SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended March 31, 2006
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For transition period from ________ to __________
COMMISSION FILE NUMBER 0-21846
AETHLON MEDICAL, INC.
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(Name of Small Business issuer in its charter)
NEVADA 13-3632859
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3030 Bunker Hill Street, Suite 4000,
San Diego, CALIFORNIA 92109
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(Address of principal executive office) (Zip Code)
ISSUER'S TELEPHONE NUMBER (858) 459-7800
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
NONE NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK--$.001 PAR VALUE
(TITLE OF CLASS)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB.[x]
Revenues of the registrant for the fiscal year ended March 31, 2006 were $0. The
aggregate market value of the Common Stock held by non-affiliates was
approximately $3,815,000 based upon the closing price of the Common Stock of
$0.37, as reported by the NASDAQ Over-the-Counter Bulletin Board ("OTCBB") on
June 15, 2006.
The number of shares of the Common Stock of the registrant outstanding as of
June 15, 2006 was 25,602,304.
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):
Yes [ ] No [X]
TABLE OF CONTENTS
PAGE
Forward Looking Statements 1
PART I.
Item 1. Description of Business 1
Item 2. Description of Property 9
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 16
Item 7. Financial Statements 33
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 33
Item 8A. Controls and Procedures 33
Item 8B. Other Information 34
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 34
Item 10. Executive Compensation 39
Item 11. Security Ownership of Certain Beneficial Owners and Management
And Related Stockholder Matters 41
Item 12. Certain Relationships and Related Transactions 42
Item 13. Exhibits 43
Item 14. Principal Accountant Fees and Services 46
Signatures 47
Certifications
FORWARD - LOOKING STATEMENTS
All statements, other than statements of historical fact, included in
this Form 10-KSB are, or may be deemed to be, "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act"). The safe harbor for forward looking statements provided by the
Private Securities Litigation Reform Act of 1995 does not apply to us. We note,
however, that such forward-looking statements involve assumptions, known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Aethlon Medical, Inc. ("Aethlon
Medical", "We" or the "Company") to be materially different from any future
results, performance, or achievements expressed or implied by such
forward-looking statements contained in this Form 10-KSB. Such potential risks
and uncertainties include, without limitation, Food and Drug Administration
("FDA") and other regulatory approval of our products, patent protection on our
proprietary technology, product liability exposure, uncertainty of market
acceptance, competition, technological change, and other risk factors detailed
herein and in other of our filings with the Securities and Exchange Commission.
Each forward-looking statement should be read in context with, and with an
understanding of, the various other disclosures concerning our Company and our
business made elsewhere in this annual report as well as other public reports
filed with the Securities and Exchange Commission. The forward-looking
statements are made as of the date of this Form 10-KSB, and we assume no
obligation to update the forward-looking statements or to update the reasons
actual results could differ from those projected in such forward-looking
statements.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL OVERVIEW:
We are a developmental stage medical device company focused on expanding the
applications of our Hemopurifier (TM) platform technology which is designed to
rapidly reduce the presence of infectious viruses and other toxins from human
blood. As such, we focus on developing therapeutic devices to treat acute viral
conditions brought on by pathogens targeted as potential biological warfare
agents and chronic viral conditions including HIV/AIDS and Hepatitis-C. The
Hemopurifier (tm) combines the established scientific technologies of
hemodialysis and affinity chromatography as a means to mimic the immune system's
response of clearing viruses and toxins from the blood before cell and organ
infection can occur. The Hemopurifier (tm) cannot cure these afflictions but can
lower viral loads and allow compromised immune systems to overcome otherwise
serious or fatal medical conditions.
On March 10, 1999, Aethlon, Inc., a California corporation ("Aethlon"), Hemex,
Inc., a Delaware corporation ("Hemex"), the accounting predecessor to the
Company and Bishop, Inc. ("Bishop"), a publicly traded "shell" company completed
an Agreement and Plan of Reorganization (the "Plan") structured to result in
Bishop's acquisition of all of the outstanding common shares of Aethlon and
Hemex (the "Reorganization"). The Reorganization was intended to qualify as a
tax-free transaction under Section 368(a)(1)(B) of the 1986 Internal Revenue
Code, as amended. Under the Plan's terms Bishop issued 733,500 and 1,350,000
shares of its common stock to the common stock shareholders of Aethlon and
Hemex, respectively, such that Bishop then owned 100% of each company. Upon
completion of the transaction, Bishop was renamed Aethlon Medical, Inc.
On January 10, 2000, we acquired all of the outstanding common stock of Syngen
Research, Inc. ("Syngen") in exchange for 65,000 shares of our common stock in
order to establish research facilities in San Diego, California, as well as to
employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a recognized
research scientist in the area of DNA synthesis and antisense. Syngen has no
significant assets, liabilities or operations and primarily served as the entity
through which Dr. Tullis performed research consulting services. As such, the
acquisition was accounted for as an acquisition of assets in the form of an
employment contract with Dr. Tullis and not as a business combination. Dr.
Tullis is presently the Chief Scientific Officer of Aethlon Medical, Inc.
On April 6, 2000, we completed the acquisition of Cell Activation, Inc.
("Cell"). In accordance with the Purchase Agreement, we issued 99,152 shares of
restricted common stock and 50,148 options to purchase common stock in exchange
for all of the outstanding common shares and options to purchase common stock of
Cell. After the transaction, Cell became a wholly-owned subsidiary of the
Company. The acquisition was accounted for as a purchase. At March 31, 2001, we
determined that goodwill recorded during the acquisition of Cell was impaired
due to the permanent suspension of operations by Cell and, accordingly, treated
the related goodwill as fully impaired.
THE HEMOPURIFIER:
The Hemopurifier (tm) is an broad spectrum platform technology that combines the
established scientific methods of hemodialysis (artificial kidneys) and affinity
chromatography (a method that allows the selective capture of viruses and
related toxins) as a means to augment the natural immune response of clearing
infectious virus and toxins from the blood. The therapeutic goal of each
Hemopurifier (tm) application is to improve patient survival rates by reducing
viral load and preserving the immune function. We believe that the Hemopurifier
(tm) will enhance and prolong the benefit of current infectious disease drug
therapies and fill the void for patients who inevitably become resistant to such
therapies. The Hemopurifier (tm) is also positioned to treat those infected by
biological agents for which there are no effective drug or vaccine treatments.
The Hemopurifier (tm) is not a substitute for antiviral drug or vaccine
therapies, as it is solely positioned to treat drug and vaccine resistant
pathogens.
1
Traditionally, hemodialysis (kidney dialysis) has been used to remove urea and
other small metabolic toxins that accumulate in the blood of people with acute
or chronic kidney failure (also called renal failure). Acute renal failure is
generally treated in hospital intensive care units using a continuous filtration
therapy. Chronic renal failure is treated through intermittent, thrice-weekly
kidney dialysis in a specialized clinic setting. A catheter is most often the
method used to gain access to the blood which is then pumped through thousands
of hollow micro-fibers running the length of the kidney dialysis cartridge.
Within the cartridge, toxins, urea and excess water pass through small pores in
the walls of the micro-fibers and are removed by a separately circulating
dialysis fluid outside of the fibers. Blood cells and molecules that are too
large to pass through the pores are retained and the cleansed blood is returned
back to circulation.
The Hemopurifier (tm) modifies this process in several ways to provide an
efficient method to selectively remove targeted viruses and toxins. First, the
pores of the micro-fibers within the Hemopurifier (tm) are large enough to allow
circulating infectious viruses and toxins to separate from the blood and diffuse
through the walls of the fibers. Second, within the cartridge but outside of the
fibers the Hemopurifier (tm) contains a unique material (the "affinity agent")
which selectively binds to the viruses or toxins. Finally, because of the
affinity agent's ability to bind to viruses and toxins, there is no need for a
separate circulation of a dialysis solution with the Hemopurifier (tm). This
provides the flexibility to use the Hemopurifier (tm) either on kidney dialysis
machines (global infrastructure), by employing a simple pump mechanism or using
a patient's own blood pressure (in field or military applications).
RESEARCH AND DEVELOPMENT:
In fiscal 2001, we realigned our research and development activities from
developing Hemopurifiers (tm) to treat harmful metals to developing
Hemopurifiers (tm) for the treatment of chronic viral conditions (HIV/AIDS and
Hepatitis-C). As a result of this strategic realignment, we consolidated all of
our research and development functions into our San Diego offices during the
fourth quarter of fiscal 2001. This consolidation was completed during the first
fiscal quarter of 2002 and our facilities in Buffalo, New York, were closed. In
fiscal 2004 we expanded our research efforts to include the development of
Hemopurifier (tm) technology against potential biological weapons and associated
acute viral pathogens. Additionally, in fiscal 2006 we began research into the
capture of the H5N1 Avian Flu virus.
MANUFACTURING:
We plan to manufacture in our current facilities a small number of cartridges
sufficient to complete clinical trials. Ultimately we will outsource cartridge
manufacturing to a GMP/ISO9001 compliant contract manufacturer. Hemopurifiers
(tm) developed to treat bioweapons candidates will likely be sold directly to
the US Military and the Federal Government. Sale of Hemopurifiers (tm) to treat
chronic viral conditions will be marketed through established healthcare
distribution channels.
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. Presently we do not have clinical trial liability insurance
coverage. There can be no assurance that future insurance coverage will be
adequate or available and 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.
APPLICATIONS:
The Aethlon Hemopurifier (tm) is designed to fill voids in drug and vaccine
therapy. Potential applications include the clearance of mutant viral strains
that cause treatment resistance to drug therapy when available, and as a first
line treatment option for viral conditions that are already known to be drug and
vaccine resistant. Each viral candidate can be further defined as envelope
viruses with glycosolated proteins that reside on the envelope surface
surrounding the virus. Some well-known envelope viruses include HIV/AIDS, SARS,
West Nile, Ebola and influenza.
CHRONIC VIRAL INFECTION:
Human Immunodeficiency Virus (HIV) - Of all the chronic viral conditions, HIV
infection is a high-profile, worldwide problem resulting in the devastation of
populations in many countries. It is estimated the approximately 950,000 people
in the United States, and 40 million people worldwide, are infected with HIV.
About 40,000 people in the United States, and close to 5 million people
worldwide, become infected by HIV each year. Three million people die of
HIV/AIDS associated illnesses every year worldwide. Generally, HIV is spread
through sexual transmission, mother-to-child transmission, inadequately screened
blood transfusions and needle sharing among intravenous drug users.
2
Hepatitis C Virus (HCV) - HCV is a major cause of acute hepatitis and chronic
liver disease, including cirrhosis and liver cancer. Globally it is estimated
that there are 170 million persons infected (with 3.9 million in the US). About
80% of newly infected patients progress to developing a chronic infection
however the majority of all infected patients are initially asymptomatic.
Cirrhosis develops in from 10% to 20% of persons chronically infected and liver
cancer develops in 1% to 5% of patients infected over a period of 20 to 30
years. HCV is spread primarily by direct contact with human blood via
inadequately screened blood transfusions, the re-use of improperly sterilized
needles and needle sharing among intravenous drug users.
ACUTE VIRAL INFECTION:
Acute viral infections attack people relatively quickly, last a number of days
and result in high mortality rates. Examples include certain strains of
influenza (H5N1 avian influenza), smallpox and viral hemorrhagic fevers (VHFs).
Influenza - In the US, seasonal influenza infects more than 15 million people
each year and results in some 36,000 deaths annually. However avian influenza,
an infection found naturally in birds, has arisen as a new concern and potential
pandemic. To date approximately 225 human cases of laboratory-confirmed avian
flu have been reported worldwide and, of these, 128 cases (56%) have resulted in
death. The majority of the confirmed cases have contracted the H5N1 virus from
close contact with infected birds but there appears to be some evidence (in
Indonesia, for example) that human to human transmission of the virus is
possible. If the avian flu virus has mutated to a form that permits human to
human infection, the potential exists for an influenza pandemic that some have
predicted could rival that of the 1918 Spanish flu that killed millions of
people worldwide.
Smallpox - Smallpox is a serious, contagious and sometimes fatal infectious
disease with no specific treatment available other that vaccination. Smallpox is
transmitted through direct face-to-face contact, exposure to infected bodily
fluids or exposure to infected blankets and bedding and has an incubation period
of from 7 to 17 days. Untreated, smallpox in its most common form, has an
overall fatality rate of approximately 30%. Smallpox was eliminated in the US by
1949 with the last case worldwide recorded in Somalia in 1977. Because of its
eradication, few people have any resistance to the smallpox virus and, given its
relatively long incubation period and virulence, were the smallpox virus
reintroduced into the general population, the results could be catastrophic.
Viral Hemorrhagic Fevers (VHFs) - VHFs are a group of envelope viruses which can
infect humans and which can be extremely severe and often result in death. These
include Ebola, Marburg and Lassa hemorragic fevers. In general these viruses are
transmitted to people when activities of infected animal "hosts" overlap with
those of humans. VHFs can be transmitted when humans have contact with body
excretions from infected rodents, when humans are bitten by infected mosquitos
and ticks, when humans care for or slaughter infected livestock or when humans
have close contact with infected people or their bodily fluids. Outbreaks of
VHFs are sporadic, period and often unpredictable. Symptoms include a marked
fever, fatigue, dizziness, muscle aches and exhaustion which progress to
bleeding under the skin, shock, bleeding of internal organs, and sometimes from
the mouth, nose or ears. VHFs are almost always fatal.
CURRENT TREATMENTS FOR VIRAL INFECTIONS:
The most effective tools in controlling viral infections have been successful
vaccines. Smallpox, polio, measles, mumps and yellow fever have been controlled
or eliminated from nature through the use of effective vaccines. Some vaccines
are developed and manufactured each year to provide some protection against
anticipated strains of flu virus prior to the typical winter flu season. These
flu vaccines are developed based on international surveillance and scientists'
estimations about which types and strains of viruses will circulate in a given
year. Vaccines, however, do not exist for most viral infections and are
difficult to develop as viruses can mutate to become vaccine resistant; These
viruses essentially become moving targets for the vaccine "silver bullet". A
good example of this is the HIV virus: An AIDS vaccine has been "just around the
corner" for 25 years despite intense scientific effort and billions of dollars
invested. Another issue is that present vaccine technology requires large
fermentation systems which are expensive to set up and are already in short
supply. Restrictions on overall production capacity are already so severe that
some companies have had to delay the introduction of approved products to the
public.
In the case of chronic viral diseases for which vaccines do not exist antiviral
drugs and combinations of inhibitor drugs can be used to manage, but not cure
the disease. For example, for HIV/AIDS the use of multiple antiretroviral drugs,
fusion inhibitors and reverse transcriptase inhibitors are used to block the
progression of the disease, but these treatments inevitably become less
effective and ultimately ineffective over time.
THE HEMOPURIFIER (tm) TO TREAT VIRAL INFECTIONS:
The Hemopurifier (tm) provides an ideal solution to reduce the burden of
circulating envelope viruses because the affinity compounds immobilized within
the Hemopurifier (tm) binds to the glycosolated proteins that reside on the
surface of all envelope viruses. Thus the Hemopurifier (tm) is a potential
treatment alternative for viral infections where vaccines do not yet exist,
where viruses have mutated to render combinatorial drug therapies ineffective or
in emergencies where the viral pathogen may not have been identified.
3
BIOLOGICAL WEAPONS AND BIOTERRORISM:
Since September 11, 2001, the Federal Government has heightened its concern and
developed plans in anticipation of a potential bioterrorist attack. Government
officials recently signed into law, Project Bioshield, a $5.6 billion program
that provides for advance purchase contracts of countermeasures against
biological weapons. Additional legislation to increase the effort to combat
bioterror agents are currently under discussion in both the House and Senate. A
bioterror attack involves the deliberate release of viruses, bacteria or other
agents to purposely cause illness or death in people or animals. In particular,
the government anticipates the possible reengineering of viruses and/or the use
of agents with particularly long incubation periods to maximize the number of
people infected prior to detection or quarantine. The Department of Health and
Human Services (HHS), and the Centers for Disease Control and Prevention (CDC)
have prioritized bioterrorism agents by category according to various criteria.
These criteria establish that the high-priority agents can be easily transmitted
from person to person, result in high death rates with the potential for major
public health impact, might cause public panic and social disruption and would
require significant government preparation for preparedness. Included in the
high-priority bioterror threat category are the Smallpox Virus and Viral
Hemorrhagic Fevers (VHFs), both of which are conditions able to be addressed by
the Aethlon Hemopurifier(TM).
Smallpox is a particularly dangerous bioterror agent both because of its
mortality rate (30% if left untreated) and its long incubation period (7 to 14
days). It can be spread through human to human contact, direct contact with
bodily fluids or contaminated objects (like bedding or clothing). Because of its
long incubation period, by the time a smallpox outbreak is identified, a high
number of individuals would likely be infected. Fortunately, in the case of
known strains of smallpox virus, the government has significant quantities of
vaccine which, in the case of smallpox, can be effective even after a person is
infected. Unfortunately, bioweapon programs in certain countries are likely to
have developed smallpox viral strains for which no vaccine exists. Were one of
these strains acquired by terrorist groups and introduced into the general
population, the outcome could be catastrophic with no treatment other than
supportive care being available.
Viral hemorrhagic fevers include variants like Ebola, Lassa, Machupo, Marburg,
Dengue and Hantaviruses. These viruses, if released into the general public,
would be particularly unpleasant. Symptoms for VHFs begin with flu-like fevers,
fatigue, dizziness and muscle aches and progress over a few days to internal
bleeding, severe shock, nervous system malfunction, coma, delirium, seizures and
death. There is basically no cure, only supportive therapy and in limited cases
anti-viral drugs (Ribavirin) have shown some effectiveness.
THE HEMOPURIFIER TO TREAT VIRAL BIOWEAPONS EXPOSURE:
In the event of exposure to a smallpox variant virus or one of the VHFs the
Hemopurifier (tm) may be the only treatment available to reduce the viral burden
of theses pathogens. The ability to bind and capture envelope viruses whether
they be engineered smallpox, ebola hemorrhagic fever or lassa hemorrhagic fever
will be critical to supporting patients' immune systems and increasing chances
of survival. A practical consideration to keep in mind is that in the early
stages of a bioweapon attack the pathogen deployed is likely to be unknown. For
example, in the case of Sudden Acute Respiratory Syndrome (SARS), it took from
November 2002 until March of 2003 to identify the virus involved. In a bioterror
attack the ability to have a broad-spectrum treatment that will be effective for
a wide range of viruses will be critically important. The utilization of the
Hemopurifier (tm) in such cases, because if its ability to capture a
broad-spectrum of viruses, will be crucial, especially in the post-exposure
treatment of unidentified pathogens.
THE HEMOPURIFIER (tm) AND CANCER:
Studies have shown that cancer surgery can cause a significant elevation of
circulating growth factors and related agents associated with the would healing
process. The agents of interest, such as vascular endothelial growth factor
(VEGF), promote the growth of new blood vessels, which provide nutrition and
oxygen to the cancerous cells, allowing them to multiply and tumors to grow. The
use of inhibitors of VEGF and other growth factors has proved effective in
controlling the growth and spread of many types of cancer; however, the use of
these agents following surgery would interfere with the healing process.
We plan to combine the core principles of our Hemopurifier (tm) platform with
intellectual property developed by researchers at Boston University as a means
to prevent the spread of cancer following surgery. The post-surgery deployment
of the Hemopurifier (tm) with immobilized growth factor affinity agents offers
the potential to control the levels of growth factors in circulation during this
critical period without affecting local growth factor levels near the surgical
wound.
4
HUMAN CLINICAL STUDIES:
On April 19, 2006 we announced the successful completion of our Human Safety
Study conducted at the Apollo Hospital in Delhi, India under the supervision Dr.
Vijay Kher. Aethlon demonstrated the safety of treatment using the
Hemopurifier(TM) in all patients enrolled in the study. Each patient suffered
from end-stage renal disease (requiring kidney dialysis treatment) as well as
Hepatitis-C infection. A total of four patients met the conditions to be
enrolled and were treated in the study. The average patient age exceeded 50
years and, as a result of their compromised condition, spent greater that 50% of
their waking hours in bed. The treatment regimen required multiple treatments
over a two-week time frame. Blood chemistry and the general health of the
patients were monitored throughout the study and, at the conclusion of the
study, no material adverse events attributable to the Hemopurifier (TM) had been
observed.
ANIMAL STUDIES:
On May 24, 2005, we disclosed the results of an animal safety study related to
Hemopurifier(TM) treatment procedures that were performed on a limited number of
New Zealand white rabbits. In general, the animals tolerated the
Hemopurifier(TM) treatment well and were able to move about freely within a
restricted space. The most common interruption during the procedure was related
to excessive animal movement that resulted in low arterial side pressures due to
partial occlusion of the catheter. Such issues are not expected in human
treatment. We did not observe any adverse events during the Hemopurifier(TM)
animal study. The choice to utilize rabbits in the study was related to the
similarity in the infection pathogenesis of rabbitpox with human smallpox. As
smallpox efficacy studies are not allowed in humans, related animal studies are
the primary challenge for market approval as a treatment countermeasure.
INDUSTRY AND COMPETITION:
The pharmaceutical, biotechnology and medical device industries are intensely
competitive and we may not be able to develop, perfect or acquire rights to new
products with commercial potential. We compete with biotechnology, medical
device and pharmaceutical companies that have been established longer than we
have, have more experience in commercializing their technology, have a greater
number of products on the market, have greater financial and other resources and
have other technological or competitive advantages. We also have competition in
the development of technologies and processes and in acquiring personnel and
technology from academic institutions, governmental agencies, and other private
and public research organizations. The factors that affect the likelihood of
commercial success for our potential products include: the development of
alternative therapies that are more user-friendly for customers or physicians or
are more effective and safer, the ability to develop cost-effective products,
the ability to acquire, develop, maintain and enforce intellectual property
rights and the availability of financial and technical resources. We cannot be
certain that one or more of our competitors will not receive patent protection
that dominates, blocks or adversely affects our clinical studies, product
development or business; will not benefit from significantly greater sales and
marketing capabilities; or will not develop products that are accepted more
widely than ours.
We are advancing our Hemopurifier (TM) technology as a treatment to enhance and
prolong current drug therapies by removing the viral strains that cause drug
resistance. The Hemopurifier (TM) is also designed to prolong life for infected
patients who have become drug resistant and to provide the only treatment option
where no vaccines exist . Therefore, we do not believe that the Hemopurifier
(TM) competes with the current drug therapy treatment standard. However, if the
industry considered the Hemopurifier (TM) to be a potential replacement for drug
therapy, then the marketplace for the Hemopurifier (TM) would be extremely
competitive. We are also pursuing the development of Hemopurifiers (TM) to be
utilized as treatment countermeasures against biological weapons. In this regard
and as described above, we are targeting the treatment of pathogens in which
current treatments are either limited or do not exist. We believe that we are
the sole developer of viral filtration systems (Hemopurifiers (TM) to treat
chronic viral diseases. We do, however, face competition from producers of the
following alternative treatment options for the biodefense industry:
Antiviral Drug Competition - For viral infections, specific drugs can be
effective, but there are no drugs that are effective against the broad-spectrum
of known pathogenic viruses. At present, only a few antiviral drugs are
available to treat the multitude of viruses that may be used as biological
weapons. For example, Ribavirin is the treatment of choice for certain
hemorrhagic fever viral infections, but has no current application to Ebola and
Marburg infections. Some newer antiviral drugs have shown significant promise in
animal models, and limited case reports in humans are encouraging. The lack of
broad-spectrum antivirals takes on added significance in light of the ability of
many viruses to rapidly develop resistance. Current efforts to define the
genetic details of normal and pathogenic agents on a molecular level promise the
hope of new points of attack. Genomic analysis of the viral pathogen and the
animal model response to infection provide valuable information enabling the
5
development of novel treatment and prevention strategies. However, even the
rapid elucidation of the genetic structure of a specific pathogen does not
provide sufficient information to design an effective cure. For example, while
SARS has been known of for more than a year and several strains have had their
complete genetic sequence determined, no effective treatment has yet emerged.
One promising approach in drug development has been the advent of combinatorial
chemistry, which provides the ability to rapidly synthesize huge libraries of
related compounds, many of which have never been seen before. However, the real
roadblock to progress is the need to laboriously screen each new compound for
efficacy in fighting a particular disease. In that sense, combinatorial drugs
confront the same problem as the traditional method of screening of plant and
animal extracts for active compounds that block viral or bacterial replication.
Thus while science can radically increase the number of drug candidates, the
slow step will always be showing that they are both effective and safe. Even
effective new drugs represent an irresistible selective pressure on natural and
unnatural pathogens to develop resistance, something at which they are clearly
very efficient.
Vaccine Development Competition - Historically, the most effective tool in
controlling infections has been vaccines. Promising vaccines are being tested
for some of the more virulent diseases, but research is hampered by the need to
conduct the studies in secure laboratories. There are other issues with relying
on vaccines as our primary protection against a biological weapons attack. While
vaccination may be an effective prophylaxis in a military setting, it would be
problematic for civilian populations for several reasons:
o The agent used would have to be known prior to its deployment.
With the exception of the smallpox vaccine, vaccination is of
no use post-exposure.
o Even if every person in the United States could be vaccinated,
it would be impossible to vaccinate him or her against every
agent for which a vaccine is available.
o Even if a vaccine is available, it would only be useful if the
agent involved has not been genetically altered so that it is
drug or vaccine resistant.
Vaccines that are both efficacious and safe are notoriously difficult to
develop. History has shown that developing vaccines can be a slow process and
may not even be possible for highly mutable pathogens like HIV and Hepatitis C.
Moreover, current vaccine strategies often carry significant risk for
complications. For example, smallpox vaccine, which uses attenuated strains of a
live virus, can occasionally cause illness or death by infection from the very
organism that usually provides protection.
In terms of a bioterrorist attack, anthrax vaccine can serve as an example of
our presumed capability in treating a well recognized threat. Only one anthrax
vaccine, licensed in 1970, is available. This vaccine, produced by the Bioport
Corporation, consists of a membrane-sterilized culture filtrate of an avirulent,
non-encapsulated strain of anthrax. The data in support of the license consisted
of a single field study. The vaccine efficacy was 92.5% effective in this small
trial. In December 1985, 15 years after the vaccine was licensed, the FDA's
advisory panel reviewed the efficacy of the anthrax vaccine but did not review
the effectiveness of the current vaccine to inhalation exposure anthrax
infection. The shortcomings of the current vaccine have spurred studies of new
anthrax vaccine products. The new vaccines include protective antigen-based
vaccines, e.g., purified protein from B. ANTHRACIS culture or live-attenuated
spore vaccine. One of the immune correlates of protection of anthrax vaccines is
likely to be the antibody response to protective antigen. However, the
quantitative relation of anti-protective antigen antibody to protection has not
been established in humans. The relationship between neutralization of
protective antigen and the lethal effects of anthrax is currently being
investigated by the Department of Defense. The point to make here is that the
development of these new vaccines will take a significant amount of time during
which the population will remain without an effective vaccine treatment.
PATENTS:
We currently own or have license rights to a number of U.S. and foreign patents
and patent applications and endeavor to continually improve our intellectual
property position. We consider the protection of our technology, whether owned
or licensed, to the exclusion of use by others, to be vital to our business.
While we intend to focus primarily on patented or patentable technology, we may
also rely on trade secrets, unpatented property, know-how, regulatory
exclusivity, patent extensions and continuing technological innovation to
develop our competitive position.
In certain countries, medical devices are not patentable or only recently have
become patentable, and enforcement of intellectual property rights in some
countries has been limited or non-existent. Future enforcement of patents and
proprietary rights in many countries can be expected to be problematic or
unpredictable. We cannot guarantee that any patents issued or licensed to us
will provide us with competitive advantages or will not be challenged by others.
Furthermore, we cannot be certain that others will not independently develop
similar products or will not design around patents issued or licensed to us.
6
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.
LICENSING AGREEMENTS:
Effective January 1, 2000, we entered into an agreement with a related party
under which an invention and related patent rights for a method of removing HIV
and other viruses from the blood using the Hemopurifier(TM) were assigned to us
by the inventors in exchange for a royalty to be paid on future sales of the
patented product or process and shares of our common stock. On March 4, 2003,
the related patent was issued and we issued 196,078 shares of restricted common
stock.
On February 9, 2006, we entered into an option agreement with the Trustees of
Boston University which provides for the right to negotiate an exclusive license
for a Boston University patent BU05-41, "Method to Prevent Proliferation and
Growth of Metastases". It is our intention to effect such license within the
term of the option.
GOVERNMENT REGULATION
The Hemopurifier(TM) is a medical device subject to extensive and rigorous
regulation by FDA, as well as other federal and state regulatory bodies in the
United States and comparable authorities in other countries. Therefore, we
cannot assure that our Hemopurifier(TM) technology will successfully complete
any regulatory clinical trial for any of our proposed applications.
One of the main problems facing the FDA is the need to ensure public safety
while at the same time preventing unsafe treatments from reaching the public.
The balance between these competing pressures has resulted in a long and
deliberate process for approving new treatments, which is not responsive to the
urgent need for new treatments presented in the era of bioterrorism. For most
drugs, the principal research and development phases take one to three years
before a drug is even submitted to FDA for testing. A clinical research program
takes two to 10 years, depending on the agent and clinical indication. The
marketing application review period requires an average of one year. Once a
product is approved for market, long-term post-marketing surveillance,
inspections, and product testing must be performed to ensure the quality,
safety, and efficacy of the product, as well as appropriate product labeling.
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Unless an exemption
applies, each medical device we wish to commercialize in the United States will
require either prior 510(k) clearance or a PMA from FDA. Medical devices are
classified into one of three classes--Class I, Class II, or Class III--depending
on the degree or risk associated with each medical device and the extent of
control needed to ensure safety and effectiveness. Devices deemed to pose lower
risks are placed in either Class I or II, which requires the manufacturer to
submit to FDA a premarket notification requesting permission to commercially
distribute the device. This process is generally known as 510(k) clearance. Some
low risk devices are exempted from this requirement. Devices deemed by FDA to
pose the greatest risk, such as life-sustaining, life-supporting or implantable
devices, or devices deemed not substantially equivalent to a previously cleared
510(k) device, are placed in Class III, requiring premarket approval. If any
application of the Hemopurifier(TM) is not cleared as a 510(k), then it is
likely that such applications will be classified as Class III medical device.
510(K) CLEARANCE PATHWAY. When a 510(k) clearance is required, we must submit a
premarket notification to FDA demonstrating that our proposed device is
substantially equivalent to a previously cleared and legally marketed 510(k)
device or a device that was in commercial distribution before May 28, 1976 for
which FDA has not yet called for the submission of a PMA application. By
regulation, FDA is required to clear or deny a 510(k) premarket notification
within 90 days of submission of the application. As a practical matter,
clearance often takes significantly longer. FDA may require further information,
including clinical data, to make a determination regarding substantial
equivalence. If FDA determines that the device, or its intended use, is not
substantially equivalent to a previously-cleared device or use, FDA will place
the device, or the particular use, into Class III. The FDA has notified the
Company that it intends to classify the Hemopurifier (TM) as a Class III medical
Device.
PREMARKET APPROVAL PATHWAY. A PMA application must be submitted to FDA if the
device cannot be cleared through the 510(k) process. The PMA application process
is much more demanding than the 510(k) premarket notification process. A PMA
application must be supported by extensive data, including but not limited to
technical, preclinical, clinical trials, manufacturing and labeling to
demonstrate to FDA's satisfaction the safety and effectiveness of the device.
7
After a PMA application is submitted and FDA determines that the application is
sufficiently complete to permit a substantive review, FDA will accept the
application for review. FDA has 180 days to review an "accepted" PMA
application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, FDA may request additional information or clarification of
the information already provided. Also, an advisory panel of experts from
outside FDA may be convened to review and evaluate the application and provide
recommendations to FDA as to the approvability of the device. In addition, FDA
will conduct a preapproval inspection of the manufacturing facility to ensure
compliance with quality system regulations. New PMA applications or PMA
application supplements are required for significant modification to the
manufacturing process, labeling and design of a device that is approved through
the premarket approval process. Premarket approval supplements often require
submission of the same type of information as a premarket approval application,
except that the supplement is limited to information needed to support any
changes from the device covered by the original premarket approval application
and may not require as extensive clinical data or the convening of an advisory
panel.
CLINICAL TRIALS. Clinical trials are almost always required to support an FDA
premarket application and are sometimes required for 510(k) clearance. In the
United States, these trials generally require submission of an application for
an Investigational Device Exemption, or IDE, to FDA. The IDE application must be
supported by appropriate data, such as animal and laboratory testing results,
showing that it is safe to test the device in humans and that the testing
protocol is scientifically sound. The IDE must be approved in advance by FDA for
a specific number of patients unless the product is deemed a non-significant
risk device eligible for more abbreviated IDE requirements. Clinical trials for
significant risk devices may not begin until the IDE application is approved by
FDA and the appropriate institutional review boards, or IRBs, at the clinical
trial sites. Our clinical trials must be conducted under the oversight of an IRB
at the relevant clinical trial sites and in accordance with FDA regulations,
including but not limited to those relating to good clinical practices. We are
also required to obtain patients' informed consent that complies with both FDA
requirements and state and federal privacy regulations. We, FDA or the IRB at
each site at which a clinical trial is being performed may suspend a clinical
trial at any time for various reasons, including a belief that the risks to
study subjects outweigh the benefits. Even if a trial is completed, the results
of clinical testing may not demonstrate the safety and efficacy of the device,
may not be equivocal or may otherwise not be sufficient to obtain approval of
the product. Similarly, in Europe the clinical study must be approved by the
local ethics committee and in some cases, including studies with high-risk
devices, by the Ministry of Health in the applicable country.
PERVASIVE AND CONTINUING REGULATION. After a device is placed on the market,
numerous regulatory requirements continue to apply. These include:
o FDA's Quality System Regulation, or QSR, which requires
manufacturers, including third-party manufacturers, to follow stringent
design, testing, control, documentation and other quality assurance
procedures during all aspects of the manufacturing process;
o labeling regulations and FDA prohibitions against the promotion of
products for uncleared, unapproved or off-label uses;
o clearance or approval of product modifications that could
significantly affect safety or efficacy or that would constitute a
major change in intended use;
o medical device reporting, or MDR, regulations, which require that
manufacturers report to FDA if their device may have caused or
contributed to a death or serious injury or malfunctioned in a way that
would likely cause or contribute to a death or serious injury if the
malfunction were to recur; and
o post-market surveillance regulations, which apply when necessary to
protect the public health or to provide additional safety and
effectiveness data for the device.
After a device receives 510(k) clearance or a PMA, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, will require a new clearance or approval. FDA
requires each manufacturer to make this determination initially, but FDA can
review any such decision and can disagree with a manufacturer's determination.
The MDR regulations also require that we report to FDA any incident in which our
product may have caused or contributed to a death or serious injury or in which
our product malfunctioned and, if the malfunction were to recur, would likely
cause or contribute to death or serious injury.
FRAUD AND ABUSE. We may also directly or indirectly be subject to various
federal and state laws pertaining to healthcare fraud and abuse, including
anti-kickback laws. In particular, the federal healthcare program Anti-Kickback
Statute prohibits persons from knowingly and willfully soliciting, offering,
receiving or providing remuneration, directly or indirectly, in exchange for or
to induce either the referral of an individual, or the furnishing, arranging for
8
or recommending a good or service, for which payment may be made in whole or
part under federal healthcare programs, such as the Medicare and Medicaid
programs. Penalties for violations include criminal penalties and civil
sanctions such as fines, imprisonment and possible exclusion from Medicare,
Medicaid and other federal healthcare programs. The Anti-Kickback Statute is
broad and prohibits many arrangements and practices that are lawful in
businesses outside of the healthcare industry. In implementing the statute, the
Office of Inspector General, or OIG, has issued a series of regulations, known
as the "safe harbors." These safe harbors set forth provisions that, if all
their applicable requirements are met, will assure healthcare providers and
other parties that they will not be prosecuted under the Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely within one or more
safe harbors does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that do not fully
satisfy each applicable element of a safe harbor may result in increased
scrutiny by government enforcement authorities, such as the OIG.
INTERNATIONAL. International sales of medical devices are subject to foreign
governmental regulations, which vary substantially from country to country. The
time required to obtain clearance or approval by a foreign country may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may be different.
The primary regulatory environment in Europe is that of the European Union,
which has adopted numerous directives and has promulgated voluntary standards
regulating the design, manufacture, clinical trials, labeling and adverse event
reporting for medical devices. Devices that comply with the requirements of a
relevant directive will be entitled to bear CE conformity marking, indicating
that the device conforms with the essential requirements of the applicable
directives and, accordingly, can be commercially distributed throughout the
member states of the European Union, and other countries that comply with or
mirror these directives. The method of assessing conformity varies depending on
the type and class of the product, but normally involves a combination of
self-assessment by the manufacturer and a third-party assessment by a notified
body, an independent and neutral institution appointed by a country to conduct
the conformity assessment. This third-party assessment may consist of an audit
of the manufacturer's quality system and specific testing of the manufacturer's
device. Such an assessment is required in order for a manufacturer to
commercially distribute the product throughout these countries. ISO 9001 and ISO
13845 certifications are voluntary harmonized standards. Compliance establishes
the presumption of conformity with the essential requirements for a CE Marking.
We have completed preclinical studies that demonstrate the removal of HIV and
Hepatitis C virus from infected human blood. We have also completed animal
safety studies and demonstrated safety in humans treated at the Apollo Hospital
in Delhi, India. We are now preparing to submit an Investigational Device
Exemption ("IDE") with the FDA which we anticipate will lead to further human
studies in the United States.
SUBSIDIARIES
We have four dormant wholly-owned subsidiaries, Aethlon, Inc., Cell
Activation, Inc., Syngen Research, Inc., and Hemex, Inc.
EMPLOYEES
At March 31, 2006, we had five full-time employees, comprised of our
Chief Executive Officer, our Chief Science Officer, our Chief Financial Officer,
a research associate and a senior bioengineer. We utilize, whenever appropriate,
contract and part time professionals in order to conserve cash and resources. We
believe that our employee relations are good. None of our employees is
represented by a collective bargaining unit.
WHERE YOU CAN FIND MORE INFORMATION
We file annual reports on Form 10-KSB, quarterly reports on Form
10-QSB, current reports on Form 8-K and proxy and information statements and
amendments to reports files or furnished pursuant to Sections 13(a) and 15(d) of
the Securities Exchange Act of 1934, as amended. The public may read and copy
these materials at the SEC's Public Reference Room at 450 Fifth St NW,
Washington, DC 20549. The public may obtain information on the operation of the
public reference room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains a website (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding other companies, like us,
that file materials with the SEC electronically. Our headquarters are located at
3030 Bunker Hill Street, Suite 4000, San Diego, CA 92109. Our phone number at
that address is (858) 459-7800. Our website is www.aethlonmedical.com.
ITEM 2. DESCRIPTION OF PROPERTY
We currently rent approximately 3,200 square feet of executive office
space and laboratory space at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109 at the rate of $7,744 per month on a lease that expires on July
12, 2007.
9
ITEM 3. LEGAL PROCEEDINGS
We may be involved from time to time in various claims, lawsuits,
disputes with third parties or breach of contract actions incidental to the
normal course of business operations. We are currently not involved in any such
litigation or any pending legal proceedings that we believe could have a
material adverse effect on our financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 10, 2005, Aethlon Medical, Inc. (the "Company") held a special
meeting of stockholders at the Company's executive offices for the following
purposes: (1) to ratify the appointment of Squar, Milner, Reehl & Williamson,
L.L.P ("Squar Milner"), as the Company's independent auditors for the fiscal
year ending March 31, 2005 and (2) to approve an amendment to the Company's
Articles of Incorporation to increase the number of authorized shares of the
Company's common stock from 25,000,000 to 50,000,000. Stockholders holding an
aggregate of 10,624,365 shares of common stock of the Company voted in favor to
ratify the appointment of Squar Milner as the Company's independent auditors and
stockholders holding an aggregate of 10,238,794 shares of common stock of the
Company voted in favor of approving the amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of common stock from
25,000,000 to 50,000,000. The number of shares voting in favor of the two
proposals was sufficient for the approval of both proposals. The number of
shares voting against and/or abstaining from the vote were as follows: Proposal
1: 80,776 shares; Proposal 2: 469,347 shares.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
LIMITED PUBLIC MARKET FOR SHARES OF COMMON STOCK
Our Common Stock is quoted on the Over-The-Counter Bulletin Board. Our
trading symbol is "AEMD."
Our Common Stock has had a limited and sporadic trading history.
The following table sets forth for the calendar period indicated the quarterly
high and low bid prices for our Common Stock as reported by the OTCBB. The
prices represent quotations between dealers, without adjustment for retail
markup, mark down or commission, and do not necessarily represent actual
transactions.
HIGH LOW
---- ---
2006
1st Quarter $ 0.89 $ 0.27
2005
4th Quarter $ 0.60 $ 0.23
3rd Quarter $ 0.25 $ 0.19
2nd Quarter $ 0.33 $ 0.22
1st Quarter $ 0.50 $ 0.25
2004
4th Quarter $ 1.00 $ 0.46
3rd Quarter $ 0.95 $ 0.44
2nd Quarter $ 1.70 $ 0.54
1st Quarter $ 4.25 $ 0.37
We have not declared any cash dividends on our common stock since
inception and do not anticipate any in the future. Our current business plan is
to retain any future earnings to finance the expansion and development of our
business. Any future determination to pay cash dividends will be at the
discretion of our Board of Directors, and will be dependent upon our financial
condition, results of operations, capital requirements and other factors our
board may deem relevant at that time.
There are approximately 146 record holders of our Common Stock at June
15, 2006. The number of registered shareholders includes any beneficial owners
of common shares held in street name.
The transfer agent and registrar for our common stock is ComputerShare
Trust Company, located in Denver, Colorado.
RECENT SALES OF UNREGISTERED SECURITIES
We have sold or issued the following securities not registered under
the Securities Act in reliance upon the exemption from registration pursuant to
Section 4(2) of the Securities Act or Regulation D of the Securities Act during
the three year period ending on the date of filing of this registration
statement. Except as stated below, no underwriting discounts or commissions were
payable with respect to any of the following transactions.
10
CONVERTIBLE DEBT
In March 2004, we issued a 10% convertible note to RP Capital, LLC an
accredited investor, in the amount of $50,000 for cash. The note was due on
April 30, 2004 and was converted at $0.44 per share in May 2004. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
On May 16, 2005 the Company issued Fusion Capital ("Fusion") a $30,000
Convertible Promissory Note (the "Note") with an interest rate of fifteen
percent (15%) per annum that matures on August 15, 2005. The Note converted into
174,716 restricted shares of common stock in March 2006.
From July 11, 2005 through December 15, 2005 the Company received cash
investments of $760,000 from an accredited investor (Ellen R. Weiner Family
Revocable Trust) based on agreed-upon terms reached on the cash receipt dates.
Such investments were documented on November 2, 2005, November 4, 2005 and
December 15, 2005 in three 10% Series A Convertible Notes ("Weiner Series A
Notes"). The Weiner Series A Notes accrue interest at a rate of ten percent
(10%) per annum and mature on January 2, 2007. The Weiner Series A Notes are
convertible into shares of restricted common stock at any time at the election
of the holder at a conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date. In addition, upon conversion, the
Company is obligated to issue three-year Warrants (the "Weiner Series A
Warrants") to purchase a number of shares equal to the number of shares into
which the Weiner Series A Notes can be converted at an exercise price of $0.20.
The Weiner Series A Warrants have been valued using a Binomial Lattice option
pricing model and an associated discount of $531,875, measured at the commitment
dates, will be expensed as future conversions occur. The convertible feature of
the Weiner Series A Notes provides for a rate of conversion that is below market
value. Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated the fair
value of such BCF to be $228,125 and records such amount as a debt discount.
Such discount is being accreted to interest expense over the term of the Weiner
Series A Notes. Total interest expense on the Weiner Series A Note for
amortization of the above BCF debt discount totaled $42,506 and $56,096 for the
three months and nine months ended December 31, 2005, respectively. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
From August 8, 2005 through December 14, 2005 the Company received cash
investments of $225,000, from an accredited investor (Allan S. Bird) based on
agreed upon terms reached on the cash receipt dates. Such investments were
documented on November 2, 2005, November 7, 2005 and December 14, 2005 in three
10% Series A Convertible Notes ("Bird Series A Notes"). The Bird Series A Notes
accrue interest at a rate of ten percent (10%) per annum and mature on January
2, 2007. The Bird Series A Notes are convertible into shares of restricted
common stock at any time at the election of the holder at a conversion price
equal to $0.20 per share for any conversion occurring on or prior to the
maturity date. In addition, upon conversion, the Company is obligated to issue
three-year Warrants (the "Bird Series A Warrants") to purchase a number of
shares equal to the number of shares into which the Bird Series A Notes can be
converted at an exercise price of $0.20. The Bird Series A Warrants have been
valued using a Binomial Lattice option pricing model and an associated discount
of $183,000, measured at the commitment dates with the warrants being initially
classified as a derivative liability. The derivative liability was reclassified
as additional paid in capital upon obtaining an effective registration statement
in January 2006 and the discount will be expensed when the warrants are issued
when future debt conversions occur. The convertible feature of the Bird Series A
Note provides for a rate of conversion that is below market value. Pursuant to
EITF 98-5 and EITF 00-27, the Company has estimated the fair value of such BCF
to be $42,000 and records such amount as a debt discount. Such discount is being
accreted to interest expense over the term of the Bird Series A Note. Total
interest expense on the Bird Series A Note for amortization of the above BCF
debt discount totaled $7,783 and $9,271 for the three months and nine months
ended December 31, 2005, respectively. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
On December 15, 2005, the Company received total cash investments of
$15,000 from two related accredited investors (Christian Hoffmann III and
Claypoole Capital, LLC). Such investments were documented in two 10% Series A
Convertible Notes ("December Notes"). The December Notes accrue interest at a
rate of ten percent (10%) per annum and mature on January 2, 2007. The December
Notes are convertible into shares of restricted common stock at any time at the
election of the holder at a conversion price of $0.20 per share for any
conversion occurring on or before the maturity date. In addition, upon
conversion, the Company is obligated to issue three-year Warrants (the "December
11
Warrants") to purchase a number of shares equal to the number of shares into
which the December Notes were converted at an exercise p rice of $0.20. The
December Warrants have been valued using a Binomial Lattice option pricing model
and an associated discount of $15,000, measured at the commitment date, with the
warrants being initially classified as a derivative liability. The derivative
liability was reclassified as additional paid in capital upon obtaining an
effective registration statement in January 2006 and the discount will be
expensed when the warrants are issued upon the occurance of future debt
conversion. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.
On March 23, 2006, the Company retired its $30,000 Aethlon Medical,
Inc. Convertible Promissory Note dated May 16, 2005 ("Note")with Fusion Capital
Fund II, LLC. The Note plus accrued interest of $4,943.19 Was exchanged for
174,716 shares of restricted common stock valued at $0.20 a share as per the
terms of the Note. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.
COMMON STOCK AND WARRANTS
In April 2004, the Company issued 500,000 shares of restricted common
stock to an accredited individual investor in connection with the exercise of
warrants at $0.25 per share for cash totaling $125,000. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In April 2004, the Company issued 17,143 shares at $1.75 per share to
an accredited individual investor for investor relations services in the amount
of $30,000. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In April 2004, the Company issued 50,000 shares of restricted common
stock to Fusion Capital Fund II, LLC, a accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In May 2004, the Company issued 225,000 shares of common stock at $0.44
per share and 225,000 warrants to purchase our common stock at a price of $0.76
per share to legal counsel for legal services in the amount of approximately
$99,000. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In May 2004, a $50,000 10% convertible note was converted at $0.44 per
share for 113,636 shares of common stock and 113,636 warrants to purchase our
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In May 2004, we issued fourteen accredited investors a total of
1,529,545 shares of restricted stock at a price of $0.44 per share for cash
totaling $673,000. In connection with the issuance of these shares, we granted
the stockholders 1,529,545 warrants to purchase our common stock at a price of
$0.76 per share. The warrants vested immediately and expire on fifth anniversary
from the date of a registration statement covering the common stock underlying
such warrants is declared effective. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In July 2004, we issued 10,715 shares of restricted common stock at
$0.70 per share to an accredited individual for employee placement services in
the amount of $7,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In July 2004, we issued 6,850 shares of restricted common stock at
$0.73 per share to an accredited individual for consulting services on
opportunities for our Hemopurifier(TM) within the biodefense marketplace in the
amount of $5,000. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In August 2004, we issued a one-year warrant to purchase 7,000 shares
of common stock at $0.55 per share to an accredited corporate entity in
conjunction with a $6,000 fee for investor and public relations services. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933,
In September 2004, we issued 479,513 shares of restricted common stock
to LH Financial (Esquire Trade and Finance), an accredited investor, in
conjunction with the conversion of $125,000 in principal amount of notes, plus
accrued interest, at $0.34 per share, in accordance with their convertible note
agreement. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.
12
In October 2004, we issued two $40,000 10% one year promissory notes
each with 80,000 three-year warrants to purchase common stock at $0.50 and
44,444 three-year warrants to purchase common stock at $0.90 for cash in the
total amount of $80,000 to two accredited individual investors. In accordance
with GAAP, the proceeds of the financing have been allocated to the debt and the
warrants, based on their relative fair values. Accordingly, a discount of
$46,000 has been recorded as a reduction in the debt balance, and the
off-setting credit has been recorded as additional paid-in capital. The debt
discount is amortized and charged to interest expense over the life of the debt.
At March 31, 2004, approximately $23,000 of such discount was unamortized and is
included in notes payable in the accompanying consolidated balance sheet. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
In October 2004, we issued a $50,000 10% one-year promissory note plus
100,000 three-year warrants to purchase common stock at $0.50 and 55,555
three-year warrants to purchase common stock at $0.90 for cash in the amount of
$50,000 to an accredited individual investor. In accordance with GAAP, the
proceeds of the financing have been allocated to the debt and the warrants,
based on their relative fair values. Accordingly, a discount of $38,000 has been
recorded as a reduction in the debt balance, and the off-setting credit has been
recorded as additional paid-in capital. The debt discount is amortized and
charged to interest expense over the life of the debt. At March 31, 2005,
approximately $22,000 of such discount was unamortized and is included in notes
payable in the accompanying consolidated balance sheet. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In November 2004, we issued 60,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of 60,000
warrants at $0.25 per share for consideration of a $15,000 reduction in the
principal amount of a 10% one-year promissory note. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
In December 2004, the Company issued 461,667 shares of restricted
common stock to two accredited individual investors in connection with the
exercise of 461,667 warrants at $0.25 per share held by an institutional
investor. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
In December 2004, the Company repaid two $25,000 12% promissory
notes, including accrued interest, through the issuance of 87,303 restricted
common shares at $0.49 per share to each of two separate accredited individual
investors. These transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.
In December 2004, the Company issued 20,000 shares of restricted common
stock to an accredited individual investor in connection with the exercise of a
warrant to purchase 20,000 shares of common stock at $0.25 per share for
consideration of a $5,000 reduction in the principal amount of a 10% one-year
note, resulting in a remaining note balance of $30,000 at December 31, 2004.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
In December 2004, the Company issued 60,000 shares of restricted common
stock at $0.50 per share under a consulting agreement with an accredited
individual investor, for investor relations consulting services to the Company.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In January 2005, the Company issued 55,556 shares of restricted common
stock at $0.36 per share and a warrant to purchase 55,556 shares of common stock
at $0.44 per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
In January 2005, the Company issued 66,666 shares of restricted common
stock at $0.45 per share to an accredited individual investor under a consulting
agreement for investor relations consulting services to the Company. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In January 2005, the Company issued 25,834 shares of restricted common
stock to an accredited individual investor in connection with the exercise of a
warrant to purchase 25,834 shares of common stock at $0.25 per share. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
In February 2005, the Company issued 139,063 shares of restricted
common stock to an accredited individual investor in connection with the
exercise of a warrant to purchase 139,063 shares of common stock at $0.25 per
share. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.
13
In February 2005, the Company issued 90,000 shares of restricted common
stock at $0.27 per share and a three-year warrant to purchase 90,000 shares of
common stock at $0.34 per share for cash in the amount of $24,300 to an
accredited individual investor. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional
total of 1,416,958 shares of restricted common stock at prices ranging from
$0.25 to $0.52 for total cash proceeds of approximately $541,000. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional
557,647 shares of restricted common stock at prices ranging from $0.25 to $0.55
under various consulting service agreements for total recorded value of
approximately $196,000. All services on these agreements were completed and
expensed during the year ended March 31, 2005. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In May 2005 the Company issued 100,000 shares of common stock and a
warrant to purchase 400,000 shares of common stock at a purchase price of $0.176
per share to an accredited investor for $17,600. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.
In June 2005, the Company issued 836,730 shares of restricted common
stock and a three-year warrant to purchase 418,365 shares of the Company's
restricted common stock at an exercise price of $0.25 to legal counsel as an
inducement to settle accrued past due legal services payable in the amount of
$167,346 which had been expensed in the prior fiscal year. At the time of the
settlement, the shares of the Company's restricted common stock were valued at
$209,183 and, using a Black-Scholes option pricing model, the warrant was valued
at $100,408. The non-cash additional consideration of $142,245 has been recorded
as professional fees expense during the quarter ended June 30, 2005. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In September 2005, the Company issued 27,852 shares of common stock
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consulting Stock Plan at $0.206 per share in payment for regulatory affairs
consulting services to the Company valued at $5,738.
On September 9, 2005, the Company granted 2,857,143 options to James A.
Joyce, its Chief Executive Officer, in exchange for $300,000 of accrued
related-party liabilities. The fair value of such options approximated the value
of the accrued related-party liability. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In December 2005, the Company issued 73,964 shares of restricted common
stock at $0.246 per share in payment of legal fees related to capital raising
transactions valued at $18,202. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In January 2006, the Company issued 579,813 shares of restricted common
stock at $0.24 per share in payment for patent fees valued at $139,155. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In January 2006, the Company issued 66,017 shares of restricted common
stock at Prices ranging from $0.28 to $0.33 per share in payment for investor
relations. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
During March 2006, the Company issued 568,181 shares of common stock,
at $0.76 per share, to Fusion Capital for total proceeds of $431,818. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
In March 2006, the Company repaid a $30,000 10% promissory notes,
including accrued interest of $4,564, through the issuance of 140,000 restricted
common shares at $0.25 per share to an accredited individual investor. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
In March 2006, a $30,000 15% convertible note was converted at $0.20
per share for 174,716 shares of common stock at a price of $0.20 per share. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.
14
In March 2006, the Company issued 150,000 shares of restricted common
stock at $0.326 per share in payment of profession services related to investor
relations valued at $49,000. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In March 2006, the Company issued 35,714 shares of restricted common
stock at $0.28 per share in payment of profession services related to investor
relations valued at $10,000. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In March 2006, the Company issued 15,152 shares of restricted common
stock at $0.33 per share in payment of profession services related to investor
relations valued at $5,000. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.
In March 2006, the Company issued 33,333 shares of restricted common
stock at $0.33 per share in payment of an option agreement valued at $10,000.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
EQUITY COMPENSATION PLANS
SUMMARY EQUITY COMPENSATION PLAN DATA
The following table sets forth March 31, 2006 information on our equity
compensation plans (including the potential effect of debt instruments
convertible into common stock) in effect as of that date:
(a) (b) (c)
Plan category Number of securities to Weighted-average Number of securities
be issued upon exercise exercise price of remaining available
of outstanding options, outstanding options, for future issuance
warrants and rights (1)(2) warrants and rights under equity
compensation plans
(excluding securities
reflected in column
(a))
Equity compensation
plans approved by
security holders 32,500 $2.65 467,500
Equity compensation
plans not approved by
security holders (1) 22,155,820 0.35 N/A
----------- ------ --------
Totals 22,188,320 0.35 467,500
(1) The description of the material terms of non-plan issuances of equity
instruments is discussed in Notes 4, 5 and 6 to the accompanying consolidated
financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
2000 STOCK OPTION PLAN
Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000,
provides for the grant of incentive stock options (ISOs") to our full-time
employees (who may also be Directors) and nonstatutory stock options ("NSOs") to
non-employee Directors, consultants, customers, vendors or providers of
significant services. The exercise price of any ISO may not be less than the
fair market value of the Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of the Common Stock on the date of grant.
The amount reserved under the Plan is 500,000 options. At March 31, 2006, we had
granted 32,500 options under the 2000 Stock Option Plan, with 467,500 available
for future issuance.
2003 CONSULTANT STOCK PLAN
Our 2003 Consultant Stock Plan (the "Stock Plan"), adopted by us in
August 2003, advances our interests by helping us obtain and retain the services
of persons providing consulting services upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or
providing those persons with incentives or inducements affording such persons an
opportunity to become owners of our capital stock. Consultants or advisors are
eligible to receive grants under the plan program only if they are natural
15
persons providing bona fide consulting services to us, with the exception of any
services they may render in connection with the offer and sale of our securities
in a capital-raising transaction, or which may directly or indirectly promote or
maintain a market for our securities. We initially reserved a total of 1,000,000
common shares for issuance under the Stock Plan and increased this to 3,000,000
on August 29, 2005. The Stock Plan provides for the grants of common stock. No
awards may be issued after the ten year anniversary of the date we adopted the
Stock Plan, the termination date for the plan.
On March 29, 2004, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 1,000,000 common shares issuable under
the Stock Plan under the Securities Act of 1933.
On August 29, 2005, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 2,000,000 common shares issuable under
The Stock Plan under the Securities Act of 1933.
At March 31, 2006, 719,312 shares of common stock remain to be issued
under the 2003 Consultant Stock Plan. To date we have issued 5,325,158 options
(of which 1,773,300 have been exercised or cancelled) outside both the 2005
Directors Compensation Plan and 2000 Stock Option Plan.
2005 DIRECTORS COMPENSATION PROGRAM
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors upon whose judgment, initiative,
efforts and/or services we are substantially dependent, by offering to or
providing those persons with incentives or inducements affording them an
opportunity to become owners of our capital stock.
Under the Directors Compensation Program, a newly elected director will
receive a one time grant of a non-qualified stock option of 1.5% of the common
stock outstanding at the time of election. The options will vest one-third at
the time of election to the board and the remaining two-thirds will vest equally
at year end over three years. Additionally, each director will also receive an
annual $25,000 non-qualified stock option retainer, $15,000 of which is to be
paid at the first of the year to all directors who are on the Board prior to the
first meeting of the year and a $10,000 retainer will be paid if a director
attends 75% of the meetings either in person, via conference call or other
electronic means. The exercise price for the options under the Directors
Compensation Program will equal the average closing of the last ten (10) trading
days prior to the date earned. At March 31, 2006 under the 2005 Directors
Compensation Program we had issued 1,337,825 options to outside directors and
3,965,450 options to employee-directors for a total of 5,303,275 options.
STAND-ALONE GRANTS
From time to time our Board of Directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction
with the consolidated Financial Statements and Notes thereto appearing elsewhere
in this report.
Operating Expenses
Consolidated operating expenses were $2,094,939 for the fiscal year
ended March 31, 2006, versus $2,183,377 for the comparable period one year ago.
The net decrease of ($88,438) was comprised of an increase in Professional fees
of $102,757, an increase in general and administration expense of $52,236 and an
asset impairment charge of $81,722 offset by a decrease in Payroll and related
expenses of ($325,063).
Professional fees increased by $102,757 of which $262,239 is a result
of increased scientific consulting fees associated with our human safety trials
conducted in India, $56,189 in investor relations expense associated with our
retention of a new Director of Corporate Communications, and $17,670 in website
development costs offset by reductions of ($108,526) in director's fees and
accounting expenses and ($101,074) in legal expenses.
Payroll and related expenses decreased by ($325,153) of which($317,236)
was due to a reduction in employee/director compensation (issuance and vesting
of below-market stock options in the prior fiscal year) as well as a reduction
of bonus/vacation expense of ($7,917) as compared to the prior fiscal year.
16
General and Administrative expenses increased by $52,236. This increase
was comprised of increases in lab expenses of $36,920, rent expense of $20,490,
utilities expense of $6,425 and depreciation expense of $6,195, offset by
decreases in, in contract labor of ($18,484), decreases in lab fees of
($11,259), office supplies of ($8,821) and a net decrease in other operating
expenses of ($8,152).
Interest and Other Expense
Other non-cash expense of $360,125 was recognized to reflect the change
in fair value of the warrants issued related to our 10% Series A Convertible
Notes on January 20, 2006, the date which the common shares underlying the
warrants were registered under Form SB-2.
Interest expense increased by $536,723 as a consequence of the increase
in convertible debt required to finance the ongoing operations of the Company.
This increase was comprised of $255,666 in amortization of BCF associated with
convertible notes outstanding, $164,628 of interest expense on notes payable, a
benefit of $113,920 recorded in the prior fiscal year due to the correction of
an error and a $2,509 increase in bank service charges for the year.
Other expense of $14,822 comprised of an increase of $142,245 to
reflect the fair value of common stock and warrants issued to satisfy an
obligation for legal expense offset by a decrease of ($131,175) for the
forgiveness of debt.
PLAN OF OPERATION
The Company's current plan of operation is to fund our anticipated
increased research and development activities and operations through the common
stock purchase agreement in place with Fusion Capital, whereby Fusion Capital
has committed to buy up to an additional $6,000,000 of our common stock over a
30-month period, that commenced, at our election, after the SEC declared
effective a registration statement under Form SB-2 on December 7, 2004 covering
such shares. Through June 15, 2006 the Company had received $1,685,001 and has
$4,314,999 remaining available from this agreement. However, no assurance can be
given that we will receive any additional funds under our agreement with Fusion
Capital. Based on our projections of additional employees and equipment for
operations and to complete research, development and testing associated with our
Hemopurifier(TM) products, we anticipate that these funds will satisfy our cash
requirements, including this anticipated increase in operations, in excess of
the next twelve months. However, due to market conditions, and to assure
availability of funding for operations in the long term, we may arrange for
additional funding, subject to acceptable terms, during the next twelve months.
The Company is a development stage medical device company that has not
yet engaged in significant commercial activities. The primary focus of our
resources is the advancement of our proprietary Hemopurifier(TM) platform
treatment technology, which is designed to treat drug and vaccine resistant
pathogens.
The Company plans to continue its research and development activities
related to the Hemopurifier(TM) platform technology, with particular emphasis on
the treatment of HIV/AIDS, HCV, and acute viral conditions such as pandemic
influenza and bioterror agents.
The Company may choose to outsource some of its research and
development in the next twelve months, as required to support our increased
research and development effort that will include expanding our goal beyond
treating infectious disease conditions. Accordingly, management anticipates
continuing to increase spending on outsourced research and development during
this period.
Operations to date have consumed substantial capital without generating
revenues, and will continue to require substantial and increasing capital funds
to conduct necessary research and development and pre-clinical and clinical
testing of our Hemopurifier(TM) products, as well as market any of those
products that receive regulatory approval. The Company does not expect to
generate revenue from operations for the foreseeable future, and our ability to
meet our cash obligations as they become due and payable is expected to depend
for at least the next several years on our ability to sell securities, borrow
funds or a combination thereof. Future capital requirements will depend upon
many factors, including progress with pre-clinical testing and clinical trials,
the number and breadth of our clinical programs, the time and costs involved in
preparing, filing, prosecuting, maintaining and enforcing patent claims and
other proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, as well as
management's ability to establish collaborative arrangements, effective
commercialization, marketing activities and other arrangements. The Company
expects to continue to incur increasing negative cash flows and net losses for
the foreseeable future.
17
Convertible Notes Payable
On March 31, 2006, the Company had $1,000,000 in 10% Series A
Convertible Notes ("Promissory Notes") outstanding, offset by a ($857,635) note
discount. The discount is associated with the unamortized fair value of a
beneficial conversion feature and warrant attached to the Promissory Notes. The
discount value will amortize to interest expense over the lives of the
Promissory Notes and warrants. On March 31, 2005 the Company had no outstanding
convertible notes payable. The 10% Series A Notes are described below.
From July 11, 2005 through December 15, 2005 the Company received a
series of cash investments totaling $760,000 from the Ellen R. Weiner Family
Revocable Trust, an accredited investor, as a part of the funding of the $1.0
million Promissory Notes. The Promissory Notes accrue interest at the rate of
ten percent (10%) per annum and mature on January 2, 2007. The Promissory Notes
are convertible into shares of restricted common stock at any time at the
election of the holder at a conversion price equal to $0.20 per share for any
conversion occurring on or prior to the maturity date. In addition, upon
conversion, the Company is obligated to issue a three-year Warrant to purchase a
number of shares equal to the number of shares into which the Note was converted
at an exercise price of $0.20.
From August 2, 2005 through December 15, 2005 the Company received cash
investments totaling $225,000 from Allan S. Bird, an accredited investor, as a
part of the funding of the $1.0 Promissory Notes. The Promissory Notes accrue
interest at the rate of ten percent (10%) per annum and mature on January 2,
2007. The Promissory Notes are convertible into shares of restricted common
stock at any time at the election of the holder at a conversion price equal to
$0.20 per share for any conversion occurring on or prior to the maturity date.
In addition, upon conversion, the Company is obligated to issue a three-year
Warrant to purchase a number of shares equal to the number of shares into which
the Note was converted at an exercise price of $0.20.
On December 15, 2005 the Company received cash investments totaling
$10,000 from Christian J. Hoffmann III and $5,000 from Claypoole Capital LLC (an
affiliate of Mr. Hoffmann), accredited investors, as a part of the funding of
the $1.0 million Promissory Notes. The Promissory Notes accrue interest at the
rate of ten percent (10%) per annum and mature on January 2, 2007. The
Promissory Notes are convertible into shares of restricted common stock at any
time at the election of the holder at a conversion price equal to $0.20 per
share for any conversion occurring on or prior to the maturity date. In
addition, upon conversion, the Company is obligated to issue a three-year
Warrant to purchase a number of shares equal to the number of shares into which
the Note was converted at an exercise price of $0.20. Mr. Hoffmann is legal
counsel to the Ellen R. Weiner Family Revocable Trust.
On May 16, 2005 the Company issued Fusion Capital ("Fusion") a $30,000
Convertible Promissory Note (the "Convertible Note") with an interest rate of
fifteen percent (15%) per annum that matures on August 15, 2005 (the "Maturity
Date"). The NOte converted into 176,716 restricted common shares at a conversion
rate of $0.20 per share in March 2006.
Notes Payable
At March 31, 2006, the Company had $527,500 in principal amount of
notes payable outstanding with 14 noteholders as compared with $537,500
outstanding at March 31, 2005 with 16 noteholders.
On May 27, 2005, the Company issued a promissory note (the "Note") to
an accredited investor in an amount of $100,000 with 12% interest maturing on
December 1, 2005. In conjunction with the issuance of the Note, the Company also
issued a 12-month warrant to acquire 400,000 shares of Common Stock at $0.25 per
share.
On October 3, 2005, the Company retired a 10% Note Payable in an amount
of $40,000 for cash.
On October 10, 2005, the Company retired a 10% Note Payable in an
amount of $40,000 for cash.
On March 23, 2006, the Company retired a 10% Debenture Note in an
amount of $30,000 plus accrued interest $4,564 in exchange for 140,000
restricted shares of common stock.
18
The Company is currently in default on approximately $527,500 of
amounts owed under various unsecured notes payable and accrued liabilities and
is currently seeking other financing arrangements to retire all past due notes.
At March 31, 2006 the Company had accrued interest in the amount of $286,098
associated with these notes payable.
Securities Issued for Services
We have issued securities in payment of services to reduce our
obligations and to avoid using our cash resources. In the year ended March 31,
2006 we issued 2,737,588 common shares for services of which 1,030,700 were
unregistered. We issued 579,813 restricted common shares in settlement of a
legal dispute, 150,000 restricted common shares for financial consulting
services, 116,883 restricted common shares for corporate communications
services, 110,040 restricted common shares for accrued legal fees and 73,964
restricted common shares for legal fees related to financing activities. In
addition, 1,706,888 shares, registered under a Form S-8 registration statement,
were issued as follows: 1,061,129 for scientific and regulatory consulting,
399,131 for legal expense, 110,040 for payment of accrued legal fees, 103,255
for financial consulting and 33,333 for the right to license intellectual
property assets. The average price discount of common shares issued for these
services, weighted by The number of shares issued for services in this period,
was approximately 9%.
For the fiscal year ended March 31, 2005 we issued 1,412,625 common
shares for services, of which 854,978 of the shares issued were unregistered. We
issued 468,604 restricted common shares for commitment and financing fees
associated with the $6 million commitment from Fusion Capital; 225,000
restricted common shares for payment of legal services associated with the
related private placement and Form SB-2 registration statement, 10,715
restricted common shares for employment placement fees; 143,809 restricted
common shares were issued for investor relations and 6,850 restricted common
shares were issued for technical consulting. In addition, 557,647 shares,
registered under a Form S-8 registration statement, were issued as follows: for
corporate and SEC legal advice, 356,547 shares; for regulatory and technical
consulting, 132,236 shares; for employment placement fee, 46,364 shares and for
achievement of employee goals and objectives, 22,500 shares. The value of
services purchased with registered and restricted shares was approximately
$337,000. The average price discount of common stock issued for these services,
weighted by the number of shares issued for services in this period, was
approximately 36%.
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, 2006 we
issued 314,716 restricted common shares for repayment in full of notes,
including accrued interest. The price discount of the common stock issued for
debt in this period weighted by the number of shares issued for conversion of
debt was approximately 70%, primarily to reflect the fact that these common
shares were not freely tradeable when issued.
In the fiscal year ended March 31, 2005 we issued 847,755 common shares
for repayment in full of notes, including accrued interest. The price discount
of common stock issued for debt in this period, weighted by number of shares
issued for conversion of debt in this period, was approximately 41%, partially
due to a substantial discount in the conversion of the $125,000 convertible note
in accordance with its original terms in 2001.
Prospects for Debt Conversion
We seek, where possible, to convert our debt and accounts payable to
stock and/or warrants in order to reduce our cash liabilities. Our success at
accomplishing this depends on several factors including market conditions,
investor acceptance and other factors, including our business prospects.
GOING CONCERN
Our independent registered public accounting firm has stated in their
audit report on our March 31, 2006 consolidated financial statements, that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of expenses during the reporting
period. On an ongoing basis, the Company evaluates estimates and assumptions
based upon historical experience and various other factors and circumstances.
Management believes the Company's estimates and assumptions are reasonable in
the circumstances; however, actual results may differ from these estimates under
different future conditions.
19
The Company believes that the estimates and assumptions that are most
important to the portrayal of the Company's financial condition and results of
operations, in that they require the most difficult, subjective or complex
judgments, form the basis for the accounting policies deemed to be most critical
to us. These critical accounting policies relate to stock purchase warrants
issued with notes payable, beneficial conversion feature of convertible notes
payable, impairment of intangible assets and long lived assets, stock
compensation, contingencies and litigation. We believe estimates and assumptions
related to these critical accounting policies are appropriate under the
circumstances; however, should future events or occurrences result in
unanticipated consequences, there could be a material impact on the Company's
future financial conditions or results of operations.
Long Lived Assets
SFAS No.144 ("SFAS 144"), "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
SFAS 144 also requires companies to separately report discontinued operations
and extends that reporting requirement to a component of an entity that either
has been disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to sell.
Management noted certain impairment indicators requiring review for impairment
during the year ended March 31, 2006 and recorded an impairment loss on patents
totaling $81,722.
Stock Purchase Warrants Issued with Notes Payable
The Company granted warrants in connection with the issuance of certain
notes payable. Under Accounting Principles Board Opinion No. 14, "Accounting for
Convertible Debt and Debt Issued With Stock Purchase Warrants," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable. Such discounts are amortized to interest expense over the
term of the notes.
Derivatives
The Company was obligated to register for resale the shares underlying
warrants in connection with the issuance of its 10% Series A Convertible
Promissory Notes. In accordance with Emerging Issues Task Force ("EITF") No.
00-19, "Accounting for Derivative Financial Instruments Indexed To, and
Potentially Settled In, a Company's Own Stock," the value of the warrants were
recorded as a liability until the registration became effective on January 20,
2006. At that time the Company determined the fair value of these warrants and
recorded an additional non-cash expense of $363,875. Coincident with this
valuation, the derivative liability balance was reclassified to equity.
Beneficial Conversion Feature of Notes Payable
The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"Accounting for Convertible Securities With Beneficial Conversion Features or
Contingently Adjustable Conversion Ratio" and EITF No. 00-27, "Application of
Eitf Issue No. 98-5 to Certain Convertible Instruments," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.
Accounting for Transactions involving Stock Compensation
Financial Accounting Standards Board ("FASB") Interpretation No. 44
("FIN 44"), "Accounting for Certain Transactions Involving Stock Compensation,
an Interpretation of APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. Under APB 25 compensation expense
is the excess, if any, of the estimated fair value of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Compensation expense, if any, is recognized over the applicable
service period, which is usually the vesting period.
20
SFAS 123, if fully adopted, changes the method of accounting for
employee stock-based compensation plans to the fair value based method. For
stock options and warrants, fair value is estimated using an option pricing
model that takes into account the stock price at the grant date, the exercise
price, the expected life of the option or warrant, stock volatility and the
annual rate of quarterly dividends. Compensation expense, if any, is recognized
over the applicable service period, which is usually the vesting period. The
adoption of the accounting methodology of SFAS 123 is optional and we have
elected to continue accounting for stock-based compensation issued to employees
using APB 25; however, pro forma disclosures, as we adopted the cost recognition
requirement under SFAS 123, are required to be presented.
SFAS 148, "Accounting for Stock-based Compensation - Transition and
Disclosure, an Amendment of FASB Statement No. 123," provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.
In December 2004, the FASB issued SFAS No. 123-R, "Share-Based
Payment," which requires that the compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No.
123-R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No.123-R replaces
SFAS No. 123 and supersedes APB 25. As originally issued, SFAS No. 123
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of APB 25,
provided that the financial statements disclosed the pro forma net income or
loss based on the preferable fair-value method.
Small Business Issuers are required to apply SFAS No. 123-R in the
first interim or annual reporting period of the registrant's first fiscal year
that begins after December 15, 2005. Thus, the Company's consolidated financial
statements will reflect an expense for (a) all share-based compensation
arrangements granted on or after January 1, 2006 and for any such arrangements
that are modified, cancelled, or repurchased on or after that date, and (b) the
portion of previous share-based awards for which the requisite service has not
been rendered as of that date, based on the grant-date estimated fair value.
Management has not yet determined the future effect of FAS 123-R on its
consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have not entered into any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources and would be
considered material to investors.
RISK FACTORS
An investment in our common shares involves a high degree of risk and
is subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. In such an
event, the trading price for our common shares could decline substantially, and
you could lose all or part of your investment. In order to attain an
appreciation for these risks and uncertainties, you should read this annual
report in its entirety and consider all of the information and advisements
contained in this annual report, including the following risk factors and
uncertainties.
RISKS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT
LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE.
We have yet to establish any history of profitable operations. We have
not had any revenues for the past three years. We have incurred annual operating
losses of $2,094,939, $2,183,377 and $995,549 respectively, during the past
three fiscal years of operation. We have incurred net losses from continuing
operations of $2,920,183 and $2,096,951 for the fiscal years ending March 31,
2006 and 2005. As a result, at March 31, 2006, we had an accumulated deficit of
$22,062,447. Our revenues have not been sufficient to sustain our operations. We
expect that our revenues will not be sufficient to sustain our operations for
the foreseeable future. Our profitability will require the successful
commercialization of our Hemopurifier(TM) technology. No assurances can be given
when or if this will occur or that we will ever be profitable.
21
WE HAVE RECEIVED AN OPINION FROM OUR AUDITORS REGARDING OUR ABILITY TO
CONTINUE AS A GOING CONCERN
Our independent auditors noted in their report accompanying our
financial statements for our fiscal year ended March 31, 2006 that we had a
significant deficit accumulated during the development stage, had a working
capital deficit and that a significant amount of additional capital,
approximately $5,000,000 as estimated by management, will be necessary to
advance the development of our products to the point at which we may become
commercially viable and stated that those conditions raised substantial doubt
about our ability to continue as a going concern. Note 1 to our financial
statements addressed management's plans to address these matters. We cannot
assure you that our business plans will be successful in addressing these
issues. This opinion about our ability to continue as a going concern could
affect our ability to obtain additional financing at favorable terms, if at all,
as such an opinion may cause investors to lose faith in our long term prospects.
If we cannot successfully continue as a going concern, our shareholders may lose
their entire investment in our common shares.
WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.
At March 31, 2006 and 2005, we had a working capital deficit of
approximately $1,920,000 and $3,349,000, respectively. The independent auditors'
report for the year ended March 31, 2006, includes an explanatory paragraph
stating that, among other conditions, our recurring losses from operations and
working capital deficiency raise substantial doubt about our ability to continue
as a going concern. We had a net operating cash flow deficit of $1,584,281 for
the fiscal year ended March 31, 2006, a net operating cash flow deficit of
$1,559,366 for the year ended March 31, 2005, and for the year ended March 31,
2004 a net operating cash flow deficit of $542,056. We do not currently have
sufficient financial resources to fund our operations or those of our
subsidiaries. Therefore, we need additional funds to continue these operations.
We have the right to receive $10,000 per trading day under an agreement
with Fusion Capital Fund II, LLC unless our stock price equals or exceeds $1.00,
in which case the daily amount may be increased under certain conditions as the
price of our common stock increases.
The extent to which we rely on Fusion Capital as a source of funding
will depend on a number of factors including, the prevailing market price of our
common stock and the extent to which we are able to secure working capital from
other sources, such as through the commercialization or licensing of our
Hemopurifier(TM) technology. If obtaining sufficient financing from Fusion
Capital were to prove prohibitively expensive and if we are unable to
commercialize and sell our Hemopurifier(TM) technology, we will need to secure
another source of funding in order to satisfy our working capital needs. Should
the financing we require to sustain our working capital needs be unavailable or
prohibitively expensive when we require it, the consequences would be a material
adverse effect on our business, operating results, financial condition and
prospects.
WE MAY FAIL TO OBTAIN GOVERNMENT CONTRACTS TO DEVELOP OUR
HEMOPURIFIER(TM) TECHNOLOGY FOR BIODEFENSE APPLICATIONS.
The U.S. Government has undertaken commitments to help secure improved
countermeasures against bioterrorism. To date, we have submitted four Small
Business Innovative Research ("SBIR") grant proposals, one in 2002, one in April
2004, and two in May 2006 with the National Institutes of Health that relate to
the use of our Hemopurifier(TM) as a treatment countermeasure against certain
biological weapon candidates and we anticipate that we will submit additional
proposals to obtain U.S. Government grants. The first proposal in 2002 was
reviewed but not scored. We expanded the proposal, submitted the proposal in
2004 and it was again reviewed but not scored as the term countermeasures in
SBIR and other related Request for Proposal ("RFP") grants includes drugs and
vaccines, but not medical devices such as the Hemopurifier(TM). Presently, the
two most recent grant submissions are in process. As a result, future attempts
to obtain grant income from the Federal Government will be sought through direct
communication to government health and military agencies, and may include
unsolicited proposals to provide the Hemopurifier(TM) as a treatment
countermeasure.
At present, the Hemopurifier(TM) has not been approved for use by any
government agency, nor have we received any contracts to purchase the
Hemopurifier(TM). Since inception, we have not generated revenues from the sale
of any product based on our Hemopurifier(TM) technology platform. The process of
obtaining government contracts is lengthy with the uncertainty that we will be
successful in obtaining announced grants or contracts for therapeutics as a
medical device technology. Accordingly, we cannot be certain that we will be
awarded any future government grants or contracts utilizing our Hemopurifier(TM)
platform technology.
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IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(TM) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.
We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(TM)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.
U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.
Our plan to provide the Hemopurifier(TM) as a candidate to treat
Certain infectious disease conditions may involve contracts with the U.S.
Government. U.S. Government contracts typically contain unfavorable termination
provisions and are subject to audit and modification by the government at its
sole discretion, which subjects us to additional risks. These risks include the
ability of the U.S. Government to unilaterally:
o suspend or prevent us for a period of time from receiving new
contracts or extending existing contracts based on violations
or suspected violations of laws or regulations;
o audit and object to our contract-related costs and fees,
including allocated indirect costs;
o control and potentially prohibit the export of our products;
and
o change certain terms and conditions in our contracts.
If we were to become a U.S. Government contractor, we would be required
to comply with applicable laws, regulations and standards relating to our
accounting practices and would be subject to periodic audits and reviews. As
part of any such audit or review, the U.S. Government may review the adequacy
of, and our compliance with, our internal control systems and policies,
including those relating to our purchasing, property, estimating, compensation
and management information systems. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees, including allocated
indirect costs. In addition, if an audit or review uncovers any improper or
illegal activity, we would possibly be subject to civil and criminal penalties
and administrative sanctions, including termination of our contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from
doing business with the U.S. Government. We could also suffer serious harm to
our reputation if allegations of impropriety were made against us. Although
adjustments arising from government audits and reviews have not seriously harmed
our business in the past, future audits and reviews could cause adverse effects.
In addition, under U.S. Government purchasing regulations, some of our costs,
including most financing costs, amortization of intangible assets, portions of
our research and development costs, and some marketing expenses, would possibly
not be reimbursable or allowed under such contracts. Further, as a U.S.
Government contractor, we would be subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower lawsuits and
other legal actions and liabilities to which purely private sector companies are
not.
WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.
Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(TM) medical device candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases we target that:
o are more effective;
o have fewer or less severe adverse side effects;
o are better tolerated;
o are more adaptable to various modes of dosing;
o are easier to administer; or
o are less expensive than the products or product candidates we
are developing.
23
Even if we are successful in developing effective Hemopurifier(TM)
products, and obtain FDA and other regulatory approvals necessary for
commercializing them, our products may not compete effectively with other
successful products. Researchers are continually learning more about diseases,
which may lead to new technologies for treatment. Our competitors may succeed in
developing and marketing products that are either more effective than those that
we may develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.
The Congress' recent passage of the Project BioShield Bill, a
comprehensive effort to develop and make available modern, effective drugs and
vaccines to protect against attack by biological and chemical weapons or other
dangerous pathogens, may encourage competitors to develop their own product
candidates. We cannot predict the decisions that will be made in the future by
the various government agencies as a result of such legislation.
Our competitors include fully integrated pharmaceutical companies and
biotechnology companies as well as universities and public and private research
institutions. Many of the organizations competing with us, have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do. The market
for medical devices is intensely competitive. Many of our potential competitors
have longer operating histories, greater name recognition, more employees, and
significantly greater financial, technical, marketing, public relations, and
distribution resources than we have. This intense competitive environment may
require us to make changes in our products, pricing, licensing, services or
marketing to develop, maintain and extend our current technology. Price
concessions or the emergence of other pricing or distribution strategies of
competitors may diminish our revenues (if any), adversely impact our margins or
lead to a reduction in our market share (if any), any of which may harm our
business.
WE HAVE LIMITED MANUFACTURING EXPERIENCE.
To achieve the levels of production necessary to commercialize our
Hemopurifier(TM) products, we will need secure manufacturing agreements with
manufacturers which comply with good manufacturing practices standards and other
standards prescribed by various federal, state and local regulatory agencies in
the U.S. and any other country of use.
We have limited experience manufacturing products for testing purposes
and no experience manufacturing products for large scale commercial purposes. We
will likely outsource the manufacture of our Hemopurifier(TM) products to third
parties operating FDA-certified facilities. To date, we have manufactured
devices on a small scale for testing purposes. There can be no assurance that
manufacturing and control problems will not arise as we attempt to commercialize
our products or that such manufacturing can be completed in a timely manner or
at a commercially reasonable cost. Any failure to surmount such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.
OUR HEMOPURIFER(TM) TECHNOLOGY MAY BECOME OBSOLETE.
Our Hemopurifier(TM) products may be made unmarketable by new
scientific or technological developments where new treatment modalities are
introduced that are more efficacious and/or more economical than our
Hemopurifier(TM) products. The Homeland Security industry is growing rapidly
with many competitors trying to develop products or vaccines to protect against
infectious disease. Any one of our competitors could develop a more effective
product which would render our technology obsolete.
OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO
COMPLY WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.
Our research and development involves the controlled use of hazardous
materials, chemicals and viruses. The primary hazardous materials include
chemicals needed to construct the Hemopurifier(TM) cartridges and HIV and
Hepatitis C infected plasma samples used in preclinical testing of the
Hemopurifier(TM). All other chemicals are fully inventoried and reported to the
appropriate authorities, such as the fire department, who inspect the facility
on a regular basis. We are subject to federal, state, local and foreign laws
governing the use, manufacture, storage, handling and disposal of such
materials. Although we believe that our safety procedures for the use,
manufacture, storage, handling and disposal of such materials comply with the
standards prescribed by federal, state, local and foreign regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. We have had no incidents or problems involving hazardous chemicals or
biological samples. In the event of such an accident, we could be held liable
for significant damages or fines. We currently carry a limited amount of
insurance to protect us from these damages. In addition, we may be required to
incur significant costs to comply with regulatory requirements in the future.
24
WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EXECUTIVE OFFICERS. OUR
INABILITY TO RETAIN THOSE OFFICERS WOULD IMPEDE OUR BUSINESS PLAN AND GROWTH
STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.
Our success depends to a critical extent on the continued services of
Our Chairman and Chief Executive Officer, James A. Joyce and our Chief Science
Officer, Richard H. Tullis. Were we to lose one or more of these key executive
officers, we would be forced to expend significant time and money in the pursuit
of a replacement, which would result in both a delay in the implementation of
our business plan and the diversion of limited working capital. The loss of Dr.
Tullis could delay the clinical development of our products due to his unique
experience with the Hemopurifier(TM) technology. The loss of Mr. Joyce would be
detrimental to our growth as he possesses unique knowledge of our business model
and infectious disease which would be difficult to replace.
We can give you no assurance that we can find satisfactory replacements
for these key executive officers at all, or on terms that are not unduly
expensive or burdensome to our company. Although Mr. Joyce and Mr. Tullis have
signed employment agreements providing for their continued service to our
company, these agreements will not preclude them from leaving our company. We do
not currently carry key man life insurance policies on any of our key executive
officers which would assist us in recouping our costs in the event of the loss
of those officers.
OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE
OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR
BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR
BUSINESS AND COULD ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.
We currently have an extremely small staff comprised of five full time
employees consisting of our Chief Executive Officer, our Chief Science Officer,
our Chief Financial Officer, a research scientist, a research associate, as well
as other personnel employed on a contract basis. Although we believe that these
employees, together with the consultants currently engaged by our company, will
be able to handle most of our additional administrative, research and
development and business development in the near term, we will nevertheless be
required over the longer-term to hire highly skilled managerial, scientific and
administrative personnel to fully implement our business plan and growth
strategies. Due to the specialized scientific nature of our business, we are
highly dependent upon our ability to attract and retain qualified scientific,
technical and managerial personal. Competition for these individuals, especially
in San Diego where many bio-technology companies are located, is intense and we
may not be able to attract, assimilate or retain additional highly qualified
personnel in the future. We cannot assure you that we will be able to engage the
services of such qualified personnel at competitive prices or at all,
particularly given the risks of employment attributable to our limited financial
resources and lack of an established track record.
WE PLAN TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR
MANAGEMENT TEAM AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED
MANAGERIAL, OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO
TRAIN AND MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR
INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND
PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES,
WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
INVESTMENT.
We will need to significantly expand our operations to implement our
longer-term business plan and growth strategies. We will also be required to
manage multiple relationships with various strategic partners, technology
licensors, customers, manufacturers and suppliers, consultants and other third
parties. This expansion and these expanded relationships will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effectuate these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot assure you that we will
institute, in a timely manner or at all, the improvements to our managerial,
operational and financial systems, procedures and controls necessary to support
our anticipated increased levels of operations and to coordinate our various
corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base.
WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND
OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR
CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND
SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD
COMPANY
25
The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these perceived risks, directors and management are also
becoming increasingly concerned with the availability of directors and officers
liability insurance to pay on a timely basis the costs incurred in defending
such claims. We currently do carry limited directors and officers liability
insurance. Directors and officers liability insurance has recently become much
more expensive and difficult to obtain. If we are unable to continue or provide
directors and officers liability insurance at affordable rates or at all, it may
become increasingly more difficult to attract and retain qualified outside
directors to serve on our board of directors. We may lose potential independent
board members and management candidates to other companies in the biotechnology
field that have greater directors and officers liability insurance to insure
them from liability or to biotechnology companies that have revenues or have
received greater funding to date which can offer greater compensation packages.
The fees of directors are also rising in response to their increased duties,
obligations and liabilities as well as increased exposure to such risks. As a
company with a limited operating history and limited resources, we will have a
more difficult time attracting and retaining management and outside independent
directors than a more established company due to these enhanced duties,
obligations and liabilities.
IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS OF DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE
PREVENTED OR DELAYED.
The Hemopurifier (TM) is subject to extensive government regulations
related to development, testing, manufacturing and commercialization in the
United States and other countries. The determination of when and whether a
product is ready for large scale purchase and potential use will be made by the
government through consultation with a number of governmental agencies,
including the FDA, the National Institutes of Health, the Centers for Disease
Control and Prevention and the Department of Homeland Security. Our product
candidates are in the pre-clinical and clinical stages of development and have
not received required regulatory approval from the FDA to be commercially
marketed and sold. The process of obtaining and complying with FDA and other
governmental regulatory approvals and regulations is costly, time consuming,
uncertain and subject to unanticipated delays. Such regulatory approval (if any)
and product development requires several years. Despite the time and expense
exerted, regulatory approval is never guaranteed. We also are subject to the
following risks and obligations, among others.
o The FDA may refuse to approve an application if they believe
that applicable regulatory criteria are not satisfied.
o The FDA may require additional testing for safety and
effectiveness.
o The FDA may interpret data from pre-clinical testing and
clinical trials in different ways than we interpret them.
o If regulatory approval of a product is granted, the approval
may be limited to specific indications or limited with respect
to its distribution.
o The FDA may change their approval policies and/or adopt new
regulations.
Failure to comply with these or other regulatory requirements of the
FDA may subject us to administrative or judicially imposed sanctions, including:
o warning letters;
o civil penalties;
o criminal penalties;
o injunctions;
o product seizure or detention;
o product recalls; and
o total or partial suspension of productions.
DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(TM) PRODUCT
CANDIDATES ON A TIMELY BASIS.
26
Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(TM) product candidates. Completion
of our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:
o serious adverse events related to our medical device
candidates;
o unsatisfactory results of any clinical trial;
o the failure of our principal third-party investigators to
perform our clinical trials on our anticipated schedules;
and/or
o different interpretations of our pre-clinical and clinical
data, which could initially lead to inconclusive results.
Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our Hemopurifier(TM)
product candidates do not prove to be safe or effective or do not receive
required regulatory approvals, our financial results and the commercial
prospects for our product candidates will be harmed. Furthermore, our inability
to complete our clinical trials in a timely manner could jeopardize our ability
to obtain regulatory approval.
THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.
We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.
THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.
We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.
OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE
TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR
MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.
Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.
Our previously planned products have not become marketable products due
in part to our transition in 2001 from a focus on utilizing our Hemopurifier(TM)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and to take
advantage of the sense of greater sense of urgency surrounding acute and chronic
infectious diseases. Prior to initiating the development of infectious disease
Hemopurifiers(TM), we successfully completed an FDA approved Phase I human
safety trial of a Hemopurifier(TM) to treat aluminum and iron intoxication.
Since changing the focus to infectious disease research, we have not initiated
an FDA approved human clinical trial as the development of the technology is
still continuing and will require both significant capital and scientific
resources. Our pending products face similar challenges of obtaining successful
clinical trials in route to gaining FDA approval prior to commercialization.
Additionally, our limited financial resources hinder the speed of our product
development due to personal constraints.
27
Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including the:
o lack of adequate quality or sufficient prevention benefit, or
unacceptable safety during pre-clinical studies or clinical
trials;
o failure to receive necessary regulatory approvals;
o existence of proprietary rights of third parties; and/or
o inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.
POLITICAL OR SOCIAL FACTORS MAY DELAY OR IMPAIR OUR ABILITY TO MARKET OUR
PRODUCTS.
Products developed to treat diseases caused by or to combat the threat
of bioterrorism will be subject to changing political and social environments.
The political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business. Bioterrorism has become the focus of political debates
especially with the upcoming presidential elections, both in terms of how to
approach bioterrorism and the amount funding the government should provide for
any programs involving homeland protection. Government funding for products on
bioterrorism could be reduced which would hinder our ability to obtain
governmental grants.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD
NEGATIVELY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND
PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.
We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.
In the case of patents, we cannot give you any assurance that our
existing patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. Since many of our patents were issued in the
1980's, they may expire before FDA approval, if any, is obtained. One of our
patents, (Ambrus and Horvath - Blood Purification) expires in October 2007.
However, we believe that certain patent applications filed and/or other patents
issued more recently will help to protect the proprietary nature of the
Hemopurifier(TM) treatment technology.
The Hemopurifier(TM) is protected by four issued patents, in the United
States, Europe and Japan, three of which we own and one in which we own an
exclusive license. One additional US patent application deals with treatments
for virus infection and manufacturing methods has been accepted by the European
Patent Office and is in process of being translated and filed in the United
Kingdom, Germany, France and Italy.
We also rely on proprietary designs, technologies, processes and
know-how not eligible for patent protection. We cannot give you any assurance
that our competitors will not independently develop the same or superior
designs, technologies, processes and know-how.
While we have and will continue to enter into proprietary rights
agreements with our employees and third parties giving us proprietary rights to
certain technology developed by those employees or parties while engaged by our
company, we can give you no assurance that courts of competent jurisdiction will
enforce those agreements.
LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE
LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.
28
There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may potentially be new accounting pronouncements or additional
regulatory rulings which will have an impact on our future financial position
and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes
as well as proposed legislative initiatives following the Enron bankruptcy have
increased our general and administrative costs as we have incurred increased
legal and accounting fees to comply with such rule changes. Further, proposed
initiatives are expected to result in changes in certain accounting rules,
including legislative and other proposals to account for employee stock options
as a compensation expense. These and other potential changes could materially
increase the expenses we report under accounting principles generally accepted
in the United States of America, and adversely affect our operating results.
OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.
Our Hemopurifier(TM) products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or
our products are designed inappropriately, we may be subject to lawsuits seeking
significant compensatory and punitive damages. The risk of product liability
claims, product recalls and associated adverse publicity is inherent in the
testing, manufacturing, marketing and sale of medical products. We do not have
general clinical trial liability insurance coverage. There can be no assurance
that future insurance coverage will to be adequate or available. We may not be
able to secure product liability insurance coverage on acceptable terms or at
reasonable costs when needed. Any product recall or lawsuit seeking significant
monetary damages may have a material affect on our business and financial
condition. Any liability for mandatory damages could exceed the amount of our
coverage. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.
RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES
TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL
BE PAID IN THE FORESEEABLE FUTURE.
We do not anticipate paying cash dividends on our common shares in the
foreseeable future, and we cannot assure an investor that funds will be legally
available to pay dividends, or that even if the funds are legally available,
that the dividends will be paid.
THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL
THOSE SHARES.
As long as the trading price of our common shares is below $5 per
share, the open-market trading of our common shares will be subject to the
"penny stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.
OUR COMMON SHARES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.
Our common shares have historically been sporadically or
"thinly-traded" on the OTCBB, meaning that the number of persons interested in
purchasing our common shares at or near ask prices at any given time may be
relatively small or non-existent. As of June 16, 2006, our average trading
volume per day for the past three months was approximately 205,665 shares a day
with a high of 1,964,000 shares traded and a low of 43,600 shares traded. This
situation is attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
29
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common shares will
develop or be sustained, or that current trading levels will be sustained.
In May of 2004, we entered into a common stock purchase agreement with
Fusion Capital II, LLC ("Fusion"). Under the common stock purchase agreement,
Fusion agreed to purchase, on each trading day during the term of the agreement,
$10,000 of our common stock. As of June 16, 2006, Fusion can purchase an
aggregate of $4,314,999 of common stock over a 30 month period from the
Commencement Date.
Fusion Capital's purchase of $10,000 of our common stock each trading
day could cause our common stock price to decline due to the additional shares
available in the market, particularly in light of the relatively thin trading
volume of our common stock. Using the closing price on June 15, 2006 of $0.37 as
an example, Fusion Capital would be issued approximately 27,027 shares each
trading day if we elected to have them purchase the daily purchase amount,
whereas our average trading volume for the prior three months is 205,665 per
day. The market price of our common stock could decline given our minimal
average trading volume compared to the number of shares potentially issuable to
Fusion Capital and the voting power and value of your investment would be
subject to continual dilution if Fusion Capital purchases the shares and resells
those shares into the market, although there is no obligation for Fusion Capital
to sell such shares. Any adverse affect on the market price of our common stock
would increase the number of shares issuable to Fusion Capital each trading day
which would increase the dilution of your investment. Although we have the right
to reduce or suspend Fusion Capital purchases at any time, our financial
condition at the time may require us to waive our right to suspend purchases
even if there is a decline in the market price.
Contractual 9.9% beneficial ownership limitations prohibit Fusion
Capital, together with its affiliates, from beneficially owning more than 9.9%
of our outstanding common stock. This 9.9% limitation does not prevent Fusion
Capital from purchasing shares of our common stock and then reselling those
shares in stages over time where Fusion Capital and its affiliates do not, at
any given time, beneficially own shares in excess of the 9.9% limitation.
Consequently, these limitations will not necessarily prevent substantial
dilution of the voting power and value of your investment.
THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN
OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC
FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUES WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE
PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In fact, during the 52-week period ended June 15, 2006, the high and low
sale prices of a share of our common stock were $0.89 and $0.19, respectively.
The volatility in our share price is attributable to a number of factors. First,
as noted above, our common shares are sporadically and/or thinly traded. As a
consequence of this lack of liquidity, the trading of relatively small
quantities of shares by our shareholders may disproportionately influence the
price of those shares in either direction. The price for our shares could, for
example, decline precipitously in the event that a large number of our common
shares are sold on the market without commensurate demand, as compared to a
seasoned issuer which could better absorb those sales without adverse impact on
its share price. Secondly, we are a speculative or "risky" investment due to our
limited operating history and lack of revenues or profits to date, and
uncertainty of future market acceptance for our potential products. As a
consequence of this enhanced risk, more risk-adverse investors may, under the
fear of losing all or most of their investment in the event of negative news or
lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; acceptance or rejection of our proprietary technology as
viable method of augmenting the immune response of clearing viruses and toxins
from human blood; government regulations, announcements of significant
acquisitions, strategic partnerships or joint ventures; our capital commitments;
and additions or departures of our key personnel. Many of these factors are
beyond our control and may decrease the market price of our common shares,
regardless of our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common shares will be
at any time, including as to whether our common shares will sustain their
current market prices, or as to what effect that the sale of shares or the
availability of common shares for sale at any time will have on the prevailing
market price.
30
Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.
VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.
The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.
OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY
31% OF OUR OUTSTANDING COMMON SHARES AS OF JUNE 15, 2006, WHICH MAY LIMIT THE
ABILITY OF YOURSELF OR OTHER SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR
COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN YOU
RECEIVING A PREMIUM OVER THE MARKET PRICE FOR YOUR COMMON SHARES.
As of June 15, 2006, our officers and directors beneficially own or
control approximately 31% of our outstanding common shares. These persons will
have the ability to control substantially all matters submitted to our
shareholders for approval and to control our management and affairs, including
extraordinary transactions such as mergers and other changes of corporate
control, and going private transactions.
A LARGE NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
OUTSTANDING COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY
NOTES. THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE
SUBSTANTIAL DILUTION OF YOUR INVESTMENT IN TERMS OF YOUR PERCENTAGE OWNERSHIP IN
THE COMPANY AS WELL AS THE BOOK VALUE OF YOUR COMMON SHARES. THE SALE OF A LARGE
AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON
THE PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME
TAXES, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY
DEPRESS THE PREVAILING MARKET PRICES FOR OUR SHARES.
As of June 15, 2006, there are outstanding non-variable priced purchase
options and warrants entitling the holders to purchase 16,740,820 common shares
at a weighted average exercise price of $0.39 per share. There are 5,000,00
shares underlying promissory notes convertible into common stock at a weighted
average exercise price of $ 0.20. The exercise price for all of the aforesaid
warrants, may be less than your cost to acquire our common shares. In the event
of the exercise of these securities, you could suffer substantial dilution of
your investment in terms of your percentage ownership in the company as well as
the book value of your common shares. In addition, the holders of the common
share purchase options or warrants may sell common shares in tandem with their
exercise of those options or warrants to finance that exercise, or may resell
the shares purchased in order to cover any income tax liabilities that may arise
from their exercise of the options or warrants.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.
We are entitled under our certificate of incorporation to issue up to
50,000,000 shares of common stock. After taking into consideration our
outstanding common stock at June 15, 2006, our convertible notes, outstanding
options and outstanding warrants we will be entitled to issue up to 21,740,820
additional common shares. Our board may generally issue shares of common stock,
or options or warrants to purchase those shares, without further approval by our
shareholders based upon such factors as our board of directors may deem relevant
at that time. It is likely that we will be required to issue a large amount of
additional securities to raise capital to further our development. It is also
likely that we will be required to issue a large amount of additional securities
31
to directors, officers, employees and consultants as compensatory grants in
connection with their services, both in the form of stand-alone grants or under
our stock plans. We cannot give you any assurance that we will not issue
additional shares of common stock, or options or warrants to purchase those
shares, under circumstances we may deem appropriate at the time.
OUR ISSUANCE OF ADDITIONAL COMMON SHARES IN EXCHANGE FOR SERVICES OR TO
REPAY DEBT, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS AND
COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.
Our board of directors may generally issue shares of common stock to
reduce debt or pay for services without further approval by our shareholders
based upon such factors as our board may deem relevant at that time. During the
past three fiscal years we issued a total of 4,413,427 shares in exchange for
outstanding debt to reduce our obligations. The average price discount of common
stock issued to reduce debt for each year, weighted by the number of shares
issued for the corresponding periods was 47.4%, 53.4% and 70.0% for the years
ended 2004, 2005 and 2006, respectively. During the past three fiscal years we
issued a total of 2,790,176 shares in payment for services. The average price
discount of common stock issued for services for the corresponding periods,
weighted by the number of shares issued in such period was 55.4%, 46.3% and 9.0%
for the years ended 2004, 2005 and 2006, respectively. It is likely that we will
issue additional securities to pay for services and reduce debt in the future.
We cannot give you any assurance that we will not issue additional shares of
common stock under circumstances we may deem appropriate at the time.
THE SALE OF OUR COMMON STOCK UNDERLYING THE PROMISSORY NOTES AND
WARRANTS OWNED BY THE SELLING SHAREHOLDERS MAY CAUSE DILUTION AND THE SALE OF
THE SHARES OF COMMON STOCK ACQUIRED BY SELLING SHAREHOLDERS COULD CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE.
Depending upon market liquidity at the time, a sale of shares under
this offering at any given time could cause the trading price of our common
stock to decline. The sale of a substantial number of shares of our common stock
under this offering, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
at a price that we might otherwise wish to effect sales.
THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS
AND EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.
Our certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to our company and
shareholders. Our bylaws also require us to indemnify our officers and
directors. We may also have contractual indemnification obligations under our
agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,
officers and employees, which we may be unable to recoup. These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our company and shareholders.
ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.
Certain provisions of the Nevada General Corporation Law have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in
acquiring us to negotiate with, and to obtain the approval of, our Board of
Directors in connection with such a transaction. However, certain of these
provisions may discourage a future acquisition of us, including an acquisition
in which the shareholders might otherwise receive a premium for their shares. As
a result, shareholders who might desire to participate in such a transaction may
not have the opportunity to do so.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In this prospectus we make a number of statements, referred to as
"FORWARD-LOOKING STATEMENTS" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), which are intended to
convey our expectations or predictions regarding the occurrence of possible
future events or the existence of trends and factors that may impact our future
plans and operating results. The safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995 does not apply
to us. We note, however, that these forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
32
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:
o whether or not markets for our products develop and, if they
do develop, the pace at which they develop;
o our ability to attract and retain the qualified personnel to
implement our growth strategies,
o our ability to obtain approval from the Food and Drug
Administration for our products;
o our ability to protect the patents on our proprietary
technology;
o our ability to fund our short-term and long-term financing
needs;
o changes in our business plan and corporate strategies; and
o other risks and uncertainties discussed in greater detail in
the sections of this prospectus, including those captioned
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".
Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.
ITEM 7. FINANCIAL STATEMENTS
The financial statements listed in the accompanying Index to Financial
Statements are attached hereto and filed as a part of this Report under Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. EVALUATION OF CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer ("CEO") and Chief Financial Officer
("CFO"), we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
of the Exchange Act as of a date (the "Evaluation Date") within 90 days prior to
filing the Company's March 31, 2006 Form 10-KSB. Based upon that evaluation, our
CEO and CFO concluded that, as of March 31, 2006, our disclosure controls and
procedures were effective in timely alerting management to the material
information relating to us (or our consolidated subsidiaries) required to be
included in our periodic filings with the SEC. Based on their most recent
evaluation as of the Evaluation Date, our CEO and the CFO have also concluded
that there are no significant deficiencies in the design or operation of
internal controls over financial reporting, at the reasonable assurance level,
which are reasonably likely to adversely affect our ability to record, process,
summarize and report financial information, and such officers have identified no
material weaknesses in our internal controls over financial reporting.
CHANGES IN CONTROLS AND PROCEDURES
There were no significant changes made in our internal controls over
financial reporting during the quarter ended March 31, 2006 that have materially
affected or are reasonably likely to materially affect these controls. Thus, no
corrective actions with regard to significant deficiencies or material
weaknesses were necessary.
LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROL
Our management, including the CEO, does not expect that our disclosure
controls and procedures or our internal control over financial reporting will
necessarily prevent all fraud and material errors. An internal control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
33
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations on all internal control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within Aethlon Medical have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.
ITEM 8B. OTHER INFORMATION
On June 28, 2006, Calvin M. Leung resigned as a director of the
Company. The resignation by Mr. Leung was not due to any disagreement with the
Company.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 requires our
officers, directors, and persons who own more than 10% of a registered class of
our equity securities to file reports of ownership and changes in ownership with
the SEC and Nasdaq. Officers, directors, and greater than 10% beneficial owners
are required by SEC regulation to furnish the Company with copies of all Section
16 (a) forms they file. Based solely on our review of copies of the Section
16(a) reports filed for the fiscal year ended December, 2005, we believe that
all filing requirements applicable toits officers, directors, and greater than
10% beneficial owners were complied with.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The names, ages and positions of our directors and executive officers
as of June 15, 2006 are listed below:
NAMES TITLE OR POSITION AGE
-----------------------------------------------------------------------
James A. Joyce (1) Chairman, President, Chief Executive 44
Officer and Secretary
Richard H. Tullis, PhD (2) Vice President, Chief Science Officer 60
and Director
James W. Dorst (3) Chief Financial Officer 51
Franklyn S. Barry, Jr. Director 66
Edward G. Broenniman Director 69
Calvin M. Leung (4) Director 68
(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. Barry also served
as a consultant to us on strategic business issues from June 1, 2001 to
May 31, 2003.
(2) Effective June 1, 2001, Dr. Tullis was appointed as our
Chief Science Officer, replacing Dr. Clara M. Ambrus, who retired.
(3) Effective August 1, 2005, Mr. Dorst was appointed Chief
Financial Officer.
(4) Effective June 30, 2003, Mr. Leung was elected to our
board of directors. On June 28, 2006, Mr. Leung resigned from the Board
of Directors.
None of our directors or executive officers has, during the past five
years:
o been convicted in a criminal proceeding and none of our
directors or executive officers is subject to a pending
criminal proceeding,
o been subject to any order, judgment, or decree not
subsequently reversed, suspended or vacated of any court of
competent jurisdiction, permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in
any type of business, securities, futures, commodities or
banking activities, or
34
o been found by a court of competent jurisdiction (in a civil
action), the Securities and Exchange Commission or the
Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law, and the
judgment has not been reversed, suspended, or vacated.
Resumes of Management:
James A. Joyce, Chairman, President and CEO
Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman
of the Board and Secretary since March 1999. On June 1, 2001, our Board of
Directors appointed Mr. Joyce with the additional roles of President and CEO. In
1992, Mr. Joyce founded and was the sole shareholder of James Joyce &
Associates, an organization that provided management consulting and corporate
finance advisory services to CEOs and CFOs of publicly traded companies.
Previously, from 1989 to 1991, Mr. Joyce was Chairman and Chief Executive
Officer of Mission Labs, Inc. Prior to that Mr. Joyce was a principal in charge
of U.S. operations for London Zurich Securities, Inc. Mr. Joyce is a graduate
from the University of Maryland.
James W. Dorst, Chief Financial Officer
Mr. Dorst brings more than 20 years of senior management experience in
finance, operations, planning and business transactions to the Company. Prior to
joining Aethlon, Mr. Dorst was Vice President of Finance and Operations for
VerdiSoft Corporation, a developmental-stage mobile-software developer recently
acquired by Yahoo, Inc. (NASDAQ:YHOO). Previously, Mr. Dorst held executive
positions as SVP of Finance and Administration at SeeCommerce; COO/CFO of Omnis
Technology Corp. (now NASDAQ Small Cap: RDTA); CFO and SVP of Information
Technology at Savoir Technology Group, Inc. (acquired by NYSE:AVT). Mr. Dorst
practiced as a Certified Public Accountant with Coopers & Lybrand
(PricewaterhouseCoopers) and holds an MS in Accounting and BS in finance from
the University of Oregon.
Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
Dr. Tullis has been Vice President and a director of the Company since
January 2000 and Chief Science Officer since June 2001. Dr. Tullis has extensive
biotechnology management and research experience, and is the founder of Syngen
Research, a wholly-owned subsidiary of Aethlon Medical, Inc. Previously, Dr.
Tullis co-founded Molecular Biosystems, Inc., a former NYSE company. At
Molecular Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization,
Senior Research Scientist and Member of the Board of Directors. In research, Dr.
Tullis developed and patented the first application of oligonucleotides to
antisense antibiotics and developed new methods for the chemical synthesis of
DNA via methoxy-hosphorochloridites. Dr. Tullis also co-developed the first
applications of covalently coupled DNA-enzyme conjugates using synthetic
oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis
founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer
in custom DNA synthesis, which was sold to Molecular Biology Resources in 1991.
Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a
company that was eventually acquired by Genetic Vectors. Dr. Tullis received his
Ph.D. in Biochemistry and Cell Biology from the University of California at San
Diego, and has done extensive post-doctoral work at UCSD, USC, and the
University of Hawaii.
Franklyn S. Barry, Jr.
Mr. Barry has over 25 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and our President and CEO from March 10, 1999 to May 31,
2001. He became a director of Aethlon Medical on March 10, 1999. From 1994 to
April 1997, Mr. Barry was a private consultant. Included among his prior
experiences are tenures as President of Fisher-Price and as co-founder and CEO
of Software Distribution Services, which today operates as Ingram Micro-D, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Merchants Mutual Insurance Company.
Edward G. Broenniman
Mr. Broenniman became a director of Aethlon Medical on March 10, 1999.
Mr. Broenniman has 30 years of management and executive experience with
high-tech, privately-held growth firms where he has served as a CEO, COO, or
corporate advisor, using his expertise to focus management on increasing
profitability and stockholder value. He is the Managing Director of The Piedmont
Group, LLC, a venture advisory firm. Mr. Broenniman recently served on the Board
of Directors of publicly-traded QuesTech (acquired by CACI International), and
currently serves on the Boards of four privately-held firms. His nonprofit
Boards are the Dingman Center for Entrepreneurship's Board of Advisors at the
University of Maryland, the National Association of Corporate Directors,
National Capital Chapter and the Board of the Association for Corporate Growth,
National Capital Chapter.
35
Calvin M. Leung
Mr. Leung became a director of Aethlon Medical on June 30, 2003. He is
the President of Mandarin Investment Corporation, specializing in investment,
development and management of mobile home and recreational vehicle parks in
California, Arizona and the midwest since 1975. He has syndicated a number of
land and housing developments in the western United States. Mr. Leung, born in
Hong Kong, received his advanced education in the United States where he was
awarded a doctorate degree in psychology specializing in experimental research.
He taught at the university level for several years. Mr. Leung resigned from the
Board of Directors effective June 28, 2006.
Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry,
Broenniman and Leung serve. Mr. Barry is Chairman of the Audit Committee, and
Mr. Broenniman is Chairman of the Compensation Committee.
Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors services upon whose judgment,
initiative, efforts and/or services we are substantially dependent, by offering
to or providing those persons with incentives or inducements affording such
persons an opportunity to become owners of our capital stock. Under the
Directors Compensation Program, a newly elected director will receive a one time
grant of a non-qualified stock option of 1.5% of the common stock outstanding at
the time of election. The options will vest one-third at the time of election to
the board and the remaining two-thirds will vest equally at year end over three
years. Additionally, each director will also receive an annual $25,000
non-qualified stock option retainer, $15,000 of which is to be paid at the first
of the year to all directors who are on the Board prior to the first meeting of
the year and a $10,000 retainer will be paid if a director attends 75% of the
meetings either in person, via conference call or other electronic means. The
exercise price for the options under the Directors Compensation Program will
equal the average closing of the last ten (10) trading days prior to the date
earned. At March 31, 2006 under the 2005 Directors Compensation Program, we had
issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors for a total of 5,303,275 options.
FAMILY RELATIONSHIPS.
There are no family relationships between or among the directors,
executive officers or persons nominated or charged by us to become directors or
executive officers.
There are no arrangements or understandings between any two or more of
our directors or executive officers. There is no arrangement or understanding
between any of our directors or executive officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether
non-management shareholders will exercise their voting rights to continue to
elect the current Board of Directors. There are also no arrangements, agreements
or understanding between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.
REGULATORY AND CLINICAL ADVISOR
Kenneth R. Michael, Pharm.D. R.A.C.
-----------------------------------
Dr. Michael is the President of KRM Associates LLC, a regulatory and
clinical affairs consulting organization. He is the former VP of Regulatory
Affairs and Quality Assurance at Siemens Medical Systems, and he is the founder,
past President and Chairman of The Regulatory Affairs Professional Society. He
is also the founder of the San Diego Regulatory Affairs Network.
SCIENCE ADVISORY BOARD
Each person listed below is a current member of our Science Advisory
Board. The role of the Science Advisory Board is to provide scientific guidance
related to the development of our Hemopurifier(TM) technology. Unlike the
members of our Board of Directors, the Science Advisory Board members are not
involved in the management or operations of our company. Members of the Science
Advisory Board are paid $500 per day for services rendered either on-site or at
a mutually agreeable location.
36
Ken Alibek, M.D., Ph.D., D.Sc.
------------------------------
Dr. Alibek is the Executive Director of Education at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor at GMU as well. Dr. Alibek specializes in medical and scientific
research dedicated to developing new forms of protection against biological
weapons and other infectious diseases.
Formerly, Dr. Alibek was a Soviet Army Colonel, and served as First
Deputy Chief of the civilian branch of the Soviet Union's biological weapons
program until he defected to the United States in 1992 and subsequently served
as a consultant to numerous U.S. government agencies in the areas of medical
microbiology, biological weapons defense, and biological weapons
nonproliferation. Dr. Alibek has worked with the National Institutes of Health,
testified extensively before the U.S. Congress on nonproliferation of biological
weapons and is the author of Biohazard: The Chilling True Story of the Largest
Covert Biological Weapons Program in the World--Told from Inside by the Man Who
Ran It, published by Random House Books. He holds numerous patents, is widely
published in science journals, and has provided over 300 lectures and
presentations to military and civilian universities, as well as foreign
governments. The December 2003 issue of the Acumen Journal of Life Sciences
named Dr. Alibek as one of top five biological warfare experts in the nation.
Charles Bailey, Ph.D.
---------------------
Dr. Bailey is the former commander of the U.S. Army Medical Research
Institute of Infectious Diseases (USAMRIID). Dr. Bailey has 25 years U.S. Army
experience in R&D and management in infectious diseases and biological warfare
defense. As an officer of the Defense Intelligence Agency, Dr. Bailey wrote
extensively on foreign biological warfare capabilities. Dr. Bailey is currently
the Executive Director for Research & International Relations at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor of Biology at GMU as well. The Acumen Journal of Life Sciences named
Dr. Bailey as one of the top five biological warfare experts in the nation.
Joseph A. Bellanti, M.D.
------------------------
Dr. Bellanti is the Director of the International Center for Immunology
and Professor of Pediatrics at Georgetown University School of Medicine. He has
authored over 400 scientific articles and 25 books and book chapters in the
areas of Immunology and Virology. Dr. Bellanti's textbook, "Immunology," is used
in medical and graduate schools throughout the country.
Larry Cowgill, D.V.M., Ph.D.
----------------------------
Dr. Cowgill is a Professor in the Department of Medicine and
Epidemiology at the School of Veterinary Medicine, University of
California--Davis and has nearly 30 years of experience as a clinical instructor
in small animal internal medicine, nephrology and hemodialysis. He currently
Heads the Companion Animal Hemodialysis Units at the Veterinary Medical Teaching
Hospital at UC Davis and the UC Veterinary Medical Center-San Diego. Dr. Cowgill
is also Associate Dean for Southern California Clinical Programs and is
Co-Director of the University of California Veterinary Medical Center-San Diego.
Prior to his appointment at the University of California, he was a National
Institutes of Health (NIH) Special Research Fellow at the University of
Pennsylvania School of Veterinary Medicine and at the Renal Electrolyte Section
at the University of Pennsylvania School of Medicine, where he conducted
research in basic renal physiology and clinical nephrology. Dr. Cowgill received
his D.V.M. from the University of California--Davis School of Veterinary
Medicine and his Ph.D. in Comparative Medical Sciences from the University of
Pennsylvania, where he also completed his internship and Residency training in
Small Animal Internal Medicine. He became a Diplomat of the American College of
Veterinary Internal Medicine in 1977. Dr. Cowgill has published extensively in
the area of veterinary nephrology and has established a Clinical Fellowship in
Renal Medicine and Hemodialysis, which is the first of its kind in veterinary
Medicine.
Pedro Cuatrecasas, M.D.
-----------------------
Dr. Cuatrecasas was President of the Pharmaceutical Research Division
of Parke-Davis Co., and Corporate Vice President for Warner Lambert Company from
1989 until his retirement in 1997. From 1986 to 1989, he served as SVP and
Director of Glaxo Inc. For the prior ten years, he was VP/R&D and Director, of
the Burroughs Wellcome Company. During his career in pharmaceutical research, he
was involved in the discovery, development and marketing registration of more
than 40 novel medicines. Dr. Cuatrecasas is widely recognized for the invention
and development of affinity chromatography which is a method for the selective
capture of proteins, sugars, fats and inorganic compounds. He is a member of the
National Academy of Sciences, The Institute of Medicine, and the American
Academy of Arts & Sciences, and he has authored more than 400 original
publications.
37
Nathan W. Levin, M.D.
---------------------
Dr. Levin is recognized as a leading authority within the hemodialysis
industry. He is the Medical and Research Director of the Renal Research
Institute, LLC, a joint venture between Fresenius Medical Care - North America
and Beth Israel Medical Center, New York. Dr. Levin also serves as Professor of
Clinical Medicine at the Albert Einstein College of Medicine.
Raveendran (Ravi) Pottathil, Ph.D.
----------------------------------
Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV
and HCV) and Tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in India.
Currently, Dr. Pottathil is the President of AccuDx, Inc. a pharmaceutical
diagnostics company he founded in 1996.
Claudio Ronco, M.D.
-------------------
Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.
Members of the Scientific Advisory Board do not receive any monetary
compensation for service on the Board. However, on occasion, the members may be
awarded stock options.
INVOLVEMENT IN LEGAL PROCEEDINGS.
To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.
38
CODE OF ETHICS.
On February 23, 2005, the Board of Directors approved a "Code of
Business Conduct and Ethics."
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth compensation received for the fiscal
years ended March 31, 2004 through 2006 by our Chief Executive Officer and all
other executive officers.
LONG TERM COMPENSATION
----------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------ ---------------------- ---------
SECURITIES LONG ALL
NAMED EXECUTIVE OFFICER AND UNDERLYING TERM OTHER
PRINCIPAL POSITION RESTRICTED OPTIONS INCENTIVE COMP-
YEAR SALARY(1) BONUS OTHER STOCK & SARS PLAN ENSATION
--------------------------------------------------------------------------------------------
James A. Joyce 2006 $ 224,712 $ -- $ -- $ -- 2,857,148 (2) -- $ --
PRESIDENT AND CHIEF 2005 187,291 20,000 -- -- 2,231,100 -- --
EXECUTIVE OFFICER 2004 180,000 -- -- -- -- -- --
Richard H. Tullis, Ph.D 2006 $ 165,000 $ -- $ -- $ -- -- $ -- $ --
VICE PRESIDENT AND CHIEF 2005 154,375 15,000 -- 1,734,750 -- --
SCIENCE OFFICER 2004 150,000 -- -- -- -- --
James W. Dorst (3) 2006 $ 93,750 $ -- 500,000 $ -- $ --
CHIEF FINANCIAL OFFICER 2005 N/A -- -- -- -- --
2004 N/A -- -- -- -- -- --
(1) The remuneration described in the above table excludes our cost of benefits
furnished to the named executive officers, including premiums for health
insurance and other personal benefits provided to such individuals that are
extended to all of our employees in connection with their employment.
Perquisites and other personal benefits, securities, or property received by an
executive officer are either the lesser of $50,000 or 10% of the total salary
and bonus reported for each named executive officer, except as otherwise
disclosed.
(2) On September 9, 2005, the Company's board of directors approved and the
Company entered into a Stock Option Agreement with Mr. James A Joyce, the
Company's Chief Executive Officer in exchange for the cancellation of $300,000
of debt owed to Mr. Joyce. the Stock Option Agreement provides for a
fully-vested, non-qualified, ten-year option to purchase restricted common stock
with an exercise price of $0.21 per share. On September 9, 2005 the market
closing price per share of the Company's common stock was $0.20.
(3) James W. Dorst was appointed Chief financial Officer August 1, 2005. Mr.
Dorst receives an annual salary of $150,000 and was granted nonqualified stock
options to purchase 500,000 shares of common stock at an exercise price equal to
the fair market value of the stock on the date of grant.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS GRANT TABLE
The following table provides certain information with respect to
individual grants during the last fiscal year to each of our named executive
officers of common share purchase options or stock appreciation rights ("SARs")
relating to our common shares:
COMMON SHARES AS PERCENTAGE OF
UNDERLYING GRANT OF GRANTS TO ALL EXERCISE OR
NAMED EXECUTIVE OFFICER OPTIONS OR SARS EMPLOYEES BASE PRICE EXPIRATION DATE
----------------------------- ------------------ ------------------- -------------- -------------------
James A. Joyce,
CHAIRMAN, PRESIDENT AND CEO 2,857,148 85.1% $0.21 9/9/2015
James W. Dorst
CHIEF FINANCIAL OFFICER 500,000 14.9% $0.23 8/1/2010
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS EXERCISE AND VALUATION TABLE
The following table sets forth the number of common stock options, both
exercisable and unexercisable, held by each of our Named Executive Officers and
the value of any in-the-money options at June 15, 2006, utilizing a value of
$0.37 per share, the closing price of the Company's common stock on the
Over-The-Counter Bulletin Board on June 15, 2006:
39
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAMED EXECUTIVE OFFICER ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
-------------------------------- -------------- ------------ ------------------------ -------------------
James A. Joyce -- -- 4,530,468 / 557,775 $440,410 / $0
Richard H. Tullis -- -- 1,580,763 / 433,587 $0 / $0
James W. Dorst -- -- 0 / 500,000 $0 / $70,000
EMPLOYMENT AGREEMENTS
We entered into an employment agreement with Mr. Joyce effective April
1, 1999. Effective June 1, 2001, Mr. Joyce was appointed President and Chief
Executive Officer and his base annual salary was increased from $120,000 to
$180,000. Effective January 1, 2005, Mr. Joyce's salary was increased from
$180,000 to $205,000 per year. Under the terms of the agreement, his employment
continues at a salary of $205,000 per year for successive one year periods,
unless given notice of termination 60 days prior to the anniversary of his
employment agreement. Effective April 1, 2006. Mr. Joyce's salary was increased
from $205,000 to $240,000.
We entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief
Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Effective January 1,
2005 Dr. Tullis' salary was increased from $150,000 to $165,000 per year Under
the terms of the agreement, his employment continues at a salary of $165,000 per
year for successive one-year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement. Dr. Tullis was granted
250,000 stock options to purchase our common stock in connection the completing
certain milestones, such as the initiation and completion of certain clinical
trials, the submission of proposals to the FDA and the filing of a patent
application. Effective April 1, 2006, Dr. Tullis salary was increased to
$185,000 per year.
Both Mr. Joyce's and Dr. Tullis' agreements provide for medical
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.
STOCK OPTION GRANTS
Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000,
provides for the grant of incentive stock options ("ISOs") to full-time
employees (who may also be Directors) and nonstatutory stock options ("NSOs") to
non-employee Directors, consultants, customers, vendors or providers of
significant services. The exercise price of any ISO may not be less than the
fair market value of our Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of our Common Stock on the date of grant.
The amount available under the Plan is 500,000 options.
Under the Directors Compensation Program, adopted by us in February
2005, a newly elected director will receive a one time grant of a non-qualified
stock option of 1.5% of the common stock outstanding at the time of election.
The options will vest one-third at the time of election to the board and the
remaining two-thirds will vest equally at year end over three years.
Additionally, each director will also receive an annual $25,000 non-qualified
stock option retainer, $15,000 of which is to be paid at the first of the year
to all directors who are on the Board prior to the first meeting of the year and
a $10,000 retainer will be paid if a director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned. At March 31,
2006 under the 2005 Directors Compensation Program we had issued 1,337,825
options to outside directors and 3,965,450 options to employee-directors for a
total of 5,303,275 options.
40
At March 31, 2006, we had granted 32,500 options under the 2000 Stock
Option Plan, with 467,500 available for future issuance. At March 31, 2006 we
had issued 5,303,275 options under the Directors Compensation Plan. We issued
5,328,158 options (of which 1,773,300 have been exercised or cancelled) outside
both the 2005 Directors Compensation Plan and 2000 Stock Option Plan.
At March 31, 2006, we had outstanding options to purchase 8,812,785
shares of our Common Stock. See Item 11, "Security Ownership of Certain
Beneficial Owners and Management."
OUTSTANDING STOCK PURCHASE WARRANTS
Common Stock purchase warrants
At March 31, 2006, we had outstanding a total of 8,343,035 warrants,
exercisable at prices between $0.18 - 4.00 per share and with expiration dates
from 2006 - 2011.
See Item 11, "Security Ownership of Certain Beneficial Owners and Management."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of June 30, 2006, information with
respect to the shares of Common Stock beneficially owned by (i) each
director nominee; (ii) each person (other than a person who is also a
director nominee) who is an executive officer; and (iii) all executive
officers and directors as a group. The term "executive officer" is defined
as the President/Chief Executive Officer, Secretary, Chief Financial
Officer/Treasurer, any vice-president in charge of a principal business
function (such as administration or finance), or any other person who
performs similar policy making functions for the Company. We believe that
each individual or entity named has sole investment and voting power with
respect to shares of common stock indicated as beneficially owned by them,
subject to community property laws where applicable, excepted where
otherwise noted:
AMOUNT AND NATURE OF PERCENT OF
TITLE OF CLASS NAME BENEFICIAL OWNERSHIP(1)(2) CLASS
-------------- -------------------------------------------- -------------------------- ----------
Common Stock James A. Joyce, Chief Executive Officer and
Director 5,130,468 shares (3) 17.0%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Calvin M. Leung, Director 2,407,405 shares(4) 9.3%
P.O. Box 2366
Costa Mesa, CA 92628
Common Stock Richard H. Tullis, Chief Scientific Officer
and Director 1,638,763 shares(5) 6.0%
3030 Bunker Hill Street, Suite 4000,
San Diego, CA 92109
Common Stock Franklyn S. Barry, Director
3030 Bunker Hill Street, Suite 4000, 368,647 shares(6) 1.4%
San Diego, CA 92109
Common Stock Edward G. Broenniman, Director
3030 Bunker Hill Street, Suite 4000, 601,561 shares(7) 2.3%
San Diego, CA 92109
Common Stock James W. Dorst
3030 Bunker Hill Street, Suite 4000, 165,000 shares (8)
*
San Diego, CA 92109
All Current
Directors and
Executive Officers
as a Group (6 10,311,844 Shares 31.2%
members)
*Less than 1%.
1. Based on 25,602,326 shares of Common Stock outstanding on the transfer
records as of June 15, 2006.
2. Calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of
1934. Under Rule 13d-3(d)(1), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and percentage
owned by such person, but not deemed outstanding for the purpose of calculating
the percentage owned by each other person listed. The Company believes that each
individual or entity named has sole investment and voting power with respect to
shares of Common Stock indicated as beneficially owned by them, subject to
community property laws, where applicable, except where otherwise noted.
41
3. Includes 1,673,325 stock options exercisable at $0.38 per share and 2,857,143
stock options exercisable at $0.21 per share.
4. Includes all shares owned by members of Mr. Leung's family and entities he
controls, 190,000 warrants to purchase common stock at exercise prices between
$0.25 and $3.00, and 231,546 stock options exercisable at $0.38 per share. Mr.
Leung resigned as director of the Company effective June 28, 2006.
5. Includes 250,000 stock options exercisable at $1.90 per share, 30,000 stock
options execisable at $3.00 per share and 1,300,763 stock options exercisable at
$0.38 per share.
5. Includes 250,000 stock options exercisable at $1.90 per share, 30,000 stock
options exercisable at $2.56 per share and 867,175 at $0.38 per share.
6. 30,675 stock options exercisable at $0.489 per share and 205,816 stock
options exercisable at $0.38 per share.
7. Includes 53,885 shares owned by Mr. Broenniman's wife, his 3,000 stock
options exercisable at $1.78, 2,500 stock options exercisable at $3.75, and
360,187 stock options exercisable at $0.38 per share.
8. Includes 165,000 stock options exercisable at $0.23, vesting August 1, 2006.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Franklyn S. Barry, Jr., a director and shareholder of Aethlon Medical,
was engaged as a consultant to the Company on strategic and business issues from
June 1, 2001 to May 31, 2003 and was paid $60,000 per year. Mr. Barry had been
our original President and Chief Executive Officer and served in such capacities
until 2001. When Mr. Barry stepped down as our President and Chief Executive
Officer was owed severance equal to one year salary. The consulting agreement
was in lieu of immediate payment to spread the payment of the course of the
agreement and to ensure that Mr. Barry provided transition consultation to Mr.
Joyce on company practices and maintained and manage relationships with certain
employees and vendors. See Item 9, "Directors and Executive Officers" and Item
11, "Security Ownership of Certain Beneficial Owners and Management."
Calvin M. Leung, a former director (resigned as of June 28, 2006) and
shareholder of Aethlon Medical, was previously engaged as our consultant
providing as needed business advisory services to management, including business
development services and introductions to potential investors and merger
candidates, and he and his affiliates have invested approximately $939,500 in
Aethlon Medical to date, through equity and convertible debt securities.
$448,000 was invested via convertible promissory notes from November 2001
through May 2002. The notes accrued interest at rates ranging from 6.75% to 12%
per annum. Mr. Leung invested $300,000 via the exercise of stock options
received while our consultant for which he received 600,000 shares of restricted
common stock. Mr. Leung and his affiliates also invested during 2003 a total of
$146,500 in cash for 586,000 shares of our restricted common stock. Finally, Mr.
Leung and his affiliates invested approximately $45,000 from September 2003 to
February 2004 via the exercise of warrants that resulted in the issuance of
180,000 shares of our restricted common stock. Mr. Leung worked as our
consultant from January 7, 2001 to January 7, 2003. We do not expect Mr. Leung
to provide consulting services now that he is no longer a member of our Board of
Directors. He currently owns 1,985,859 of our common shares, 231,546 options to
purchase common stock at $0.38 per share and 190,000 warrants to purchase common
stock at exercise prices of between $0.25 and $3.00 per share. (See ITEM 11.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT).
Certain of our officers and other related parties have advanced us
funds, agreed to defer compensation or paid expenses on behalf of us to cover
short-term working capital deficiencies in the aggregate amount of approximately
$1,178,000. Of this amount, we owe Dr. Richard H Tullis, our Chief Scientific
Officer approximately $267,900 in deferred salary. We also owe our former Chief
Financial Officer, Mr. Edward C Hall, approximately $38,111 in deferred salary.
We owe Mr. Franklyn S Barry, a director, a total of approximately $289,848 for
deferred salary and consulting fees from pre-merger in 1999 through May 2003. We
owe approximately $46,475 to James Joyce and Associates, a company founded by
our current Chief Executive Officer, for deferred consulting fees on services
provided prior to our merger in 1999. We previously repaid Mr. Barry a total of
$30,000 in cash. Additionally, we owe John Murray, our former Chief Financial
Officer, a total of approximately $25,000 for deferred salary and medical
benefits for services rendered from September 2000 through May 2001. We owe
Robert S. Stefanovich, a former Chief Financial Officer, a total of
approximately $91,000 for deferred salary, vacation and medical benefits for
services rendered from July 2001 until July 2002. Additionally, we owe Dr. Clara
Ambrus, the founder of Hemex, Inc., approximately $190,500 for services rendered
from pre-merger in 1999 through March 2002. We owe Edward Broenniman, a board
member, and Linda Broenniman, his wife, an aggregate of approximately $174,000
for services rendered prior to our merger in 1999. Mr. Broenniman has been paid
a total of $30,000 against this debt. We owe approximately $34,500 to directors
for deferred directors' fees. These non interest-bearing liabilities have been
included as due to related parties in the accompanying financial statements.
42
Effective January 1, 2000, we entered into an agreement with Dr. Julian
Ambrus, the son of Dr. Clara Ambrus, who was the original founder of Hemex, Inc.
Under this agreement, an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to us by the inventors in exchange for (a) a royalty to be paid on
future sales of the patented product or process equal to 8.75% of net sales, as
defined and (b) 12,500 shares of our restricted common stock. Upon the issuance
of the first United States patent relating to the invention, we were obligated
to issue an additional 12,500 shares of our restricted common stock to the
inventors. If the market price of our common stock on the date the patent was
issued was below $8 per share, the number of shares to be issued was that amount
which equates to $100,000 of market value. On March 4, 2003, the related patent
was issued and, as a result, we issued 196,078 shares of our restricted common
stock. Such shares were recorded at par value since the original patent
acquisition purchase transaction had been measured at $100,000 and recorded as
"patents" in the March 2000 consolidated balance sheet. The 196,078 shares
merely satisfied a contingent obligation under the original purchase agreement.
We believe that each of the related party transactions above, due to
their related party nature, are not necessarily on terms that would have been
obtained from unaffiliated third parties.
ITEM 13. EXHIBITS
The following documents are filed as part of this report on Form 10-KSB:
1. Consolidated Financial Statements for the periods ended March 31, 2006 and
2005:
Independent Auditors' Reports
Consolidated Balance Sheet
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Deficit
Notes to Consolidated Financial Statements
2. Exhibits
3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)
3.2 Bylaws of Aethlon Medical, Inc. (1)
3.3 Certificate of Amendment of Articles of Incorporation dated
March 28, 2000 (2)
3.4 Certificate of Amendment of Articles of Incorporation dated
June 13, 2005(3)
10.1 Employment Agreement between Aethlon Medical, Inc. and James
A. Joyce dated April 1, 1999 (4)
10.2 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Aethlon, Inc. dated March 10, 1999 (5)
10.3 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Hemex, Inc. dated March 10, 1999 (5)
10.4 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Syngen Research, Inc. (6)
10.5 Agreement and Plan of Reorganization Between Aethlon Medical,
Inc. and Cell Activation, Inc. (7)
10.6 Common Stock Purchase Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.7 Registration Rights Agreement between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC. (8)
10.8 Form of Securities Purchase Agreement for Private Placement
closing on June 7, 2004 (8)
10.9 Form of Common Stock Purchase Warrant for Private Placement
closing on June 7, 2004 (8)
10.10 Form of Registration Rights Agreement for Private Placement
closing on June 7, 2004 (8)
10.11 Note Purchase Agreement by and between Aethlon Medical, Inc.
and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
10.12 Convertible Promissory Note by and between Aethlon Medical,
Inc. and Fusion Capital Fund II, LLC, dated May 16, 2005.(9)
43
10.13 Form of Common Stock Cashless Purchase Warrant for benefit of
Fusion Capital Fund II, LLC, dated May 16, 2005. (9)
10.14 2003 Consultant Stock Plan (10)
10.15 Lease by and between Aethlon Medical, Inc. and San Diego
Science Center (11)
10.16 Consulting Agreement by and between Aethlon Medical, Inc. and
Jean-Claude Chermann, PhD (11)
10.17 Consulting Agreement by and between Aethlon Medical, Inc. and
Franklyn S. Barry, Jr. (11)
10.18 Patent License Agreement by and amongst Aethlon Medical, Inc.,
Hemex, Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra
(11)
10.19 Employment Agreement by and between Aethlon Medical, Inc. and
Dr.Richard H. Tullis (11)
10.20 Employment Agreement by and between Aethlon Medical, Inc. and
Edward C. Hall (11)
10.21 Cooperative Agreement by and between Aethlon Medical, Inc. and
George Mason University (12)
10.22 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Charles Bailey (13)
10.23 Consulting Agreement by and between Aethlon Medical, Inc. and
Dr. Ken Alibek (13)
10.24 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A Joyce (14)
10.25 Stock Option Agreement by and between Aethlon Medical, Inc.
and Richard Tullis (14)
10.26 Stock Option Agreement by and between Aethlon Medical, Inc.
and Franklyn S. Barry (14)
10.27 Stock Option Agreement by and between Aethlon Medical, Inc.
and Ed Broenniman (14)
10.28 Stock Option Agreement by and between Aethlon Medical, Inc.
and Calvin Leung (14)
10.29 Warrant for the benefit of Richardson and Patel, LLP (14)
10.30 Stock Option Agreement by and between Aethlon Medical, Inc.
and James A. Joyce(15)
10.31 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Allan S. Bird(16)
10.32 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Ellen R. Weiner Family Revocable Trust(16)
10.33 Form of Warrant for Series A Convertible Noteholders(16)
10.34 Form of Registration Rights Agreement for Series A Convertible
Noteholders(16)
10.35 Employment Agreement by and between Aethlon Medical, Inc. and
James Dorst(17)
10.36 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Christian Hoffmann(18)
10.37 10% Series A Convertible Note by and between Aethlon Medical,
Inc. and Claypoole Capital, LLC(18)
10.38 Form of Warrant for additional Series A Convertible
Noteholders(18)
10.39 Form of Registration Rights Agreement for additional Series A
Convertible Noteholders(18)
10.40 Option Agreement by and between Aethlon Medical, Inc. and
Trustees of Boston University(19)
10.41 Warrant for the benefit of Fustion Capital Fund II, LLC(20)
44
21 List of subsidiaries (21)
23.1 Consent of Independent Registered Public Accounting Firm
(Squar, Milner, Reehl & Williamson, LLP) *
31.1 Certification of our Chief Executive Officer and President,
pursuant to Securities Exchange Act rules 13a-14(a) and
15d-14(a) as adopted pursuant to Section 302 of the Sarbanes
Oxley Act of 2002.*
31.2 Certification of our Chief Financial Officer, pursuant to
Securities Exchange Act rules 13a-14(a) and 15d-14(a) as
adopted pursuant to Section 302 of the Sarbanes Oxley Act of
2002.*
32 Statement of our Chief Executive Officer and Chief Financial
Officer under Section 906 of the Sarbanes-Oxley Act of 2002
(18 U.S.C. Section 1350)*
99.1 Resignation Letter dated June 28, 2006 from Calvin Leung*
* Filed herewith
(1) December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Current Report on Form 8-K, dated June 10,
2005 and incorporated by reference.
(4) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999 and incorporated by reference.
(5) Filed with the Company's Current Report on Form 8-K dated March 10,
1999 and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated January 10,
2000 an incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated April 10,
2000 and incorporated by reference.
(8) Filed with the Company's Current Report on Form 8-K dated June 7, 2004
and incorporated by reference.
(9) Filed with the Company's Current Report on Form 8-K dated May 16, 2005
and incorporated by reference.
(10) Filed with the Company Registration Statement on Form S-8 (File No.
333-114017) filed on August 29, 2005 and incorporated by reference.
(11) Filed with the Company's Annual Report on Form 10-KSB/A for the year
ended March 31, 2004 and incorporated by reference.
(12) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 filed on October 28, 2004 and incorporated by reference.
(13) Filed with the Company's Amendment No. 3 to Registration Statement on
Form SB-2 (File No. 333-117203) filed on November 24, 2004 and
incorporated by reference.
(14) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2005 and and incorporated by reference.
(15) Filed with the Company's Current Report on Form 8-K filed on September
12, 2005 and incorporated by reference.
(16) Filed with the Company's Current Report on Form 8-K filed on November
7, 2005 and incorporated by reference.
(17) Filed with the Company's Post-Effective Amendment to Registration
Statement on Form SB-2 filed on December 8, 2005 and incorporated by
reference.
(18) Filed with the Company's Registration Statement on Form SB-2 (File No.
333-130915) filed on January 9, 2006 and incorporated by reference.
(19) Filed with the Company's Current Report on Form 8-K filed on February
23, 2006 and incorporated by reference.
(20) Filed with the Company's Current Report on Form 8-K filed on April 4,
2006 and incorporated by reference.
(21) Filed with the Company's Registration Statement on Form SB-2 filed on
July 7, 2004 and incorporated by reference.
45
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional services rendered by Squar,
Milner, Reehl & Williamson LLP ("Squar Milner") for the annual audit of our
consolidated financial statements as of and for the fiscal years ended March 31,
2006, and 2005 and fees billed for other services rendered by Squar Milner
during such years:
Fiscal Years Ended March 31,
2006 2005
------- -------
Audit Fees $86,000 $63,140
Audit Related Fees 47,050 43,754
Tax Fees - -
All Other Fees - -
---------------------------
$123,050 $106,894
===========================
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT AND PERMISSIBLE NON-AUDIT
SERVICES OF INDEPENDENT AUDITOR
Our audit committee of the Board of Directors is responsible for
pre-approving all audit and permitted non-audit services to be performed for us
by our independent auditor.
46
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 28th day of June, 2006.
BY: /S/ JAMES A. JOYCE
---------------------------------------------
JAMES A. JOYCE
CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER
BY: /S/ JAMES W. DORST
---------------------------------------------
JAMES W. DORST
CHIEF FINANCIAL OFFICER
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ JAMES A. JOYCE CHAIRMAN OF THE BOARD JUNE 28, 2006
-------------------------
JAMES A. JOYCE
/S/ FRANKLYN S. BARRY, JR. DIRECTOR JUNE 28, 2006
--------------------------
FRANKLYN S. BARRY, JR.
/S/ EDWARD G. BROENNIMAN DIRECTOR JUNE 28. 2006
--------------------------
EDWARD G. BROENNIMAN
/S/ RICHARD H. TULLIS DIRECTOR JUNE 28, 2006
-------------------------
RICHARD H. TULLIS
47
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.................... F-1
Consolidated Balance Sheet ................................................ F-2
Consolidated Statements of Operations ..................................... F-3
Consolidated Statements of Stockholders' Deficit........................... F-4
Consolidated Statements of Cash Flows ..................................... F-13
Notes to Consolidated Financial Statements................................. F-15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2006 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aethlon Medical,
Inc. and Subsidiaries as of March 31, 2006 and the consolidated results of their
operations and their cash flows for each of the years in the two-year period
then ended and for the period from January 31, 1984 (Inception) to March 31,
2006, in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has suffered
continuing losses from operations, is in default on certain debt, has negative
working capital of approximately $1,921,000 and a deficit accumulated during the
development stage of approximately $22,062,000 at March 31, 2006. As discussed
in Note 1 to the consolidated financial statements, a significant amount of
additional capital will be necessary to advance the development of the Company's
products to the point at which they may become commercially viable. These
conditions, among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans regarding these matters are also
described in Note 1. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/S/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP
JUNE 27, 2006
NEWPORT BEACH, CALIFORNIA
F-1
--------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
--------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 836,377
Prepaid expenses 32,222
------------
TOTAL CURRENT ASSETS 868,599
NON-CURRENT ASSETS
Property and equipment, net 12,378
Patents, net 131,599
Other assets 17,200
------------
TOTAL ASSETS $ 1,029,776
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 880,773
Due to related parties 1,238,624
Notes payable, net of discounts 527,500
Convertible notes payable, net of discounts 142,365
------------
TOTAL CURRENT LIABILITIES 2,789,262
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Common stock, par value of $0.001, 50,000,000 shares
authorized; 25,383,706 issued and outstanding 25,384
Additional paid-in capital 20,322,494
Deferred consulting fees (44,917)
Deficit accumulated during the development stage (22,062,447)
------------
TOTAL STOCKHOLDERS' DEFICIT (1,759,486)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 1,029,776
============
--------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-2
----------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
----------------------------------------------------------------------------------------------------------
JANUARY 31, 1984
(INCEPTION) THROUGH
2006 2005 MARCH 31, 2006
--------------------------------------------------------
Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
--------------------------------------------------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 851,594 748,837 5,238,135
Payroll and related 675,171 1,000,324 7,246,005
General and administrative 486,452 434,216 4,432,031
Impairment 81,722 -- 1,313,253
--------------------------------------------------------
2,094,939 2,183,377 18,229,424
--------------------------------------------------------
OPERATING LOSS (2,094,939) (2,183,377) (16,695,856)
OTHER (INCOME) EXPENSE
Change in fair value of warrant liability 360,125 -- 360,125
Interest expense (credit) 450,297 (86,426) 4,871,452
Interest income -- -- (17,415)
Other 14,822 -- 152,429
--------------------------------------------------------
825,244 (86,426) 5,366,591
--------------------------------------------------------
NET LOSS $ (2,920,183) $ (2,096,951) $(22,062,447)
========================================================
Basic and diluted net loss per share
attributable to common stockholders $ (0.15) $ (0.15)
==================================
Weighted average number of common
shares outstanding 19,551,501 14,037,341
==================================
----------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-3
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Balance, January 31, 1984 (Inception) -- $ -- $ -- $ -- $ -- $ --
Common stock issued for cash at $1
per share 22,000 22 26,502 -- -- 26,524
Common stock issued for cash at $23
per share 1,100 1 24,999 -- -- 25,000
Common stock issued for cash at $86
per share 700 1 59,999 -- -- 60,000
Common stock issued for cash at $94
per share 160 1 14,999 -- -- 15,000
Common stock issued for cash at $74
per share 540 1 39,999 -- -- 40,000
Common stock issued for cash at $250
per share 4,678 5 1,169,495 -- -- 1,169,500
Capital contributions -- -- 521,439 -- -- 521,439
Common stock issued for compensation
at $103 per share 2,600 3 267,403 -- -- 267,406
Conversion of due to related parties
to common stock at $101 per share 1,120 1 113,574 -- -- 113,575
Conversion of due to related parties
to common stock at $250 per share 1,741 2 435,092 -- -- 435,094
Effect of reorganization 2,560,361 2,558 (2,558) -- -- --
Common stock issued in connection with
employment contract at $8 per share 65,000 65 519,935 -- -- 520,000
Common stock issued in connection with
the acquisition of patents at $8 per
share 12,500 13 99,987 -- -- 100,000
Warrants issued to note holders in
connection with notes payable -- -- 734,826 -- -- 734,826
Warrants issued for services -- -- 5,000 -- -- 5,000
Net loss -- -- -- -- (4,746,416) (4,746,416)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 2000 2,672,500 2,673 4,030,691 -- (4,746,416) (713,052)
Common stock and options issued in
connection with acquisition of Cell
Activation, Inc. at $7.20 per share 99,152 99 1,067,768 -- -- 1,067,867
Warrants issued to note holders in
connection with notes payable -- -- 218,779 -- -- 218,779
Warrants issued to promoter in
connection with notes payable -- -- 298,319 -- -- 298,319
Beneficial conversion feature of
convertible notes payable -- -- 150,000 -- -- 150,000
Warrants issued to promoter in
connection with convertible notes
payable -- -- 299,106 -- -- 299,106
Options issued to directors for
services as board members -- -- 14,163 -- -- 14,163
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-4
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Options and warrants issued for
services -- -- 505,400 -- -- 505,400
Common stock issued for services at
$3 per share 5,500 5 16,495 -- -- 16,500
Common stock issued for cash at $1
per share 100,000 100 99,900 -- -- 100,000
Net loss -- -- -- -- (4,423,073) (4,423,073)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ -- $ (9,169,489) $ (2,465,991)
Common stock, warrants and options
issued for accounts payable and
accrued liabilities 21,750 22 243,353 -- -- 243,375
Common stock issued for services at
$2.65 per share 6,038 6 15,994 -- -- 16,000
Common stock issued for cash at $1.00
per share, net of issuance costs of
$41,540 paid to a related party 730,804 731 688,533 -- -- 689,264
Common stock issued for services at
$2.75 per share 10,000 10 27,490 -- -- 27,500
Common stock issued in connection with
license agreement at $3.00 per share 6,000 6 17,994 -- -- 18,000
Common stock issued to holder of
convertible notes payable at $3.00
per share 70,586 71 211,687 -- -- 211,758
Options issued to directors for
services as board members -- -- 7,459 -- -- 7,459
Common stock issued for cash at $1.50
per share, net of issuance costs
of $2,500 16,667 17 22,483 -- -- 22,500
Beneficial conversion feature of
convertible notes payable -- -- 185,000 -- -- 185,000
Common stock issued for conversion of
convertible notes payable and accrued
interest at an average price of
$1.24 per share 134,165 134 166,352 -- -- 166,486
Common stock issued for services at
$2.72 per share 9,651 10 26,240 -- -- 26,250
Options issued to consultant for
services -- -- 562,000 -- -- 562,000
Common stock and warrants for services
at $1.95 per share 62,327 62 161,475 -- -- 161,537
Common stock issued for services at
$1.90 per share 9,198 9 17,491 -- -- 17,500
Stock options exercised for cash 400,000 400 199,600 -- -- 200,000
Warrants issued to note holders for
90-day forebearance -- -- 118,000 -- -- 118,000
Common stock and warrants issued to
note holders and vendors in the
debt-to-equity conversion program at
$1.25 per share 816,359 816 1,623,635 -- -- 1,624,451
Other warrant transactions -- -- (32,715) -- -- (32,715)
Net loss -- -- -- -- (3,995,910) (3,995,910)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $ -- $(13,165,399) $ (2,197,536)
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-5
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $ -- $(13,165,399) $ (2,197,536)
Proceeds from the issuance of common
stock at $0.50 per share in connection
with the exercise of options 200,000 200 99,800 -- -- 100,000
Interest expense related to beneficial
conversion feature -- -- 150,000 -- -- 150,000
Pro-rata value assigned to warrants
issued in connection with conversion of
accounts payable -- -- 71,000 -- -- 71,000
Pro-rata value assigned to warrants
issued in connection with note payable -- -- 30,000 -- -- 30,000
Issuance of common stock at $1.25 per
share in connection with the conversion
of accounts payable 150,124 150 187,505 -- -- 187,655
Issuance of common stock at $1.25 per
share in connection with the conversion
of notes payable 420,000 420 104,580 -- -- 105,000
Estimated fair market value of options
issued for services -- -- 114,000 -- -- 114,000
Issuance of common stock at $0.25 per
share for cash 461,600 462 114,938 -- -- 115,400
Issuance of common stock at $0.26 per
share for cash 19,230 19 4,981 -- -- 5,000
Issuance of common stock at $1.25 per
share for cash 8,000 8 9,992 -- -- 10,000
Issuance of common stock at $0.65 per
share for services 69,231 69 44,931 -- -- 45,000
Issuance of common stock at $0.51 per
share for services 196,078 196 99,804 -- -- 100,000
Adjustment booked -- -- (100,000) -- 100,000 --
Net loss -- -- -- -- (2,461,116) (2,461,116)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,894,223 $ -- $(15,526,515) $ (3,625,597)
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-6
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2003 6,694,960 $ 6,695 $ 11,894,223 $ -- $(15,526,515) $ (3,625,597)
Proceeds from the issuance of common
stock at $0.25 per share in connection
with the exercise of warrants 540,000 540 134,460 -- -- 135,000
Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable, including interest
of $15,099 300,397 300 74,799 -- -- 75,099
Issuance of common stock at $0.35 per
share in connection with the conversion
of notes payable, including interest
of $59,827 813,790 814 284,013 -- -- 284,827
Issuance of common stock at $0.50 per
share in connection with the conversion
of notes payable, including interest
of $509 11,017 11 5,498 -- -- 5,509
Issuance of common stock at $0.42 per
share in connection with the conversion
of notes payable, including interest
of $696 13,725 14 5,682 -- -- 5,696
Issuance of common stock at $0.65 per
share in connection with the conversion
of notes payable, including interest
of $5,088 27,059 27 17,561 -- -- 17,588
Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable, including interest
of $15,416 461,667 462 114,954 -- -- 115,416
Issuance of common stock at $0.25 per
share for cash 1,226,000 1,226 305,274 -- -- 306,500
Issuance of common stock at $0.30 per
share for cash 180,000 180 53,820 -- -- 54,000
Issuance of common stock at $0.525 per
share for cash 40,000 40 20,960 -- -- 21,000
Issuance of common stock at $1.125 per
share for cash 5,000 5 5,620 -- -- 5,625
Issuance of common stock at $0.25 per
share for services 10,000 10 2,490 -- -- 2,500
Issuance of common stock at $0.34 per
share for services 73,529 73 24,927 -- -- 25,000
Issuance of common stock at $0.40 per
share for services 62,000 62 24,763 -- -- 24,825
Issuance of common stock at $0.45 per
share for services 185,185 185 83,148 -- -- 83,333
Issuance of common stock at $0.50 per
share for services 5,000 5 2,495 -- -- 2,500
Interest expense related to beneficial
conversion feature -- -- 324,800 -- -- 324,800
Net loss -- -- -- -- (1,518,798) (1,518,798)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2004 10,649,329 $ 10,649 $ 13,379,487 $ -- $(17,045,313) $ (3,655,177)
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-7
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2004 10,649,329 $ 10,649 $ 13,379,487 $ -- $(17,045,313) $ (3,655,177)
Proceeds from the issuance of common
stock at $0.25 per share in connection
with the exercise of warrants 1,126,564 1,127 280,515 -- -- 281,642
Issuance of common stock at $0.44 per
share for cash 1,415,909 1,416 621,584 -- -- 623,000
Issuance of common stock at $0.25 per
share for cash 40,233 40 9,960 -- -- 10,000
Issuance of common stock at $0.28 per
share for cash 35,947 36 9,964 -- -- 10,000
Issuance of common stock at $0.29 per
share for cash 69,431 69 19,931 -- -- 20,000
Issuance of common stock at $0.32 per
share for cash 94,449 94 29,906 -- -- 30,000
Issuance of common stock at $0.33 per
share for cash 60,620 61 19,939 -- -- 20,000
Issuance of common stock at $0.35 per
share for cash 172,824 173 59,826 -- -- 59,999
Issuance of common stock at $0.36 per
share for cash 223,756 224 79,776 -- -- 80,000
Issuance of common stock at $0.37 per
share for cash 108,079 108 39,892 -- -- 40,000
Issuance of common stock at $0.38 per
share for cash 26,549 27 9,973 -- -- 10,000
Issuance of common stock at $0.39 per
share for cash 51,748 52 19,948 -- -- 20,000
Issuance of common stock at $0.40 per
share for cash 25,233 25 9,975 -- -- 10,000
Issuance of common stock at $0.42 per
share for cash 143,885 144 59,857 -- -- 60,001
Issuance of common stock at $0.43 per
share for cash 70,467 70 29,930 -- -- 30,001
Issuance of common stock at $0.45 per
share for cash 22,455 22 9,978 -- -- 10,000
Issuance of common stock at $0.46 per
share for cash 43,944 44 19,956 -- -- 20,000
Issuance of common stock at $0.47 per
share for cash 128,836 129 59,872 -- -- 60,001
Issuance of common stock at $0.52 per
share for cash 95,502 96 49,904 -- -- 49,999
Issuance of common stock with warrants
at $0.36 per unit for cash 55,556 56 19,944 -- -- 20,000
Issuance of common stock at $0.27 per
share for cash 90,000 90 24,210 -- -- 24,300
Issuance of common stock at $0.50 per
share for cash 3,000 3 1,497 -- -- 1,500
Issuance of common stock to Fusion
Capital for "commitment" shares 50,000 50 (50) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-8
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common stock to Fusion
Capital for fees 418,604 419 (419) -- -- (0)
Issuance of common stock at $0.34 per
share in connection with the conversion
of notes payable, including interest
of $38,371 479,513 480 162,891 -- -- 163,371
Issuance of common stock at $0.44 per
share in connection with the conversion
of notes payable 113,636 114 49,886 -- -- 50,000
Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable 80,000 80 19,920 -- -- 20,000
Issuance of common stock at $0.49 per
share in connection with the conversion
of notes payable 174,606 175 85,382 -- -- 85,557
Issuance of common stock at $1.75 per
share for services 17,143 17 29,983 -- -- 30,000
Issuance of common stock at $0.44 per
share for services 265,273 265 116,455 -- -- 116,720
Issuance of common stock at $0.70 per
share for services 10,715 11 7,489 -- -- 7,500
Issuance of common stock at $0.73 per
share for services 6,850 7 4,993 -- -- 5,000
Issuance of common stock at $0.55 per
share for services 46,364 46 25,454 -- -- 25,500
Issuance of common stock at $0.25 per
share for services 165,492 165 41,208 -- -- 41,373
Issuance of common stock at $0.45 per
share for services 28,377 28 12,741 -- -- 12,769
Issuance of common stock at $0.50 per
share for services for deferred
consulting services 60,000 60 29,940 (30,000) -- --
Issuance of common stock at $0.49 per
share for services 25,087 25 12,318 -- -- 12,343
Issuance of common stock at $0.45 per
share for services for deferred
consulting services 66,666 67 29,933 (30,000) -- --
Issuance of common stock at $0.37 per
share for services 13,369 13 4,987 -- -- 5,000
Issuance of common stock at $0.42 per
share for services 19,231 19 7,981 -- -- 8,000
Issuance of common stock at $0.39 per
share for services 18,042 18 6,982 -- -- 7,000
Issuance of common stock at $0.32 per
share for services 162,678 163 52,382 -- -- 52,545
Issuance of common stock at $0.31 per
share for services 16,234 16 4,984 -- -- 5,000
Issuance of common stock at $0.39 per
share for employee bonus 22,500 22 8,754 -- -- 8,776
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-9
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Debt discount on debt issued with
detachable warrants -- -- 84,000 -- -- 84,000
Amortization of deferred consulting
fees -- -- -- 30,000 -- 30,000
Intrinsic value of options issued to
directors -- -- 424,262 -- -- 424,262
Net loss -- -- -- -- (2,096,951) (2,096,951)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2005 17,014,696 $ 17,015 $ 16,088,278 $ (30,000) $(19,142,264) $ (3,066,971)
Issuance of common stock at $0.28 per
share for cash 35,947 36 9,964 -- -- 10,000
Issuance of common stock at $0.26 per
share for cash 38,256 38 9,962 -- -- 10,000
Issuance of common stock at $0.26 per
share for cash 38,401 38 9,962 -- -- 10,000
Issuance of common stock at $0.25 per
share for cash 201,165 201 49,799 -- -- 50,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.25 per
share for cash 80,466 80 19,920 -- -- 20,000
Issuance of common stock at $0.18 per
share for cash 100,000 100 17,500 -- -- 17,600
Issuance of common stock at $0.25 per
Share for cash 301,744 302 74,698 -- -- 75,000
Issuance of common stock at varied prices
for cash 2,485,249 2,485 767,512 -- -- 769,997
Issuance of common stock at $0.76 per
share for cash 568,181 568 431,249 -- -- 431,818
Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable, including interest
of $4,564 140,000 140 34,860 -- -- 35,000
Issuance of common stock at $0.20 per
share in connection with the conversion
of convertible notes payable, including
interest of $4,943 174,716 175 34,768 -- -- 34,943
Issuance of common stock at $0.31 per
share for services 9,740 10 2,990 -- -- 3,000
Issuance of common stock at $0.30 per
share for services 25,134 25 7,475 -- -- 7,500
Issuance of common stock at $0.25 per
share for services 31,424 31 7,869 -- -- 7,900
Issuance of common stock at $0.26 per
share for services 19,084 19 4,981 -- -- 5,000
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-10
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common stock at $0.25 per
share for services 33,228 33 8,407 -- -- 8,440
Issuance of common stock at $0.25 per
share for services 24,000 24 5,976 -- -- 6,000
Issuance of common stock at $0.26 per
share for services 11,450 11 2,989 -- -- 3,000
Issuance of common stock at $0.26 per
share for services 19,084 19 4,981 -- -- 5,000
Issuance of common stock at $0.26 per
share for services 34,352 34 8,966 -- -- 9,000
Issuance of common stock at $0.26 per
share for services 11,450 11 2,989 -- -- 3,000
Loss on settlement of accrued legal
liabilities -- -- 142,245 -- -- 142,245
Issuance of common stock at $0.24 per
share for services 12,605 13 2,987 -- -- 3,000
Issuance of common stock at $0.24 per
share for services 21,008 21 4,979 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 21,739 22 4,978 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 21,740 22 4,978 -- -- 5,000
Issuance of common stock at $0.23 per
share for services 2,155 2 498 -- -- 500
Issuance of common stock at $0.23 per
share for services 91,739 92 21,008 -- -- 21,100
Issuance of common stock at $0.21 per
share for services 175,755 176 37,084 -- -- 37,260
Issuance of common stock at $0.23 per
share for services 37,863 38 8,519 -- -- 8,557
Issuance of common stock at $0.23 per
share for services 21,368 21 4,979 -- -- 5,000
Issuance of common stock at $0.21 per
share for services 27,852 28 5,710 -- -- 5,738
Issuance of common stock at $0.24 per
share for services 21,186 21 4,979 -- -- 5,000
Issuance of common stock at $0.22 per
share for services 35,278 35 7,585 -- -- 7,620
Issuance of common stock at $0.38 per
share for services 13,298 13 4,987 -- -- 5,000
Issuance of common stock at $0.38 per
share for services 19,948 20 7,640 -- -- 7,660
Issuance of common stock at $0.37 per
share for services 97,662 98 36,037 -- -- 36,135
Issuance of common stock at $0.25 per
share for services 371,847 372 91,137 -- -- 91,509
Issuance of common stock at $0.25 per
share for services 73,964 74 18,128 -- -- 18,202
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-11
-----------------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT (CONTINUED)
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
-----------------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED TOTAL
COMMON STOCK ADDITIONAL DEFERRED DURING STOCKHOLDERS'
-------------------------- PAID IN CONSULTING DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL FEES STAGE (DEFICIT)
------------ ------------ ------------ ------------ ------------ ------------
Issuance of common stock at $0.29 per
share for services 13,333 13 3,827 -- -- 3,840
Issuance of common stock at $0.33 per
share for services 15,060 15 4,985 -- -- 5,000
Issuance of common stock at $0.24 per
share for services 579,813 580 138,575 -- -- 139,155
Issuance of common stock at $0.28 and
$0.33 per share for services 66,017 66 19,934 -- -- 20,000
Issuance of common stock at $0.36 per
share for services 13,889 14 4,986 -- -- 5,000
Issuance of common stock at $0.33 per
share for services 9,091 9 2,989 -- -- 2,999
Issuance of common stock at $0.28 per
share for services 10,563 11 2,991 -- -- 3,001
Issuance of common stock at $0.33 per
share for services 150,000 150 48,850 (49,000) -- --
Issuance of common stock at $0.28 per
share for services 35,714 36 9,964 -- -- 10,000
Issuance of common stock at $0.33 per
share for services 15,152 15 4,985 -- -- 5,000
Issuance of common stock at $0.28 per
per share for services 17,730 18 4,982 -- -- 5,000
Issuance of common stock at $0.20 and
$0.37 per share for services 79,255 79 19,894 -- -- 19,974
Issuance of common stock at $0.33 per
share for services 33,333 33 9,967 -- -- 10,000
Issuance of common stock at $0.39 per
share for services 220,080 220 85,171 -- -- 85,391
Issuance of common stock at $0.49 per
share for services 7,275 7 3,543 -- -- 3,550
Issuance of common stock at $0.34 per
share for services 27,284 27 9,170 -- -- 9,197
Issuance of common stock at $0.33 per
share for services 158,046 158 51,997 -- -- 52,155
Issuance of common stock at $0.20 per
share for services 836,730 837 166,509 -- -- 167,346
Issuance of cashless warrants 389,168 389 (389) -- -- --
Conversion of accrued salaries to
employee stock options -- -- 300,000 -- -- 300,000
Debt discount on debt issued with
detachable warrants -- -- 119,610 -- -- 119,610
Interest expense related to beneficial
conversion feature -- -- 222,375 -- -- 222,375
Professional fees related to registration
statement -- -- (76,732) -- -- (76,732)
Amortization of deferred consulting
fees -- -- -- 34,083 -- 34,083
Reclassification of derivative liabilities
upon registration of shares underlying
warrants -- -- 1,090,000 -- -- 1,090,000
Net loss -- -- -- -- (2,920,183) (2,920,183)
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - MARCH 31, 2006 25,383,705 $ 25,384 $ 20,322,494 $ (44,917) $(22,062,447) $ (1,759,486)
============ ============ ============ ============ ============ ============
-----------------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-12
--------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006
--------------------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception) Through
2006 2005 March 31, 2006
-------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,920,183) $ (2,096,951) $(22,062,447)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 34,241 39,836 983,993
Amortization of deferred consulting fees 34,083 30,000 64,083
Gain on settlement of debt (131,175) -- (131,175)
Loss on settlement of accrued legal liabilities 142,245 -- 142,245
Gain on sale of property and equipment -- -- (13,065)
Change in estimated fair value of warrant liability 360,125 -- 360,125
Fair market value of warrants issued in connection
with accounts payable and debt related costs -- -- 2,715,736
Fair market value of common stock, warrants and
options issued for services and interest 704,383 339,027 3,212,002
Intrinsic value of stock options issued
to directors -- 424,262 424,262
Amortization of debt discount 259,416 38,809 1,108,025
Beneficial conversion feature of convertible notes payable -- -- 334,304
Impairment of patents and patents pending 81,722 -- 978,949
Impairment of goodwill -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (22,034) (4,606) 129,315
Other assets 20,050 (16,845) (17,200)
Accounts payable and accrued liabilities (118,276) (206,943) 1,513,950
Due to related parties (28,878) (105,955) 1,472,125
-------------------------------------------------
Net cash used in operating activities (1,584,281) (1,559,366) (8,567,550)
-------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (4,651) (30,070) (248,887)
Patents and patents pending (11,000) -- (363,833)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
-------------------------------------------------
Net cash used in investing activities (15,651) (30,070) (584,927)
-------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
continued.........
F-13
--------------------------------------------------------------------------------------------------------------------------
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2006 AND 2005 AND
FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2006 (CONTINUED)
--------------------------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception) Through
2006 2005 March 31, 2006
-------------------------------------------------
Cash flows from financing activities:
Net proceeds from the issuance of notes payable 100,000 130,000 1,710,000
Principal repayments of notes payable (80,000) (22,500) (292,500)
Proceeds from the issuance of convertible notes payable 1,030,000 -- 2,028,000
Net proceeds from the issuance of common stock 1,454,415 1,488,942 6,620,085
Professional fees related to registration statements (76,731) -- (76,731)
-------------------------------------------------
Net cash provided by financing activities 2,427,684 1,596,442 9,988,854
-------------------------------------------------
Net increase in cash 827,752 7,006 836,377
Cash at beginning of period 8,625 1,619 --
-------------------------------------------------
Cash at end of period $ 836,377 $ 8,625 $ 836,377
=================================================
Supplemental disclosure of cash flow information
- Cash paid during the period for:
Interest $ 8,000 $ 34,766 $ 263,258
=================================================
Income taxes $ -- $ -- $ 13,346
=================================================
Supplement schedule of noncash investing and
financing activities:
Debt and accrued interest converted to common stock $ 69,942 $ 318,925 $ 2,436,961
=================================================
Debt discount on notes payable associated with
detachable warrants $ 1,070,860 $ 84,000 $ 1,154,860
=================================================
Issuance of common stock, warrants and options in
settlement of accrued expenses and due to related parties $ 467,346 $ -- $ 980,162
=================================================
Reclassification of derivative liability to
additional paid in capital $ 1,090,000 $ -- $ 1,090,000
=================================================
Issuance of common stock in connection with license
agreements $ -- $ -- $ 18,000
=================================================
Net assets of entities acquired in exchange for
equity securities $ -- $ -- $ 1,597,867
=================================================
Debt placement fees paid by issuance of warrants $ -- $ -- $ 843,538
=================================================
Patent pending acquired for 12,500 shares of common stock $ -- $ -- $ 100,000
=================================================
Common stock issued for prepaid expenses $ -- $ -- $ 161,537
=================================================
--------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
F-14
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Aethlon Medical, Inc. ("Aethlon") engages in the research and development of a
medical device known as the Hemopurifier(TM) that removes harmful substances
from the blood. Aethlon is in the development stage on the Hemopurifier(TM) and
significant research and testing are still needed to reach commercial viability.
Any resulting medical device or process will require approval by the U.S. Food
and Drug Administration ("FDA") or the regulatory agency of any foreign country
where it intends to sell its device. Aethlon has not yet begun efforts to obtain
any FDA approval, which may take several years, but it intends to initiate human
trials in India to obtain regulatory approval there. Since many of Aethlon's
patents were issued in the 1980's, some have expired and other are scheduled to
expire in the near future. Thus, some patents may expire before FDA approval or
approval in a foreign country, if any, is obtained. However, the Company
believes that certain patent applications and/or other patents issued more
recently will help protect the proprietary nature of the Hemopurifier(TM)
treatment technology.
Aethlon is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its planned principal operations.
Aethlon's common stock is quoted on the Over-the-Counter Bulletin Board
administered by the National Association of Securities Dealers ("OTCBB") under
the symbol "AEMD.OB."
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its inactive wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc., Syngen Research, Inc. and Cell Activation, Inc.(hereinafter
collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.
GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has suffered continuing losses from
operations, is in default on certain debt (see Notes 6 and 7), has negative
working capital of approximately $1,921,000, recurring losses from operations
and a deficit accumulated during the development stage of approximately
$22,062,000 at March 31, 2006, which among other matters, raises substantial
doubt about its ability to continue as a going concern. A significant amount of
additional capital will be necessary to advance the development of the Company's
products to the point at which they may become commercially viable. The Company
intends to fund operations through debt and/or equity financing arrangements,
which management believes may be insufficient to fund its capital expenditures,
working capital and other cash requirements (consisting of accounts payable,
accrued liabilities, amounts due to related parties and amounts due under
various notes payable) for the fiscal year ending March 31, 2006. Therefore, the
Company will be required to seek additional funds to finance its long-term
operations.
The Company is currently addressing its liquidity issue by continually seeking
investment capital through the public markets, specifically, through private
placement of common stock and a common stock purchase agreement with Fusion
Capital Fund II, LLC ("Fusion"). As of June 15, 2006, provided certain terms of
the agreement remain in force, the Company can sell Fusion up to $4,314,999 of
the Company's common stock through June 2007. The Company believes that its cash
on hand and the funds available from the common stock purchase agreement with
Fusion will be sufficient to meet its liquidity needs for fiscal 2007. However,
no assurance can be given that the Company will receive any funds in addition to
the funds it has received to date.
F-15
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
GOING CONCERN (continued)
Under such agreement and there is no guarantee that these strategies will enable
the Company to meet its obligations for the foreseeable future. The successful
outcome of future activities cannot be determined at this time and there is no
assurance that, if achieved, the Company will have sufficient funds to execute
its intended business plan or generate positive operating results.
The consolidated financial statements do not include any adjustments related to
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
RISKS AND UNCERTAINTIES
The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.
USE OF ESTIMATES
The Company prepares its consolidated financial statements in conformity with
GAAP, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods. Significant
estimates made by management include, among others, realization of long-lived
assets, valuation of derivative liabilities, estimating fair value associated
with debt and equity transactions and valuation of deferred tax assets. Actual
results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosure About
Fair Value of Financial Instruments," requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. The carrying amount of the Company's cash, accounts payable, accrued
liabilities and notes payable approximates their estimated fair values due to
the short-term maturities of those financial instruments. . Management has
concluded that it is not practical to determine the estimated fair value of
amounts due to related parties. SFAS No. 107 requires that for instruments for
which it is not practicable to estimate their fair value, information pertinent
to those instruments be disclosed, such as the carrying amount, interest rate,
and maturity, as well as the reasons why it is not practicable to estimate fair
value. Information about these related party instruments is included in Note 9.
Management believes it is not practical to estimate the fair value of such
financial instruments because the transactions cannot be assumed to have been
consummated at arm's length, the terms are not deemed to be market terms, there
are no quoted values available for these instruments, and an independent
valuation would not be practicable due to the lack of data regarding similar
instruments, if any, and the associated potential costs.
CONCENTRATIONS OF CREDIT RISKS
Cash is maintained at various financial institutions. The Federal Deposit
Insurance Corporation ("FDIC") insures accounts at each institution for up to
$100,000. At times, cash may be in excess of the FDIC insurance limit. The
Company had no amounts exceeding this limit at March 31, 2006.
F-16
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from two to five years. Repairs and maintenance are charged to
expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation with any gain or loss included in the
statements of operations.
INCOME TAXES
Under SFAS 109, "Accounting for Income Taxes," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carry-forwards. The Company records a valuation allowance for deferred
tax assets when, based on management's best estimate of taxable income in the
foreseeable future, it is more likely than not that some portion of the deferred
income tax assets may not be realized.
LONG-LIVED ASSETS
SFAS 144, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. If the cost basis
of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized.
Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value. SFAS 144 also requires companies to
separately report discontinued operations and extends that reporting requirement
to a component of an entity that either has been disposed of (by sale,
abandonment or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or the
estimated fair value less costs to sell. The provisions of this pronouncement
relating to assets held for disposal generally are required to be applied
prospectively after the adoption date to newly initiated commitments to sell or
dispose of such assets, (as defined), by management. As a result, management
cannot determine the potential effects that adoption of SFAS 144 will have on
the Company's financial statements with respect to future disposal decisions, if
any. Management noted certain impairment indicators requiring review for
impairment during the year ended March 31, 2006 and recorded an impairment loss
on patents totaling $81,722.
EARNINGS PER SHARE
Under SFAS 128, "Earnings per Share," basic earnings per share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares assumed to be outstanding during the period of
computation. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive
(If the Company had net income in each of the years ended March 31, 2006 and
2005, approximately 6,800,000 and 2,100,000 shares would have been considered
additional common stock equivalents, respectively, based on the treasury stock
method). As the Company had net losses for the periods presented, basic and
diluted loss per share are the same, as any additional common stock equivalents
would be antidilutive.
F-17
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SEGMENTS
SFAS 131, "Disclosure About Segments of an Enterprise and Related Information,"
requires public companies to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds significant assets and how the Company reports
revenues and its major customers. The Company currently operates in one segment,
as disclosed in the accompanying consolidated statements of operations.
STOCK BASED COMPENSATION
The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
estimated fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Compensation expense,
if any, is recognized over the applicable service period, which is usually the
vesting period.
SFAS 123, "Accounting for Stock-Based Compensation," changed the method of
accounting for employee stock-based compensation plans to the fair value based
method. For stock options and warrants, fair value is estimated using an option
pricing model that takes into account the stock price at the measurement date,
the exercise price, the expected life of the option or warrant, stock volatility
and the annual rate of quarterly dividends, if any.
The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue account for stock-based compensation issued to
employees using APB 25; however, pro forma disclosures, as if the Company had
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below).
Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purpose of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. Management believes that the
Company accounts for transactions involving stock-based employee compensation in
accordance with FIN 44.
SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an Amendment of FASB Statement No. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.
F-18
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
At March 31, 2006, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 8. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation. Stock options granted under the Plan had exercise prices equal
to or greater than the estimated fair value of the underlying common stock on
the dates of grant. In February 2005, the Company granted 5,303,275 stock
options to directors for past services, all at an exercise price that was $0.08
below the estimated fair value of the underlying common stock on the date of
grant. Accordingly, the Company recorded approximately $424,000 of compensation
expense in the accompanying consolidated statement of operations for the year
ended March 31, 2005. The following table illustrates the effect on net loss and
loss per common share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation.
YEAR ENDED MARCH 31,
----------------------------
2006 2005
------------ ------------
Net loss available to common stockholders, as reported $ 2,920,183 $ 2,096,951
Add back: Recorded intrinsic value -- (424,262)
Pro forma compensation expense 361,111 2,386,474
------------ ------------
Pro forma net loss available to common stockholders $ 3,281,294 $ 4,059,163
============ ============
Loss per common share, as reported
Basic and diluted $ (0.15) $ (0.15)
Loss per common share, pro forma
Basic and diluted $ (0.17) $ (0.29)
The Company follows SFAS No. 123 (as intepreted by EITF Issue No. 96-18,
"Accounting for Equity Instruments That are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services") to account for
transactions involving services provided by third parties where the Company
issues equity instruments as part of the total consideration.
Pursuant to paragraph 8 of SFAS No. 123, the Company accounts for such
transactions using the fair value of the consideration received (i.e. the value
of the goods or services) or the fair value of the equity instruments issued,
whichever is more reliably measurable. The Company applies EITF Issue No. 96-18,
in transactions, when the value of the goods and/or services are not readily
determinable and (1) the fair value of the equity instruments is more reliably
measurable and (2) the counterparty receives equity instruments in full or
partial settlement of the transactions, using the following methodology:
a) For transactions where goods have already been delivered or services
rendered, the equity instruments are issued on or about the date the
performance is complete (and valued on the date of issuance).
b) For transactions where the instruments are issued on a fully vested,
non-forfeitable basis, the equity instruments are valued on or about
the date of the contract.
c) c) For any transactions not meeting the criteria in (a) or (b) above,
the Company re-measures the consideration at each reporting date based
on its then current stock value.
F-19
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION (continued)
In December 2004, the FASB issued SFAS No. 123 (R), "Share-Based Payments,"
which requires that the compensation cost relating to share-based payment
transactions (including the cost of all employee stock options) be recognized in
the financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123 (R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123 (R) replaces SFAS No. 123 and
supersedes APB 25. As originally issued, SFAS No. 123 established as preferable
a fair-value-based method of accounting for share-based payment transactions
with employees. However, that pronouncement permitted entities to continue
applying the intrinsic-value model of APB 25, provided that the financial
statements disclosed the pro forma net income or loss based on the preferable
fair-value method.
The Company is required to apply SFAS No. 123 (R) in the first interim or annual
reporting period of the registrant's first fiscal year that begins after
December 15, 2005. Thus, the Company's consolidated financial statements will
reflect an expense for (a) all share-based compensation arrangements granted on
or after April 1, 2006 and for any such arrangements that are modified,
cancelled, or repurchased on or after that date, and (b) the portion of previous
share-based awards for which the requisite service has not been rendered as of
that date, based on the grant-date estimated fair value. Management has not yet
determined the future effect of SFAS 123 (R) on its consolidated financial
statements.
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion 29, Accounting for Nonmonetary
Transactions". The amendments made by SFAS No. 153 are based on the principle
that exchanges of nonmonetary assets should be measured using the estimated fair
value of the assets exchanged. SFAS No. 153 eliminates the narrow exception for
nonmonetary exchanges of similar productive assets and replaces it with a
broader exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has "commercial substance" if the
future cash flows of the entity are expected to change significantly as a result
of the transaction. This pronouncement is effective for nonmonetary exchanges in
fiscal periods beginning after June 15, 2005. The adoption of this pronouncement
is not expected to have a material impact on the Company's consolidated
financial statements.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes" and FASB
Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements."
This pronouncement applies to all voluntary changes in accounting principle, and
revises the requirements for accounting for and reporting a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle, unless it is
impracticable to do so. This pronouncement also requires that a change in the
method of depreciation, amortization, or depletion for long-lived, non-financial
assets be accounted for as a change in accounting estimate that is affected by a
change in accounting principle. SFAS No. 154 retains many provisions of APB
Opinion No. 20 without change, including those related to reporting a change in
accounting estimate, a change in the reporting entity, and correction of an
error. The pronouncement also carries forward the provisions of FASB No. 3 which
govern reporting accounting changes in interim financial statements. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements, including those
that are in a transition phase as of the effective date of SFAS No. 154. The
adoption of this pronouncement is not expected to have a material impact on the
Company's future consolidated financial statements.
F-20
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)
In February 2006, the FASB issued SFAS No. 155 entitled "Accounting for Certain
Hybrid Financial Instruments," an amendment of SFAS No. 133 ("Accounting for
Derivative Instruments and Hedging Activities") and SFAS No. 140 ("Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities"). In this context, a hybrid financial instrument refers to certain
derivatives embedded in other financial instruments. SFAS No. 155 permits fair
value re-measurement of any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation under SFAS No. 133.
SFAS No. 155 also establishes a requirement to evaluate interests in securitized
financial assets in order to identify interests that are either freestanding
derivatives or "hybrids" which contain an embedded derivative requiring
bifurcation. In addition, SFAS No. 155 clarifies which interest/principal strips
are subject to SFAS No. 133, and provides that concentrations of credit risk in
the form of subordination are not embedded derivatives. SFAS No. 155 amends SFAS
No. 140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative. When SFAS No. 155 is adopted, any difference
between the total carrying amount of the components of a bifurcated hybrid
financial instrument and the fair value of the combined "hybrid" must be
recognized as a cumulative-effect adjustment of beginning deficit/retained
earnings.
SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. Earlier adoption is permitted only as of the beginning of a fiscal year,
provided that the entity has not yet issued any annual or interim financial
statements for such year. Restatement of prior periods is prohibited. The
Company has not determined the impact of SFAS No. 155 on its future consolidated
financial statements.
Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not
believed by management to have a material impact on the Company's present or
future consolidated financial statements.
PATENTS
The Company capitalizes the cost of patents and patents pending, some of which
were acquired, and amortizes such costs over the shorter of the remaining legal
life or their estimated economic life, upon issuance of the patent.
STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE
The Company granted warrants in connection with the issuance of certain notes
payable (see Notes 6, 7 and 8). Under Accounting Principles Board Opinion No.
14, "Accounting for Convertible Debt and Debt Issued With Stock Purchase
Warrants", as amended, the relative estimated fair value of such warrants
represents a discount from the face amount of the notes payable. Accordingly,
the relative estimated fair value of the warrants in those certain transactions
where the warrants qualified for equity classification has been recorded in the
consolidated financial statements as a discount from the face amount of the
notes. The discount is amortized using the effective yield method over the
respective term of the related notes payable.
F-21
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE
The convertible feature of certain notes payable (see Notes 6 and 7) provides
for a rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging
Issues Task Force Issue No. 98-5 ("EITF Issue No. 98-5"), "Accounting for
Convertible Securities With Beneficial Conversion Features or Contingently
Adjustable Conversion Ratio" and Emerging Issues Task Force Issue No. 00-27,
"Application of EITF Issue No. 98-5 to Certain Convertible Instruments," the
estimated fair value of the BCF is recorded in the consolidated financial
statements as a discount from the face amount of the notes. Such discounts are
amortized to interest expense over the term of the notes using the effective
yield method. The Company has determined the unamortized fair value of such BCF
to be approximately $127,761 and $0 for the years ended March 31, 2006 and 2005,
respectively.
CLASSIFICATION OF WARRANT OBLIGATION
In connection with the issuance of the 10% Series A Convertible Notes (see Note
7), the Company had an obligation to file a registration statement covering the
common shares underlying the convertible notes and related warrants (the
"Registrable Securities", as defined in the Registration Rights Agreement). The
obligation to file the registration statement met the criteria of an embedded
derivative to be bifurcated pursuant to SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended. Additionally, the Company was
required to classify the warrant obligation as a derivative liability, recorded
at its fair value, in accordance with SFAS No. 133 under EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed To, and Potentially
Settled In, a Company's Own Stock." The classification of the warrant obligation
was evaluated at each reporting date and until such time a registration
statement which includes the shares underlying the warrants became effective,
with changes in fair value included in earnings.
RESEARCH AND DEVELOPMENT EXPENSES
The Company incurred approximately $754,000 and $497,000 of research and
development expenses during the years ended March 31, 2006 and 2005,
respectively, which are included in various operating expenses in the
accompanying consolidated statements of operations.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has not entered into any off-balance sheet arrangements that have or
are reasonably likely to have a current or future material effect on the
Company's financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2005 financial statement
presentation to Correspond to the 2006 presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at March 31, 2006:
Furniture and office equipment $ 243,724
Accumulated depreciation (231,346)
---------------
$ 12,378
===============
Depreciation expense for the years ended March 31, 2006 and 2005 approximated
$23,000 and $16,000, respectively.
F-22
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
3. PATENTS
Patents include both foreign and domestic patents. There was one patent pending
at March 31, 2006 and 2005. The unamortized cost of patents and patents pending
is written off when management determines there is no future benefit. During the
years ended March 31, 2006 and 2005, patents with net carrying values of $81,722
and $0, respectively, were written off as impairment expense. At March 31, 2006,
the gross carrying amount of patents and the related accumulated amortization
approximated $157,000 and $26,000, respectively. Amortization of patents
approximated $12,000 and $23,000 during the years ended March 31, 2006 and 2005,
respectively. Amortization expense on patents is estimated to be approximately
$9,000 per year for the next five fiscal years. Some of the Company's patents
have expired and others may expire before FDA approval, if any, is obtained.
4. OTHER ASSETS
Other assets consist of deposits at March 31, 2006.
5. DEBT-TO-EQUITY CONVERSION PROGRAM
In March 2002, for a limited time, the Company extended an offer to certain note
holders and vendors to convert past due amounts into restricted common stock and
warrants to purchase common stock of the Company. The offer entailed the
conversion of liabilities at a rate of one share and one-half of a warrant for
every $1.25 converted. The warrants had an exercise price of $2.00 per share and
expired three years from the date of issuance; none are outstanding at March 31,
2006 and 2005.
6. NOTES PAYABLE
12% NOTES
From August 1999 through September 2000, the Company entered into arrangements
for the issuance of notes payable from private placement offerings (the "12%
Notes") in the original aggregate amount of $422,500. The 12% Notes bore annual
interest at 12% (15% after maturity), required interest to be paid quarterly,
matured one year from the date of issuance, and carried detachable warrants.
These notes have no acceleration provisions. In June 2004, one such note in the
principal amount of $12,500 plus accrued interest was repaid. In December 2004,
each of two such notes in the principal amount of $25,000, plus $17,778 accrued
interest, were converted to 87,303 restricted common shares at $0.49 per share.
On May 27, 2005 the Company issued a promissory note to an accredited investor
in an amount of $100,000 with 12% interest maturing on December 1, 2005. In
conjunction with the issuance of the Note, the Company also issued a 12-month
warrant to acquire 400,000 shares of Common Stock at $0.25 per share.
Accordingly, this warrant has been valued using a Black-Scholes option pricing
model and an associated discount of $41,860, was accreted to interest expense
over the term of the Note. This entire amount was included in interest expense
during the fiscal year ended March 31, 2006.
At March 31, 2006, $372,500 of principal balance of the 12% Notes were
outstanding and delinquent, in default, and bore interest at the default rate of
15%.
F-23
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
6. NOTES PAYABLE (continued)
10% NOTES
In October 2004, the Company issued two $40,000, 10% one-year promissory notes
(the "10% Notes") each with 80,000 three-year warrants to purchase common stock
at $0.50 per share and 44,444 three-year warrants to purchase common stock at
$0.90 per share for cash in the total amount of $80,000 to two accredited
individual investors. In accordance with GAAP, the proceeds of the financing
have been allocated to the debt and the warrants, based on their relative fair
values. Accordingly, a discount of $46,000 has been recorded as a reduction in
the debt blance, and the off-setting credit has been recorded as additional
paid-in capital. The debt discount is amortized and charged to interest expense
over the life of the debt. During each of the fiscal year ended March 31, 2006
and 2005, the Company amortized approximately $23,000 to interest expense. The
entire principal balance of the 10% Notes totaling $80,000, and associated
accrued interest of $8,000, were repaid in October 2005. This transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
In October 2004, the Company issued a $50,000, 10% one-year promissory note plus
100,000 three-year warrants to purchase common stock at $0.50 per share and
55,555 three-year warrants to purchase common stock at $0.90 per share for cash
in the amount of $50,000 to an accredited individual investor. In accordance
with GAAP, the proceeds of the financing were allocated to the debt and the
warrants in fiscal 2005, based on their relative fair values. Accordingly, a
discount of $38,000 was recorded as a reduction in the debt balance, and the
off-setting credit was recorded as additional paid-in capital. The debt discount
is being amortized and charged to interest expense over the term of the debt.
During the year ended March 31, 2006 and 2005, the Company amortized
approximately $22,000 and $16,000 to interest expense, respectively. During the
year ended March 31, 2005, $20,000 in principal amount of this note was reduced
through application of the note to exercise a portion of the warrants. On March
23, 2006 the Company issued 140,000 restricted shares of common stock in
exchange for the remaining $30,000 principal balance and approximately $4,600 of
accrued interest associated with this note. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
From time to time, the Company issued convertible notes payable ("10% Note") to
various investors, bearing interest at 10% per annum, with principal and
interest due six months from the date of issuance. The 10% Notes require no
payment of principal or interest during the term and may be converted to common
stock of the Company at the conversion price of $0.50 per share at any time at
the option of the noteholder. The total amount of the original notes issued was
$275,000. There were two remaining 10% Notes outstanding at March 31, 2004. As
of such date and through March 31, 2006, these notes were classified as notes
payable since they were no longer convertible.
In July 2004, the Company repaid one of the two remaining 10% Note in the
principal amount of $10,000, plus accrued interest. This note was classified as
notes payable as of March 31, 2004 since the note was no longer convertible at
such time.
The remaining 10% Note in the amount of $5,000, was past due and in default at
March 31, 2006. At March 31, 2006, interest payable on this note totaled $2,375.
9% NOTE
In April 2003, the Company issued a convertible note in the amount of $150,000
("9% Note"), bearing interest at 9% per annum, with principal and interest due
in June 2003, which is in default and currently bears penalty interest at 18%
per annum. The 9% Note required no payment of principal or interest during the
term and was convertible into common stock of the Company at the conversion
price of $0.25 per share through June 2003 at the option of the noteholder. As
this note is no longer convertible, the outstanding balance totaling $150,000
has been recorded as notes payable in the accompanying consolidated balance
sheet.
Notes payable, which are all in default, consist of the following at March 31,
2006:
12% Notes payable, all past due $372,500
10% Note payable, past due 5,000
9% Note payable, past due 150,000
--------
$527,500
========
Management's plans to satisfy the remaining outstanding balance on these notes
include converting the notes to common stock at market value or repayment with
available funds.
7. CONVERTIBLE NOTES PAYABLE
8% CONVERTIBLE NOTE
In November 2000, the Company issued convertible notes payable ("8% Convertible
Notes") with original issue amounts totaling $395,000, bearing interest at 8%
per annum, with principal and accrued interest due on November 1, 2002.
F-24
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
7. CONVERTIBLE NOTES PAYABLE (continued)
8% CONVERTIBLE NOTE (continued)
The 8% Convertible Notes required the Company to file an effective registration
statement by February 2001. The Company filed a Form SB-2 with the SEC in
December 2000; however, such registration statement was never declared effective
and was subsequently abandoned. However, as the underlying securities are no
longer restricted under Rule 144 of the Securities Act of 1933, the Company no
longer plans on filing a registration statement in connection with this
transaction. The Company accrued and expensed penalties approximating $244,000
through March 31, 2004 in connection with not filing an effective registration
statement. During the year ended March 31, 2005 it was discovered that the
penalties did not have to be paid. Accordingly, such amount was reversed in
fiscal 2005 and is included as a credit to interest expense in the accompanying
consolidated statements of operations.
There was one remaining 8% Convertible Note with an outstanding principal
balance of $125,000 at March 31, 2004. This note balance, including accrued
interest of $38,370, was converted in September 2004 to 479,513 shares of common
stock
15% CONVERTIBLE NOTE
On May 16, 2005 the Company issued Fusion Capital ("Fusion") a $30,000
Convertible Promissory Note (the "Convertible Note") with an interest rate of
fifteen percent (15%) per annum that matured on August 15, 2005 (the "Maturity
Date"). In addition, the Company issued Fusion a five-year warrant to purchase
300,000 shares of the Company's common stock at an exercise price of $0.25 per
share (the "Warrant"). In accordance with EITF Issue No. 98-5, EITF Issue No.
00-27 and APB No. 14, the Company recorded debt discounts associated with
conversion feature and the warrants totaling $30,000 which was entirely
amortized to interest expense during the fiscal year ended March 31, 2006. The
Convertible Note and approximately $5,000 in associated accrued interest was
exchanged for 174,716 shares of restricted common stock on March 23, 2006.
10% SERIES A CONVERTIBLE NOTES
From July 11, 2005 through December 15, 2005 the Company received cash
investments totaling $1,000,000 from accredited investors based on agreed-upon
terms reached on the cash receipt dates. Such investments were documented in
November and December 2005 in several 10% Series A Convertible Notes. The 10%
Series A Convertible Notes accrue interest at a rate of ten percent (10%) per
annum and mature on January 2, 2007. The 10% Series A Convertible Notes are
convertible into shares of common stock at any time at the election of the
holder at a conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date.
In addition, upon conversion, the Company is obligated to issue three-year
Warrants (the "Series A Warrants") to purchase a number of shares equal to the
number of shares into which the Series A Notes can be converted at an exercise
price of $0.20.
The Conversion Option
SFAS No. 133 states that a contract issued by an entity that is both (a) indexed
to its own stock and (b) would be classified in stockholders' equity if it were
a freestanding financial instrument is not a derivative for purposes of that
pronouncement. Management has concluded that the conversion option associated
with the 10% Series A Convertible Notes is "indexed to the Company's own stock"
as that term is defined by EITF Issue No. 01-6, "The Meaning of Indexed to
Company's Own Stock". In addition, since such notes have been determined to be
"conventional convertible debt instruments" as defined in EITF Issue No. 05-2,
"The Meaning of Conventional Convertible Debt Instrument" in Issue 00-19", the
requirements of EITF Issue No. 00-19 do not apply. Lastly, the debt host
contract is not a derivative in its entirety and (based on SFAS No. 133) the
conversion option need not be bifurcated from such contract. Therefore, the
conversion option is not a derivative instrument as contemplated by EITF Issue
No. 00-19 or SFAS No. 133. As explained below, the Company has therefore applied
intrinsic value accounting to the BCF embedded in the conversion option.
Intrinsic Value Accounting for the BCF
The Company has accounted for the BCF associated with the 10% Series A
Convertible Notes in accordance EITF Issue No. 98-5, EITF Issue No. 00-27, and
APB No. 14. The convertible feature of the 10% Series A Convertible Notes
provides for a rate of conversion that is below market value. The excess of the
proceeds over the estimated fair value of the warrants (see "Accounting for the
Warrants" below) was used to calculate the effective conversion price per share.
Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated the fair value
of such BCF to be $270,125 and recorded such amount as a debt discount against
the face amount of the notes. Such discount is being accreted to interest
expense over the term of the notes. Total interest expense on the 10% Series A
Convertible Notes for amortization of the above BCF debt discount totaled
$142,365 for the fiscal year ended March 31, 2006.
F-25
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
7. CONVERTIBLE NOTES PAYABLE (continued)
10% SERIES A CONVERTIBLE NOTES (continued)
Accounting for the Warrants
Under this transaction, the Company is obligated to register for resale the
common shares underlying the warrants, and as a result, the embedded derivative
associated with this warrant obligation does not meet the scope exception of
paragraph 11(a) of SFAS No. 133. Specifically, at the commitment date, the
Company did not have any uncommitted registered shares to settle the warrant
obligation and accordingly, such obligation was required to be classified as a
liability (outside of stockholders' deficit) in accordance with EITF Issue No.
00-19. The Series A Warrants were valued at $729,875 on the commitment date
using a Binomial Lattice option pricing model. Such amount was recorded as a
derivative liability and an offsetting debt discount against the face amount of
the 10% Series A Convertible Notes. Such debt discount will be expensed as
future conversions occur.
On January, 2006, the registration statement which included the shares
underlying the 10% Series A Convertible Notes and related warrants was deemed
effective. Accordingly, the Company revalued the warrants at such date, totaling
$1,090,000, with the change in fair value of the warrant liability totaling
$360,125 expensed in the accompanying consolidated statements of operations for
the year ended March 31, 2006.
If the effectiveness of the registration statement is not maintained, the
Company could incur liquidated damages as described in the related registration
rights agreement.
8. EQUITY TRANSACTIONS
2003 CONSULTANT STOCK PLAN
In August 2003, the Company adopted the 2003 Consultant Stock Plan (the "Stock
Plan"), which provides for grants of common stock through August 2013, to assist
the Company in obtaining and retaining the services of persons providing
consulting services for the Company. A total of 1,000,000 common shares are
reserved for issuance under the Stock Plan. On March 29, 2004, the Company filed
a registration statement on Form S-8 for the purpose of registering 1,000,000
common shares issuable under the Stock Plan under the Securities Act of 1933. On
August 29, 2005, the Company filed a Form S-8 for the purpose of registering an
additional 2,000,000 shares, for a total of 3,000,000 common shares reserved
under the Plan.
2005 DIRECTORS COMPENSATION PROGRAM
In February 2005, the Company adopted the 2005 Directors Compensation Program
(the "Directors Compensation Program") to assist in obtaining and retaining the
services of outside directors. Under the Directors Compensation Program, a newly
elected director will receive a one time grant of a non-qualified stock option
of 1.5% of the common stock outstanding at the time of election. The options
will vest one-third at the time of election to the board and the remaining
two-thirds will vest equally at year end over three years. Additionally, each
director will also receive an annual $25,000 non-qualified stock option
retainer, $15,000 of which is to be paid at the first of the year to all
directors who are on the Board prior to the first meeting of the year and a
$10,000 retainer will be paid if a director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned.
F-26
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK
In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In April 2004, the Company issued 50,000 shares of restricted common stock to
Fusion Capital Fund II, LLC, an accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. The Company recorded no
expense related to the issuance of these shares since they were related to
equity fund raising activities. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.
In May 2004, the Company issued 225,000 shares of common stock at $0.44 per
share and 225,000 warrants to purchase the Company's common stock at a price of
$0.76 per share to legal counsel for legal services in the amount of $99,000,
which was recorded as expense in the accompanying consolidated financial
statements. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares of common stock and 113,636 warrants to purchase the Company's
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In May 2004, the Company issued a total of 1,415,909 shares of restricted stock
at a price of $0.44 per share for cash totaling $623,000 to fourteen accredited
investors. In connection with the issuance of these shares, the Company granted
the stockholders 1,640,908 warrants to purchase the Company's common stock at a
price of $0.76 per share. The warrants vested immediately and expire on the
fifth anniversary from the date when a registration statement covering the
common stock underlying such warrants is declared effective. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
In July 2004, the Company issued 10,715 shares of restricted common stock at
$0.70 per share to an accredited individual for employee placement services in
the amount of $7,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
In July 2004, the Company issued 6,850 shares of restricted common stock at
$0.73 per share to an accredited individual for consulting services on
opportunities for the Company's Hemopurifier(TM) within the biodefense
marketplace in the amount of $5,000. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.
In September 2004, the Company issued 479,513 shares of restricted common stock
to an accredited investor, in conjunction with the conversion of $125,000 in
principal amount of notes, plus accrued interest, at $0.34 per share, in
accordance with their convertible note agreement (see Note 7). This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.
F-27
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In November and December 2004, the Company issued 80,000 shares of restricted
common stock to an accredited individual investor in connection with the
exercise of 80,000 warrants at $0.25 per share for consideration of a $20,000
reduction in the principal amount of a 10% one-year promissory note. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In December 2004, the Company issued 461,667 shares of restricted common stock
to two accredited individual investors in connection with the exercise of
461,667 warrants at $0.25 per share for cash totaling $115,417. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.
In December 2004, the Company repaid two $25,000 12% promissory notes, including
accrued interest of $17,778 each, through the issuance of 87,303 restricted
common shares at $0.49 per share to each of two separate accredited individual
investors. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.
In December 2004, the Company issued 60,000 shares of restricted common stock at
$0.50 per share under a consulting agreement with an accredited individual
investor, for investor relations consulting services to the Company. The fair
value of the transaction of $30,000 was recorded as deferred compensation and
presented as an offset to additional paid-in capital in the accompanying
consolidated financial statements. Such amount is being amortized to expense
over the six month term of the agreement. At March 31, 2005, $15,000 of such
amount remained unamortized. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933. The remaining $15,000
balance in deferred consulting fees were amortized during the fiscal year ended
March 31, 2006.
In January 2005, the Company issued 55,556 shares of restricted common stock at
$0.36 per share and a warrant to purchase 55,556 shares of common stock at $0.44
per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.
In January 2005, the Company issued 66,666 shares of restricted common stock at
$0.45 per share to an accredited individual investor under a consulting
agreement for investor relations services to the Company. The fair value of the
transaction of $30,000 was recorded as deferred compensation and presented as an
offset to additional paid-in capital in the accompanying consolidated financial
statements. Such amount is being amortized to expense over the six month term of
the agreement. At March 31, 2005, $15,000 of such amount remained unamortized.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933. The remaining $15,000 balance in deferred consulting
fees were amortized during the fiscal year ended March 31, 2006.
In January 2005, the Company issued 25,834 shares of restricted common stock to
an accredited individual investor in connection with the exercise of a warrant
to purchase 25,834 shares of common stock at $0.25 per share for cash totaling
$6,459. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.
In February 2005, the Company issued 139,063 shares of restricted common stock
to an accredited individual investor in connection with the exercise of a
warrant to purchase 139,063 shares of common stock at $0.25 per share for cash
totaling $34,766. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.
F-28
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In February 2005, the Company issued 90,000 shares of restricted common stock at
$0.27 per share and a three-year warrant to purchase 90,000 shares of common
stock at $0.34 per share for cash in the amount of $24,300 to an accredited
individual investor. This transaction was exempt from registration pursuant to
Section 4(2)of the Securities Act of 1933.
During the year ended March 31, 2005, the Company issued an additional total of
1,416,958 shares of restricted common stock at prices ranging from $0.25 to
$0.52 for total cash proceeds of approximately $541,000.
During the year ended March 31, 2005, the Company issued an additional 557,647
shares of restricted common stock at prices ranging from $0.25 to $0.55 under
various consulting service agreements for total recorded value of approximately
$196,000. All services on these agreements were completed and expensed during
the year ended March 31, 2005.
In April 2005, the Company issued 9,740 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.31 per share in payment for scientific consulting services to
the Company valued at $3,000.
In April 2005, the Company issued 25,134 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $7,500.
In April 2005, the Company issued 31,424 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $7,900.
During the year ended March 31, 2006, the Company issued 3,990,807 shares of
common stock at prices between $0.25 to and $0.76 per share to Fusion Capital
under its $6,000,000 common stock purchase agreement for cash proceeds totaling
$1,436,815. These shares are registered pursuant to the Company's Form SB-2
registration statement effective December 7, 2004.
During the quarter ended June 30, 2005, the Company issued 95,420 shares of
common stock pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.262 per share in payment for
regulatory affairs consulting services to the Company valued at $25,000.
In May 2005, the Company issued 33,228 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $8,440.
In May 2005, the Company issued 24,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.25 per share in payment for investor relations consulting
services to the Company valued at $6,000.
In May 2005 the Company issued 100,000 shares of common stock and a warrant to
purchase 400,000 shares of common stock at a purchase price of $0.18 per share
to an accredited investor for $17,600. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.
F-29
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In May 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 34,352 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.26 per share in payment for scientific consulting services to
the Company valued at $3,000.
In June 2005, the Company issued 21,008 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2005, the Company issued 836,730 shares of restricted common stock and a
three-year warrant to purchase 418,365 shares of the Company's restricted common
stock at an exercise price of $0.25 to legal counsel as an inducement to settle
accrued past due legal services payable in the amount of $167,346 which had been
expensed in the prior fiscal year. At the time of the settlement, the shares of
the Company's restricted common stock were valued at $209,183 and, using a
Black-Scholes option pricing model, the warrant was valued at $100,408. The
non-cash additional consideration of $142,245 has been recorded as professional
fees expense during the fiscal year ended March 31, 2006.
In June 2005, the Company issued 12,605 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for scientific consulting services to
the Company valued at $3,000.
During the quarter ended June 30, 2005, the Company expensed $30,000 of deferred
consulting fees, which were included in additional paid-in capital at March 31,
2005, as the related consulting services were completed.
In July 2005, the Company issued 43,479 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $10,000.
In July 2005, the Company issued 2,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $500.
In August 2005, the Company issued 37,863 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $8,557.
F-30
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $21,100.
In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $37,260.
In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.21 per share in payment for regulatory affairs consulting
services to the Company valued at $5,738.
In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.24 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.22 per share in payment for regulatory affairs consulting
services to the Company valued at $7,620.
In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $7,660.
In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company valued at $36,135.
In November 2005, the Company issued 13,298 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.38 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In December 2005, the Company issued 371,847 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan at $0.25 per share in payment of general
legal fees valued at $91,509.
In December 2005, the Company issued 73,964 shares of restricted common stock at
$0.25 per share in payment of legal fees related to capital raising transactions
valued at $18,202.
F-31
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In December 2005, the Company issued 13,333 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $3,840.
In December 2005, the Company issued 15,060 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In January 2006, the Company issued 579,813 shares of restricted common stock at
$0.24 per share in payment for patent fees valued at $139,155.
In January 2006, the Company issued 66,017 shares of restricted common stock at
Prices ranging from $0.28 to $0.33 per share in payment for investor relations
valued at $20,000.
In January 2006, the Company issued 9,091 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In January 2006, the Company issued 13,889 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.36 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In February 2006, the Company issued 10,563 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In March 2006, the Company issued 17,730 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In March 2006, the Company issued 79,255 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.28 per share in payment for Corporate communications consulting
services to the Company valued at $19,974.
In March 2006, the Company issued 110,040 shares of common stock to legal
counsel pursuant to the Company's S-8 registration statement covering the
Company's 2003 Consultant Stock Plan and 110,040 shares of restricted stock at
$0.39 per share in payment of general legal fees valued at $85,392.
In March 2006, the Company issued 7,275 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.49 per share in payment for regulatory affairs consulting
services to the Company.
In March 2006, the Company issued 27,284 shares of common stock to legal counsel
pursuant to the Company's S-8 registration statement covering the Company's 2003
Consultant Stock Plan at $0.34 per share in payment of general legal fees valued
at $9,197.
F-32
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
COMMON STOCK (continued)
In March 2006, the Company issued 158,046 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.33 per share in payment for regulatory affairs consulting
services to the Company valued at $52,155.
In March 2006, the Company converted a $30,000 10% promissory notes held by an
accredited individual investor, including accrued interest of $4,564, through
the issuance of 140,000 restricted common shares at $0.25 per share.
In March 2006, a $30,000 15% convertible note, including accrued interest of
$4,943, was converted at $0.20 per share for 174,716 shares of common stock.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.
In March 2006, the Company issued 150,000 shares of restricted common stock
under a one year investor relations consulting agreement which was valued at
$49,000 and being amortized over a one year period. Approximately $4,000 was
amortized during the year ended March 31, 2006. As a result, the remaining
balance of $44,917 represents that entire balance of deferred consulting fees
(contra equity) in accompanying consolidated balance sheet.
In March 2006, the Company issued 35,714 shares of restricted common stock
payment of professional services related to investor relations valued at
$10,000.
In March 2006, the Company issued 15,152 shares of restricted common stock at
$0.33 per share in payment of professional services related to investor
relations valued at $5,000.
In March 2006, the Company issued 33,333 shares of restricted common stock at
$0.30 per share in payment of an option agreement valued at $10,000.
WARRANTS
During the year ended March 31, 2005, the Company granted 568,181 warrants to an
investor in connection with a commitment fee for the purchase of common stock.
The warrants have an exercise price of $0.76 per share, vest immediately and are
exercisable through May 2009. As the warrants were issued in connection with
equity financing, no expense has been recorded in the accompanying consolidated
financial statements.
During the year ended March 31, 2005, the Company granted 847,727 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.76 per share, vest immediately and are exercisable through
May 2009. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.
During the year ended March 31, 2005, the Company issued 113,636 warrants to
purchase common stock for $0.76 per share, which are exercisable through May
2009 and vested upon grant. The warrants were issued in connection with the
conversion of notes payable (see Notes 7 and 8). These warrants were valued
using the Black Scholes option pricing model; the relative pro-rata estimated
fair value was insignificant and was charged to interest expense upon grant.
During the year ended March 31, 2005, the Company issued 225,000 warrants to
purchase common stock for $0.76 per share, which are exercisable through May
2009 and vested upon grant. The warrants were issued in connection with common
stock issued for legal services expense totaling $99,000 (see "Common Stock"
above).
F-33
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
During the year ended March 31, 2005, the Company issued 260,000 warrants to
purchase common stock for $0.50 per share, which vested upon grant and expire in
October 2007. The warrants were issued in connection with the issuance of notes
payable (see Note 7). These warrants were valued using the Black Scholes option
pricing model; the relative pro-rata estimated fair value is being amortized to
interest expense over the life of the notes.
During the year ended March 31, 2005, the Company issued 144,443 warrants to
purchase common stock for $0.90 per share, which vested upon grant and expire in
October 2007. The warrants were issued in connection with the issuance of notes
payable (see Note 7). These warrants were valued using the Black Scholes option
pricing model; the relative pro-rata estimated fair value was amortized to
interest expense over the life of the notes.
During the year ended March 31, 2005, the Company granted 55,556 warrants to An
investor in connection with the purchase of common stock. The warrants have an
exercise price of $0.44 per share, vest immediately and are exercisable through
January 2008. As the warrants were issued in connection with equity financing,
no expense has been recorded in the accompanying consolidated financial
statements.
During the year ended March 31, 2005, the Company granted 90,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.34 per share, vest immediately and are exercisable through
February 2008. As the warrants were issued in connection with equity financing,
no expense has been recorded in the accompanying consolidated financial
statements.
As noted under "Common Stock", 1,206,564 warrants with an exercise price of
$0.25 per share, which were granted to investors in connection with the purchase
of common stock, were exercised during the year ended March 31, 2005.
On May 16, 2005, the Company granted 100,000 warrants to an accredited investor
in connection with the purchase of 100,000 restricted common shares for $17,600.
the warrants have an exercise price of $0.176 and are exercisable through May
2008.
On May 16, 2005, the Company granted 300,000 warrants to Fusion Capital Fund II,
LLC in connection with the issuance of a 15% Convertible Note. The warrants have
an exercise price of $0.25 per share and are exercisable through May 2010.
On May 27, 2005, the Company granted 400,000 warrants to an accredited investor
in connection with the issuance of a $100,000 12% note payable. The warrants had
an exercise price of $0.25 and expired on May 27, 2006.
On June 27, 2005, the Company granted three-year warrants to purchase 418,365
shares of the Company's restricted common stock at an exercise price of $0.25 to
legal counsel as an inducement to settle accrued past due legal services
payable.
From July 11, 2006 through December 14, 2005, the Company granted three-year
warrants to purchase 5,000,000 shares of common stock to the holders of an
aggregate of $1,000,000 in 10% Series A Convertible Notes. The warrants have an
exercise price of $0.20 and will be issued upon conversion of the underlying 10%
Series A Convertible Notes.
On March 31, 2006, as an inducement to exercise 568,181 warrants at an exercise
price of $0.76 per share, the Company issued five-year replacement warrants in
like amount to Fusion Capital Fund II, LLC. The 568,181 replacement warrants
have an exercise price of $0.76. Such warrants were valued using Binomial Option
Pricing model and such vale was insignificant.
F-34
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
WARRANTS (continued)
A summary of the aggregate warrant activity for the years ended March 31, 2006
and 2005 is presented below:
Year Ended March 31,
-----------------------------------------------------
2006 2005
------------------------- -------------------------
Weighted Weighted
Average Exercise Average Exercise
Warrants Price Warrants Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 2,833,834 $ 0.91 3,793,194 $ 2.22
Granted 1,786,546 $ 0.41 2,311,543 0.71
Exercised (568,182) $ 0.76 (1,206,564) 0.25
Cancelled/Forfeited (260,291) $ 3.30 (2,064,339) 2.75
----------- --------- ---------- ---------
Outstanding, end of year 3,791,908 $ 0.61 2,833,834 $ 0.91
=========== ========= ========== =========
Exercisable, end of year 3,791,908 $ 0.61 2,833,834 $ 0.91
=========== ========= ========== =========
Weighted average estimated fair
value of warrants granted $ 0.23 $ 0.60
========= =========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented utilizing the Black-Scholes and
Binomial Lattice option pricing models:
Years Ended March 31,
2006 2005
----------- -----------
Risk free interest rate 4.18%-4.3% 2.00%
Average expected life 3 years 2 years
Expected volatility 72% - 97% 139%
Expected dividends None None
The detail of the warrants outstanding and exercisable as of March 31, 2006 is
as follows:
Warrants Outstanding Warrants Exercisable
--------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life (Years) Price Outstanding Price
--------------------------- -------------- ------------- ---------- --------------- ----------
$0.18 - $0.20 100,000 3.00 $ 0.18 100,000 $ 0.18
$0.25 - $0.44 1,443,921 1.76 $ 0.26 1,443,921 $ 0.26
$0.50 - $0.90 2,158,987 3.63 $ 0.74 2,158,987 $ 0.74
$2.75 - $4.00 89,000 0.73 $ 3.79 89,000 $ 3.79
-------------- ---------------
3,791,908 3,791,908
============== ===============
F-35
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
OPTIONS
At March 31, 2006 the Company had issued 1,337,825 options to outside directors
and 3,965,450 options to employee-directors under the 2005 Directors
Compensation Program.
From time to time, the Company's Board of Directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of the Company's formal stock plans. The terms
of these grants are individually negotiated.
In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option
Plan"), which was approved by its stockholders in September 2000. The Stock
Option Plan provides for the issuance of up to 500,000 options to purchase
shares of common stock. Such options can be incentive options or nonstatutory
options, and may be granted to employees, directors and consultants. The Stock
Option Plan has limits as to the eligibility of those stockholders who own more
than 10% of Company stock, as defined. The options granted pursuant to the Stock
Option Plan may have exercise prices of no less than 100% of fair market value
of the Company's common stock at the date of grant (incentive options), or no
less than 75% of fair market value of such stock at the date of grant
(nonstatutory). At March 31, 2006, the Company had granted 47,500 options under
the 2000 Stock Option Plan of which 15,000 had been forfeited, with 467,500
available for future issuance.
In March 2002, the Board of Directors granted the Company's Chief Executive
Officer ("CEO") and Chief Scientific Officer ("CSO") non-qualified stock options
to purchase up to 250,000 shares of common stock each, at an exercise price of
$1.90 per share (the estimated fair value of the underlying common stock at
grant date) and expire March 2012. Awards are earned upon achievement of certain
financial and/or research and development milestones. On July 1, 2005, the
Company's CEO forfeited all of his aforementioned 250,000 options.
In February 2005, the Board of Directors granted the Company's Chief Executive
Officer ("CEO")and Chief Scientific Officer ("CSO") non-qualified stock options
to purchase up to 2,231,100 and 1,734,350 shares of common stock, respectively,
at an exercise price of $0.38 per share and vest fifty percent immediately,
twenty-five percent in December 2005 and twenty-five percent in December 2006.
In addition Mr. Calvin Leung, a board member, was granted non-qualified stock
options to purchase up to 308,725 shares at $0.38 that vest fifty percent
immediately, twenty-five percent in December 2005 and twenty-five percent in
December 2006. Messrs. Franklyn S Barry and Edward G Broenniman, board members,
were each granted non-qualified stock options to purchase up to 514,550 shares
at $0.38 that vest forty percent immediately, twenty-five percent in December
2005 and twenty-five percent in December 2006. All of these options granted
expire in 2010 and 2011 and were granted at a price that was $0.08 below the
estimated fair value of the underlying common stock on the date of grant.
Accordingly, the Company recorded approximately $424,000 of compensation expense
in the accompanying consolidated statement of operations for the year ended
March 31, 2005.
On September 9, 2005, the Company granted 2,857,143 options to James A. Joyce,
its Chief Executive Officer, in exchange for $300,000 of accrued related-party
liabilities. The fair value of such options approximated the value of the
accrued related-party liability.
F-36
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
8. EQUITY TRANSACTIONS (continued)
OPTIONS (continued)
The following is a summary of the stock options outstanding at March 31, 2006
and 2005 and the changes during the two years then ended:
Year Ended March 31,
-----------------------------------------------------
2006 2005
------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
----------- ----------- ----------- -----------
Outstanding, beginning of year 6,679,390 $ 0.80 1,376,115 $ 2.49
Granted 3,357,143 0.21 5,303,275 0.38
Exercised -- -- -- --
Cancelled/Forfeited (1,023,748) 2.74 -- --
----------- ----------- ----------- ----------
Outstanding, end of year 9,012,785 $ 0.38 6,679,390 $ 0.80
=========== =========== =========== ==========
Exercisable, end of year 7,135,518 $ 0.39 3,924,856 $ 1.10
=========== =========== =========== ==========
Weighted average estimated fair
value of options granted $ 0.12 $ 0.45
=========== ==========
The following outlines the significant weighted average assumptions used to
estimate the fair value information presented utilizing the Binomial Lattice
option pricing model for the years ended March 31, 2006 and March 31, 2005:
Years Ended March 31,
2006 2005
----------- -----------
Risk free interest rate 4.18% 3.75%
Average expected life 4.7 years 4 years
Expected volatility 72% 225%
Expected dividends None None
The detail of the options outstanding and exercisable as of March 31, 2006 is as
follows:
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
--------------- ------------- ------------ --------------- ---------
$0.21 - $0.23 3,357,143 4.13 years $ 0.21 2,857,143 $ 0.21
$0.38 5,303,275 4.61 years $ 0.38 3,926,008 $ 0.38
$1.78 - $3.75 352,367 5.57 years $ 2.02 352,367 $ 2.02
----------- ----------
9,012,785 7,135,518
=========== ==========
F-37
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
9. RELATED PARTY TRANSACTIONS
DUE TO RELATED PARTIES
Certain officers of the Company and other related parties have advanced the
Company funds, agreed to defer compensation and/or paid expenses on behalf of
the Company to cover working capital deficiencies. These non interest-bearing
liabilities have been included as due to related parties in the accompanying
consolidated financial statements.
Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.
10. INCOME TAX PROVISION
Income tax expense for the years ended March 31, 2006 and 2005 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 percent to
the loss from continuing operations before provision for income taxes as a
result of the following:
2006 2005
---------- ----------
Computed "expected" tax benefit $ (993,000) $ (713,000)
Reduction in income taxes resulting from:
Derivative expense 122,000 --
Change in deferred tax assets valuation
allowance 1,024,000 814,000
State and local income taxes,
net of federal benefit (153,000) (125,000)
Other -- 24,000
----------- -----------
$ -- $ --
=========== ===========
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at March 31, 2006 are presented below:
Deferred tax assets:
Capitalized research and development $ 2,401,000
Net operating loss carryforwards 4,401,000
Other 136,000
-----------
Total gross deferred tax assets 6,938,000
Less valuation allowance (6,938,000)
-----------
Net deferred tax assets $ --
===========
The valuation allowance increased by $1,024,000 and $814,000 during the years
ended March 31, 2006 and 2005, respectively. The current provision for income
taxes for the years ended March 31, 2006 and 2005 is not significant and due
primarily to certain state taxes. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. Based upon the history of
operating losses, management believes it is more likely than not the Company
will not realize the benefits of these deductible differences. A full reduction
allowance has been recorded to offset 100% of the deferred tax asset.
As of March 31, 2006, the Company had tax net operating loss carryforwards of
approximately $11,600,000 and $6,300,000 available to offset future taxable
Federal and state income, respectively. The carryforward amounts expire in
various years through 2026. In the event the Company were to experience a
greater than 50% change in ownership as defined in Section 382 of the Internal
Revenue Code, the utilization of the Company's tax net operating loss
carryforwards could be severely restricted.
F-38
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
11. COMMITMENTS AND CONTINGENCIES
EMPLOYMENT CONTRACTS
The Company entered into an employment agreement with its Chairman of the Board
effective April 1, 1999. The agreement, which is cancelable by either party upon
sixty days notice, will be in effect until the employee retires or ceases to be
employed by the Company. The Chairman of the Board was appointed President and
Chief Executive Officer ("CEO") effective June 1, 2001 upon which the base
annual salary was increased from $120,000 to $180,000. Effective January 1,
2005, the CEO's salary was increased from $180,000 to $205,000 per year. The CEO
is eligible for an annual bonus at the discretion of the Board of Directors, of
which $0 and $20,000 was earned during each of the years ended March 31, 2006
and 2005, respectively. Under the terms of the agreement, if the employee is
terminated he may become eligible to receive a salary continuation payment in
the amount of at least twelve months' base salary. Effective April 1, 2006,the
CEO's salary was increased from $205,000 to $240,000 per year.
The Company entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed the Company's
Chief Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Effective January 1,
2005 Dr. Tullis' salary was increased from $150,000 to $165,000 per year Under
the terms of the agreement, his employment continues at a salary of $165,000 per
year for successive one-year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement. Dr. Tullis was granted
250,000 stock options to purchase the Company's common stock in connection the
completing certain milestones, such as the initiation and completion of certain
clinical trials, the submission of proposals to the FDA and the filing of a
patent application. Under the terms of the agreement, if the employee is
terminated he may become eligible to receive a salary continuation payment in
the amount of twelve months base salary. Effective April 1, 2006, the CSO's
salary was increased from $165,000 per year to $185,000 per year.
LEASE COMMITMENTS
The Company leases its office and research and development space under an
operating lease agreement which expires in July 2006. The Company signed a new
12 month extension of its existing lease on substantially the same terms as its
present lease. Minimum monthly payments under the new extension approximate
$7,700.
Rent expense approximated $126,000 and $106,000 for the years ended March 31,
2006 and 2005, respectively.
12. SUBSEQUENT EVENTS (unaudited)
In April 2006, the Company issued 3,782 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In April 2006, the Company issued 25,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.50 per share in payment for past due rents owed by the Company
valued at $12,800.
In April 2006, the Company issued 6,313 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
F-39
AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
--------------------------------------------------------------------------------
12. SUBSEQUENT EVENTS (unaudited) (continued)
In April 2006, the Company issued 10,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In April 2006, the Company issued 14,563 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $4,165.
In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations.
During April 2006, the Company issued 209,679 shares of common stock at prices
between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for cash proceeds totaling $140,002. These shares are
registered pursuant to the Company's Form SB-2 registration statement effective
December 7, 2004.
In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.405 per share to an accredited individual investor.
In May 2006, the Company issued 8,532 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In May 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In May 2006, the Company issued 4,545 shares of restricted common stock at $0.55
per share in payment for investor relations.
In June 2006, the Company issued 8,681 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.
In June 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.
In June 2006, the Company issued 3,363 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500.
F-40