Estate agreed
to extend the expiration date of the Note to April 1, 2016, to convert approximately $116,970 of accrued interest to equity, and
to waive anti-dilution price protection underlying the Note and warrants previously issued to the Estate.
Under the Agreement, the Estate converted the entire
$116,970 past due interest balance on the Note, which previously was in default, into an aggregate of 51,837 restricted shares
of our common stock. The Estate received five-year warrants to acquire up to 46,429 shares of our common stock at an exercise price
of $2.10 per share (which exercise price was the result of certain contractual price adjustments previously made during 2011).
Based on our common stock prices during a period of negotiation with the Estate including during calendar year 2013, the Estate
also received five-year warrants to acquire up to 2,708 shares of our common stock at an exercise price of $5.40 (collectively
known as the “Conversion Securities”). Based on the fair value of the warrants and shares issued to the Estate for
the accrued interest, we recorded a loss on settlement of notes of $663,209 during the fiscal year ended March 31, 2015.
In exchange for the Estate’s extension
of the Note, conversion of accrued interest and for the waivers of anti-dilution price protection in the previously issued warrants,
in addition to the Conversion Securities, we also issued to the Estate 500 restricted shares of common stock as an extension fee
and extended the expiration date of all of the previously issued warrants to July 1, 2018. We valued the 500 share extension fee
at $4,500 based on our closing price and recorded that value as a deferred financing cost, which we will amortize over the extended
two year life of the note.
Bird Estate Conversion
In November 18, 2014, we issued an aggregate of 112,500 shares of
common stock to the Estate upon the conversion of an aggregate of $236,250 representing all $225,000 of unpaid principal and $11,250
of unpaid accrued interest due under the Note. The conversion price per share was $2.10.
2008 10% CONVERTIBLE NOTES
In September 2014, we issued to the holder
of the remaining 2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit
warrants to acquire up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share (see Note 6). The
units were issued to the Note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due
under the Note, which represented the entire amount outstanding under the Note and the Note was retired. We recorded a loss on
debt conversion of $65,493 on this transaction.
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 $12.50 per share. The investors also received matching three year warrants
to purchase unregistered shares of our common stock at an exercise price of $12.50 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. Such
discount was fully amortized at March 31, 2014.
The following table shows the conversions into principal
of the October and November 2009 10% Convertible Notes by fiscal year:
Activity in October & November 2009 10% Convertible Notes |
Initial principal balance |
|
$ |
450,250 |
|
Conversions during the fiscal year ended March 31, 2010 |
|
|
(70,000 |
) |
Conversions during the fiscal year ended March 31, 2011 |
|
|
(175,000 |
) |
Conversions during the fiscal year ended March 31, 2012 |
|
|
(130,250 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(25,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
– |
|
Conversions into equity unit structure during the fiscal year ended March 31, 2015 |
|
|
(50,000 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the September
2011 Convertible Notes was converted into equity during the fiscal year ended March 31, 2015.
In October 2014, we issued to the holder of the remaining October
& November 2009 10% Convertible Note and the April 2010 10% Convertible Note units consisting of an aggregate of 36,716 shares
of common stock and unit warrants to acquire up to an aggregate of 18,358 shares of common stock at an exercise price of $7.70
per share. The units were issued to the note holder upon the conversion of an aggregate of $189,087 of unpaid principal and accrued
interest due under two promissory notes (the remaining October & November 2009 10% Convertible Note and the April 2010 10%
Convertible Note). The amounts converted represented the entire principal and interest outstanding under the notes and the notes
held by that holder were retired. We recorded a loss on debt conversion of $92,811 during the fiscal year ended March 31, 2015
related to the conversion of the remaining October & November 2009 10% Convertible Note.
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 was originally scheduled to mature 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.
In October 2014, we issued to the holder of the remaining October
& November 2009 10% Convertible Note and the April 2010 10% Convertible Note units consisting of an aggregate of 36,716 shares
of common stock and unit warrants to acquire up to an aggregate of 18,358 shares of common stock at an exercise price of $7.70
per share. The units were issued to the note holder upon the conversion of an aggregate of $189,087 of unpaid principal and accrued
interest due under two promissory notes (the remaining October & November 2009 10% Convertible Note and the April 2010 10%
Convertible Note). The amounts converted represented the entire principal and interest outstanding under the notes and the notes
held by that holder were retired. We recorded a loss on debt conversion of $130,128 during the fiscal year ended March 31, 2015
related to the conversion of the April 2010 10% Convertible Note.
SEPTEMBER 2010 12% 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 74,360 shares of our common stock at an exercise price of $15.56 per share, and (iii) five-year warrants
to purchase an aggregate of 74,360 shares of our common stock at an exercise price of $21.79 per share. The convertible promissory
notes bear interest compounded monthly at the annual rate of ten percent (10%) and mature on April 1, 2016 (see below). 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 $15.00 nor
less than $10.00. There are no registration requirements with respect to the shares of common stock underlying the notes or the
warrants.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the September 2010 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were in
default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity date
of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of fifteen percent at which interest had been accruing. By entering into the Amendments,
we also agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260 to a total of
$776,451.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also set the conversion price of the Notes, as well
as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue of
the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015 and September 23,
2016 to January 1, 2017.
The following table shows the activity in the September 2010 12%
Convertible Notes by fiscal year:
Activity in the September 2010 10% Convertible Notes |
Initial principal balance |
|
$ |
743,600 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(405,500 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(30,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(25,000 |
) |
Increase in principal balance due to 12% extension fee |
|
|
33,972 |
|
Conversions during the fiscal year ended March 31, 2015 |
|
|
(317,072 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the September
2011 Convertible Notes was converted into equity during the fiscal year ended March 31, 2015.
JULY & AUGUST 2011 10% CONVERTIBLE NOTES
During the three months ended September 30, 2011, we raised $357,656
in five separate 10% convertible notes. Those notes had a fixed conversion price of $4.50 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 79,479
shares of common stock at $6.25 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 March 31, 2014, the holders of three of the five notes
totaling $100,000 converted all of their principal and accrued interest into 28,774 shares of our common stock at the contractual
conversion price of $4.50 per share.
In September 2014, we entered into a forbearance agreement with
the holder of the remaining two notes in which we agreed to repay his notes by October 31, 2014 and in which we also agreed to
extend his warrants by two years. We recorded a charge of $143,363 in the September 2014 period related to this warrant extension
due to the change in the fair value of the warrants.
In October 2014, we paid off in full the remaining outstanding
principal balance and interest balances on the two remaining notes with cash payments of $382,748.
APRIL 2011 12% 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 80,080 shares of our common stock at an exercise price of $6.25 per share, and (iii) five-year warrants to purchase
an aggregate of 80,080 shares of our common stock at an exercise price of $8.75 per share. The convertible promissory notes bear
interest compounded monthly at the annual rate of 10% and mature on April 1, 2016 (see below). 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 $10.00 nor less than
$5.00. 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 16,250 shares of our common stock at an exercise price of $6.25 per share, and (ii) five-year warrants to purchase an aggregate
of 16,250 shares of our common stock at an exercise price of $8.75 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.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the April 2011 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were in
default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity date
of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the Amendments, we also
agreed to increase the currently outstanding principal amount of the Notes by 12% from a total of $693,260 to a total of $776,451.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also set the conversion price of the Notes, as well
as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue of
the Amendments, the expiration dates of the Warrants also were extended from dates between September 3, 2015 and September 23,
2016 to January 1, 2017.
The following table shows the conversions into principal of the
April 2011 12% Convertible Notes by fiscal year:
Activity in the April 2011 12% Convertible Notes |
Initial principal balance |
|
$ |
400,400 |
|
Increase in principal balance due to extension fee |
|
|
48,048 |
|
Conversions during the fiscal year ended March 31, 2015 |
|
|
(448,448 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the April
2011 Convertible Notes was converted into equity during the fiscal year ended March 31, 2015.
SEPTEMBER 2011 CONVERTIBLE NOTES
In September 2011, we issued $253,760 of convertible notes, convertible
at $3.50 per share. Such notes originally matured in September 2012.
On March 31, 2014, we entered into separate Amendments to Convertible
Notes and Warrants (collectively, the “Amendments”) with three accredited investors (collectively, the “Investors”)
who own certain convertible promissory notes (collectively, the “Notes”) and warrants (collectively, the “Warrants”)
previously issued by us on various dates between December 5, 2007 and September 23, 2011, including the September 2011 Convertible
Notes.
Prior to the Amendments, the Notes were past maturity and were in
default, resulting in the accrual of interest at the applicable default interest rate. The Amendments extended the maturity date
of each of the Notes to April 1, 2016, which permits us to classify them as long-term liabilities. As a result of the Amendments,
the Notes are no longer in default and the non-default interest rate for all of the Notes was set at 12% per annum, which represents
a reduction from the default interest rates of 15% at which interest had been accruing. By entering into the Amendments, we also
agreed to increase the currently outstanding principal amount of the Notes by 12%, which in the case of the September 2011 Notes,
they increased from $9,760 to $10,931.
During the period from October 2011 to February 2014, the Investors
had converted, at conversion prices between $2.73 and $3.50 per share, portions of principal and interest outstanding under the
Notes and certain other convertible promissory notes previously issued to them by us. Certain antidilution provisions applicable
to such notes should have resulted in such conversions being effected at a conversion price of $2.10 per share. Accordingly, pursuant
to the Amendments, we issued to the investors an aggregate of 90,142 shares of the Company’s Common Stock, which represents
the additional shares of Common Stock that would have been issued to the Investors had such conversions been effected at $2.10
per share.
The Amendments also set the conversion price of the Notes, as well
as the exercise price at which shares of our common stock can be purchased under the Warrants, at $2.10 per share. By virtue of
the Amendments, the expiration dates of the Warrants also were extended to January 1, 2017.
The following table shows the conversions into principal of the
September 2011 Convertible Notes by fiscal year:
Activity in the September 2011 Convertible Notes |
Initial principal balance |
|
$ |
253,760 |
|
Conversions during the fiscal year ended March 31, 2012 |
|
|
(15,000 |
) |
Conversions during the fiscal year ended March 31, 2013 |
|
|
(60,000 |
) |
Conversions during the fiscal year ended March 31, 2014 |
|
|
(169,000 |
) |
Increase in principal balance due to extension fee |
|
|
1,171 |
|
Conversions during the fiscal year ended March 31, 2015 |
|
|
(10,931 |
) |
Balance as of March 31, 2015 |
|
$ |
– |
|
As noted in the above table, the remaining balance of the September
2011 Convertible Notes was converted into equity during the fiscal year ended March 31, 2015.
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 at that time. The Promissory
Note originally had a maturity date of December 31, 2012 and bore interest at 5% per annum. The note was 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 $4.00 per share. The holder subsequently agreed to extend the Maturity Date of the Note
first to October 1, 2013, then to September 30, 2013, and then the expiration date of this note was again extended to October
1, 2014.
In November 2014, we paid off in full the Law Firm Note with a
cash payment of $50,000 and an issuance of 3,400 common shares.
6. EQUITY TRANSACTIONS
COMMON STOCK AND WARRANTS
Aethlon Medical, Inc. Equity Transactions in the Fiscal Year
Ended March 31, 2015.
Equity Unit Investments in the Fiscal Year Ended March 31, 2015
In the three months ended June 30, 2014, we completed unit subscription
agreements with seven accredited investors pursuant to which we issued 43,849 shares of our common stock and 21,924 warrants to
purchase our common stock for net cash proceeds of $320,800. Such warrants have exercise prices ranging from $9.65 to $11.80 per
share.
During the three months ended September 30, 2014, we issued and
sold to three accredited investors units consisting of (a) two thousand (2,000) restricted shares of our common stock, par value
$.001 per share, at prices per share ranging from $4.55 to $4.70 and (b) a five-year warrant to purchase one thousand (1,000) shares
of common stock at exercise prices ranging from $6.80 to $7.15 per share. In total, the investors purchased for cash an aggregate
of $90,000 of units. The investors acquired an aggregate of 19,500 shares of common stock and warrants to acquire up to an aggregate
of 9,750 shares of Common Stock.
During the three months ended December 31, 2014, we issued and sold
to eight accredited investors units consisting of (a) 2,000 restricted shares of our common stock at prices per share ranging from
$5.25 to $5.70 and (b) a five-year warrant to purchase 1,000 shares of common stock at exercise prices ranging from $7.70 to $8.35
per share. In total, the investors purchased for cash an aggregate of $502,700 of units. The investors acquired an aggregate of
90,125 shares of common stock and warrants to acquire up to an aggregate of 45,063 shares of common stock.
During the three months ended December 31, 2014, we sold $3,300,000
of units at a price of $15.00 per unit (the “December Financing”). Each unit consists of one share of common stock
and a warrant to purchase 1.2 shares of common stock at an exercise price per share of $15.00. We sold a total of 220,000 units
in the financing consisting of 220,000 shares of common stock and warrants to purchase 264,000 shares of common stock at an exercise
price of $15.00 per share.
Roth Capital Partners, LLC served as sole placement agent for the
December Financing and received a cash fee of $231,000, expense reimbursement of $25,000, and a five-year warrant to purchase 11,000
shares of common stock at an exercise price of $15.00 per share for its services in the financing. In addition, we paid $10,000
in legal expenses to the investors’ counsel. We also paid $32,572 to our counsel related to this financing. The net proceeds
to us after the placement fee and legal fees were $3,001,428.
Note Conversions in the Fiscal Year Ended March 31, 2015
As discussed above in Note 5, during the three months ended June
30, 2014, we issued 314,286 shares of restricted common stock to the holder of one of the Series A 12% Convertible Notes in exchange
for the conversion in full of the $660,000 principal balance of that note, 152,079 shares of restricted common stock in exchange
for conversion of $343,200 of accrued interest and 75,000 shares of restricted common stock as a restructuring fee. During that
period, we also issued the other holder of the Series A 12% Convertible Notes 51,837 shares of restricted common stock in exchange
for conversion of $116,970 of accrued interest and 500 shares of restricted common stock as a restructuring fee.
During the three months ended September 30, 2014, we issued 38,750
shares of restricted common stock to the holders of three convertible notes in exchange for the partial or full conversion of principal
and interest in the aggregate amount of $81,375 at a conversion price of $2.10 per share.
On July 24, 2014, we issued an aggregate of 50,079 shares of restricted
common stock and a seven-year warrant to issue up to 25,040 shares of common stock at an exercise price of $6.60 per share to Dr.
Chetan Shah, a director. The common stock and warrant were issued to Dr. Shah upon the conversion of an aggregate of $220,349 of
unpaid principal and accrued interest due under a 10% Convertible Note previously issued to Dr. Shah by us on July 9, 2013.
On September 17, 2014, we issued to the holder of the remaining
2008 10% Convertible Note units consisting of an aggregate of 9,564 shares of restricted common stock and unit warrants to acquire
up to an aggregate of 4,782 shares of common stock at an exercise price of $4.80 per share (see Note 5). The units were issued
to the note holder upon the conversion of an aggregate of $45,906 of unpaid principal and accrued interest due under the promissory
note, which represented the entire amount outstanding under the note. We recorded a loss on debt conversion of $65,493 on this
transaction.
During the three months ended December 31, 2014, we issued an aggregate
of 284,745 shares of common stock to two accredited investors upon the conversion of an aggregate of $597,965 of unpaid principal
and accrued interest due under promissory notes we previously issued to the investors. The conversion price per share was $2.10
(see Note 5).
During the three months ended December 31, 2014, we issued an aggregate
of 112,500 shares of common stock to convert in full the outstanding principal balance of $225,000 and interest balance of $11,250
on the remaining note from 2010 through the issuance of 112,500 shares of common stock. The conversion price per share was $2.10
(see Note 5).
During the three months ended December 31, 2014, we issued to an
accredited investor units consisting of an aggregate of 36,716 shares of common stock and warrants to acquire up to an aggregate
of 18,358 shares of common stock at an exercise price of $5.15 per share. The units were issued to the investor upon the conversion
of an aggregate of $189,087 of unpaid principal and accrued interest due under two promissory notes we previously issued to the
investor. The amounts converted represented the entire principal and interest outstanding under the notes and the notes held by
that holder were retired (see Note 5).
During the three months ended March 31, 2015, we issued an aggregate
of 98,688 shares of Common Stock to an accredited investor upon the conversion of an aggregate of $207,245 of unpaid principal
due under a convertible promissory note previously issued to the investor. The conversion price per share was $2.10 (see Note 6).
Common Stock Issuances in the Fiscal Year Ended March 31, 2015
During the three months ended June 30, 2014, we issued 4,383 shares
of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $8.50 per
share in payment for legal services, internal controls consulting services and regulatory consulting services collectively valued
at $38,268 based on the value of the services provided.
During the three months ended September 30, 2014, we issued 7,199
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $7.00
per share in payment for legal and scientific consulting services valued at $49,090 based on the value of the services provided.
During the three months ended September 30, 2014, we issued 7,806
shares of restricted common stock at an average price of $9.50 per share in payment for investor relations consulting services
valued at $75,000 based on the value of the services provided.
During the three months ended December 31, 2014, we issued 7,486
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $7.30
per share in payment for legal and scientific consulting services valued at $54,800 based on the value of the services provided.
During the three months ended December 31, 2014, we issued 780 shares
of restricted common stock at an average price of $10.50 per share in payment for investor relations consulting services valued
at $8,000 based on the value of the services provided.
Warrant Exercises and Issuance of New Warrants upon Exercise
in the Fiscal Year Ended March 31, 2015
During the three months ended September 30, 2014, we issued to four
investors 53,465 shares of restricted common stock through the cash exercise of eight warrants for $259,474 of cash at an average
exercise price of approximately $5.00 per share. As an inducement to those investors, we issued them replacement warrants to acquire
up to an aggregate of 53,465 shares of common stock on the same terms as the warrants they exercised.
During the three months ended December 31,
2014, we issued an aggregate of 113,422 shares of common stock and seven-year warrants to issue up to an aggregate of 113,422 shares
of common stock at exercise prices ranging from $4.65 to $5.80 per share to eight accredited investors. One of the investors was
Dr. Chetan Shah, one of our directors. We issued the common stock and warrants to the investors upon the cash exercise of previously
issued warrants held by them. The investors paid an aggregate of $579,251 upon exercise of the previously outstanding warrants
at exercise prices ranging from $4.65 to $5.80 per share.
Debt Reduction in the Fiscal Year Ended March 31, 2015
During the three months ended December 31, 2014, we paid off in
full the outstanding principal balance and interest balance on the Law Firm Note with a cash payment of $50,000 and an issuance
of 3,400 common shares (see Note 4).
Issuance of Convertible Notes in the Fiscal Year Ended March
31, 2015
During the three months ended December 31, 2014, we sold to two
accredited investors (i) convertible promissory notes in the aggregate principal amount of $527,780 and (ii) five year warrants
to purchase up to 47,123 shares of common stock at a fixed exercise price of $8.40 per share. The convertible promissory notes
bear interest at the annual rate of 10% and mature on April 1, 2016. The aggregate gross cash proceeds to us were $415,000 after
subtracting legal fees of $35,000; the balance of the principal amount of the notes represents a $27,780 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 fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of common stock (see Note 5).
Warrant
Exercises in the Fiscal Year Ended March 31, 2015
During the three months ended December 31, 2014, we issued an aggregate
of 430,333 shares of common stock to accredited investors upon the exercise of previously issued warrants. The warrants were exercised
on a cashless or “net” basis. Accordingly, we did not receive any proceeds from such exercises. The cashless exercise
of such warrants resulted in the cancellation of previously issued warrants to purchase an aggregate of 605,304 shares of common
stock.
During the three months ended March 31, 2015, we issued 3,574 shares
of common stock to an accredited investor upon the exercise of a previously issued warrant. The warrant was exercised on a cashless
or “net” basis. Accordingly, we did not receive any proceeds from such exercise. The cashless exercise of the warrant
resulted in the cancellation of a portion of the previously issued warrant to purchase an aggregate of 1,602 shares of common stock.
Stock Option Exercises in the Fiscal Year Ended March 31, 2015
During the three months ended December 31, 2014, two former employees
exercised stock options to purchase 1,000 common shares through a cash payment of $9,500 with an exercise price of $9.50 per share.
Aethlon Medical, Inc. Equity Transactions in the Fiscal Year
Ended March 31, 2014
Common Stock Issuances in the Fiscal Year Ended March 31, 2014:
In June 2013, we completed a unit subscription agreement with three
accredited investors pursuant to which we issued 31,605 shares of our common stock and 15,802 warrants to purchase our common
stock for net cash proceeds of $128,000. Such warrants have an exercise price of $6.05 per share.
In June 2013, we issued to our CEO the remaining 68,000 shares
under his restricted share grant, all of which were vested.
During the three months ended June 30, 2013, we issued 73,506 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 $3.35 per share.
During the three months ended June 30, 2013, we issued 4,455 shares
of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $4.88 per
share in payment for legal services valued at $21,750 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 we issued 18,018 shares of our common stock and 9,009
warrants to purchase our common stock in exchange for net cash proceeds of $100,000. Such warrants have an exercise price of $8.35
per share.
During the three months ended September 30, 2013, we issued 18,670
shares of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $6.83
per share in payment for legal and scientific consulting services valued at $127,593 based on the value of the services provided.
During the three months ended September 30, 2013, we issued 23,367
shares of restricted common stock at an average price of $4.92 per share in payment for investor relations and public relations
services valued at $115,000 based on the value of the services provided.
During the three months ended September 30, 2013, we issued 55,907
shares of restricted common stock to the holders of four notes issued by the Company in exchange for the partial or full conversion
of principal and interest in an aggregate amount of $173,960 at an average conversion price of $3.11 per share.
During the three months ended December 31, 2013, we entered into
a unit purchase agreement and subscription agreements with 32 accredited investors pursuant to which we issued 287,344 shares of
our common stock and warrants to purchase our common stock for gross cash proceeds of $1,795,900. Such warrants have an exercise
price of $11.00 per share. A FINRA registered broker-dealer was engaged as placement agent in connection with the above Unit Purchase
Agreement. We paid the placement agent an aggregate cash fee in the amount of $270,508 and will issue the placement agent or its
designees warrants to purchase an aggregate of 43,102 shares of our common stock. We also paid $78,360 in other costs and fees,
including legal fees, blue sky fees and escrow costs. The net proceeds that we received totaled $1,447,032.
During the three months ended December 31, 2013, we issued 29,304
shares of restricted common stock to the holders of two notes issued by us in exchange for the partial or full conversion of accrued
interest in an aggregate amount of $80,000 at an average conversion price of $2.73 per share.
During the three months ended March 31, 2014, we issued 52,764 shares
of restricted common stock to the holders of five notes issued by us in exchange for the partial or full conversion of accrued
interest in an aggregate amount of $226,316 at an average conversion price of $4.29 per share.
During the three months ended March 31, 2014, we issued 6,935 shares
of common stock pursuant to our S-8 registration statement covering our Amended 2010 Stock Plan at an average price of $9.41 per
share in payment for legal services valued at $65,250 based on the value of the services provided.
During the three months ended March 31, 2014, we issued 7,996 shares
of restricted common stock at an average price of $7.82 per share in payment for investor relations and public relations services
valued at $62,500 based on the value of the services provided.
On March 31, 2014, we entered into extension agreements with three
noteholders (see Note 5). In conjunction with the extension agreements, we agreed to issue to the noteholders an aggregate 90,142
shares of restricted common stock as a result of the noteholders invoking the antidilution protection on their notes.
In March 2014, a former director exercised 3,659 in vested stock
options through the contribution of $2,000 in cash and $13,000 in accrued expenses owed to him based on the exercise price of $4.10
per share.
During the fiscal year ended March 31, 2014, we issued 254,325 shares
of restricted common stock in connection with cashless warrant exercises discussed elsewhere in this footnote.
Exosome Sciences, Inc. Equity Transactions in the Fiscal Year
Ended March 31, 2014
On November 21, 2013, ESI, prior to the transaction described herein,
a wholly owned diagnostic subsidiary of ours, entered into a stock purchase agreement with twelve accredited investors pursuant
to which such investors purchased an aggregate of 220,000 shares of ESI’s common stock at a purchase price of $5.00 per share,
for an aggregate purchase price of $1,100,000 in cash.
On December 13, 2013, ESI entered into a second stock purchase agreement
with three accredited investors, pursuant to which such investors purchased an aggregate of 80,000 shares of ESI’s common
stock at a purchase price of $5.00 per share, for an aggregate purchase price of $400,000 in cash.
The aggregate gross proceeds received by ESI under these two transactions
above were $1,500,000. As a result of these transactions the Company’s percentage ownership of the outstanding common stock
of ESI was reduced from 100% to 80%.
One of the investors was Dr. Chetan Shah, a director of the Company.
Dr. Shah purchased 70,000 ESI shares for an aggregate purchase price of $350,000.
WARRANTS:
A summary of the aggregate warrant activity for the years ended
March 31, 2015 and 2014 is presented below:
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
|
Warrants |
|
|
Weighted Average
Exercise Price |
|
|
Warrants |
|
|
Weighted Average
Exercise Price |
|
Outstanding, beginning of year |
|
|
1,414,190 |
|
|
$ |
5.00 |
|
|
|
1,512,946 |
|
|
$ |
5.50 |
|
Granted |
|
|
806,478 |
|
|
$ |
8.46 |
|
|
|
290,610 |
|
|
$ |
9.00 |
|
Exercised |
|
|
(590,659 |
) |
|
$ |
4.29 |
|
|
|
(254,324 |
) |
|
$ |
4.00 |
|
Cancelled/Forfeited |
|
|
(199,271 |
) |
|
$ |
7.11 |
|
|
|
(135,042 |
) |
|
$ |
5.50 |
|
Outstanding, end of year |
|
|
1,430,738 |
|
|
$ |
6.84 |
|
|
|
1,414,190 |
|
|
$ |
5.00 |
|
Exercisable, end of year |
|
|
1,430,738 |
|
|
$ |
6.84 |
|
|
|
1,414,190 |
|
|
$ |
5.00 |
|
Weighted average estimated fair value of warrants granted |
|
|
|
|
|
$ |
11.83 |
|
|
|
|
|
|
$ |
4.50 |
|
The following outlines the significant weighted average assumptions
used to estimate the fair value of warrants granted utilizing the Binomial Lattice option pricing model:
|
Year Ended March 31, |
|
2015 |
|
2014 |
Risk free interest rate |
0.79%-2.29% |
|
1.3%-2.04% |
Average expected life |
5 to 7 years |
|
5 to 7 years |
Expected volatility |
87.8% - 107.4% |
|
91.2% - 98.5% |
Expected dividends |
None |
|
None |
The detail of the warrants outstanding and exercisable as of March
31, 2015 is as follows:
|
|
Warrants Outstanding |
|
|
Warrants Exercisable |
|
Range of
Exercise Prices |
|
Number
Outstanding |
|
|
Weighted Average
Remaining
Life (Years) |
|
|
Weighted Average
Exercise Price |
|
|
Number
Outstanding |
|
|
Weighted Average
Exercise Price |
|
$5.00 or Below |
|
|
528,657 |
|
|
|
3.77 |
|
|
$ |
2.62 |
|
|
|
528,657 |
|
|
$ |
2.62 |
|
$5.20 - $9.00 |
|
|
605,152 |
|
|
|
4.37 |
|
|
$ |
6.66 |
|
|
|
605,152 |
|
|
$ |
6.66 |
|
$9.65 - $15.00 |
|
|
296,929 |
|
|
|
4.71 |
|
|
$ |
14.70 |
|
|
|
296,929 |
|
|
$ |
14.70 |
|
|
|
|
1,430,738 |
|
|
|
|
|
|
|
|
|
|
|
1,430,738 |
|
|
|
|
|
STOCK OPTIONS:
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan provides for the grant of incentive stock
options to our full-time employees (who may also be directors) and nonstatutory stock options to non-employee directors, consultants,
customers, vendors or providers of significant services. The exercise price of any incentive stock option may not be less than
the fair market value of the common stock on the date of grant or, in the case of an optionee who owns more than 10% of the total
combined voting power of all classes of our outstanding stock, not be less than 110% of the fair market value on the date of grant.
The exercise price, in the case of any nonstatutory stock option, must not be less than 75% of the fair market value of the common
stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is 10,000 options.
At March 31, 2015, all of the grants previously made under the 2000
Stock Option Plan had expired and 200 restricted shares had been issued under the plan, with 9,800 available for future issuance.
2003 CONSULTANT STOCK PLAN
Our 2003 Consultant Stock Plan, as amended from time to time (the
"Stock Plan"), adopted by us in August 2003, advances our interests by helping us obtain and retain the services of persons
providing consulting services upon whose judgment, initiative, efforts and/or services we are substantially dependent, by offering
to or providing those persons with incentives or inducements affording such persons an opportunity to become owners of our common
stock. Over several years, we issued 150,000 shares under the Stock Plan and discontinued using the Stock Plan in October 2012.
2010 STOCK INCENTIVE PLAN
In August 2010, we adopted the 2010 Stock Incentive Plan, which
provides incentives to attract, retain and motivate employees and directors whose present and potential contributions are important
to our success by offering them an opportunity to participate in our future performance through awards of options, the right to
purchase common stock, stock bonuses and stock appreciation rights and other awards. A total of 70,000 common shares were initially
reserved for issuance under the 2010 Stock Incentive Plan.
In August 2010, we filed a registration statement on Form S-8 for
the purpose of registering 70,000 common shares issuable under this plan under the Securities Act, and in July 2012, we filed a
registration statement on Form S-8 for the purpose of registering 100,000 common shares issuable under this plan under the Securities
Act.
At March 31, 2015, we had 28,845 shares available under this plan.
2012 DIRECTORS COMPENSATION PROGRAM
In July 2012, our Board of Directors approved a board compensation
program that modifies and supersedes the 2005 Directors Compensation Program, which was previously in effect. Under the 2012 program,
in which only non-employee directors may participate, an eligible director will receive a grant of $35,000 worth of ten-year 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. In addition, under this 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 fiscal year ended March 31, 2013, our Board of Directors
granted ten-year options to acquire an aggregate of 33,342 shares of our common stock, all with an exercise price of $3.80 per
share, to our four outside directors under the 2012 program.
In the fiscal year ended March 31, 2014, our Board of Directors
granted ten-year options to acquire an aggregate of 31,911 shares of our common stock, all with an exercise price of $4.10 per
share, to our five outside directors under the 2012 program.
In the fiscal year ended March 31, 2015, our Board of Directors
granted ten-year options to acquire an aggregate of 11,053 shares of our common stock, all with an exercise price of $9.50 per
share, to our three outside directors under the 2012 program.
At March 31, 2015 we had issued 26,757 options under the old 2005
program to outside directors and 79,309 options to employee-directors, 21,756 outside directors’ options had been forfeited,
5,000 outside directors’ options had been exercised, 79,309 employee-directors’ options had been forfeited and no options
under the old 2005 program remained outstanding.
On June 6, 2014, our Board of Directors approved certain changes
to the 2012 program. Under this modified program, a new eligible director will receive an initial grant of $50,000 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. These options will have a term of ten
years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. In addition, at the beginning
of each fiscal year, each existing director eligible to participate in the modified 2012 program also will receive a grant of $35,000
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. Such options will vest on the first anniversary of the date of grant. In lieu
of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The modified 2012 program also provides
for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Audit Committee
member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.
STAND-ALONE GRANTS
From time to time our Board of Directors grants restricted stock
or common share purchase options or warrants to selected directors, officers, employees and consultants as equity compensation
to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually negotiated.
On June 8, 2009, our Board of Directors approved the grant to Mr.
Joyce of 80,000 shares of restricted common stock at a price per share of $12.00, the vesting and issuance of which occurred in
equal installments over a thirty-six-month period that commenced on June 30, 2010.
As of March 31, 2015, we had issued 499,763 options (of which 146,810
have been exercised or cancelled) and authorized the issuance of 80,000 shares of restricted stock outside of the 2005 Directors
Compensation Plan, the 2012 Directors Compensation Plan, the 2000 Stock Option Plan, the 2003 Consultant Stock Plan and the 2010
Incentive Stock Plan.
The following is a summary of the stock options outstanding at March
31, 2015 and 2014 and the changes during the years then ended:
|
|
Year Ended March 31, |
|
|
|
2015 |
|
|
2014 |
|
|
|
Options |
|
|
Weighted Average
Exercise Price |
|
|
Options |
|
|
Weighted Average
Exercise Price |
|
Outstanding, beginning of year |
|
|
522,668 |
|
|
$ |
12.50 |
|
|
|
421,916 |
|
|
$ |
14.00 |
|
Granted |
|
|
59,453 |
|
|
$ |
9.50 |
|
|
|
104,411 |
|
|
$ |
4.50 |
|
Exercised |
|
|
(1,000 |
) |
|
$ |
9.50 |
|
|
|
(3,659 |
) |
|
$ |
4.00 |
|
Cancelled/Forfeited |
|
|
(79,431 |
) |
|
$ |
18.76 |
|
|
|
– |
|
|
$ |
– |
|
Outstanding, end of year |
|
|
501,690 |
|
|
$ |
11.00 |
|
|
|
522,668 |
|
|
$ |
12.50 |
|
Exercisable, end of year |
|
|
418,923 |
|
|
$ |
12.00 |
|
|
|
449,751 |
|
|
$ |
13.50 |
|
Weighted average estimated fair value of options granted |
|
|
|
|
|
$ |
9.50 |
|
|
|
|
|
|
$ |
6.50 |
|
The following outlines the significant weighted average assumptions
used to estimate the fair value with respect to stock options utilizing the Binomial Lattice option pricing model for the years
ended March 31, 2015 and March 31, 2014:
|
Year Ended March 31, |
|
2015 |
|
2014 |
Risk free interest rate |
2.60% |
|
0.38% to 2.65% |
Average expected life |
10 years |
|
3 to 10 years |
Expected volatility |
90.23% |
|
91.05% to 102.67% |
Expected dividends |
None |
|
None |
The detail of the options outstanding and exercisable as of March
31, 2015 is as follows:
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
Range of
Exercise Prices |
|
|
Number
Outstanding |
|
|
Weighted Average
Remaining
Life (Years) |
|
|
Weighted Average
Exercise
Price |
|
|
Number
Outstanding |
|
|
Weighted Average
Exercise
Price |
|
$4.00 - $9.50 |
|
|
|
190,547 |
|
|
|
8.56 years |
|
|
$ |
6.03 |
|
|
|
107,780 |
|
|
$ |
5.56 |
|
$10.50 - $12.50 |
|
|
|
220,143 |
|
|
|
4.25 years |
|
|
$ |
11.98 |
|
|
|
220,143 |
|
|
$ |
11.98 |
|
$18.00 - $20.50 |
|
|
|
91,000 |
|
|
|
3.05 years |
|
|
$ |
19.13 |
|
|
|
91,000 |
|
|
$ |
19.13 |
|
|
|
|
|
|
501,690 |
|
|
|
|
|
|
|
|
|
|
|
418,923 |
|
|
|
|
|
We recorded stock-based compensation expense related to share issuances
and to options granted totaling $416,481 and $607,946 for the fiscal years ended March 31, 2015 and 2014, respectively. These expenses
were recorded as stock compensation included in payroll and related expenses in the accompanying consolidated statement of operations
for the years ended March 31, 2015 and 2014.
Our total stock-based compensation for fiscal years ended March
31, 2015 and 2014 included the following:
| |
March 31, 2015 | | |
March 31, 2014 | |
Vesting of restricted stock grant | |
$ | – | | |
$ | 64,444 | |
Incremental fair value of option modifications | |
| – | | |
| 1,914 | |
Vesting of stock options | |
| 416,481 | | |
| 541,588 | |
Total Stock-Based Compensation | |
$ | 416,481 | | |
$ | 607,946 | |
As of March 31, 2015, we had $341,982 of remaining unrecognized
stock option expense, which is expected to be recognized over a weighted average remaining vesting period of 1.10 years.
On March 31, 2015, our stock options had a negative intrinsic value
since the closing price on that date of $9.50 per share was below the weighted average exercise price of our stock options.
7. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Historically, certain of our officers and other related parties
have advanced us funds, agreed to defer compensation and/or paid expenses on our behalf to cover working capital deficiencies.
During the fiscal year ended March 31, 2015, we repaid to related parties all amounts due that was accrued prior to April 1, 2014.
These unsecured and non-interest-bearing liabilities have been included as due to related parties in the accompanying consolidated
balance sheets.
Other related party transactions are disclosed elsewhere in these
notes to consolidated financial statements.
8. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
| |
March 31, | | |
March 31, | |
| |
2015 | | |
2014 | |
Accrued interest | |
$ | 21,258 | | |
$ | 1,165,335 | |
Accrued legal fees | |
| – | | |
| 179,465 | |
Accrued liquidated damages | |
| – | | |
| 362,800 | |
Other accrued liabilities | |
| 64,473 | | |
| 147,774 | |
Total other current liabilities | |
$ | 85,731 | | |
$ | 1,855,374 | |
9. INCOME TAXES
For the years ended March 31, 2015 and 2014, we had no income tax
expense due to our net operating losses and 100% deferred tax asset valuation allowance.
At March 31, 2015 and 2014, we had net deferred tax assets as detailed
below. These deferred tax assets are primarily composed of capitalized research and development costs and tax net operating loss
carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a 100% valuation
has been established to offset the net deferred tax assets.
Significant components of our net deferred tax assets at March 31,
2015 and 2014 are shown below:
|
|
YEAR ENDED MARCH 31, |
|
|
|
2015 |
|
|
2014 |
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Capitalized research and development |
|
$ |
3,442,000 |
|
|
$ |
3,442,000 |
|
Net operating loss carryforwards |
|
|
17,927,000 |
|
|
|
15,193,000 |
|
Total deferred tax assets |
|
|
21,369,000 |
|
|
|
18,635,000 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
– |
|
|
|
– |
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
21,369,000 |
|
|
|
18,635,000 |
|
Valuation allowance for deferred tax assets |
|
|
(21,369,000 |
) |
|
|
(18,635,000 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
– |
|
|
$ |
– |
|
At March 31, 2015, we had tax net operating loss carryforwards
for federal and state purposes approximating $46 million and $38 million, which begin to expire in the year 2021.
The provision for income taxes on earnings subject to income taxes
differs from the statutory federal rate for the years ended March 31, 2015 and 2014 due to the following:
| |
2015 | | |
2014 | |
| |
| | | |
| | |
Income taxes (benefit) at federal statutory rate of 34% | |
$ | (2,373,000 | ) | |
$ | (4,541,000 | ) |
State income tax, net of federal benefit | |
| (418,000 | ) | |
| (156,000 | ) |
Tax effect on non-deductible expenses and credits | |
| 1,524,000 | | |
| 4,297,000 | |
Change in valuation allowance1 | |
| 1,267,000 | | |
| 400,000 | |
| |
$ | – | | |
$ | – | |
Pursuant to Internal Revenue Code Sections 382, use of our tax net
operating loss carryforwards may be limited.
ASC 740, “Income Taxes”, clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements, and prescribes recognition thresholds and measurement
attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the
impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not
to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. Our practice is to recognize interest and/or penalties
related to income tax matters in income tax expense. During the years ended March 31, 2015 and 2014, we did not recognize any interest
or penalties relating to tax matters.
At and for the years ended March 31, 2015 and 2014, management does
not believe the Company has any uncertain tax positions. Accordingly, there are no unrecognized tax benefits at March 31,
2015 or March 31, 2014.
Our tax returns remain
open for examination by the applicable authorities, generally 3 years for federal and 4 years for state. We are currently not under
examination by any taxing authorities.
10. FAIR VALUE MEASUREMENTS
We follow FASB ASC 820, "FAIR VALUE MEASUREMENTS AND DISCLOSURES"
(“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent
to initial recognition.
ASC 820 requires that assets and liabilities carried at fair value
will be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets
or liabilities.
Level 2: Observable market based inputs or unobservable inputs that
are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market
data.
The 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 reporting date were as follows:
At March 31, 2015, we no longer had any derivative liabilities as
all of the holders of the financial instruments that had price antidilution protection waived such price antidilution protection.
Our fair value measurements at the March 31, 2014 reporting date
are classified based on the valuation technique level noted in the table below:
Description |
|
Quoted Prices in
Active Markets for Identical Assets
(Level 1) |
|
|
Significant Other
Observable Inputs
(Level 2) |
|
|
Significant
Unobservable
Inputs (Level 3) |
|
Derivative Liabilities |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
10,679,067 |
|
Total Assets |
|
$ |
– |
|
|
$ |
– |
|
|
$ |
10,679,067 |
|
The following outlines the significant weighted average assumptions
used to estimate the fair value information presented for the fiscal year ended March 31, 2014 in connection with our April 2011
convertible note, July & August 2011 10% convertible notes and the September 2011 convertible note offerings and with
respect to warrant and embedded conversion option derivative instruments utilizing the Binomial Lattice option pricing model:
|
Fiscal Year Ended March 31, 2014 |
Risk free interest rate |
0.02% - 0.79% |
Average expected life |
0.25 – 2.8 years |
Expected volatility |
58.0% - 103.1% |
Expected dividends |
None |
The table below sets forth a summary of changes in the fair value
of our Level 3 financial instruments for the year ended March 31, 2014:
| |
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 | | |
March 31, 2014 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Derivative liabilities | |
$ | 3,588,239 | | |
$ | – | | |
$ | 5,729,780 | | |
$ | 1,361,048 | | |
$ | 10,679,067 | |
11. DARPA CONTRACT AND RELATED REVENUE RECOGNITION
As discussed in Note 1, we entered into a contract with the Defense
Advanced Research Projects Agency on September 30, 2011. Under the Defense Advanced Research Projects Agency award, we have been
engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in
the death of combat-injured soldiers. The award from the Defense Advanced Research Projects Agency was a fixed-price contract with
potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement of multiple,
incremental milestones to receive the full award during each year of the contract. Under the terms of the contract, we will perform
certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed
payment amounts.
Originally, only the base year (year one contract) was effective
for the parties, however, the Defense Advanced Research Projects Agency subsequently exercised the option on the second, third
and fourth years of the contract. The Defense Advanced Research Projects Agency has the option to enter into the contract for year
five. The milestones are comprised of planning, engineering and clinical targets, the achievement of which in some cases will require
the participation and contribution of third party participants under the contract. There can be no assurance that we alone, or
with third party participants, will meet such milestones to the satisfaction of the government and in compliance with the terms
of the contract or that we will be paid the full amount of the contract revenues during any year of the contract term. We commenced
work under the contract in October 2011.
Due to budget restrictions within the Department of Defense, on
February 10, 2014, the Defense Advanced Research Projects Agency reduced the scope of our contract in years three through five
of the contract. The reduction in scope focused our research on exosomes, viruses and blood processing instrumentation. This scope
reduction will reduce the possible payments under the contract by $858,491 over years three through five. We recently completed
a re-budgeting of the expected costs on the remaining years of the Defense Advanced Research Projects Agency contract based on
the reduced milestones and have concluded that the reductions in our costs due to the scaled back level of work will almost entirely
offset the anticipated revenue levels based on current assumptions.
Fiscal Year Ended March 31, 2015
During the fiscal year ended March 31, 2015, we invoiced the Defense
Advanced Research Projects Agency for four milestones totaling $630,887. The details of those milestones were as follows:
Milestone 2.4.2.2 – Determine capacity requirements of affinity
resin to multiple simultaneous targets. The milestone payment was $197,362. 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 determine the capacity requirements of affinity resin to multiple simultaneous targets. The report was accepted by the
contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.4.2.4 – Finish construction and delivery of 25
experimental cartridges for testing by the system integrator. The milestone payment was $50,000. 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 delivered the 25 cartridges to the systems integrator as part of our submission for approval. The report was accepted by
the contracting officer's representative and the invoice was submitted thereafter.
Milestone M9 – Target capture > 90% in 24 hours for at
least 3 targets ex vivo in blood or blood components using the optimized cartridge. The milestone payment was $197,361. 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 approximately 90% in 24 hours for at least 3 targets ex vivo in blood or
blood components using the optimized cartridge. The report was accepted by the contracting officer's representative and the invoice
was submitted thereafter.
Milestone M11 - Develop a strategic plan for developing an alternate
method of producing galanthus nivalis agglutinin by cloning the gene into an alternate vector and identify potential partners for
such production. The milestone payment was $186,164. 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 developed a strategic
plan for developing an alternate method of producing GNA by cloning the gene into an alternate vector and identified potential
partners for such production. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Fiscal Year Ended March 31, 2014
As a result of achieving eight milestones in the fiscal year ended
March 31, 2014, we reported $1,466,482 in contract revenue for that fiscal year. The details of the eight milestones achieved during
the fiscal year ended March 31, 2014 were as follows:
Milestone 2.3.2.2 – Formulate initial design work based on
work from the previous phase. Begin to build and test selected instrument design and tubing sets. The milestone payment was $195,581.
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 formulate the initial design work and to build and test selected
instrument design and tubing sets as part of our submission for approval. The report was accepted by the contracting officer's
representative and the invoice was submitted thereafter.
Milestone 2.3.2.2 – Write and test software and conduct ergonomic
research. Begin discussions with the systems integrator. The milestone payment was $195,581. 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
wrote and tested software and conducted ergonomic research and began discussions with the systems integrator. The report was accepted
by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.3.3.2 – Cartridge construction with optimized
affinity matrix design for each potential target. Complete the capture agent screening. 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 completed the cartridge construction with optimized affinity matrix design for each potential target and completed
the capture agent screening. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone M5 – Target capture > 90% in 24 hours for at
least three targets in blood or blood components. 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 to capture > 90% in 24 hours for at least three 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 M3 – Conduct a series of experiments aimed at characterizing
the contribution of several alternate fluidic designs and methods of perfusing plasma filters and affinity columns in the performance
of affinity plasmapheresis. The milestone payment was $195,576. 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 had conducted
the relevant series of experiments. The report was accepted by the contracting officer's representative and the invoice was submitted
thereafter.
Milestone 2.4.2.1 – Evaluate contribution of manufacturing
process variables to binding capacity of affinity resin. The milestone payment was $197,362. 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 had evaluated the contribution of manufacturing process variables to binding capacity of affinity resin. The report was
accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.4.1.1 – Design and fabricate optimized configuration(s)
of hemopurification device(s) that contain(s) a combination of hemofilters, plasma filters and affinity columns. The milestone
payment was $186,164. 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 had designed and fabricated optimized configuration of
hemopurification devices. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.
Milestone 2.4.2.3 – Perform biocompatibility tests for the
combination ADAPT device to confirm the combination cartridge does not present additional risk. The milestone payment was $78,641.
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 had performed biocompatibility tests for the combination ADAPT device to confirm
the combination cartridge does not present additional risk. The report was accepted by the contracting officer's representative
and the invoice was submitted thereafter.
12. SIGNIFICANT FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of the fiscal years ended March 31, 2015
and 2014, we did not deem any unusual or infrequently occurring items or adjustments to be material to our fourth quarter results.
13. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
We entered into an employment agreement with our Chairman of the
Board (“Chairman”) effective April 1, 1999. The agreement, which is cancelable by either party upon sixty days’
notice, will be in effect until the Chairman retires or ceases to be employed by us. Under the terms of the agreement, if the Chairman
is terminated he may become eligible to receive a salary continuation payment in the amount of at least twelve months' base salary,
which was increased to $350,000 per year in June 2014.
We entered into an employment agreement with Dr. Tullis (“Tullis”)
effective January 10, 2000 as our Chief Science Officer ("CSO"). Under the terms of the agreement, if Tullis is terminated
he may become eligible to receive a salary continuation payment in the amount of twelve months base salary, which is $195,000 per
year.
LEASE COMMITMENTS
We currently rent approximately 2,600 square feet of executive office
space at 9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 at the rate of $6,054 per month on a four year lease that expires
in January 2019. 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 $4,560 per month on a one year lease that expires in October 2015. Our current
plans are to renew the lease prior to expiration.
Our Exosome Sciences, Inc. subsidiary rents approximately 2,055
square feet of office and laboratory space at 11 Deer Park Drive, South Brunswick, NJ at the rate of $3,917 per month on a one
year lease that expires in October 2015. Our current plans are to renew the lease prior to expiration.
Rent expense approximated $167,000 and $163,000 for the fiscal years
ended March 31, 2015 and 2014, respectively. As of March 31, 2015, our commitments under the lease agreements are as follows:
| |
Fiscal Year Ended March 31, | |
| |
2016 | | |
2017 | | |
2018 | | |
2019 | |
9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 office lease | |
$ | 73,048 | | |
$ | 75,512 | | |
$ | 78,156 | | |
$ | 67,018 | |
| |
| | | |
| | | |
| | | |
| | |
11585 Sorrento Valley Road, Suite 109, San Diego, CA 92121 office lease | |
| 31,923 | | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
11 Deer Park Drive, South Brunswick, NJ office lease | |
| 27,423 | | |
| – | | |
| – | | |
| – | |
| |
| | | |
| | | |
| | | |
| | |
Total Lease Commitments | |
$ | 132,394 | | |
$ | 75,512 | | |
$ | 78,156 | | |
$ | 67,018 | |
LEGAL MATTERS
From time to time, claims are made against us in the ordinary course
of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable
outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products
or engaging in other activities.
The occurrence of an unfavorable outcome in any specific period
could have a material adverse effect on our results of operations for that period or future periods. We are not presently a party
to any pending or threatened legal proceedings.
14. SEGMENTS
We operate our businesses principally through two reportable segments:
Aethlon, which represents our therapeutic business activities, and ESI, which represents our diagnostic business activities. Our
reportable segments have been determined based on the nature of the potential products being developed.
Aethlon’s revenue is generated primarily from government contracts
to date and ESI does not yet have any revenues. We have not included any allocation of corporate overhead to the ESI segment.
The following tables set forth certain information regarding our
segments and other operations that conforms to the consolidated balance sheet and statement of operations presented in this Report:
| |
Fiscal Years Ended March 31, | |
| |
2015 | | |
2014 | |
Revenues: | |
| | | |
| | |
Aethlon | |
$ | 762,417 | | |
$ | 1,623,769 | |
ESI | |
| – | | |
| – | |
Total Revenues | |
$ | 762,417 | | |
$ | 1,623,769 | |
| |
| | | |
| | |
Operating Losses: | |
| | | |
| | |
Aethlon | |
$ | (3,081,169 | ) | |
$ | (2,651,863 | ) |
ESI | |
| (911,684 | ) | |
| (404,065 | ) |
Total Operating Loss | |
$ | (3,992,853 | ) | |
$ | (3,055,928 | ) |
| |
| | | |
| | |
Net Losses: | |
| | | |
| | |
Aethlon | |
$ | (6,067,810 | ) | |
$ | (13,357,232 | ) |
ESI | |
| (911,684 | ) | |
| (81,730 | ) |
Net Loss Before Non-Controlling Interests | |
$ | (6,979,494 | ) | |
$ | (13,438,962 | ) |
| |
| | | |
| | |
Cash: | |
| | | |
| | |
Aethlon | |
$ | 721,689 | | |
$ | 208,259 | |
ESI | |
| 133,907 | | |
| 1,042,020 | |
Total Cash | |
$ | 855,596 | | |
$ | 1,250,279 | |
| |
| | | |
| | |
Total Assets: | |
| | | |
| | |
Aethlon | |
$ | 1,159,910 | | |
$ | 597,026 | |
ESI | |
| 220,678 | | |
| 1,098,076 | |
Total Assets | |
$ | 1,380,588 | | |
$ | 1,695,102 | |
| |
| | | |
| | |
Capital Expenditures: | |
| | | |
| | |
Aethlon | |
$ | – | | |
$ | 37,313 | |
ESI | |
| – | | |
| 58,743 | |
Capital Expenditures | |
$ | – | | |
$ | 96,056 | |
| |
| | | |
| | |
Depreciation and Amortization: | |
| | | |
| | |
Aethlon | |
$ | 17,770 | | |
$ | 11,549 | |
ESI | |
| 19,582 | | |
| 9,538 | |
Total Depreciation and Amortization | |
$ | 37,352 | | |
$ | 21,087 | |
| |
| | | |
| | |
Interest Expense: | |
| | | |
| | |
Aethlon | |
$ | 349,923 | | |
$ | 1,282,638 | |
ESI | |
| – | | |
| 4,583 | |
Total Interest Expense | |
$ | 349,923 | | |
$ | 1,287,221 | |
15. SUBSEQUENT EVENTS (UNAUDITED)
Management has evaluated events subsequent to March 31, 2015 through
the date that the accompanying 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.
Reverse Split
On April 14, 2015, we completed a 1-for-50 reverse stock split.
Accordingly, authorized common stock was reduced from 500,000,000 shares to 10,000,000 shares, and each 50 shares of outstanding
common stock held by stockholders were combined into one share of common stock. The accompanying consolidated financial statements
and accompanying notes have been retroactively revised to reflect such reverse stock split as if it had occurred on April 1, 2013.
All share and per share amounts have been revised accordingly.
Government Contracts
Subsequent to March 31, 2015, we billed $186,164 under our DARPA
contract and billed $6,344 under the Battelle subcontract and we collected $384,882 under both contracts.
Common Stock Issuances
Subsequent to March 31, 2015, we issued 951 shares of common stock
as the result of rounding up of fractional shares that arose due to our reverse stock split.
June 2015 Financing – See Note 16 below
NOTE 16 – PRO FORMA BALANCE SHEET (UNAUDITED)
Management has presented unaudited pro forma balance sheet information
as if the subsequent event discussed below had occurred on March 31, 2015. Such pro forma information is subject to future adjustment
as management determines the final accounting for such transaction.
June 2015 Financing
In June 2015, we sold units (the “Units”),
comprised of common stock and warrants, in exchange for net proceeds of $5,591,988, to certain accredited investors, including
three institutional investors (collectively the “Purchasers”) at a price of $6.30 per Unit (the “Agreement”).
Each Unit consists of one share of common stock and .75 of a five-year warrant to purchase one share of common stock at an exercise
price of $6.30 per share. We issued 952,383 shares of common stock and warrants to purchase 714,286 shares of common stock
Roth Capital Partners served as placement
agent for the transaction and will receive 32,371 warrants for its services as well as a cash commission of $285,512 and $75,000
for its legal expenses in the transaction. We intend to use the proceeds to fund the clinical advancement of the Aethlon Hemopurifier
and for general corporate purposes.
As part of the terms of the Agreement,
we entered into a Registration Rights Agreement with the Purchasers pursuant to which we agreed to file a registration statement
to register for resale the shares of common stock issued, as well as the shares of common stock underlying the warrants, within
30 calendar days following the closing of the transaction. Subject to certain exceptions, in the event the registration statement
does not become effective within certain time periods set forth in the Registration Rights Agreement, we would be required to pay
the Purchasers an amount in cash equal to two percent (2.0%) of the aggregate purchase price of the Units every month until such
time as the registration statement becomes effective or the shares of common stock (and shares of common stock underlying the Warrants)
sold may be sold by the Purchasers pursuant to Rule 144 without any restrictions or limitations.
In connection with the transaction,
Mr. James Joyce, our Chief Executive Officer, Mr. James Frakes, our Chief Financial Officer and Dr. Chetan Shah, a director
of our Company, each agreed to waive their right to exercise certain stock options and warrants held by them representing
the right to acquire 402,318 shares of common stock in the aggregate (the “Waivers”). The Waivers were required
in order to make a sufficient number of shares of common stock available for issuance and expire when we amend our Articles
of Incorporation to increase sufficiently the number of authorized shares of common stock available for issuance.
Pro Forma References
The unaudited pro forma balance sheet information as of March 31,
2015 assumes (1) the addition to our cash of $5,591,988 in net proceeds from the June 2015 financing, (2) the issuance
of 952,383 shares of our common stock to the Purchasers in the transaction which increases the common stock on our balance sheet
by $952, and (3) an increase in our additional paid in capital of $5,591,036.
The following unaudited pro forma information has been prepared
as though the subsequent event transaction had occurred on March 31, 2015. The pro forma references refer to the above paragraph.
| |
Aethlon Medical, Inc. Consolidated | | |
| | |
| |
Pro Forma Consolidated | |
| |
Balance Sheet | | |
Pro Forma Adjustments | |
Balance Sheet | |
| |
March 31, 2015 | | |
Amount | | |
Reference | |
March 31, 2015 | |
| |
| | |
| | |
| |
| |
ASSETS | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
CURRENT ASSETS | |
| | | |
| | | |
| |
| | |
Cash | |
$ | 855,596 | | |
$ | 5,591,988 | | |
(1) | |
$ | 6,447,584 | |
Accounts receivable | |
| 193,341 | | |
| – | | |
| |
| 193,341 | |
Deferred financing costs | |
| 82,324 | | |
| – | | |
| |
| 82,324 | |
Prepaid expenses | |
| 73,135 | | |
| – | | |
| |
| 73,135 | |
| |
| | | |
| | | |
| |
| | |
TOTAL CURRENT ASSETS | |
| 1,204,396 | | |
| 5,591,988 | | |
(1) | |
| 6,796,384 | |
| |
| | | |
| | | |
| |
| | |
NON-CURRENT ASSETS | |
| | | |
| | | |
| |
| | |
Property and equipment, net | |
| 56,091 | | |
| – | | |
| |
| 56,091 | |
Patents, net | |
| 103,325 | | |
| – | | |
| |
| 103,325 | |
Deposits | |
| 16,776 | | |
| – | | |
| |
| 16,776 | |
| |
| | | |
| | | |
| |
| | |
TOTAL NONCURRENT ASSETS | |
| 176,192 | | |
| – | | |
| |
| 176,192 | |
| |
| | | |
| | | |
| |
| | |
TOTAL ASSETS | |
$ | 1,380,588 | | |
$ | 5,591,988 | | |
(1) | |
$ | 6,972,576 | |
| |
| | | |
| | | |
| |
| | |
LIABILITIES AND DEFICIT | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
CURRENT LIABILITIES | |
| | | |
| | | |
| |
| | |
Accounts payable | |
$ | 342,133 | | |
$ | – | | |
| |
$ | 342,133 | |
Due to related parties | |
| 146,112 | | |
| | | |
| |
| 146,112 | |
Other current liabilities | |
| 85,731 | | |
| – | | |
| |
| 85,731 | |
| |
| | | |
| | | |
| |
| | |
TOTAL CURRENT LIABILITIES | |
| 573,976 | | |
| – | | |
| |
| 573,976 | |
| |
| | | |
| | | |
| |
| | |
NONCURRENT LIABILITIES | |
| | | |
| | | |
| |
| | |
Convertible notes payable, non-current portion | |
| 155,229 | | |
| – | | |
| |
| 155,229 | |
TOTAL NONCURRENT LIABILITIES | |
| 155,229 | | |
| – | | |
| |
| 155,229 | |
| |
| | | |
| | | |
| |
| | |
TOTAL LIABILITIES | |
| 729,205 | | |
| – | | |
| |
| 729,205 | |
| |
| | | |
| | | |
| |
| | |
COMMITMENTS AND CONTINGENCIES | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
STOCKHOLDERS' EQUITY | |
| | | |
| | | |
| |
| | |
| |
| | | |
| | | |
| |
| | |
Common stock | |
| 6,657 | | |
| 952 | | |
(2) | |
| 7,609 | |
Additional paid in capital | |
| 82,238,507 | | |
| 5,591,036 | | |
(3) | |
| 87,829,543 | |
Accumulated deficit | |
| (81,629,714 | ) | |
| – | | |
| |
| (81,629,714 | ) |
| |
| | | |
| | | |
| |
| | |
TOTAL AETHLON MEDICAL, INC. STOCKHOLDERS' EQUITY | |
| 615,450 | | |
| 5,591,988 | | |
(2) (3) | |
| 6,207,438 | |
| |
| | | |
| | | |
| |
| | |
Noncontrolling interests | |
| 35,933 | | |
| – | | |
| |
| 35,933 | |
| |
| | | |
| | | |
| |
| | |
TOTAL EQUITY | |
| 651,383 | | |
| 5,591,988 | | |
(2) (3) | |
| 6,243,371 | |
| |
| | | |
| | | |
| |
| | |
TOTAL LIABILITIES AND EQUITY | |
$ | 1,380,588 | | |
$ | 5,591,988 | | |
(2) (3) | |
$ | 6,972,576 | |
Exhibit 3.2
BISHOP EQUITIES,
INC.
BY-LAWS
ARTICLE I - MEETINGS OF STOCKHOLDERS
1. Stockholders' Meetings
shall he held in the office of the corporation, at Carson City, NV, or at such other place or places as the Directors shall from
time to time determine.
2. The annual meeting
of the stockholders of this corporation shall be held at 11 A.M., on the 1st day of June of each year beginning in 1992, at which
time there shall be elected by the stockholders of the corporation a Board of Directors for the ensuing year, and the stockholders
shall transact such other business as shall properly come before them.
3. A notice setting
out the time and place of such annual meeting shall be mailed postage prepaid to each of the stockholders of record, at his address
and as the same appears on the stock book of the Company, or if no such address appears, at his last known place of business, at
least ten (10) days prior to the annual meeting.
4. If a quorum is not
present at the annual meeting, the stockholders present, in person or by proxy, may adjourn to such future time as shall be agreed
upon by them, and notice of such adjournment shall be mailed, postage prepaid, to each stockholder of record at least ten (10)
days before such date to which the meeting was adjourned; but if a quorum is present, they may adjourn from day to day as they
see fit, and no notice of such adjournment need be given.
5. Special meetings
of the stockholders may be called at anytime by the President; by all of the directors provided there are no more than three, or
if more than three, by any three Directors; or by the holder of a majority share of the capital stock of the corporation. The Secretary
shall send a notice of such called meeting to each stockholder of record at least ten (10) days before such meeting, and such notice
shall state the time and place of the meeting, and the object thereof. No business shall be transacted at a special meeting except
as stated in the notice to the stockholders, unless by unanimous consent of all stockholders present, either in person or by proxy,
all such stock being represented at the meeting.
6. A majority of the
stock issued and outstanding, either in person or by proxy, shall constitute a quorum for the transaction of business at any meeting
of the stockholders.
7. Each stockholder
shall be entitled to one vote for each share of stock in his own name on the books of the company, whether represented in person
or by proxy.
8. All proxies shall
be in writing and signed.
9. The following order
of business shall be observed at all meetings of the stockholders so far as is practicable:
|
a. |
Call the roll; |
|
b. |
Reading, correcting, and approving of the minutes of the previous meeting; |
|
c. |
Reports of officers; |
|
d. |
Reports or Committees; |
|
e. |
Election of Directors; |
|
f. |
Unfinished business; and |
|
g. |
New business. |
ARTICLE II - STOCK
1. Certificates of
stock shall be in a form adopted by the Board of Directors and shall be signed by the President and Secretary of the Corporation.
2. All certificates
shall be consecutively numbered; the name of the person owning the shares represented thereby, with the number of such shares and
the date of issue shall be entered on the company's books.
3. All certificates
of stock transferred by endorsement thereon shall be surrendered by cancellation and new certificates issued to the purchaser or
assignee.
ARTICLE III - DIRECTORS
1. A Board of Directors,
consisting of at least one (1) person shall be chosen annually by the stockholders at their meeting to manage the affairs of the
company. The Directors' term of office shall be one (1) year, and Directors may be re-elected for successive annual terms.
2. Vacancies on the
board of Directors by reason of death, resignation or other causes shall be filled by the remaining Director or Directors choosing
a Director or Directors to fill the unexpired term.
3. Regular meetings
of the Board of Directors shall be held at 1 P.M., on the 1st day of June of each year beginning in 1992 at the office of the company
at Carson City, NV, or at such other time or place as the Board of Directors shall by resolution appoint; special meetings may
be called by the President or any Director giving ten (10) days notice to each Director. Special meetings may also be called by
execution of the appropriate waiver of notice and call when executed by a majority of the Directors of the company. A majority
of the Directors shall constitute a quorum.
4. The Directors shall
have the general management and control of the business and affairs of the company and shall exercise all the powers that may be
exercised or performed by the corporation, under the statutes, the certificates of incorporation, and the By-Laws. Such management
will be by equal vote of each member of the Board of Directors with each Board member having an equal vote.
5. A resolution, in
writing, signed by all or a majority of the members of the Board of Directors, shall constitute action by the Board of Directors
to effect therein expressed, with the same force and effect as though such resolution had been passed at a duly convened meeting;
and it shall be the duty of the Secretary of record every such resolution in the Minute Book or the corporation under its proper
date.
ARTICLE IV - OFFICERS
1. The officers of
this company shall consist of: a President, one or more Vice Presidents, Secretary, Treasurer, Resident Agent, and such other officers
as shall, from time to time, be elected or appointed by the Board of Directors.
2. The PRESIDENT shall
preside at all meetings of the Directors and the Stockholders and shall have general charge and control over the affairs of the
corporation subject to the Board of Directors. He shall sign or countersign all certificates, contracts and other instruments of
the corporation as authorized by the Board of Directors and shall perform all such other duties as are incident to his office or
are required by him by the Board of Directors.
3. The VICE PRESIDENT
shall exercise the functions of the President during the absence or disability of the President and shall have such powers and
such duties as may be assigned to him from time to time by the Board of Directors.
4. The SECRETARY shall
issue notices for all meetings as required by the By-Laws, shall keep a record of the minutes of the proceedings of the meetings
of the Stockholders and Directors, shall have charge of the corporate books, and shall make such reports and perform such other
duties as are incident to his office, or properly required of him by the Board of Directors. He shall be responsible that the corporation
complies with Section 78.105 of the Nevada Corporation Laws and supplies to the Nevada Resident Agent or Principal Office in Nevada,
any and all amendments to the Corporation's Articles of Incorporation and any and all amendments or changes to the By-Laws of the
Corporation. In compliance with Section 78.105, he will also supply to the Nevada Resident Agent or Principal Office in Nevada,
and maintain, a current statement setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the
present and complete Post Office address, including street and number, if any, where such stock ledger or duplicate stock ledger
specified in the section is kept.
5. The TREASURER shall
have the custody of all monies and securities of the corporation and shall keep regular books of account. He shall disburse the
funds of the corporation in payment of the just demands against the corporation, or as may be ordered by the Board of Directors,
making proper vouchers for such disbursements and shall render to the Board of Directors, from time to time, as may be required
of him, an account of all his transactions as Treasurer and of the financial condition of the corporation. He shall perform all
duties incident to his office or which are properly required of him by the Board of Directors.
6. The RESIDENT AGENT
shall be in charge of the corporation's registered office in the State of Nevada, upon whom process against the corporation may
be served and shall perform all duties required of him by statute.
7. The salaries of
all officers shall be fixed by the Board of Directors and may be changed from time to time by a majority vote of the Board.
8. Each of such officers
shall serve for a term of one (1) year or until their successors are chosen and qualified. Officers may be re-elected or appointed
for successive annual terms.
9. The Board of Directors
may appoint such other officers and agents, as it shall deem necessary or expedient, who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors.
ARTICLE V - INDEMNIFICATION OF OFFICERS AND
DIRECTORS
1. The corporation
shall indemnify any and all of its Directors and Officers, and its former Directors and Officers, or any person who may have served
at the Corporations request as a Director or Officer of another corporation in which it owns shares of capital stock or of which
it is a creditor, against expenses actually and necessarily incurred by them in connection with the defense of any action, suit
or proceeding in which they, or any of them, are made parties, or a party, by reason of being or having been Director(s) or Officer(s)
of the corporation, or of such other corporation, except, in relation to matters as to which any such Director or Officer or former
Director or Officer or person shall be adjudged in such action, suit or proceeding to be liable for negligence or misconduct in
the performance of duty. Such indemnification shall not be deemed exclusive of any other rights to which those indemnified may
be entitled, under By-Law, agreement, vote of stockholders or otherwise.
ARTICLE VI - AMENDMENTS
1. Any of these By-Laws
may be amended by a majority vote of the stockholders at any annual meeting or at any special meeting called for that purpose.
2. The Board of Directors
may amend the By-Laws or adopt additional By-laws, but shall not alter or repeal any By-Laws adopted by the stockholders of the
company.
CERTIFIED TO BE THE BY-LAWS OF:
BISHOP EQUITIES, INC.
|
BY: |
/s/ Maureen Abato |
|
|
Secretary |
FIRST AMENDMENT
TO
BY-LAWS
OF
AETHLON MEDICAL, INC.
Effective as of July 24, 2012, Section 1
of Article III of the By-laws of Aethlon Medical, Inc. (the “Corporation”) hereby is amended and restated in its entirety
as follows:
“1. The number of Directors constituting the
Board of Directors shall be no less than one (1) and shall be fixed by resolution of the Board of Directors from time to time.
The Directors’ term of office shall be one (1) year, and Directors may be re-elected for successive annual terms.”
I hereby certify that (a) I am the duly
elected and acting Secretary of the Corporation, and (b) the foregoing amendment was duly adopted by resolution of the Board of
Directors of the Corporation on July 24, 2012.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of
July 24, 2012.
/s/ James A. Joyce
James A. Joyce
Secretary
SECOND AMENDMENT
TO
BY-LAWS
OF
AETHLONE MEDICAL, INC.
Effective as of June 10, 2015, Section 6
of Article I of the By-laws of Aethlon Medical, Inc. (the “Corporation”) hereby is amended and restated in its entirety
as follows:
“ 6. Stockholders
representing a majority of the stock issued and outstanding, either in person or by proxy, shall constitute a quorum for the transaction
of business at any meeting of stockholders; provided, however, that at any time during which shares of the capital
stock of the company are listed for trading on the NASDAQ Stock Market, stockholders representing not less than thirty-three and
one-third percent (33 1/3%) of the common voting stock issued and outstanding, either in person or by proxy, shall constitute a
quorum for the transaction of business at any meeting of the holders of common stock.”
I hereby certify that (a) I am the duly
elected and acting Secretary of the Corporation, and (b) the foregoing amendment was duly adopted by resolution of the Board of
Directors of the Corporation on June 10, 2015.
IN WITNESS WHEREOF, I have hereunto subscribed my name as of
June 15, 2015.
|
/s/ James A. Joyce |
|
|
James A. Joyce |
|
|
Secretary |
|
Exhibit 10.56
MASTER SERVICES AGREEMENT
This MASTER SERVICES AGREEMENT (the "Agreement")
is made as of this 14th day of February, 2014 (the "Effective Date") by and between Aethlon Medical
Inc. with offices located at 8910 University Center Lane, Suite 660, San Diego, CA 92122 (hereinafter referred to as "Sponsor"),
and Total Renal Research, Inc. d/b/a DaVita Clinical Research with offices located at 825 South 8th Street, Suite
300, Minneapolis, MN 55404 ("DCR"). Sponsor and DCR shall each be hereinafter referred to as a "Party"
and collectively as the "Parties".
RECITALS:
WHEREAS, Sponsor is in the business
of developing blood purification medical devices;
WHEREAS, DCR, among other things,
is a provider of clinical trial related services for the medical device, biotechnology and pharmaceutical industries; and
WHEREAS, Sponsor and DCR desire
to enter into this Agreement to provide the general terms and conditions upon which Sponsor may engage DCR from time to time to
provide Services (defined herein) and Deliverables (defined herein) hereunder.
NOW, THEREFORE, in consideration
of the premises and the terms and conditions contained herein, Sponsor and DCR hereby agree as follows:
1. DEFINITIONS
1.1 "Affiliate" means any person or entity
controlling, controlled, or under common control with a Party where "control" shall mean either (1) ownership of at least
fifty percent (50%) of the voting stock of another entity; or (2) power of one entity to direct the management or policies of another
entity, by contract or otherwise.
1.2 "Protocol" means, with respect to any
Services, the clinical testing procedures and conditions for the clinical evaluation of the safety and efficacy of a medical device
as specifically stated in the applicable Work Order.
1.3 "Services" shall mean the services provided
by DCR to Sponsor as described in the applicable Work Order.
1.4 "Standard Operating Procedures" means,
with respect to a Party, such Party's standard procedures applicable to the Services.
1.5 "Study" means any clinical investigational
study provided for in a Protocol.
1.6 "Work Order" means a written agreement,
including any applicable Change Orders (defined herein), agreed to and executed by both Parties which contains the terms and conditions
specifically applicable to the performance of Services by DCR a form of which is attached hereto as Exhibit A.
2. WORK ORDERS AND CHANGE ORDERS
2.1 Work Orders. The Parties will execute Work Orders
hereunder which will each be separately numbered and attached hereto. Work Orders will include the following:
(a)
a description of the Services;
(b)
any Deliverables (if applicable);
(c)
Acceptance Criteria (if applicable);
(d)
the Work Order term;
(e)
the Protocol (if applicable);
(f)
the payment schedule ("Payment Schedule"); and
(g)
invoicing and payment detail
2.2 Conflict. In the event of
a conflict between the terms of this Agreement and a Work Order the terms of the Agreement shall control unless otherwise specifically
agreed to by the Parties in the applicable Work Order.
2.3 Change Orders. Changes to
a Work Order, including modifications to the scope of Services or the assumptions on which a Work Order is based shall be made
only by a written amendment to the applicable Work Order executed by parties thereto a form of which is attached hereto as Exhibit
B (a "Change Order"). The Parties agree to respond promptly to a request for a Change Order made by the other
Party ("Change Order Request(s))". The Parties shall consider Change Order Requests received hereunder in good
faith. As part of a Change Order Request or response, DCR will propose, in writing, any necessary modifications to the milestone
dates, target dates and other timelines, fees, or costs described in the Work Order.
2.4 Affiliates. Affiliates
of either Party may also enter into their own separately numbered Work Orders agreeing to be bound by the terms and conditions
of this Agreement. In the event of such, references to "Sponsor", "DCR", "Party" or "Parties"
in this Agreement (and the related rights and obligations) and the applicable Work Order shall apply to the respective Affiliate(s)
that is a party to the Work Order.
3. SERVICES
3.1 Performance. DCR shall provide the Services hereunder
in accordance with:
(a)
the terms of this Agreement and the applicable Work Order;
(b)
the Protocol (if applicable);
(c)
DCR's Standard Operating Procedures;
(d)
all applicable laws and regulations;
(e)
ICH Good Clinical Practice guidelines (if applicable); and
(f)
the standards currently established in the industry for such Services.
3.2 Subcontractors. DCR shall not
subcontract any Services to another entity, other than to an Affiliate, without Sponsor's prior written approval.
4.
DELIVERABLES
If required pursuant to a Work Order, DCR
shall provide certain deliverables to Sponsor as stated in such Work Order (the "Deliverables"). The Deliverables
shall be provided by DCR in accordance with the acceptance criteria included in the applicable Work Order (the "Acceptance
Criteria"). If the applicable Work Order does not include acceptance criteria for a Deliverable such Deliverables shall
be subject to Sponsor's reasonable approval. If a Deliverable does not satisfy the applicable Acceptance Criteria DCR shall, at
Sponsor's discretion either recreate the Deliverable at issue ("Re-perform" or "Re-performance")
or refund any amounts received from Sponsor for such Deliverables. Notwithstanding the foregoing to the extent that Re-performance
is not commercially reasonable DCR shall not be required to Re-perform hereunder.
5.
DEVICE
"DEVICE" shall mean the
investigational devices to be provided by or on behalf of Sponsor to DCR for administration to Study subjects pursuant to a Protocol
hereunder. If the Services involve the performance of a Protocol, Sponsor shall provide DCR, at no charge to DCR, with such quantities
of the Device as may be required to conduct a Study in accordance with the Protocol. DCR shall use the Device only in accordance
with the applicable Protocol and for no other purpose without the prior written consent of Sponsor. DCR shall return to Sponsor,
at Sponsor's expense, any and all unused Devices for the Study unless otherwise instructed in writing by Sponsor.
6.
SERIOUS ADVERSE EXPERIENCE REPORTING
If DCR receives notice of a Serious Adverse
Experience (defined herein) related to the investigational Device, DCR shall provide Sponsor with notice within two (2) business
days thereafter and provide such additional information thereafter as reasonably requested by Sponsor. Furthermore, upon Sponsor's
reasonable request, DCR shall promptly investigate any such Serious Adverse Experience and shall submit follow-up reports of new
information in a timely manner. "Serious Adverse Experience" refers to an experience that has any serious adverse effect
on health or safety or any life-threatening problem caused by, or associated with, a Device, if that effect, problem, or death
was not previously identified in nature, severity, or degree of incidence in the investigational plan or application, or any other
unanticipated serious problem associated with a ❑evice that relates to the rights, safety, or welfare of subjects. Any
untoward event which occurs regardless of its causality, including any side effect, injury, toxicity or sensitivity reaction during
the testing of protocol treatments (whether or not considered Device-related), will be designated as an unanticipated adverse
effect and recorded on the adverse events page of the Case Report Form (CRF).
7.
TRANSFER OF OBLIGATIONS
If the applicable Work Order includes
clinical services, unless otherwise specified in an applicable Work Order, Sponsor shall be responsible for all obligations of
a sponsor pursuant to all applicable laws and regulations including but not limited 21 CFR § 312.52.
8.
PAYMENT
8.1 Fees and Invoicing. In consideration
for its performance of Services pursuant to a Work Order Sponsor shall pay DCR in accordance with the applicable Payment Schedule
("Fees"). Unless otherwise agreed to in the applicable Work Order, DCR shall invoice Sponsor for Fees and Expenses (as
defined herein) on a monthly basis. Each invoice shall include reasonably sufficient detail and include any supporting documentation
as may be reasonably requested by Sponsor. Sponsor shall pay all invoices within thirty (30) days of receipt.
8.2 Taxes. Unless otherwise stated
in the applicable Work Order, all sums payable by Sponsor for Services provided hereunder shall be excluding any VAT and/or any
similar duties or taxes ("Taxes"). Sponsor shall be liable for all Taxes.
8.3 Expenses. Sponsor shall reimburse
DCR for all expenses included in the applicable Work Order or otherwise incurred by DCR in the performance of the Services and
approved by Sponsor ("Expenses"). All Expenses shall be reimbursed by Sponsor on a pass through basis with no mark up
by DCR.
9.
TERM; TERMINATION
9.1 Term. This Agreement shall
commence on the Effective Date and shall continue for a period of five (5) years unless terminated in accordance with the terms
hereof (the "Term").
9.2 Termination of the Agreement or
Work Orders:
9.2.1 If applicable, DCR may terminate
any applicable Work Order immediately upon written notice to Sponsor if in DCR's reasonable medical opinion such termination is
in the best interest of Study subjects.
9.2.2 Either Party may terminate this Agreement
or any Work Order immediately upon written notice if the other Party becomes insolvent, or if proceedings are instituted against
the other Party for reorganization or other relief under any bankruptcy law, or if any substantial part of the other Party's assets
come under the jurisdiction of a receiver or trustee in an insolvency proceeding authorized by law.
9.2.3 Either Party may terminate this Agreement
or any Work Order if, in the event of a breach of this Agreement or the applicable Work Order, the breaching Party fails to remedy
such material breach within thirty (30) days of receipt of written notice by the non-breaching Party.
9.2.4 Either Party may terminate this Agreement
or a Work Order for any reason upon sixty (60) days written notice to the other Party.
9.3 Effect of Termination. Sponsor
shall be liable to DCR for all Fees and non-cancellable Expenses incurred up to and including the effective date of termination.
If, upon the effective date of termination, Sponsor has advanced funds which are unearned by DCR, DCR shall repay such funds within
forty-five (45) days of the effective date of termination.
10. STUDY RECORDS AND AUDITS
10.1 Study Records. If the Services included in an
applicable Work Order include the performance of a Study, DCR will maintain records generated as a direct result of the performance
of the Study ("Study Records") in accordance with applicable law. Study Records are the property of the Sponsor.
Prior to the destruction of any Study Records DCR shall provide notice to Sponsor and, at Sponsor's direction and reasonable expense,
DCR shall either continue to maintain such Study Records or deliver the Study Records to Sponsor. Notwithstanding any other terms
contained herein any medical records shall be the property of the applicable institution at which a Study is conducted
hereunder ("Institution").
10.2 Sponsor Audits. During the
term of the applicable Work Order and for two (2) years following the expiration or termination thereof, Sponsor or Sponsor's
designee ("Designees") may, at mutually agreeable times and on a confidential basis, inspect DCR's records, facilities,
equipment, or procedures related to DCR's obligations under this Agreement or a Work Order. Designees shall be subject to DCR's
reasonable approval.
10.3 Regulatory Authority Audits. If
a governmental or regulatory authority ("Regulatory Authority") gives notice to DCR of an inspection or any other
regulatory action directly related to any Services, DCR will notify Sponsor as soon as reasonably practicable under the circumstances
provided DCR is permitted to provide such notice pursuant to applicable law. If reasonably practicable, DCR will notify Sponsor
prior to complying with any demand or request by a Regulatory Authority where such demand or request is directly related to Services.
DCR shall provide to Sponsor a copy of correspondence with Regulatory Authorities directly related to Services. If reasonably
practicable under the circumstances, DCR shall permit Sponsor's authorized representatives to be present at any audit or inspection
by a Regulatory Authority that is directly related to Services.
11. CONFIDENTIALITY
11.1 Confidential
Information. "Confidential Information" means any and all information, data, and know-how, whether written or oral,
technical or non-technical, including, without limitation, any financial, business, marketing, or operations information, formulas,
manufacturing processes, basic scientific data, prior clinical data, Data (defined herein) or other information provided by or
on behalf of a Party or its Affiliates (the "Disclosing Party") to the other Party pursuant to this Agreement
(the "Receiving Party").
11.2 Confidentiality Obligations. Confidential
Information shall remain the sole and exclusive property of the Disclosing Party. For a period of five (5) years after the receipt
of Confidential Information hereunder, the Receiving Party agrees to hold such Confidential Information in confidence, to only
use such Confidential Information for the purposes of this Agreement and to only disclose such Confidential Information to its
employees, agents, Affiliates, contractors and representatives who are bound by an obligation of confidentiality. Receiving Party
also agrees to use the same degree of care to avoid disclosure of such Confidential Information as the parties employ with respect
to their own confidential information of like importance, but in no event less than a reasonable amount of care;
11.3 Exceptions.
Confidential Information shall not include information that:
(a)
at the time of disclosure, or thereafter, has become publicly available, except by breach of this Agreement;
(b)
was in the possession of the Receiving Party prior to disclosure hereunder as evidenced by competent records;
(c)
was developed by a Receiving Party independently from and without reference to Confidential Information received hereunder; or
(d)
a Receiving Party received from a third party without an obligation of confidentiality.
11.4 Compliance with Applicable Law. Notwithstanding
any other terms contained herein, a Receiving Party may disclose Confidential Information received hereunder to the extent required
by applicable law provided that such Receiving Party provides notice to the Disclosing Party as soon as reasonably practicable
under the circumstances and agrees to cooperate in Disclosing Party's efforts to obtain a protective order or other appropriate
remedy. Any information disclosed pursuant to this paragraph shall otherwise remain Confidential Information.
11.5 Return of Confidential
Information. Upon request of a Disclosing Party, a Receiving Party shall return to such Disclosing Party all Confidential
Information received from that Disclosing Party pursuant to this Agreement.
12. INVENTIONS AND DATA
12.1 Inventions. All inventions,
discoveries, technology and other intellectual property rights conceived or reduced to practice by DCR directly resulting from
performance of Services hereunder, whether or not patentable, including Data (defined herein) shall be the sole property of Sponsor
or its designee ("Inventions"). DCR hereby assigns, and shall cause its employees and contractors to assign, to
Sponsor all rights, title and interest in, to Inventions. DCR agrees to perform reasonable acts necessary to assist Sponsor in
perfecting or enforcing its right to any Inventions.
12.2 Data. "Data"
shall mean all case report forms and other Study data generated by an Institution and/or DCR in the course of conducting a
Study and required to be delivered to Sponsor pursuant to the Protocol. Notwithstanding any other terms contained herein, DCR
shall have the limited right to use such Data for any lawful reason provided that such use does not jeopardize Sponsor's ability
to obtain patent protection of any Inventions. Notwithstanding the foregoing, any Publications (defined herein) shall be made
in accordance with Section 14 (Publication).
12.3 DCR
Property. Notwithstanding the foregoing, Sponsor acknowledges that DCR and its Affiliates own, control, or
otherwise possess, certain inventions, processes, know-how, trade secrets, improvements, other intellectual properties and
other assets, including but not limited to data, analytical methods, procedures and techniques, procedure manuals, financial
information, computer and technical expertise and software as of the Effective Date or if developed after the Effective Date
does not necessarily incorporate Confidential Information received from Sponsor hereunder including, for the purpose of this
paragraph, the Drug (collectively "DCR Property"). DCR hereby grants to Sponsor a non-exclusive, worldwide,
irrevocable, sub-licensable and royalty free license to use the DCR Property only to the extent necessary for the use of any
Deliverables or Servicers provided hereunder.
12.4 DCR Software. Notwithstanding
the foregoing, to the extent that, in connection with DCR's performance of a Study pursuant to a Work Order, Sponsor is granted
access to any to any software or systems owned or controlled by, or licensed to, DCR or its Affiliates ("DCR Software")
Sponsor's use of such DCR Software shall be limited solely to performance of the applicable Study.
13.
PUBLICATION
13.1 DCR shall not publish any articles or make any
presentations relating to the Services, Sponsor Confidential Information or referring to data generated pursuant to any Work Order
issued hereunder, without the prior written consent of Sponsor. Sponsor shall not publish any articles or make any presentations
including DCR Confidential Information, without the prior written consent of DCR.
13.2 Multi-Center Publications. Notwithstanding
the foregoing, if a particular Study is part of a multicenter study, DCR agrees that the first publication of the Study results
shall be made in conjunction with the presentation of a joint, multicenter publication. However, if a multicenter publication
is not submitted within six (6) months after completion, abandonment or termination of the applicable Study at all Study sites,
or if Sponsor confirms that there will be no multicenter publication, DCR may publish the Study results otherwise in accordance
with the terms of this Agreement.
14.
REPRESENTATIONS AND WARRANTIES
14.1 Authority. The Parties represent
and warrant that:
14.1.1 They each have the full power and
authority to enter into this Agreement and to perform its obligations hereunder and that execution of, and performance under, this
Agreement shall not breach any agreement either Party may have with any third party.
14.1.2 They each represent and warrant
that neither it nor any of their employees, agents or subcontractors (collectively "Personnel") are currently:
(a)
excluded, debarred, suspended or otherwise ineligible to participate in federal health care programs as defined in 42 U.S.C. Sec.
1320a-7b or from federal procurement or non-procurement activities as defined in Executive Order 12689 (collectively "Ineligible");
or
(b)
debarred pursuant to the Generic Drug Enforcement Act of 1992, 21 U.S.C. Sec. 335 (a), as amended, or any similar state law or
regulation (collectively "Debarred") or
(c)
convicted of a criminal offense that falls within the ambit of 42 U.S.C. Sec 1320a-7(a), but has not yet been excluded, debarred,
suspended, or otherwise declared ineligible ("Convicted").
The Parties also each represent and warrant
that if any of their respective Personnel becomes Ineligible, Debarred or Convicted during the Term, such Party will notify the
other Party promptly, and in any event no later than five (5) business days after receiving notification of the Ineligibility,
Debarment, or Conviction.
14.1.3 The arrangements set out in this
Agreement do not take effect and are not intended to take effect as an incentive or reward for a person's past, present or future
willingness to prescribe, administer, recommend (including formulary recommendations), purchase, pay for, reimburse, authorize,
approve or supply any product or service sold or provided by Sponsor or as an incentive to grant an interview for any sales or
marketing purposes.
14.1.4 They shall not pay or promise to
pay, or authorize the payment of any money, or give, promise to give or authorize the giving of anything of value to any government
official, healthcare professional or person affiliated with a healthcare organization to obtain or retain business or secure improper
advantage. Further, the Parties represent and warrant that they have not made prior to the Effective Date any payment, authorization,
promise or gift of the sort described in this paragraph.
14.1.5 They shall comply with the requirements
of the U.S. Foreign Corrupt Practices Act and any other applicable anti-corruption national or international laws and regulations.
Further, each Party hereby represents, warrants and covenants to that they have not, and agrees that it will not, in connection
with the transactions contemplated by this Agreement, make, promise or offer to make any payment or transfer anything of value:
(a) to any foreign government official or to an intermediary for payment to any foreign government officials; or (b) to any political
party. Further, no payments or transfer of value shall be made which have the purpose or effect of public or commercial bribery,
acceptance of or acquiescence in extortion, kickbacks or other unlawful or improper means of obtaining or retaining business.
15. INDEMNIFICATION, LIMITATION OF LIABILITY, DISCLAIMER
AND INSURANCE
15.1 Reciprocal Indemnity. Either
Party ("Indemnifying Party") agrees to indemnify and defend the other Party, its Affiliates and their respective
directors, officers, employees, and agents (the "Indemnitee(s)") from and against any and all claims, costs,
expenses, liabilities, damages, and losses (including reasonable legal expenses and attorneys' fees) resulting from any third
party suits, claims, actions or demands (collectively, "Claims") against any Indemnitee caused by the Indemnifying
Party's (including its Affiliates): (a) negligence, recklessness, willful malfeasance or lack of adherence to applicable laws;
or (b) breach of this Agreement. Neither Party's obligation to indemnify pursuant to this paragraph shall apply to the extent
the applicable Claim was caused by the negligence, recklessness, willful malfeasance, lack of adherence to applicable law, or
breach of this Agreement by an Indemnitee.
15.2 Sponsor Indemnity. In
addition to any other of Sponsor's obligation to indemnify contained herein, Sponsor shall indemnify DCR, its Affiliates and their
respective directors, officers, employees, subcontractors and agents ("DCR Indemnitee(s)") for any Claims caused
by (a) Sponsor's (including its Affiliates) use of Inventions or Data; (b) the administration of a Drug in accordance with the
applicable Protocol; and (c) any procedures performed in accordance with a Protocol. Sponsor's indemnification obligations pursuant
to this paragraph shall not apply to the extent the applicable Claim was caused by the negligence, recklessness, willful misconduct,
lack of adherence to applicable law, or breach of this Agreement by a DCR Indemnitee.
15.3 Subject Injury. To
the extent not otherwise included in Sponsor's obligations to indemnify included herein, Sponsor shall be responsible for all
necessary and reasonable costs associated with the diagnosis and treatment of injuries to any Study subjects caused by a Drug
or procedures performed in accordance with the applicable Protocol. Sponsor shall not be responsible for any costs pursuant to
this paragraph to the extent that such injuries were caused the negligence, recklessness, willful malfeasance, lack of adherence
to applicable laws, or breach of this Agreement by any DCR Indmenitee.
15.4 LIMITATION OF LIABILITY.
NEITHER PARTY NOR THEIR AFFILIATES SHALL BE LIABLE TO THE OTHER PARTY OR ITS AFFILIATES FOR PUNITIVE, EXEMPLARY, CONSEQUENTIAL,
INCIDENTAL, SPECIAL, OR INDIRECT DAMAGES, INCLUDING LOSS OF PROFITS, IN TORT OR CONTRACT, AS A RESULT OF THIS AGREEMENT.
15.5 DISCLAIMER. EXCEPT
AS OTHERWISE EXPRESSLY SET FORTH IN THIS AGREEMENT, DCR MAKES NO REPRESENTATIONS AND EXTENDS NO WARRANTIES OF ANY KIND, EITHER
EXPRESS OR IMPLIED, IN REGARD TO THE DATA OR DELIVERABLES AND DCR DISCLAIMS ALL IMPLIED WARRANTIES OF TITLE, NON-INFRINGEMENT,
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
15.6 Insurance. For the
duration of an applicable Work Order and for a reasonable period thereafter the Parties shall maintain insurance in accordance
with the following minimums:
15.6.1 Professional Liability: DCR
shall maintain Professional Liability coverage with a minimum of one million US Dollars (US$1,000,000) per occurrence and three
million US Dollars (US$3,000,000) in the aggregate.
15.6.2 General Liability: The Parties
shall maintain Commercial General Liability insurance with a minimum of three million US Dollars (US$3,000,000) per occurrence
and in the aggregate.
16. MISCELLANEOUS
16.1 Independent Contractor.
The relationship of the Parties is that of independent contractors. Neither Party is the partner, joint venturer, or agent
of the other and neither Party has authority to make any statement, representation, commitment, or action of any kind which purports
to bind the other without the other's prior written authorization.
16.2 Use of Name. Neither
Party shall make (or have made on its behalf) any oral or written release of any statement, information, advertisement or publicity
in connection with this Agreement or any Work Order which uses the other Party's name, symbols, or trademarks without the other
Party's prior written approval. The obligations of this Section shall survive termination of this Agreement and any applicable
Work Order.
16.3 Force Majeure. In
the event either Party shall be delayed or hindered or prevented from performing any act required hereunder by reasons beyond
its reasonable control, including strike, lockouts, labor troubles, inability to procure materials or services, failure of
power or restrictive government or judicial orders, decrees, riots, insurrection, war, Acts of God, inclement weather etc.;
performance is excused for the period of such delay. The delayed Party shall promptly notify the other in writing of the
delaying event.
16.4 Notices. All notices under this Agreement
or a Work Order shall be sent by registered or certified mail, postage prepaid, or by overnight courier service. Notices may be
sent by facsimile or e-mail, if confirmed by also sending as described above. Notices pertaining to this Agreement shall be sent
to:
As to DCR: Total Renal Research Inc. d/b/a DaVita Clinical
Research 825 South 8th Street, Suite 300 Minneapols, MN 55404
|
|
Copy to: DaVita HealthCare Partners, Inc.
2000 16th Street
Denver, CO 80202 |
If
to Sponsor:
Name: Aethlon Medical Inc.
Address: 8910 University Center Lane, suite 660, San Diego
CA 92122
Facsimile: 858-272-2738
Notices pertaining to a Work Order shall
be sent to representatives identified in the Work Order, if applicable.
16.5 Assignment. Neither
Party may assign its rights and duties under this Agreement or any Work Order without the other Party's consent, provided, however,
DCR may assign its rights and duties under this Agreement or any Work Order to an Affiliate without prior written consent of Sponsor.
To the extent permitted above, this Agreement or any Work Order shall be binding upon and inure to the benefit of the Parties
and their permitted successors and assigns.
16.6 Severability. If any
provision(s) of this Agreement or a Work Order should be illegal or unenforceable in any respect, the legality and enforceability
of the remaining provisions of this Agreement or the Work Order shall not in any way be affected.
16.7 Waiver; Modification of
Agreement. No waiver, amendment, or modification of any of the terms of this Agreement or a Work Order shall be valid unless
in writing and signed by authorized representatives of both Parties. Failure by either Party to enforce any rights under this
Agreement or a Work Order shall not be construed as a waiver of such rights nor shall a waiver by either Party in one or more
instances be construed as constituting a continuing waiver or as a waiver in other instances.
16.8 Governing Law. This
Agreement and any Work Order shall be governed by and interpreted in accordance with laws of the State of Delaware, without giving
effect to the principles of choice of law of that jurisdiction.
16.9 Counterparts. This
Agreement and any Work Order may be executed in one or more counterparts, including .PDF copies or counterparts submitted by facsimile,
each of which shall be deemed an original and all of which shall constitute the same instrument.
16.10 Dispute Resolution
16.10.1 In the event that any dispute
arises relating to this Agreement, the Parties shall meet within thirty (30) days after the dispute arises and attempt to resolve
same through good faith discussions. If they are unable to resolve any dispute to their mutual satisfaction within such thirty
(30) day period, and do not agree to extend the time for resolution of the issue, then either Party may initiate alternative dispute
resolution in accordance with Section 16.10.2
16.10.2 Any dispute arising between the
Parties in connection with this Agreement that cannot be resolved using the procedure specified in Section 16.10.1, shall be resolved
by binding arbitration in accordance with Sections 16.10.2-16.10.4; provided, that actions by either Party seeking equitable or
declaratory relief may be brought in court without resort to any of the provisions of this Section 16.10. This agreement to arbitrate
shall continue in full force and effect despite the expiration, rescission or termination of this Agreement. Following arbitration,
the decision of the arbitrator(s) shall be enforceable in any court of competent jurisdiction. The Parties knowingly and voluntarily
waive their rights to have their dispute tried and adjudicated by a judge and jury except as expressly provided herein. The arbitrator(s)
shall apply the law of the State of California and the arbitration shall be held in San Diego, California.
16.10.3 Either Party may demand arbitration
by sending written notice to the other Party. The arbitration and the selection of the arbitrator(s) shall be conducted in accordance
with such rules as may be agreed upon by the Parties, or, failing agreement within thirty (30) days after arbitration is demanded,
under the Commercial Arbitration Rules of the American Arbitration Association, as such rules may be modified by this Agreement.
If the Parties are unable to agree upon a single arbitrator within thirty (30) days following the date arbitration is demanded,
three (3) arbitrators shall be used, one selected by each Party within ten (10) days after the conclusion of the thirty (30) day
period and a third selected by the first two within ten (10) days thereafter. Unless the Parties agree otherwise, they shall be
limited in their discovery to directly relevant documents. Responses or objections to a document request shall be served ten (10)
days after receipt of the request. The arbitrator(s) shall resolve any discovery disputes.
16.10.4 The arbitrator(s) shall only have
the authority to award actual money damages (with interest on unpaid amounts from the date due) and the arbitrator(s) shall not
have the authority to award exemplary or punitive damages, and the Parties expressly waive any claimed right to such damages. The
arbitration shall be of each party's individual claims only, and no claim of any other party shall be subject to arbitration in
such proceeding. The costs and expenses of the arbitration, but not the costs and expenses of the Parties, shall be shared equally
by the Parties. If a Party fails to proceed with arbitration, unsuccessfully challenges the arbitration award, or fails to comply
with the arbitration award, the other Party is entitled to costs, including reasonable attorneys' fees, for having to compel arbitration
or defend or enforce the award. Except as otherwise required by law, the Parties and the arbitrator(s) shall maintain as confidential
all information or documents obtained during the arbitration process, including the resolution of the dispute.
16.11 Entire Agreement. This Agreement,
in conjunction with individual Work Orders, represents the entire and integrated agreement between the Parties and supersedes all
prior negotiations, representations or agreements, either written or oral, regarding its subject matter.
16.12 Survival. The following Sections
of this Agreement as well as any Sections which survive by their terms as stated herein shall survive the expiration or termination
of this Agreement or a Work Order: Sections 1 (Definitions), 8 (Payments), 10 (Study Records and Audits), 11 (Confidentiality),
12 (Inventions and Data), 13 (Publication), 14 (Representations and Warranties), 15 (Indemnification, Insurance, Limitation of
Liability, Disclaimer and Insurance), and 16 (Miscellaneous).
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Signatures to follow.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed by their authorized representatives as of the Effective Date.
EXHIBIT A
A Form of Work Order
Work Order # _______
This Work Order
#_____ ("Work Order") dated __________ ("Effective Date") is entered into by and between Aethlon
Medical Inc. ("Sponsor") and Total Renal Research, Inc., d/b/a DaVita Clinical Research ("DCR")
. Sponsor and DCR shall each be hereinafter referred to as a "Party" and collectively as the "Parties".
WHEREAS, this Work Order is entered into pursuant to the Master
Services Agreement by and between the Parties dated _________________ (the "Agreement"), which is incorporated
by reference herein.
Unless otherwise defined herein all capitalized
terms shall have the same meaning as in the Agreement.
The Parties hereby agree as follows:
1. Services. The Services shall
be described at Attachment 1 attached hereto. To the extent applicable the applicable Protocol, if any, shall be stated in Attachment
1.
2. Deliverables. The Deliverables
required to be delivered pursuant to this Work Order shall include:
3. Acceptance Criteria. The Acceptance
Criteria for any such Deliverables shall be as follows:
4. Work Order Term. The term
of this Work Order shall commence as of the Effective Date until ________________ or until the Services are completed, whichever
occurs first, unless otherwise agreed to by the parties ("Work Order Term"). If the Agreement expires during the Work
Order Term then the Parties specifically agree that this Work Order shall survive and the terms of the Agreement shall continue
to apply to this Work Order during the Work Order Term.
5. Payment Schedule. Sponsor
shall makes payments to DCR for Fees and Expenses in accordance with the terms of the Agreement and the Payment Schedule attached
hereto as Attachment 2.
6. Invoicing and Payment Detail.
A. Invoices to Sponsor shall be sent to Sponsor via e-mail
at:
Name: Jim Frakes
e-mail: jfrakes@aethlonmedical.com
B. Payment to DCR shall be made electronically as follows:
Bank Name: Wells Fargo
Bank ABA/Routing #: 121000248
Account Name: Total Renal Research, Inc.
Account Number: 2000045286065
7. Conflict. To the extent that
the terms of the attachments hereto conflict with either the terms of the Agreement or this Work Order shall be controlled by the
Agreement or Work Order, as applicable.
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Signatures to follow.
IN WITNESS WHEREOF, the Parties have
caused this Work Order to be executed by their duly authorized representatives as of the Effective Date.
Aethlon Medical Inc. |
Total Renal Research, Inc., d/b/a |
|
DaVita Clinical Research |
|
|
Signature: __________ |
Signature:__________ |
Name: |
Name: |
Title: |
Title: |
Date:__________ |
Date: __________ |
ATTACHMENT 1
Services
ATTACHMENT 2
Payment Schedule
EXHIBIT B
A Form of Chance Order
Change
Order # ____ to Work Order # ___
This Change Order #_____ ("Change Order") dated
______________("Effective Date") is entered into by and between Aethlon Medical Inc. ("Sponsor")
and Total Renal Research, Inc., d/b/a DaVita Clinical Research ("DCR") . Sponsor and DCR shall each be hereinafter
referred to as a "Party" and collectively as the "Parties".
WHEREAS, this Change Order is entered into pursuant to the Work
Order # _____by and between the Parties dated __________, (the "Work Order); and
WHEREAS, the Work Order was entered into
pursuant to the Master Services Agreement by and between the Parties dated ______________ (the "Agreement").
The Parties hereby agree as follows:
1. Unless otherwise defined herein all
capitalized terms shall have the same meaning as in the Work Order or the Agreement, as applicable.
2. Unless otherwise stated herein all
other terms of the Work Order and the Agreement shall remain in full force and effect.
3. The changes, modifications, or additions
to the Services are as follows:
4. The changes to the Fees, Expenses,
delivery schedule, and other requirements are as follows:
a. Changes in Fees and Expenses:
b. Changes in delivery schedule:
c. Changes to any other requirements:
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left blank.
Signatures to follow.
IN WITNESS WHEREOF, the Parties have
caused this Work Order to be executed by their duly authorized representatives as of the Effective Date.
Aethlon Medical Inc. |
Total Renal Research, Inc., d/b/a |
|
DaVita Clinical Research |
|
|
Signature: __________ |
Signature:__________ |
Name: |
Name: |
Title: |
Title: |
Date:__________ |
Date: __________ |
Exhibit 10.57
FIRST AMENDMENT TO THE MASTER SERVICES
AGREEMENT
This First Amendment (the "Amendment") to the Master
Services Agreement (the "Agreement") is made and entered into effective as of the 16th day of May, 2014 (the
"Effective Date") by and between Aethlon Medical Inc. with offices located at 8910 University Center Lane, Suite 660,
San Diego, CA 92122 (hereinafter referred to as "Sponsor"), and Total Renal Research, Inc. d/b/a DaVita Clinical
Research with offices located at 825 South 8th Street, Suite 300, Minneapolis, MN 55404 ("DCR"). Sponsor
and DCR shall each be hereinafter referred to as a "Party" and collectively as the "Parties".
WHEREAS, the Parties entered into the Agreement
on the 14th day of February, 2014;
WHEREAS, the Parties wish to amend the terms of the Agreement
as outlined in this Amendment;
NOW, THEREFORE, in consideration of the mutual promises and
covenants in the Agreement and this Amendment, the Parties agree as follows:
1. The following paragraphs of the Agreement
are deleted in their entirety and replaced with the following:
6. SERIOUS ADVERSE EXPERIENCE REPORTING
If DCR receives notice of a Serious
Adverse Experience (defined herein) related to the investigational Device, DCR shall provide Sponsor with notice within twenty-four
(24) hours of learning of the event and provide such additional information thereafter as reasonably requested by Sponsor. Furthermore,
upon Sponsor's reasonable request, DCR shall promptly investigate any such Serious Adverse Experience and shall submit follow-up
reports of new information in a timely manner. "Serious Adverse Experience" refers to an experience that has any serious
adverse effect on health or safety or any life-threatening problem caused by, or associated with, a Device, if that effect, problem,
or death was not previously identified in nature, severity, or degree of incidence in the investigational plan or application,
or any other unanticipated serious problem associated with a Device that relates to the rights, safety, or welfare of subjects.
Any untoward event which occurs regardless of its causality, including any side effect, injury, toxicity or sensitivity reaction
during the testing of protocol treatments (whether or not considered Device-related), will be designated as an unanticipated adverse
effect and recorded on the adverse events page of the Case Report Form (CRF).
12.3 DCR
Property. Notwithstanding the foregoing, Sponsor acknowledges that DCR and its Affiliates own, control, or otherwise possess,
certain inventions, processes, know-how, trade secrets, improvements, other intellectual properties and other assets, including
but not limited to data, analytical methods, procedures and techniques, procedure manuals, financial information, computer and
technicalexpertise and software as of the Effective Date or if developed after the Effective Date does not necessarily incorporate
Confidential Information received from Sponsor hereunder including, for the purpose of this paragraph, the Device (collectively
"DCR Property"). DCR hereby grants to Sponsor a non-exclusive, worldwide, irrevocable, sub-licensable and royalty
free license to use the DCR Property only to the extent necessary for the use of any Deliverables or Servicers provided hereunder.
15.2 Sponsor Indemnity. In
addition to any other of Sponsor's obligation to indemnify contained herein, Sponsor shall indemnify DCR, its Affiliates and their
respective directors, officers, employees, subcontractors and agents ("DCR Indemnitee(s)") for any Claims caused
by (a) Sponsor's (including its Affiliates) use of Inventions or Data; (b) the administration of a Device in accordance with the
applicable Protocol; and (c) any procedures performed in accordance with a Protocol. Sponsor's indemnification obligations pursuant
to this paragraph shall not apply to the extent the applicable Claim was caused by the negligence, recklessness, willful misconduct,
lack of adherence to applicable law, or breach of this Agreement by a DCR Indemnitee.
15.3 Subject Injury. To the
extent not otherwise included in Sponsor's obligations to indemnify included herein, Sponsor shall be responsible for all necessary
and reasonable costs associated with the diagnosis and treatment of injuries to any Study subjects caused by a Device or procedures
performed in accordance with the applicable Protocol. Sponsor shall not be responsible for any costs pursuant to this paragraph
to the extent that such injuries were caused the negligence, recklessness, willful malfeasance, lack of adherence to applicable
laws, or breach of this Agreement by any DCR Indemnitee.
2. | | Except as stated in this Amendment all terms and conditions of the Agreement remain
in full force and effect. |
IN WITNESS WHEREOF, the Parties have executed this Amendment
as of the Effective Date.
Aethlon-DCR First Amendment
Exhibit 10.58
Work Order # 01
This Work Order #01 ("Work Order")
dated May 16, 2014 ("Effective Date") is entered into by and between Aethlon Medical Inc. ("Sponsor")
and Total Renal Research, Inc., d/b/a DaVita Clinical Research ("DCR"). Sponsor and DCR shall each be hereinafter
referred to as a "Party" and collectively as the "Parties".
Parties, this Work Order is entered into
pursuant to the Master Services Agreement by and between the Parties dated February 14, 2014, (the "Agreement"), which
is incorporated by reference herein.
Unless otherwise defined herein all capitalized
terms shall have the same meaning as in the Agreement.
The Parties hereby agree as follows:
1. Services. DCR shall conduct
the Services as outlined in Attachment 1 attached hereto, involving the Study Device entitled "A Clinical Safety Study
of the Aethlon HemopurifierrE0 in Chronic ESRD Patients with HCV Infection" (the "Study"), bearing protocol
ID# AEMD-IDE-2013 v1.09, dated March 31, 2014, together with any of its subsequent revisions (the "Protocol"), the provisions
of which are attached hereto and incorporated herein by reference. The Protocol may be revised only at the direction of and with
the prior written approval of the Sponsor, subject to subsequent approval by the Institutional Review Board ("IRB").
2. Deliverables. The Deliverables
required to be delivered pursuant to this Work Order shall include: Intentionally omitted.
3. Acceptance Criteria. The
Acceptance Criteria for any such Deliverables shall be as follows: Intentionally omitted.
4. Work Order Term. The term
of this Work Order shall commence as of the Effective Date and shall continue until the Services are completed, unless otherwise
agreed to by the parties ("Work Order Term"). If the Agreement expires during the Work Order Term then the Parties specifically
agree that this Work Order shall survive and the terms of the Agreement shall continue to apply to this Work Order during the
Work Order Term.
5. Budget and Payment Schedule.
Sponsor shall make payments to DCR for Fees and Expenses in accordance with the terms of the Agreement and the Payment Schedule
attached hereto as Attachment 2.
6. Subcontractor. Through execution
of this Work Order and the applicable Clinical Trial Agreement or Investigator Agreement (form of which is attached hereto as
Attachment 4), Sponsor approves DCR's use of third party consulting physicians (each an "Investigator")
at certain sites, including a network of dialysis centers owned and operated by a DCR affiliate (each a "Site").
7. Invoicing and Payment Detail.
A. Invoices to Sponsor shall be sent to Sponsor via e-mail
at:
Name: Jim Frakes
e-mail: jfrakes@aethlonmedical.com
B. Payment to DCR shall be made electronically as follows:
Bank Name: Wells Fargo
Bank ABA/Routing #: XXXXXXX*
Account Name: Total Renal Research, Inc.
Account Number: XXXXXXX*
C. All payments shall reference project number: 13-M-0249-00
7. Conflict. To the extent that
the terms of the attachments hereto conflict with either the terms of the Agreement or this Work Order such terms shall be controlled
by the Agreement or Work Order, as applicable.
8. Delay of Study. In the event
of a Sponsor derived postponement of Hemopurifiere treatment (including but not limited to: Device shipment, Device usability,
Study approval by governing boards), or a Sponsor-derived postponement or cancellation of the Study, Sponsor and DCR will negotiate
the cost consequences with the intent that DCR shall be paid for activities and services earned (including any non-cancellable
items) for their participation in the Study.
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Signatures to follow.
[*] This material has been omitted
pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
IN WITNESS WHEREOF,
the Parties have caused this Work Order to be executed by their duly authorized representatives as of the Effective Date.
ATTACHMENT 1
Services
The following Services will be provided
by DCR to Sponsor with respect to the Study as described in the Sponsor Protocol and in accordance with the terms of the Agreement:
1. Site Management and Clinical Study Conduct
A. DCR will conduct site management
administrative services ("Services") for Study Sites in accordance with the Protocol, attached hereto and incorporated
herein. The Services will include: (i) selection of Sites for the Study including (1) the ability to enroll the desired number
of patients; (2) availability of an appropriate population to meet the inclusion and exclusion criteria; (3) identification of
proposed Investigators for each Site prior to his/her participation in the Study (it being understood that Sponsor reserves the
right to approve or disapprove individual Investigators); and (4) confirming that prospective, replacement and current clinical
investigators are not listed by the FDA as unacceptable to conduct clinical investigation; (ii) the preparation of all Investigational
Review Board (IRB) materials to be submitted to a central IRB and assistance, as needed, to those Sites (if any) using their own
internal IRB; (iii) providing payments to Sites or Investigators, or both, upon and subject to receipt of funds from Sponsor; (iv)
providing or coordinating ongoing onsite orientation and training of all Investigators and their support personnel as needed with
regard to compliance with the Protocol; and (v) providing confirmation of accountability of Investigator performance with regard
to the following aspects of the Study conducted at the respective Sites: (1) the number of subjects screened for the Study; (2)
the number of qualified subjects participating in the Study; and (3) the number of acceptable completed case report forms resulting
from the Study.
B. It is understood and agreed that
Services shall not include the clinical activities of any Investigator under an Investigator Agreement or a Clinical Trial Agreement,
as applicable, and that each Investigator is personally responsible for the conduct of the Study in which s/he participates and
shall exercise his/her own independent medical judgment. DCR's responsibilities with respect to Investigators shall be limited
to those responsibilities specifically set forth in this Work Order. DCR will contract with each Investigator for their services
on the Study using an Investigator Agreement or a Clinical Trial Agreement, as applicable, substantially in the form attached hereto
as Attachment 4. DCR shall not perform the Study with an Investigator who has not entered into an Investigator Agreement or for
whom a Clinical Trial Agreement has not been entered into.
C. DCR shall perform the Services and
DCR shall inform the Investigator of his/her obligation to perform the Study in compliance with generally accepted standards of
Good Clinical Practice as set forth in Title 21 of the U.S. Code of Federal Regulations, the Protocol, instructions provided by
Sponsor and all applicable local, state and federal laws and regulations governing the performance of clinical investigations
including but not limited to the Federal Food, Drug, and Cosmetic Act, and regulations and guidances of the U.S. Food and Drug
Administration (FDA), the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and all other applicable
medical privacy laws and regulations; and any conditions imposed by the IRB.
D. The Study shall commence upon execution
of this Work Order and the applicable Investigator Agreement(s) or the Clinical Trial Agreement(s), as applicable. The Study shall
enroll up to ten (10) patients meeting all Protocol eligibility requirements. Sponsor shall not be obligated to pay any sums for
tests performed on individuals who do not meet all Protocol eligibility criteria for the Study or for additional individuals who
are enrolled in the Study without Sponsor's prior written approval. In the case where DCR enrolls ten (10) subjects, and one or
more subjects discontinues, DCR will contact Aethlon regarding enrollment of additional subjects to meet Aethlon's primary endpoint.
Notwithstanding the foregoing, if Sponsor and DCR agree in writing to increase the number of subjects for the Study, Sponsor shall
pay DCR additional compensation for such additional subjects as may be agreed upon between the parties.
E. DCR shall, as part of the Services,
use its best efforts to cause all Investigators to: (i) timely submit to DCR, Sponsor and/or Sponsor's designee, clean and completed
original case report forms for each Study subject as provided in the Protocol; and (ii) provide to DCR (and DCR will then provide
to Sponsor) completed FDA form 1572 and sufficient accurate financial information on FDA forms 3454/3455 to allow Sponsor to submit
complete and accurate certification or disclosure statements as required by 21 C.F.R. Part 54 and promptly update this information
if any relevant changes occur during the course of each Study, and for one year following the completion of the Study.
F. At the completion of the Services
for the Study by DCR or upon the earlier termination of the Agreement or this Work Order, all materials, information and all other
data owned by Sponsor with respect to the transactions covered by this Agreement, regardless of the method of storage or retrieval,
shall be delivered to Sponsor in such form as is then currently in the possession of DCR, or in such data media formats as are
set forth in the Protocol. Sponsor shall pay the costs of delivery of such materials, information and other data from DCR to Sponsor.
Alternatively, at Sponsor's written request, such materials and data may be retained by DCR for Sponsor for an agreed-upon time
period, or disposed of pursuant to the written directions of Sponsor. If materials are so retained, Sponsor shall pay a to-be-determined
fee for storage by DCR of records and materials after completion or termination of the Services. DCR, however, reserves the right
to retain, at its own cost and subject to the confidentiality provisions herein, copies of all materials that may be needed to
satisfy regulatory requirements or to resolve disputes regarding the Study.
G. During the term of this Agreement,
DCR will permit Sponsor's representatives (unless such representatives are competitors of DaVita HealthCare Partners Inc.) to examine
or audit the work performed hereunder upon reasonable advance notice during regular business hours to determine that the Study
is being conducted in accordance with the Protocol. Any access to any Study Sites granted by DCR to Sponsor's representatives hereunder
shall be limited to purposes related to the Study.
H. If Sponsor is providing Device for purposes of the Study,
then neither Investigators nor DCR shall bill third party payers for such Device. Neither Investigators nor DCR shall bill third
party payers for Study related items and services except as permitted by applicable payer coverage rules.
ATTACHMENT 2
Payment Schedule, Payment Terms and
Budget
1.0 Payment Terms
1.1 The Budget set forth herein is based
on the specific charges applicable for the Services. The Budget will change to reflect modifications in the scope of Services.
Applicable DCR service fees, as related to enrollment, will also change with said modifications. Sponsor shall pay to DCR the amounts
specified in the Budget in accordance with the payment schedule outlined in the Payment Schedule. The parties acknowledge and agree
that the terms and conditions of the Budget are confidential and shall be treated as Confidential Information in accordance with
the provisions of Section
11 of the Agreement. Payments will be
reconciled as a part of the financial reconciliation at the time of the final payment set forth in the Payment Schedule.
1.2 Sponsor will reimburse DCR monthly
on a completed-visit-per-Subject basis in accordance with the Budget herein. In the event of an amendment to the Protocol that
modifies the Services to be provided under this Work Order, Sponsor and DCR shall negotiate in good faith any modification to the
payments hereunder in an amount equal to the Services added or eliminated by the Protocol amendment and agree to this change in
writing (email is sufficient). Furthermore, pricing for both Study Site and DCR Services may be subject to change in accordance
with any change in Study scope. Completed-visit-per-Subject payment due, including any screen failure payments that may be payable
under the terms of this Work Order, will be made based upon prior month enrollment data as entered into the DCR Clinical Trial
Management System (CTMS) and on submission of an invoice by DCR to this effect. All screen failures will be paid at the screening
rate. DCR shall, verify and reconcile this enrollment data with Sponsor, and appropriate payment adjustments shall be made on the
presentation of an invoice from DCR. Sponsor shall provide proper documentation necessary to complete said reconciliation. DCR
Services will be invoiced to Sponsor in accordance with the progression of the Study.
1.3 In the event of premature termination of this Work Order
by Sponsor for any reason other than for DCR's breach, Sponsor shall pay DCR for services performed up to and including the date
of termination and expenses incurred up until the date of termination in accordance with the budgeted amounts set forth in the
Budget. Upon receipt of such notice of termination DCR will, and will direct the study Site and Investigator to, take all reasonable
steps to cease conduct of the Study as soon as reasonably possible and to protect the safety, heath, and welfare of the subjects
participating the Study. The parties agree to work collaboratively in the orderly termination of the study, under the direction
of the Sponsor. Sponsor shall pay DCR for the additional services involved in Study termination, according to the amounts set forth
in the Budget for such services and other reasonable, documented Study procedures or expenses.
1.4 All payments shall be payable in U.S. dollars and made within thirty (30) days of
Sponsor’s receipt of an invoice dealing DCR’s Services under this Work Order or incurrence of pass-through
expenses, and only after full execution of this Work Order. If any portion of any invoice is disputed, then Sponsor shall pay
the undisputed amounts as set forth in the preceding sentence and the Parties shall use good faith efforts to reconcile the
disputed amount as soon as practicable. Sponsor shall pay DCR interest in an amount equal to one percent (1%) per month (or
the maximum lesser amount permitted by law) of all undisputed amounts owing hereunder and not paid within forty-five (45)
days of the date of the invoice.
1.5 DCR shall be responsible for making monthly payments to the Site and Investigator upon Site’s
entry of completed study activities into the Clinical Trrial Management System (CTMS).
1.6 Terms of the budget shall remain confidential.
2.0 Payment Schedule
Patient compensation for study time and effort will be paid to DCR on a monthly bases with the
concurrent study visit payment. Patients will be compensated for each completed visit by the Study Site. Payment for
patients who are terminated prior to the end of the study will be prorated for actual visits completed.
[*] This material has been omitted
pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
2.2 DCR Project Management of XXXXXXX* of the total invoiced
patient and site pricing costs will be added to each monthly invoice.
2.3 All per occurrence fees and pass
through costs payable hereunder shall be paid in full within 30 days of Sponsor's receipt of invoice from DCR.
2.4 Disposal fee for used Hemopurifier
will be paid by Sponsor to DCR following last patient last visit.
2.5 The following will be retained for each Site in the Study:-
i) Site Close Out Visit
iii) Record Storage Fee
Which will be paid by Sponsor to DCR promptly
following the occurrence of all of the following events: a) final acceptance by Sponsor of all CRFs b) all data clarifications
issued, and c) upon satisfaction of all other applicable conditions set forth in the Agreement. Sponsor shall make all efforts
to complete these activities in a timely basis. Sponsor shall notify DCR upon each site's official completion of the above conditions.
[*] This material has been omitted
pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
[*] This material has been omitted
pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
[*] This material has been omitted
pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
ATTACHMENT 4
Form of Clinical Trial Agreement
CLINICAL TRIAL AGREEMENT
This Clinical Trial Agreement (Agreement), effective
as of __________________ , 2014, is entered into by and among [NAME OF INSTITUTION] (Institution), Total Renal
Research, Inc., d/b/a DaVita Clinical Research with offices located at 825 South 8th Street, Suite 300, Minneapolis,
MN 55404 (DCR), Aethlon Medical Inc. with offices located at 8910 University Center Lane, Suite 660, San Diego,
CA 92122 (Sponsor) and [NAME OF INVESTIGATOR], M.D. (Investigator).
Background
Sponsor is engaged in research
and development of blood purification medical devices including the conduct of clinical trials involving the use of Hemopurifier®
(Study Device). Institution and the Investigator are engaged in the treatment of patients with chronic early stage renal
disease. Sponsor and DCR have entered into a Master Services Agreement and Work Order pursuant to which DCR will provide site management
services in connection with the Study (as defined below). The clinical study contemplated by this Agreement (the Study) is
of mutual interest and benefit to the Institution, Investigator and Sponsor; and Sponsor Protocol No. ID# AEMD-IDE-2014 entitled
""A Clinical Safety Study of the Aethlon Hemopurifie? in Chronic ESRD Patients with HCV Infection"," dated
May 13, 2013, which shall guide the performance of the Study has been prepared by Sponsor and accepted by the Institution and DCR
(such protocol, together with any of its subsequent amendments, the Protocol).
NOW, THEREFORE, in consideration
of the foregoing premises and the covenants contained herein the parties agree as follows:
1. SCOPE OF WORK
The Investigator shall carry
out the Study in a professional, competent manner in accordance with the Protocol, the terms of this Agreement and any applicable
Institution policies. Institution shall use its best efforts to ensure that the Investigator shall carry out the Study in accordance
with the Protocol and the terms of this Agreement. The Protocol shall be provided to DCR and the Investigator by Sponsor.
2. PERFORMANCE PERIOD AND ENROLLMENT OF SUBJECTS
The Study will commence upon
execution of this Agreement and will continue until completion of the Study as required by the Protocol (including any amendments
thereto), unless this Agreement is terminated earlier pursuant to Section 5 hereof.
3. SERIOUS ADVERSE EXPERIENCE REPORTING
If Institution and/or Investigator receives
notice of a Serious Adverse Experience (defined herein) related to the investigational Device, Institution and/or Investigator
shall provide Sponsor with notice within twenty-four (24) hours of learning of the event and provide such additional information
thereafter as reasonably requested by Sponsor. Furthermore, upon Sponsor's reasonable request, Institution and/or Investigator
shall promptly investigate any such Serious Adverse Experience and shall submit follow-up reports of new information in
a timely manner. "Serious Adverse Experience" refers to an experience that has any serious adverse effect on
health or safety or any life-threatening problem caused by, or associated with, a Device, if that effect, problem, or death was
not previously identified in nature, severity, or degree of incidence in the investigational plan or application, or any other
unanticipated serious problem associated with a Device that relates to the rights, safety, or welfare of subjects. Any untoward
event which occurs regardless of its causality, including any side effect, injury, toxicity or sensitivity reaction
during the testing of protocol treatments (whether or not considered Device-related), will be designated as an unanticipated adverse
effect and recorded on the adverse events page of the Case Report Form (CRF).
4. PAYMENT
Cost and payment terms are set forth in
Exhibit A of this Agreement and incorporated herein by reference. The parties acknowledge and agree that, as between
DCR, Institution and Investigator, the terms and conditions of Exhibit A are confidential and shall be treated by
DCR, Institution and Investigator as Confidential Information in accordance with the terms and conditions of Section 6.2 of this
Agreement. Without limiting the generality of the foregoing, neither DCR, nor Sponsor, nor Institution, nor Investigator shall
disclose the terms and conditions of Exhibit A without the prior written consent of the others, unless such disclosure
is required by applicable law. Institution represents and warrants that the compensation provided under the terms of this Agreement
shall be consistent with fair market value in arm's length transactions, and has not been determined in any manner with regard
to, or has been given in exchange for, any implicit or explicit agreement to provide favorable procurement decisions with regard
to Sponsor's products, or to the value or volume of any business generated between the parties, and that the services to be performed
under the Agreement do not and will not involve the counseling or promotion of a business arrangement or other activity that violates
any state or federal law.
5. TERMINATION
A. This Agreement may be terminated:
| (1) | by DCR or the Institution upon thirty (30) days' prior
written notice; |
| (2) | by Sponsor immediately upon written notice; |
| (3) | by
either DCR, the Institution or Sponsor immediately if the Investigator is unable to continue
to serve and a successor acceptable to both the Institution and Sponsor is not available;
or |
| (4) | by
either DCR, the Institution or Sponsor upon the occurrence of an event qualifying as
a termination event as described in the Protocol. |
B.
Immediately upon receipt of a notice of termination, the Investigator shall stop enrolling Subjects into the Study and shall cease
conducting procedures on Subjects already enrolled in the Protocol as directed by Sponsor, to the extent medically permissible
and appropriate.
C.
In the event that this Agreement is terminated in accordance with Section 5.A, DCR will credit or return to Sponsor any funds
not expended or obligated by the Institution in connection with the Study prior to the effective termination date.
D.
Upon the effective date of termination, DCR shall conduct an accounting of expenses chargeable to Sponsor. Sponsor shall
verify the charges presented by DCR and if Sponsor objects to any charge, the parties shall use best efforts to resolve
expeditiously any disagreement. Within thirty (30) days after receipt of adequate documentation or resolution of any dispute,
Sponsor shall make payment to DCR for:
| (1) | all services properly rendered and monies properly expended by the Institution
prior to the date of termination and not yet paid for; and |
| (2) | reasonable non-cancelable obligations properly incurred for the Study by
the Institution prior to the effective date of termination. |
E.
Termination of this Agreement by any party shall not affect the rights and obligations of the parties accrued prior to the effective
date of the termination. The rights and duties under Sections 4, 5, 6, 7, 8, 9, 11, 12, and 13.1-13.9 survive the termination or
expiration of this Agreement.
6. CONFIDENTIALITY
6.1 Publicity.
A. Except as is necessary
to comply with applicable laws and regulations or to enforce their respective rights under this Agreement, or to a party's legal
or financial advisors, and except as otherwise agreed to by the parties in writing, the parties shall keep the material terms of
this Agreement confidential. If this Agreement is required to be filed by any party with the Securities and Exchange Commission,
such party shall not file this Agreement with the Securities and Exchange Commission without first notifying the other parties
and seeking confidential treatment for any provisions of this Agreement that any other party believes would disclose trade secrets,
confidential commercial or financial information that would impair the value of the contractual rights represented by this Agreement
or provide detailed commercial and financial information to competitors or third parties.
B. No party shall make
(or have made on its behalf) any oral or written release of any statement, information, advertisement or publicity in connection
with this Agreement which uses the other party's name, symbols, or trademarks without the other party's prior written approval.
The obligations of this Section shall survive termination of this Agreement.
C. Study results may
not be published or referred to, in whole or in part, by Investigators without the prior expressed written consent of Sponsor.
Sponsor shall include, or cause to be included in any reports, presentations, and publications it makes concerning the Study a
statement that clearly indicates the role of DaVita Healthcare Partners Inc. as a clinical research site for such Study.
6.2 Confidentiality.
A. "Confidential
Information" means any and all information, data, and know-how, whether written or oral, technical or non-technical,
including, without limitation, any financial, business, marketing, or operations information, formulas, manufacturing processes,
basic scientific data, prior clinical data, Data (defined herein) or other information provided by or on behalf of a Party or
its Affiliates (the Disclosing Party) to the other Party pursuant to this Agreement (the Receiving Party).
As between DCR, Institution and Investigator, Confidential Information shall also include the terms and conditions of
Exhibit A of this Agreement.
B. Confidential Information
shall remain the sole and exclusive property of the Disclosing Party. For a period of five (5) years after the receipt of Confidential
Information hereunder, the Receiving Party agrees to hold such Confidential Information in confidence, to only use such Confidential
Information for the purposes of this Agreement and to only disclose such Confidential Information to its employees, agents, Affiliates,
contractors and representatives who are bound by an obligation of confidentiality. Receiving Party also agrees to use the same
degree of care to avoid disclosure of such Confidential Information as the parties employ with respect to their own confidential
information of like importance, but in no event less than a reasonable amount of care;
C. Exceptions. Confidential Information shall not include
information that:
(i) at the time of disclosure,
or thereafter, has become publicly available, except by breach of this Agreement;
(ii) was in the possession
of the Receiving Party prior to disclosure hereunder as evidenced by competent records;
(iii) was developed
by a Receiving Party independently from and without reference to Confidential Information received hereunder; or
(iv) a Receiving Party
received from a third party without an obligation of confidentiality.
D. Compliance with Applicable
Law. Notwithstanding any other terms contained herein, a Receiving Party may disclose Confidential Information received
hereunder to the extent required by applicable law provided that such Receiving Party provides notice to the Disclosing Party as
soon as reasonably practicable under the circumstances and agrees to cooperate in Disclosing Party's efforts to obtain a protective
order or other appropriate remedy. Any information disclosed pursuant to this paragraph shall otherwise remain Confidential Information.
E.
Return of Confidential Information. Upon request of a Disclosing Party, a Receiving Party shall return to such Disclosing
Party all Confidential Information received from that Disclosing Party pursuant to this Agreement.
F.
Subject Information. If DCR, Institution, Investigator, Sponsor or Sponsor's Designee (as defined below) shall come into
contact with any Study Subject's medical records, each of them shall hold in confidence the identity of such Subject and shall
comply with all applicable law(s) regarding the confidentiality of such subject's records. To the extent that DCR, the Investigators,
or any other person or entity involved in the Study (other than as a subject) is a "covered entity" under the Health
Insurance Portability and Accountability Act of 1996 (HIPAA), DCR warrants that DCR will cause Investigators to
obtain a valid HIPAA Privacy Rule authorization, as prescribed in 45 C.F.R. §164.508(b) from each individual participating
in the Study permitting disclosures from DCR and/or the Investigators to Sponsor and any and all other clinical trial service
providers of the individual's "protected health information" (as defined in HIPAA) as required by and in accordance with the
Study, which such authorization will permit Sponsor's use [and disclosure] of such protected health information for the purposes
of monitoring the accuracy and completeness of the research data, performing clinical and scientific research, and medical product
development.
7. PROPRIETARY RIGHTS
A. All information
directly resulting from the Study conducted under this Agreement, including all Data (as defined herein), results, conclusions,
discoveries, inventions, know-how and the like, whether patentable or not (collectively, Inventions) shall be promptly and
fully disclosed by Institution and/or Investigator to Sponsor. Data shall mean all case report forms and other Study data generated
by DCR, Institution or Investigator in the course of conducting the Study and required to be delivered to Sponsor pursuant to the
Protocol.
B. Sponsor shall
have the unrestricted right to freely utilize all such Inventions in whatever manner it desires. All Inventions shall be the sole
property of Sponsor excluding the identity of any Study Subject or such Subject's "protected health information" (as
defined in the HIPAA Privacy Rule) unless the Subject has provided authorization or a waiver has been provided. Institution and/or
Investigator shall assist Sponsor, at Sponsor's expense, in the preparation of all documentation necessary to effectuate and perfect
Sponsor's rights in such Inventions.
C. The use of the
Study Device by DCR, the Institution or the Investigator for any purpose outside of the Study is prohibited by this Agreement.
While Sponsor in no way condones the use of the Study Device for any purpose outside of the Study, if such work is performed, all
data, results, conclusions, observations, discoveries, inventions, ideas, know-how, procedures, advancements and the like, whether
patentable or not, shall be treated in all respects as Inventions in accordance with this Agreement and shall be the sole property
of Sponsor.
D. Neither Sponsor,
DCR, nor the Institution transfers to the other by operation of this Agreement any patent right, copyright right, or other proprietary
right of any party, except as described in this Agreement.
8. PUBLICATION
Neither DCR, Institution
nor Investigator shall publish any articles or make any presentations relating to the services, Sponsor Confidential Information
or referring to Data generated pursuant to this Agreement, without the prior written consent of Sponsor.
9. CHANGES TO THE PROTOCOL
A.
If generally accepted standards of Good Clinical Practice as set forth in Title 21 of the U.S. Code of Federal Regulations (C.F.R.)
(GCP) relating to the safety of Subjects require a deviation from the Protocol, these standards shall be followed.
Any party who becomes aware of the need for a deviation from the Protocol shall immediately inform the other parties to this Agreement
of the facts causing the deviation as soon as the facts are known to the party. In addition, the Investigator shall promptly inform
the Institution's institutional review board ("IRB") of the deviation.
B.
Sponsor may also, from time to time, make changes to the Protocol. Any such changes may not be implemented before approval by
the IRB. If these changes shall affect the cost of the Study, DCR and Sponsor shall agree to the changes in Exhibit A to
reflect the changes in the Study cost and the change shall not be implemented until Sponsor agrees in writing to assume responsibility
for the new costs.
10. MATERIALS
Sponsor agrees to provide Study Device
and any reagents that may be required during the course of the Study. Access to any Materials shall be limited to only those persons
who, under the Investigator's direct control, shall be using Materials for the Study. The term "Materials"
shall include the Study Device, reagents and materials derived from Subjects enrolled in the Study, including, but not limited
to, blood, bone marrow, sera, and other biological materials. At no time shall any Materials be used for any purpose other than
as described in the Protocol or transferred to any third party without Sponsor's prior written consent. Upon termination or completion
of the Study, all unused Materials shall be returned to Sponsor or destroyed at Sponsor's sole option; provided, however, that
Institution shall be permitted to retain blood, bone marrow, sera, and other biological materials as needed for record keeping
purposes in accordance with Institution's policies and practices.
11. COMPLIANCE WITH LAW AND ACCEPTED PRACTICE
A. The Institution and the
Investigator shall perform the Study in compliance with generally accepted standards of GCP, the Protocol, consistent instructions
provided by Sponsor and all applicable local, state and federal laws governing the performance of clinical investigations including
but not limited to the Federal Food, Drug, and Cosmetic Act, regulations and guidances of the United States Food and Drug Administration
(FDA). The Institution and Investigator shall permit Sponsor and agencies such as the FDA to inspect Study
records including the Subjects' medical records. The subject informed consent form signed by the Subjects shall provide for access
to the Subjects' medical records by Sponsor and by agencies such as the FDA.
B. The Investigator will
direct and monitorthe Study in accordance with Section 1. Sponsor shall have the right to (a) monitor and audit the activities
of the Investigator in the conduct of the Study, and (b) monitor and audit the collection of Inventions from the Study.
C. Each of the
Institution and Investigator hereby represents and warrants that neither the Institution, the Investigator, nor any of the
Institution's nor Investigator's agents or employees rendering services in connection with the Study, respectively,is
presently: (1) excluded, debarred, suspended or otherwise ineligible to participate in federal health care programs as
defined in 42 U.S.C. Sec. 1320a-7b or from federal procurement or non-procurement activities as defined in Executive Order
12689 (collectively "Ineligible"); or (2) debarred pursuant to the Generic Drug Enforcement Act of 1992, 21 U.S.C.
Sec. 335 (a), as amended, or any similar state law or regulation (collectively "Debarred") or; (3) convicted of a
criminal offense that falls within the ambit of 42 U.S.C. Sec 1320a-7(a), but has not yet been excluded, debarred, suspended,
or otherwise declared ineligible ("Convicted"). The Institution and Investigator also each represent and warrant
that if any of their respective agents or employees becomes Ineligible, Debarred or Convicted during the Term, they will
notify Sponsor promptly, and in any event no later than five (5) business days after receiving notification of the
Ineligibility, Debarment, or Conviction.
D. The arrangements set
out in this Agreement do not take effect and are not intended to take effect as an incentive or reward for a person's past, present
or future willingness to prescribe, administer, recommend (including formulary recommendations), purchase, pay for, reimburse,
authorize, approve or supply any product or service sold or provided by Sponsor or as an incentive to grant an interview for any
sales or marketing purposes.
E. The parties shall
not pay or promise to pay, or authorize the payment of any money, or give, promise to give or authorize the giving of anything
of value to any government official, healthcare professional or person affiliated with a healthcare organization to obtain or retain
business or secure improper advantage. Further, the parties represent and warrant that they have not made prior to the Effective
Date any payment, authorization, promise or gift of the sort described in this paragraph.
F. The parties shall
comply with the requirements of the U.S. Foreign Corrupt Practices Act and any other applicable anti-corruption national or international
laws and regulations. Further, each party hereby represents, warrants and covenants that they have not, and agrees that it will
not, in connection with the transactions contemplated by this Agreement, make, promise or offer to make any payment or transfer
anything of value: (a) to any foreign government official or to an intermediary for payment to any foreign government officials;
or (b) to any political party. Further, no payments or transfer of value shall be made which have the purpose or effect of public
or commercial bribery, acceptance of or acquiescence in extortion, kickbacks or other unlawful or improper means of obtaining or
retaining business.
G. If any governmental
or regulatory authority conducts or gives notice to Institution of its intent to conduct an inspection at Institution's facilities
or take any other regulatory action with respect to the Study, Institution will promptly give Sponsor notice thereof, including
all information pertinent thereto. Sponsor acknowledges that Sponsor may not direct the manner in which Institution fulfills its
obligations to permit inspection by governmental entities. It shall not be a breach of this Agreement for Institution to comply
with the demands and requests of any governmental entity in accordance with Institution's judgment or to fail to inform and consult
with Sponsor before complying with any such demand or request. Except as permitted by this section, neither Institution nor Investigator
shall communicate with the FDA or any other governmental agency concerning the subject matter hereof unless required by law or
requested to do so by Sponsor and, then, only upon prior consultation with Sponsor.
H. Neither DCR, Investigator
nor Institution shall bill third party payers for Study related items and services except as permitted by applicable payer coverage
rules.
12. INDEMNIFICATION, DISCLAIMER AND INSURANCE
A. Subject
to the provisions of Section 12.D, Sponsor will defend, indemnify and hold harmless DCR, Investigator, Institution, and DCR's
and Institution's parent corporations, affiliates, officers, directors, employees, agents, and their successors and assigns (each,
a Indemnified Party) from and against any and all costs (including reasonable attorneys' fees), expenses,
damages and judgments or liabilities (collectively, Losses) arising from or related to any third party claims,
demands, actions or suits, for illness or personal or bodily injury (including death) to a Subject participating in the Study.
The foregoing indemnification action shall not apply in the event and to the extent that (a) such Losses are determined to have
resulted from any Indemnified Party's gross negligence, intentional misconduct or negligence; or (b) Investigator(s) or those
assisting them did not adhere to the terms of the Protocol and to Sponsor's written instructions relative to the use of substances
administered in the Study or failed to employ reasonable care in the conduct of the Study in conformity with the generally accepted
standards of the medical community or violated any applicable laws or regulations in any material respect. For purposes of this
Section 12.A, a violation shall be deemed "material" if it adversely affects the safety, health or welfare of Study
subjects.
B. It is understood and agreed that,
Investigators are not employees or agents of DCR and that DCR shall not be required to indemnify Sponsor or its agents or employees
for any claims, suits or damages arising as a result of, or in connection with, the willful misconduct or negligent acts or omissions
of any Investigator. DCR shall, however, cause each Investigator to maintain professional liability insurance with policy limits
of at least $1,000,000 per claim and $3,000,000 annual aggregate.
C. In the event a Subject participating
in the Study suffers an illness or injury which the Investigator and Sponsor reasonably determine to be an adverse reaction to
the Sponsor material being tested in the Study or Study procedures required by the Protocol then, subject to the Indemnified Party's
compliance with Section 12.D, Sponsor shall pay all necessary and reasonable medical expenses directly associated with the emergency
medical treatment of such adverse reaction. In the event diagnostic procedures are required to determine the etiology of the patient's
symptoms, Sponsor shall pay the reasonable expense of such diagnostic work-up without regard to the final diagnosis, so long as
Sponsor agrees to the need for the diagnostic work-up, but Sponsor shall not be responsible for expenses connected with the subsequent
treatment of the patient if the work-up establishes that the patient's symptomology is not related to the administration of the
Sponsor material being tested in the Study or Study procedures required by the Protocol. Payments under this Section 12.0 shall
be in addition to any payments specified in Section 12.A.
D. To receive the benefit of
indemnification under Section 12.A, the Indemnified Party must promptly notify Sponsor in writing of a claim or suit and
provide reasonable cooperation (at Sponsor's expense) and tender to the Sponsor authority to defend or settle the claim or
suit; provided, however, that Sponsor shall not enter into any settlement of any claim that is based on any admission
of liability by an Indemnified Party without such Indemnified Party's consent. Sponsor has no obligation to indemnify the
Indemnified Party in connection with any settlement made without the Sponsor's written consent. The Indemnified Party has the
right to participate at its own expense in the claim or suit and in selecting its own counsel therefor. The Indemnified Party
shall cooperate with Sponsor, as reasonably requested, at Sponsor's cost and expense.
E. EXCEPT FOR BREACH OF CONFIDENTIALITY
OBLIGATIONS UNDER SECTION 6.2 AND EXCEPT AS OTHERWISE PROVIDED IN SECTION 12.A WITH RESPECT TO THIRD PARTY CLAIMS IN NO EVENT SHALL
ANY PARTY BE LIABLE TO THE OTHER FOR PUNITIVE, EXEMPLARY, CONSEQUENTIAL, INCIDENTAL, SPECIAL, OR INDIRECT DAMAGES, INCLUDING LOSS
OF PROFITS, IN TORT OR CONTRACT, AS A RESULT OF THIS AGREEMENT.
13. GENERAL PROVISIONS.
13.1 Governing Law. This Agreement
shall be governed and construed in accordance with the laws of Delaware to the exclusion of any choice or conflict of laws rule
or provision that would result in the application of the substantive law of any other jurisdiction.
13.2 Amendment and Waiver. No provision
of or right under this Agreement shall be deemed to have been waived by any act or acquiescence on the part of any party, its agents
or employees, but only by an instrument in writing signed by an authorized officer of each party. No waiver by any party of any
breach of this Agreement by any other party shall be effective as to any other breach, whether of the same or any other term or
condition and whether occurring before or after the date of such waiver.
13.3 Relationship of the Parties. In
the activities connected with the Study, DCR, Institution and Investigator are, and shall in all respects act as, independent contractors
without the capacity to bind Sponsor or any other party, and DCR, Institution and Investigator also agree that they are not acting
as agents or employees of Sponsor. Notwithstanding anything contained in this Agreement to the contrary, DCR, Institution and Investigator
shall not initiate or participate in any communications with the FDA or any other governmental agency concerning the subject matter
hereof unless required by law or requested to do so by Sponsor and, then, only upon prior consultation with Sponsor.
13.4 Assignment. Neither the Institution
nor the Investigator may assign or transfer any of their rights or obligations under this Agreement without the prior written consent
of Sponsor and DCR. Any attempted assignment in violation of the provisions of this Section 13.4 will be void. This Agreement shall
bind and inure to the benefit of the parties hereto and their respective successors and permitted assigns.
13.5 Notices. Unless otherwise provided
herein, any notice, report, payment or document to be given by one party to the other shall be sent by registered or certified
mail, postage prepaid, or by overnight courier service. Notices may be sent by facsimile or e-mail, if confirmed by also sending
as described above.
13.6 Severability. If any provision(s)
of this Agreement should be illegal or unenforceable in any respect, the legality and enforceability of the remaining provisions
of this Agreement shall not in any way be affected.
13.7 Captions; Word Meanings. Captions
of the sections and subsections of this Agreement are for reference purposes only and do not constitute terms or conditions of
this Agreement and shall not limit or affect the meaning or construction of the terms and conditions hereof. Words such as herein,
hereinafter, hereof and hereunder refer to this Agreement as a whole and not merely to a section or paragraph
in which such words appear, unless the context otherwise requires. The singular shall include the plural, and each masculine, feminine
and neuter reference shall include and refer also to the others, unless the context otherwise requires.
13.8 Entire Agreement. This Agreement
(including Exhibit A and the Protocol) represents the entire and integrated agreement between the Parties and supersedes
all prior negotiations, representations or agreements, either written or oral, regarding its subject matter
13.9 Conflict or Inconsistency. In
case of a conflict between this Agreement and the Protocol, this Agreement shall control. The parties agree that they have participated
equally in the formation of this Agreement and that the language and terms of this Agreement shall not be construed against any
party by reason of the extent to which such party or its professional advisors participated in the preparation of this Agreement.
13.10 Counterparts. This Agreement
and any Work Order may be executed in one or more counterparts, including .PDF copies or counterparts submitted by facsimile, each
of which shall be deemed an original and all of which shall constitute the same instrument.
13.11 Further Assurances. Each party
covenants and agrees that, subsequent to the execution and delivery of this Agreement and without any additional consideration,
it will execute and deliver any further legal instruments and perform any acts which are or may become reasonably necessary to
effectuate the purposes of this Agreement.
(signature
page follows]
IN WITNESS WHEREOF the parties have caused this Agreement
to be executed on their behalf by their duly authorized representatives intending it to take effect as an instrument under seal
as of the Effective Date.
CONFIDENTIAL
DO NOT REPRODUCE OR DISCLOSE
Exhibit A
BUDGET, PAYMENT TERMS AND PAYMENT SCHEDULE
[BUDGET TO BE ATTACHED]
1.0 Payment Terms.
1.1
The Budget set forth herein is based on the specific charges applicable for the services of the Institution and/or Investigator.
Sponsor shall pay to DCR the amounts specified in The Budget in accordance with the payment schedule outlined in the Payment Schedule
outlined below in section 2.0. DCR shall then pay the Institution and/or Investigator monthly payments upon entry of completed
study activities into the Clinical Trial Management System (CTMS). The parties acknowledge and agree that the terms and conditions
of The Budget are confidential and shall be treated as Confidential Information in accordance with the provisions of Section 4
of this Agreement. Payments will be reconciled as a part of the financial reconciliation at the time of the final payment set
forth in the Payment Schedule.
1.2
In the event of an amendment to the Protocol that modifies the services to be provided under this Agreement, Sponsor and DCR shall
negotiate any modification to the payments hereunder in an amount equal to the services added or eliminated by the Protocol amendment
and agree to this change in writing (email is sufficient). Furthermore, pricing for Institution and/or Investigator services may
be subject to change in accordance with any change in Study scope. Completed-visit-per-Subject payment due, including any screen
failure payments that may be payable under the terms of this Agreement, will be made based upon prior month enrollment data as
entered into the DCR Clinical Trial Management System (CTMS). All screen failures will be paid at the screening rate. DCR shall,
at its discretion, verify and reconcile this enrollment data with Sponsor, and appropriate payment adjustments from Sponsor shall
be made on the presentation of an invoice from DCR, or as to Study Site, at DCR's discretion. Sponsor or designee shall provide
proper documentation necessary to complete said reconciliation.
1.3
All amounts required to be paid by DCR to Institution and/or Investigator under this Agreement are exclusive of any and all duties
and taxes, however designated, levied or based on this Agreement or the Services delivered hereunder, including, without limitation,
any personal property, retail sales, goods and services, use or value added taxes and whether such taxes are now in force or subsequently
levied. Sponsor shall pay and be responsible for all such taxes (excluding taxes based on DCR's net income and the Federal Insurance
Contributions Act, workers' compensation, unemployment and withholding taxes concerning DCR personnel). Sponsor shall promptly
reimburse DCR for any such taxes which DCR pays directly.
[*] This material has been omitted
pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
FIRST AMENDMENT
TO WORK ORDER #01
This First Amendment (the
"Amendment") to Work Order #01 (the "Work Order") is made and entered into effective as of the 71h
day of January, 2015, (the "Effective Date") by and between Aethlon Medical Inc. with offices located at 8910 University
Center Lane, Suite 660, San Diego, CA 92122 (hereinafter referred to as "Sponsor"), and Total Renal Research,
Inc. d/b/a DaVita Clinical Research with offices located at 825 South 8th Street, Suite 300, Minneapolis, MN 55404 ("DCR").
Sponsor and DCR shall each be hereinafter referred to as a "Party" and collectively as the "Parties".
WHEREAS, the Parties entered into the Work Order on the 16th day of May, 2014, pursuant to the Master Services Agreement
effective the 14th day of February, 2014 (the "Agreement");
WHEREAS, the Parties wish to amend the terms of the Work
Order as outlined in this Amendment;
NOW, THEREFORE, in consideration of the mutual
promises and covenants in the Agreement, Work Order and this Amendment, the Parties agree as follows:
1. | Attachment 3, Study Conduct and Site Management Services Budget is hereby deleted in its entirety and replaced with the attached Study Conduct and Site Management Services Budget to reflect the addition of: |
| |
· Study
Subject travel expense reimbursement |
| |
· Central
lab identification assistance and protocol amendment review |
| |
· IStat
Celite Act Cartridges procurement |
| |
|
2. | Sponsor hereby agrees that DCR shall procure, and Sponsor shall pay for, the iStat Celite Act Cartridges ("Cartridges") for use in the Study. Cartridges will be procured in quantities of twenty-five (25) Cartridges per box. DCR shall invoice Sponsor, and Sponsor shall reimburse DCR, the current market price of each box of Cartridges. Any unused Cartridges shall, at Sponsor's expense, be shipped to Sponsor or destroyed, as requested by Sponsor in writing (for which email shall suffice). In addition, DCR shall invoice and Sponsor shall pay to DCR an administrative fee of XXXXXXXX* of the total cost of each Cartridge box procured for the Study. Sponsor shall pay DCR in accordance with the terms of the Agreement and Work Order. |
3. | Except as stated in this Amendment all terms and conditions of the Agreement and Work Order remain in full force and effect. |
Signature page follows
[*] This material has been omitted pursuant
to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
[*] This material has been omitted pursuant
to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
[*] This material has been omitted pursuant
to a request for confidential treatment and filed separately with the Securities and Exchange Commission.
EXHIBIT 23.1
CONSENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent
to the incorporation by reference in the Registration Statements of Aethlon Medical, Inc. on Form S-8 (File Nos. 333-182902, 333-168483,
333-168481, 333-164939, 333-160532, 333-145290, 333-127911, 333-114017 and 333-49896) and Form S-1 (File No. 333-201334) of our
report dated June 25, 2015 relating to the audits of the consolidated financial statements of Aethlon Medical, Inc. and Subsidiary
(collectively the “Company”) as of March 31, 2015 and 2014 and for each of the years then ended appearing in this
Annual Report on Form 10-K for the year ended March 31, 2015.
/s/ Squar, Milner, Peterson,
Miranda & Williamson, LLP
Newport Beach,
California
June 25, 2015
EXHIBIT 31.1
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a),
AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, James Joyce, certify that:
1. I have reviewed this Annual Report on Form 10-K
of Aethlon Medical, Inc.;
2. Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this Report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s)
and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant's other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: June 26, 2015
|
/s/ JAMES A. JOYCE |
|
|
JAMES A. JOYCE |
|
|
CHIEF EXECUTIVE OFFICER |
|
|
(PRINCIPAL EXECUTIVE OFFICER ) |
|
EXHIBIT 31.2
CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a),
AS ADOPTED
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY
ACT OF 2002
I, James Frakes, certify that:
1. I have reviewed this Annual Report on Form 10-K
of Aethlon Medical, Inc.;
2. Based on my knowledge, this report does not
contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements,
and other financial information included in this Report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s)
and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
(a) |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
|
(b) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
(c) |
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
|
(d) |
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. The registrant's other certifying officer(s)
and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
|
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
|
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: June 26, 2015
|
/s/ JAMES B. FRAKES |
|
|
JAMES B. FRAKES |
|
|
CHIEF FINANCIAL OFFICER |
|
|
(PRINCIPAL FINANCIAL OFFICER) |
|
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual Report of Aethlon
Medical, Inc. (the “Registrant”) on Form 10-K for the fiscal year ended March 31, 2015 as filed with the Securities
and Exchange Commission on the date hereof, I, James A. Joyce, Chief Executive Officer of the Registrant, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. Based on my knowledge, the Annual Report
on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
and
2. The information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Aethlon Medical,
Inc.
|
|
Dated: June 26, 2015 |
/s/ JAMES A. JOYCE |
|
James A. Joyce |
|
Chief Executive Officer |
|
Aethlon Medical, Inc. |
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906, has been provided to Aethlon Medical, Inc. and will be retained
by Aethlon Medical, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION
1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In connection with the Annual Report of Aethlon
Medical, Inc. (the “Registrant”) on Form 10-K for the fiscal year ended March 31, 2015 as filed with the Securities
and Exchange Commission on the date hereof, I, James B. Frakes, Chief Financial Officer of the Registrant, certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. Based on my knowledge, the Annual Report
on Form 10-K fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
and
2. The information contained in such Annual
Report on Form 10-K fairly presents, in all material respects, the financial condition and results of operations of Aethlon Medical,
Inc.
|
|
Dated: June 26, 2015 |
/s/ JAMES B. FRAKES |
|
James B. Frakes |
|
Chief Financial Officer |
|
Aethlon Medical, Inc. |
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