Table of Contents

 

As filed with the Securities and Exchange Commission on November 28, 2018

 

Registration No. 333 -219589

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

POST EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

AETHLON MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

(State or other jurisdiction of incorporation or organization)

 

3826

(Primary Standard Industrial Classification Code Number)

 

13-3632859

(I.R.S. Employer Identification Number)

 

9635 Granite Ridge Drive, Suite 100
San Diego, California 92123

(858) 459-7800

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

James A. Joyce
9635 Granite Ridge Drive, Suite 100
San Diego, California 92123
(858) 459-7800

(Name, address, including zip code, and telephone number, including area code, of agent for service)


With copies of all correspondence to:

 

Jolie Kahn, Esq.
33 Edgewood
Locust Valley, NY 11560
(516) 217-6379

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date hereof.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]

 

 

 

   

 

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [_] Accelerated filer [_]
Non-accelerated filer [_] Smaller reporting company [X]
(Do not check if a smaller reporting company)  

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (*230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (*240.12b-2 of this chapter).

 

[_]

Emerging growth company

   
[_] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act.

 

CALCULATION OF REGISTRATION FEE

 

Title of each Class of Securities
to be Registered
  Proposed Maximum
Aggregate Offering
Price (1)(2)
   Amount of
Registration Fee
 
Units, each Unit consisting of one share of Common Stock, par value $0.001 per share and one common warrant to purchase one share of Common Stock (3)  $7,500,000   $869.25 
(i) Common Stock included in the Units (4)        
(ii) Common warrants included in the Units (4)        
Pre-funded Units, each Pre-funded Unit consisting of one pre-funded warrant to purchase one share of Common Stock and one common warrant to purchase one share of Common Stock (3)  $7,500,000   $869.25 
(i) Pre-funded warrants included in the Pre-funded Units (4)        
(ii) Common warrants included in the Pre-funded Units (4)        
Shares of Common Stock underlying pre-funded warrants included in the Pre-funded Units (3)  $   $ 
Shares of Common Stock underlying common warrants included in the Units and the Pre-funded Units (3)  $15,000,000   $1,738.50 
Placement Agent’s warrants (6)        
Common Stock issuable upon exercise of Placement Agent’s warrants (5)(6)  $281,250   $32.60 
     Total  $30,281,250   $3,509.60(7)

 

(1)  Estimated pursuant to Rule 457(o) of the Securities Act of 1933 solely for purposes of calculating the amount of the registration fee.

 

 

 

   

 

 

(2)  Pursuant to Rule 416 of the Securities Act of 1933, this Registration Statement also shall cover any additional shares of common stock that shall become issuable by reason of any stock dividend, stock split, recapitalization, or other similar transaction by the registrant.

 

(3)  The proposed maximum aggregate offering price of the Units proposed to be sold in the offering will be reduced on a dollar-for-dollar basis based on the offering price of any Pre-funded Units offered and sold in the offering, and as such the proposed maximum aggregate offering price of the Units and Pre-funded Units (including the common stock issuable upon exercise of the pre-funded warrants included in the Pre-funded Units), if any, is $7,500,000.

 

(4)  No additional registration fee is payable pursuant to Rule 457(i) under the Securities Act of 1933, as amended.

 

(5)   No additional registration fee is payable pursuant to Rule 457(g) under the Securities Act of 1933, as amended.

 

(6) Represents warrants to purchase a number of shares of common stock equal to 3% of the number of shares of common stock (i) included within the Units and (ii) issuable upon the exercise of the pre-funded warrants included within the Pre-funded Units placed in this offering at an exercise price equal to 125% of the offering price per unit (excluding any shares of common stock underlying the common warrants included in the units and the pre-funded units placed in this offering).

 

(7) The Registrant previously paid $1,506.70 as a registration fee in connection with this registration statement filed on July 31, 2017, $108.66 was paid with the S-1A file September 26, 2017 and $1,894.24 with paid with Form S-1 filed on September 15, 2017 (and subsequently withdrawn).

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission acting pursuant to said section 8(a), may determine.

 

 

 

   

 

 

Explanatory Note

 

This Post-Effective Amendment No. 1 to Form S-1 relates solely to the 5,454,546 shares of common stock to be issued upon exercise of warrants issued in connection with a public offering of 5,454,546 units, pursuant to which these 5,454,546 shares of common stock were registered under that certain registration statement on Form S-1 (Registration No. 333-219589) of the registrant declared effective on September 29, 2017 by the Commission. The aforesaid registration statement originally registered the 5,454,546 shares of common stock contained in the 5,454,546 units (each unit consisting of one share of our common stock and one common warrant to purchase one share of our common stock) offered with respect to the aforesaid registration statement, as well as the 5,454,546 shares of common stock underlying the warrants contained in those units that are issuable from time to time upon exercise of the common warrants contained in the units. The 5,454,546 shares of common stock to be issued upon exercise of the warrants are available for issuance under the registration statement. This Post–Effective Amendment No. 1 to Form S-1 is being filed to include the financial statements for the year ended March 31, 2018 and the six months ended September 30, 2018. All filing fees payable in connection with the registration of these securities were previously paid by the registrant at the time of filing the original registration statement on Form S-1.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we are not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS

 

Subject to completion, dated November 28, 2018

 

Aethlon Medical, Inc.

 

5,454,546 shares of Common Stock of Aethlon Medical, Inc. issuable upon exercise of 5,454,546 warrants of Aethlon Medical, Inc., each to purchase one share of common stock, issued pursuant to the Registration Statement on Form S-1, declared effective on September 29, 2017

 

___________________

 

We are offering the 5,454,546 shares of common stock issuable upon exercise of the 5,454,546 warrants contained in the 5,454,546 units (each unit consisting of one share of our common stock and one common warrant to purchase one share of our common stock), originally offered by us pursuant to our Registration Statement on Form S-1, declared effective by the SEC on September 29, 2017. Each common warrant contained in a unit has an exercise price of $1.10 per share. The common warrants contained in the units will be exercisable immediately and will expire five years from the date of issuance. We are also offering the shares of our common stock that are issuable from time to time upon exercise of the common warrants contained in the units.

 

Our common stock is listed on the NASDAQ Capital Market under the symbol “AEMD.” On November 26, 2018, the closing bid price of our common stock as reported on the NASDAQ Capital Market was $1.17 per share. The public offering price per share and related warrant will be determined between us, the placement agent and the investors in the offering based on market conditions at the time of pricing, and may be at a discount to the current market price of our common stock. There is no established trading market for the warrants, and we do not expect an active trading market to develop. We do not intend to list the warrants on any securities exchange or other trading market. Without a trading market, the liquidity of the warrants will be extremely limited.

 

Investing in our securities involves risks. You should carefully read and consider the “Risk Factors” beginning on page 5 of this prospectus before investing.

 

   Per Unit   Per
Pre-Funded
Unit
   Total 
Public offering price  $1.10   $1.09    6,000,000.00 
Placement agent fees  $0.077   $0.077    420,000.00 
Proceeds, before expenses, to us  $1.023   $1.013    5,580,000.00 

 

We have retained H.C. Wainwright & Co., LLC as our exclusive placement agent to use its reasonable best efforts to solicit offers to purchase the securities in this offering. The placement agent has no obligation to buy any of the securities from us or to arrange for the purchase or sale of any specific number or dollar amount of the securities. The placement agent is not required to sell any specific number or dollar amount of securities being offered hereby but will use its best efforts to sell the securities offered. Because there is no minimum offering amount required as a condition to closing in this offering, the actual public offering amount, placement agent's fees, and proceeds to us, if any, are not presently determinable and may be substantially less than the total maximum offering amounts set forth above.

 

We have agreed to pay the placement agent a total cash fee equal to 6.0% of the gross proceeds of this offering and a management fee of 1% of the gross proceeds of this offering. In addition to the placement agent’s fees, we have agreed to pay the placement agent a non-accountable expense allowance of $50,000, to reimburse the placement agent for fees and expenses of its legal counsel in an amount up to $100,000 and to reimburse the placement agent for any escrow or settlement fees in an amount not to exceed $10,000. As additional compensation, we plan to issue the placement agent warrants to purchase a number of shares of common stock equal to 3% of (i) the number of shares of common stock placed in this offering, and (ii) issuable upon exercise of the pre-funded warrants. The exercise price for these warrants will be $1.375 per share, which represents 125% of the public offering price per unit. See “Plan of Distribution.”

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

Delivery of the shares of our common stock and warrants was made on or about October 4, 2017.

 

H.C. Wainwright & Co.

 

The date of this prospectus is _______ __, 2018.

 

 

 

   

 

 

AETHLON MEDICAL, INC.

TABLE OF CONTENTS

 

    Page  
About this Prospectus     1  
Prospectus Summary     1  
The Offering     4  
Risk Factors     6  
Special Note Regarding Forward-Looking Statements     28  
Use of Proceeds     29  
Market Price for Common Equity and Related Stockholder Matters     30  
Capitalization     37  
Dividend Policy     38  
Dilution     38  

Financial Statements for the Year ended March 31, 2018 and the Three and Six Months ended September 30, 2018

    F-1  
Management’s Discussion and Analysis of Financial Condition and Results of Operations     40  
Business     60  
Directors and Executive Officers     72  
Executive Compensation     76  
Security Ownership of Certain Beneficial Owners and Management     81  
Certain Relationships and Related Transactions and Director Independence     82  
Description of Capital Stock     82  
Description of Securities We Are Offering     83  
Plan of Distribution     86  
Legal Matters     88  
Experts     88  
Where You Can Find More Information     89  
         

 

 

 

 

 

 

 

 

 

 

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ABOUT THIS PROSPECTUS

 

You should rely only on the information contained in this prospectus. We have not authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date of this document, regardless of the time of delivery of this prospectus or the time of issuance or sale of any securities. Our business, financial condition, results of operations and prospects may have changed since that date. You should read this prospectus in its entirety before making an investment decision. You should also read and consider the information in the documents to which we have referred you in the section of this prospectus entitled “Where You Can Find More Information.”

 

For investors outside of the United States, neither we nor the placement agent have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.

 

PROSPECTUS SUMMARY

 

This summary highlights certain information about us, this offering and selected information contained elsewhere in this prospectus. This summary is not complete and does not contain all of the information that you should consider before deciding whether to invest in our securities. You should carefully read the entire prospectus, including the information set forth in the section entitled “Risk Factors.”

 

Company Overview

 

We are a therapeutic technology company focused on addressing unmet needs in global health and biodefense. In the field of infectious disease therapeutics, a majority of viruses that transmit human infections are not addressed with approved antiviral therapies. To address this significant unmet need, the Aethlon Hemopurifier® is an affinity hemofiltration device developed for the single-use elimination of life-threatening viruses from the human circulatory system. In the United States, we are advancing the Hemopurifier under a “Breakthrough Device” designation from The United States Food and Drug Administration (FDA).

 

Under the “Breakthrough Device” program, the FDA has permitted the proposed “Indication for Use” for our device to include: “The Hemopurifier is a single-use device indicated for the treatment of life-threatening glycosylated viruses that are not addressed with an approved therapy.” We are currently in discussions with FDA to determine the pathway to clinically advance this “Indication for Use” under the “Breakthrough Device” program.

 

The “Indication for Use” under the “Breakthrough Device” program also aligns with our goal to fulfill the broad-spectrum countermeasure objective set forth by the U.S. Government to protect citizens from life-threatening bioterror and pandemic threat viruses that are not addressed with approved therapies. Based on previous human treatment outcomes, we believe our Hemopurifier may also augment the benefit of approved antiviral drug agents.

 

In human studies, the Hemopurifier has been administered to individuals infected with the following glycosylated viruses: The Human Immunodeficiency Virus (HIV), Hepatitis-C Virus (HCV) and Ebola Virus (EBV). Additionally, the Hemopurifier has been validated in vitro to capture a broad-spectrum of glycosylated viral threats including; Marburg virus, Zika virus, Lassa virus, MERS-CoV, Cytomegalovirus, Epstein-Barr virus, Herpes Simplex virus, Chikungunya virus, Dengue virus, West Nile virus, Smallpox related viruses, H1N1 Swine Flu virus, H5N1 Bird Flu virus, and the reconstructed Spanish flu virus of 1918. In many cases, these validations were conducted in collaboration with leading government or non-government research institutes.

 

In collaboration with the FDA, we are focused on the clinical advancement of our Hemopurifier in the U.S. In March of 2017, we concluded an Investigational Device Exemption (IDE) feasibility study that was previously approved by FDA. The feasibility study demonstrated safety of our device in health-compromised dialysis patients infected with HCV. The protocol of the IDE study was originally recommended by FDA as a surrogate model to advance the Hemopurifier as a broad-spectrum candidate to treat virulent viruses that are often classified as bioterror or pandemic threats. Prior to FDA approval of our IDE feasibility study, we conducted several clinical studies in virally infected individuals outside of the U.S.

 

 

 

 1 

 

 

In September of 2017, our Hemopurifier received an Expedited Access Pathway (EAP) program designation from FDA to support an accelerated clinical advancement of our device. Subsequent to the EAP designation, the Hemopurifier was transitioned to the “Breakthrough Device” program that was established under the 21st Century Cures Act, which was signed into law in December of 2016.

 

We are also investigating the ability of the Hemopurifier to capture glycosylated bacterial toxins and tumor-derived exosomes that promote cancer progression and treatment resistance. Additionally, we are the majority owner of Exosome Sciences, Inc. (ESI), a Company that is focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening disease conditions that may be current or future therapeutic targets for Aethlon Medical.

 

Corporate History

 

On March 10, 1999, Aethlon, Inc., a California corporation, Hemex, Inc., a Delaware corporation and the accounting predecessor to Aethlon, Inc., and Bishop, Inc., a publicly-traded company, completed an Agreement and Plan of Reorganization structured to result in Bishop, Inc.'s acquisition of all of the outstanding common shares of Aethlon, Inc. and Hemex, Inc. Under the plan's terms, Bishop, Inc. issued shares of its common stock to the stockholders of Aethlon, Inc. and Hemex, Inc. such that Bishop, Inc. then owned 100% of each company. Upon completion of the transaction, Bishop, Inc. was renamed Aethlon Medical, Inc. Our executive offices are located at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. Our website address is www.aethlonmedical.com. Our website and the information contained on our website are not incorporated into this prospectus or the registration statement of which it forms a part.

 

The Mechanism of the Hemopurifier

 

The Aethlon Hemopurifier is an affinity hemofiltration device designed for the single-use removal of life-threatening viruses from the human circulatory system. In the United States, the Hemopurifier is classified as a combination product whose regulatory jurisdiction is The Center for Devices and Radiological Health (CDRH), the branch of FDA responsible for the premarket approval of all medical devices.

 

In application, our Hemopurifier is deployed for use on the established infrastructure of continuous renal replacement therapy (CRRT) and dialysis instruments located in hospitals and clinics worldwide. Incorporated within the Hemopurifier is an active affinity lectin that binds to a glycosylated structure with which infectious viruses cloak themselves to evade the surveillance of the immune system as a means to promote replication of progeny viruses. In mechanism, the Hemopurifier eliminates circulatory viruses prior to cell infection as a means to interrupt the replication of progeny viruses.

 

We have demonstrated that the Hemopurifier affinity mechanism provides for the capture of a broad-spectrum of strains, species and families of viral pathogens. We are also investigating the utility of our Hemopurifier to capture glycosylated bacterial toxins as well as circulating tumor-derived exosomes that promote cancer progression and treatment resistance.

 

The Hemopurifier - U.S. Clinical Trials

  

On March 13, 2017, we concluded an FDA-approved Investigational Device Exemption (IDE) feasibility study of Hemopurifier therapy. In the study, safety of the Hemopurifier was demonstrated in health-compromised individuals infected with a viral pathogen. Based on guidance from FDA, the study served as a surrogate model to advance our device as a broad-spectrum treatment countermeasure against highly virulent viruses that are often considered bioterror or pandemic threats. The feasibility study was conducted on Hepatitis C virus (HCV) infected dialysis patients at DaVita MedCenter Dialysis in Houston, Texas. The principal investigator of the study was Dr. Ronald Ralph. We reported that there were no device-related adverse events in enrolled subjects who met the study inclusion-exclusion criteria. We also reported that an average capture of 154 million copies of HCV (in International Units, I.U.) within the Hemopurifier® during 4-hour treatments. The FDA approved the IDE feasibility study protocol in June of 2013. Prior to this approval, we collected supporting Hemopurifier data through investigational human studies conducted overseas.

 

 

 

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Exosome Sciences, Inc. – Majority Owned Biomarker Discovery Company

 

We are the majority owner of Exosome Sciences, Inc. (ESI), a Company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening disease conditions that may be current or future therapeutic targets for Aethlon Medical. At present, the priority of ESI is directed toward exosomal biomarkers to diagnose and monitor cancer and neurological disorders.

 

Since it began operations in 2013, ESI researchers disclosed the discovery of an exosomal biomarker that may be associated with neurological tauopathies, which involve the abnormal accumulation of tau protein in the brain. Tauopathies are a family of 21 different neurological disorders that include Alzheimer's disease and Chronic Traumatic Encephalopathy (CTE).  Related to CTE, the ESI team was invited to participate in an NIH-funded research study with The Boston University CTE Center. In the study, ESI researchers investigated an exosomal tau biomarker (TauSome) as a candidate to diagnose and monitor CTE in living individuals. At present, CTE can only be diagnosed through post-mortem brain autopsy.

 

The results of the study indicated that TauSome levels (in blood) of former professional American football players (high CTE risk group) were significantly higher as compared to same-age group control subjects who did not participate in activities that involved repetitive head trauma. Additionally, high TauSome levels also correlated with poor performance in cognitive decline testing. These results were published in an article entitled “Preliminary Study of Plasma Exosomal Tau as a Potential Biomarker for Chronic Traumatic Encephalopathy” in the Journal of Alzheimer's Disease on April 12, 2016.

 

To further validate these observations, ESI has initiated a follow-on study to evaluate TauSome levels in up to 200 former professional football players and control subjects. If fully enrolled, the study would be the largest study to date related to the advancement of a candidate biomarker to diagnose and monitor CTE in the living. Enrollment of study participants began in March 2018 at the Translational Genomics Research Institute (TGEN) in Phoenix, AZ.  Kendall Van Keuren-Jensen, Ph.D., Co-Director of TGEN’s Center for Noninvasive Diagnostics is the principal investigator at this site location. Dr. Van Keuren-Jensen is neurodegenerative disease thought leader whose research includes discovery and detection of biomarkers for central nervous system disorders. Additional site locations are anticipated.

 

 

 

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THE OFFERING

(as of September 29, 2017)

 

Units offered by us in this offering: 5,454,546 units, each consisting of one share of our common stock and one common warrant to purchase one share of our common stock
   
Pre-funded units offered by us in this offering: We are also offering to each purchaser whose purchase of units in this offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common stock immediately following the consummation of this offering, the opportunity to purchase, if the purchaser so chooses, pre-funded units (each pre-funded unit consisting of one pre-funded warrant to purchase one share of our common stock and one common warrant to purchase one share of our common stock) in lieu of units that would otherwise result in the purchaser’s beneficial ownership exceeding 4.99% of our outstanding common stock (or, at the election of the purchaser, 9.99%). The purchase price of each pre-funded unit will equal the price at which the units are being sold to the public in this offering, minus $0.01, and the exercise price of each pre-funded warrant included in each pre-funded unit will be $0.01 per share. This offering also relates to the shares of common stock issuable upon exercise of any pre-funded warrants sold in this offering. For each pre-funded unit we sell, the number of units we are offering will be decreased on a one-for-one basis. Because we will issue a common warrant as part of each unit or pre-funded unit, the number of common warrants sold in this offering will not change as a result of a change in the mix of the units and pre-funded units sold.
   
Common warrants offered by us in the offering Common warrants to purchase an aggregate of 5,454,546 shares of our common stock. Each unit and each pre-funded unit includes a common warrant to purchase one share of our common stock. Each common warrant will have an exercise price of $1.10 per share, will be immediately separable from the common stock or pre-funded warrant, as the case may be, will be immediately exercisable and will expire on the fifth anniversary of the original issuance date. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the common warrants.
   
Common stock outstanding prior to the offering (1) 8,951,081 shares on September 7, 2017
   
Common stock outstanding after the offering (1) 14,324,117 shares, or 19,778,663 shares if the warrants sold in this offering are exercised in full.
   
Use of proceeds We intend to use the net proceeds of this offering to continue clinical development of our product candidates and for working capital and other general corporate purposes. See “Use of Proceeds” on page 27 of this prospectus.
   
Risk factors You should read the “Risk Factors” section of this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.

 

 

 

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Market symbol and trading Our common stock is listed on the NASDAQ Capital Market under the symbol “AEMD.” There is no established trading market for the warrants, and we do not expect a trading market to develop. We do not intend to list the warrants on any securities exchange or other trading market. Without a trading market, the liquidity of the warrants will be extremely limited. We do not plan on applying to list the pre-funded warrants or the common warrants on NASDAQ, any national securities exchange or any other nationally recognized trading system. Without an active trading market, the liquidity of the pre-funded warrants or common warrants will be limited.

 

  (1) The number of shares of our common stock outstanding prior to and to be outstanding immediately after this offering, as set forth in the above table, is based on 8,951,081 shares of our common stock outstanding as of September 7, 2017 and excludes as of that date:

 

  · 466,547 shares of common stock issuable upon exercise of outstanding stock options under our stock incentive plans at a weighted average exercise price of $10.30 per share;

 

  · 2,464,739 additional shares of common stock reserved for issuance under outstanding warrants with a weighted average exercise price of $3.48 per share;

 

  · 507,375 additional shares of common stock reserved for future issuance under our stock incentive plans;

 

  · 451,786 additional shares of common stock issuable under convertible notes, which includes accrued interest through September 7, 2017;

 

  · shares of common stock issuable upon exercise of the warrants offered hereby; and

 

  · shares of common stock issuable upon exercise of warrants to be issued to the placement agent in connection with this offering.

 

 

 

 5 

 

 

RISK FACTORS

 

An investment in our securities involves a high degree of risk. You should carefully consider the risks described below as well as the other information in this prospectus before deciding to invest in or maintain your investment in our company. The risks described below are not intended to be an all-inclusive list of all of the potential risks relating to an investment in our securities. Any of the risk factors described below could significantly and adversely affect our business, prospects, financial condition and results of operations. Additional risks and uncertainties not currently known or that are currently considered to be immaterial may also materially and adversely affect our business. As a result, the trading price or value of our securities could be materially adversely affected and you may lose all or part of your investment.

 

Risks Relating to Our Financial Position and Need for Additional Capital

 

We have incurred significant losses and expect to continue to incur losses for the foreseeable future.

 

We have never been profitable. We have generated revenues during the fiscal years ended March 31, 2018 and March 31, 2017, in the amounts of $149,625, and $392,073, respectively, primarily from our contract with the National Institute of Health, or NIH, in the fiscal year ended March 31, 2018 and from the Defense Advanced Research Projects Agency, or DARPA in the fiscal year ended March 31, 2017. However, our revenues continue to be insufficient to cover our cost of operations. Additionally, our contracts with DARPA have now ended, and we cannot be assured when, if at all, we will be able to enter into future government contracts beyond the current NIH contract. Future profitability, if any, will require the successful commercialization of our Hemopurifier technology, other products that may emerge from our potential diagnostic products or from additional government contract or grant income. We cannot assure you when or if we will be able to successfully commercialize one or more of our products, or if commercialization is successful, whether we will ever be profitable.

 

We may require additional financing to sustain our operations, and without it, if such financing becomes necessary, we would not be able to continue operations.

 

We raised $9,628,505 in net proceeds from sales of common stock during the fiscal year ended March 31, 2018 and we expect those proceeds will support our operations for the ensuing twelve months. However, we will likely require significant additional financing for expected additional future clinical trials in the U.S., as well as fund all of our continued research and development activities for the Hemopurifier and other future products in future fiscal years. In addition, as we expand our activities, our overhead costs to support personnel, laboratory materials and infrastructure will increase. Should the financing we may require to sustain our working capital needs be unavailable to us on reasonable terms, if at all, when we require it, we may be unable to support our research and FDA clearance activities including our planned clinical trials. The failure to implement our research and clearance activities would have a material adverse effect on our ability to commercialize our products.

 

We will need to raise additional funds through debt or equity financings in the future to achieve our business objectives and to satisfy our cash obligations, which would dilute the ownership of our existing stockholders.

 

We will need to raise additional funds through debt and/or equity financings in order to complete our ultimate business objectives, including funding working capital to support development and regulatory clearance of our products. We also may choose to raise additional funds in debt or equity financings if they are available to us on reasonable terms to increase our working capital and to strengthen our financial position. Any sales of additional equity or convertible debt securities would result in dilution of the equity interests of our existing stockholders, which could be substantial. Also, new investors may require that we and certain of our stockholders enter into voting arrangements that give them additional voting control or representation on our Board of Directors.

 

 

 

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Risks Related to Our Business Operations

 

We face intense competition in the medical device industry.

 

We compete with numerous U.S. and foreign companies in the medical device industry, and many of our competitors have greater financial, personnel, operational and research and development resources than we do. Our competitors are developing vaccine candidates, which could compete with the Hemopurifier medical device candidates we are developing. Our commercial opportunities will be reduced or eliminated if our competitors develop and market products for any of the diseases we target that:

 

  · are more effective;
     
  · have fewer or less severe adverse side effects;
     
  · are better tolerated;
     
  · are more adaptable to various modes of dosing;
     
  · are easier to administer; or
     
  · are less expensive than the products or product candidates we are developing.

 

Even if we are successful in developing the Hemopurifier and potential diagnostic products, and obtain FDA and other regulatory approvals necessary for commercializing them, our products may not compete effectively with other successful products. Researchers are continually learning more about diseases, which may lead to new technologies for treatment. Our competitors may succeed in developing and marketing products that are either more effective than those that we may develop, alone or with our collaborators, or that are marketed before any products we develop are marketed. Our competitors include fully integrated pharmaceutical companies and biotechnology companies as well as universities and public and private research institutions. Many of the organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, greater experience in product development and in obtaining regulatory approvals, and greater marketing capabilities than we do. If our competitors develop more effective pharmaceutical treatments for infectious disease or cancer, or bring those treatments to market before we can commercialize the Hemopurifier for such uses, we may be unable to obtain any market traction for our products, or the diseases we seek to treat may be substantially addressed by competing treatments. If we are unable to successfully compete against larger companies in the pharmaceutical industry, we may never generate significant revenue or be profitable.

  

We have limited experience in identifying and working with large-scale contracts with medical device manufacturers; manufacture of our devices must comply with good manufacturing practices in the U.S.

 

To achieve the levels of production necessary to commercialize our Hemopurifier and other future products, we will need to secure large-scale manufacturing agreements with contract manufacturers which comply with good manufacturing practice standards and other standards prescribed by various federal, state and local regulatory agencies in the U.S. and any other country of use. We have limited experience coordinating and overseeing the manufacture of medical device products on a large-scale. We cannot assure you that manufacturing and control problems will not arise as we attempt to commercialize our products or that such manufacturing can be completed in a timely manner or at a commercially reasonable cost. In addition, we cannot assure you that we will be able to adequately finance the manufacture and distribution of our products on terms acceptable to us, if at all. If we cannot successfully oversee and finance the manufacture of our products when they have obtained regulatory clearances, we may never generate revenue from product sales and we may never be profitable.

 

 

 

 7 

 

 

Our Aethlon Hemopurifier technology may become obsolete.

 

Our Aethlon Hemopurifier 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 products. The homeland security industry is growing rapidly with many competitors that are trying to develop products or vaccines to protect against infectious disease. Any one of our competitors could develop a more effective product which would render our technology obsolete. Further, our ability to achieve significant and sustained penetration of our key target markets will depend upon our success in developing or acquiring technologies developed by other companies, either independently, through joint ventures or through acquisitions. If we fail to develop or acquire, and manufacture and sell, products that satisfy our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by quickly introducing competitive products, then market acceptance of our products could be reduced and our business could be adversely affected. We cannot assure you that our products will remain competitive with products based on new technologies.

 

Our use of hazardous materials, chemicals and viruses exposes us to potential liabilities for which we may not have adequate insurance.

 

Our research and development involves the controlled use of hazardous materials, chemicals and viruses. The primary hazardous materials include chemicals needed to construct the Hemopurifier cartridges and the infected plasma samples used in preclinical testing of the Hemopurifier. All other chemicals are fully inventoried and reported to the appropriate authorities, such as the fire department, who inspect the facility on a regular basis. We are subject to federal, state, local and foreign laws governing the use, manufacture, storage, handling and disposal of such materials. Although we believe that our safety procedures for the use, manufacture, storage, handling and disposal of such materials comply with the standards prescribed by federal, state, local and foreign regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. We have had no incidents or problems involving hazardous chemicals or biological samples. In the event of such an accident, we could be held liable for significant damages or fines.

 

We currently carry a limited amount of insurance to protect us from damages arising from hazardous materials. Our product liability policy has a $3,000,000 limit of liability that would cover certain releases of hazardous substances away from our facilities. For our facilities, our property policy provides $25,000 in coverage for contaminant clean-up or removal and $50,000 in coverage for damages to the premises resulting from contamination. Should we violate any regulations concerning the handling or use of hazardous materials, or should any injuries or death result from our use or handling of hazardous materials, we could be the subject of substantial lawsuits by governmental agencies or individuals. We may not have adequate insurance to cover all or any of such claims, if any. If we were responsible to pay significant damages for violations or injuries, if any, we might be forced to cease operations since such payments could deplete our available resources.

 

Our success is dependent in part on a few key executive officers.

 

Our success depends to a critical extent on the continued services of our Chief Executive Officer, James A. Joyce, and our Chief Financial Officer, James B. Frakes. If one or both of these key executive officers were to leave us, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. The unique knowledge and expertise of these individuals would be difficult to replace within the biotechnology field. We can give you no assurances that we can find satisfactory replacements for these key executive officers at all, or on terms that are not unduly expensive or burdensome to us. Although Mr. Joyce has signed an employment agreement providing for his continued service to us, that agreement will not preclude him from leaving us should we be unable to compete with offers for employment he may receive from other companies. We do not currently carry key man life insurance policies on any of our key executive officers which would assist us in recouping our costs in the event of the loss of those officers. If either of our key officers were to leave us, it could make it impossible, if not cause substantial delays and costs, to implement our long-term business objectives and growth.

  

 

 

 8 

 

 

Our inability to attract and retain qualified personnel could impede our ability to achieve our business objectives.

 

We have six full-time employees consisting of our Chief Executive Officer, our President, our Chief Financial Officer, two research scientists and an executive assistant. We utilize, whenever appropriate, consultants in order to conserve cash and resources.

 

Although we believe that these employees and consultants will be able to handle most of our additional administrative, research and development and business development in the near term, we will nevertheless be required over the longer-term to hire highly skilled managerial, scientific and administrative personnel to fully implement our business plan and growth strategies, including to mitigate the material weakness in our internal control over financial reporting described above. Due to the specialized scientific nature of our business, we are highly dependent upon our ability to attract and retain qualified scientific, technical and managerial personnel. Competition for these individuals, especially in San Diego, California, where many biotechnology companies are located, is intense and we may not be able to attract, assimilate or retain additional highly qualified personnel in the future. We cannot assure you that we will be able to engage the services of such qualified personnel at competitive prices or at all, particularly given the risks of employment attributable to our limited financial resources and lack of an established track record. Also, if we are required to attract personnel from other parts of the U.S. or abroad, we may have significant difficulty doing so due to the high cost of living in the Southern California area and due to the costs incurred with transferring personnel to the area. If we cannot attract and retain qualified staff and executives, we will be unable to develop our products and achieve regulatory clearance, and our business could fail.

 

We plan to grow rapidly which will strain our resources; our inability to manage our growth could delay or derail implementation of our business objectives.

 

We will need to significantly expand our operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships with various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties. This expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational and financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage, train, motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain on our management personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational and financial systems, procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our various corporate functions, or that we will be able to properly manage, train, motivate and retain our anticipated increased employee base. If we cannot manage our growth initiatives, we will be unable to commercialize our products on a large-scale in a timely manner, if at all, and our business could fail.

 

As a public company with limited financial resources undertaking the launch of new medical technologies, we may have difficulty attracting and retaining executive management and directors.

 

The directors and management of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims, as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws imposing additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management are also becoming increasingly concerned with the availability of directors’ and officers’ liability insurance to pay on a timely basis the costs incurred in defending such claims. While we currently carry directors’ and officers’ liability insurance, such insurance is expensive and difficult to obtain. If we are unable to continue or provide directors’ and officers’ liability insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to serve on our Board of Directors. We may lose potential independent board members and management candidates to other companies in the biotechnology field that have greater directors’ and officers’ liability insurance to insure them from liability or to biotechnology companies that have revenues or have received greater funding to date which can offer greater compensation packages. The fees of directors are also rising in response to their increased duties, obligations and liabilities. In addition, our products could potentially be harmful to users, and we are exposed to claims of product liability including for injury or death. We have limited insurance and may not be able to afford robust coverage even as our products are introduced into the market. As a company with limited resources and potential exposures to management, we will have a more difficult time attracting and retaining management and outside independent directors than a more established public or private company due to these enhanced duties, obligations and potential liabilities.

 

 

 

 9 

 

 

If we fail to comply with extensive regulations of U.S. and foreign regulatory agencies, the commercialization of our products could be delayed or prevented entirely.

 

Our Hemopurifier products are subject to extensive government regulations related to development, testing, manufacturing and commercialization in the U.S. and other countries. The determination of when and whether a product is ready for large-scale purchase and potential use will be made by the U.S. Government through consultation with a number of governmental agencies, including the FDA, the National Institutes of Health, the Centers for Disease Control and Prevention and the Department of Homeland Security. Our product candidates are in the pre-clinical and clinical stages of development and have not received required regulatory approval from the FDA, or any foreign regulatory agencies, to be commercially marketed and sold. The process of obtaining and complying with FDA and other governmental regulatory approvals and regulations in the U.S. and in foreign countries is costly, time consuming, uncertain and subject to unanticipated delays. Obtaining such regulatory approvals, if any, can take several years. Despite the time and expense exerted, regulatory approval is never guaranteed. We also are subject to the following risks and obligations, among others:

 

  · the FDA may refuse to approve an application if they believe that applicable regulatory criteria are not satisfied;
     
  · the FDA may require additional testing for safety and effectiveness;
     
  · the FDA may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them;
     
  · if regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and
     
  · 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:

 

  · warning letters;
     
  · civil penalties;
     
  · criminal penalties;
     
  · injunctions;
     
  · product seizure or detention;
     
  · product recalls; and
     
  · total or partial suspension of productions.

 

 

 

 10 

 

 

Delays in successfully completing our planned clinical trials could jeopardize our ability to obtain regulatory approval.

 

Our business prospects will depend on our ability to complete studies, clinical trials, obtain satisfactory results, obtain required regulatory approvals and successfully commercialize our Hemopurifier product candidates. Completion of our clinical trials, announcement of results of the trials and our ability to obtain regulatory approvals could be delayed for a variety of reasons, including:

 

  · serious adverse events related to our medical device candidates;
     
  · unsatisfactory results of any clinical trial;
     
  · the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules; and
     
  · different interpretations of our pre-clinical and clinical data, which could initially lead to inconclusive results.

  

Our development costs will increase if we have material delays in any clinical trial or if we need to perform more or larger clinical trials than planned. If the delays are significant, or if any of our product candidates do not prove to be safe or effective or do not receive required regulatory approvals, our financial results and the commercial prospects for our product candidates will be harmed. Furthermore, our inability to complete our clinical trials in a timely manner could jeopardize our ability to obtain regulatory approval.

 

If we or our suppliers fail to comply with ongoing FDA or foreign regulatory authority requirements, or if we experience unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.

 

Any product for which we obtain clearance or approval, and the manufacturing processes, reporting requirements, post-approval clinical data and promotional activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA and other domestic and foreign regulatory bodies. In particular, we and our third-party suppliers may be required to comply with the FDA’s Quality System Regulation, or QSR. These FDA regulations cover the methods and documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization, storage and shipping of our products. Compliance with applicable regulatory requirements is subject to continual review and is monitored rigorously through periodic inspections by the FDA. If we, or our manufacturers, fail to adhere to QSR requirements in the U.S., this could delay production of our products and lead to fines, difficulties in obtaining regulatory clearances, recalls, enforcement actions, including injunctive relief or consent decrees, or other consequences, which could, in turn, have a material adverse effect on our financial condition or results of operations.

 

In addition, the FDA assesses compliance with the QSR through periodic announced and unannounced inspections of manufacturing and other facilities. The failure by us or one of our suppliers to comply with applicable statutes and regulations administered by the FDA, or the failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in any of the following enforcement actions:

 

  · untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
  · unanticipated expenditures to address or defend such actions;
  · customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
  · operating restrictions or partial suspension or total shutdown of production;
  · refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
  · withdrawing 510(k) clearances or premarket approvals that have already been granted;
  · refusal to grant export approval for our products; or
  · criminal prosecution.

 

 

 

 11 

 

 

Any of these sanctions could have a material adverse effect on our reputation, business, results of operations and financial condition. Furthermore, our key component suppliers may not currently be or may not continue to be in compliance with all applicable regulatory requirements, which could result in our failure to produce our products on a timely basis and in the required quantities, if at all.

 

If our products, or malfunction of our products, cause or contribute to a death or a serious injury, we will be subject to medical device reporting regulations, which can result in voluntary corrective actions or agency enforcement actions.

 

Under the FDA medical device reporting regulations, medical device manufacturers are required to report to the FDA information that a device has or may have caused or contributed to a death or serious injury or has malfunctioned in a way that would likely cause or contribute to death or serious injury if the malfunction of the device or one of our similar devices were to recur. If we fail to report these events to the FDA within the required timeframes, or at all, FDA could take enforcement action against us. Any such adverse event involving our products also could result in future voluntary corrective actions, such as recalls or customer notifications, or agency action, such as inspection or enforcement action. Any corrective action, whether voluntary or involuntary, as well as defending ourselves in a lawsuit, will require the dedication of our time and capital, distract management from operating our business, and may harm our reputation and financial results.

  

Our products may in the future be subject to product recalls. A recall of our products, either voluntarily or at the direction of the FDA or another governmental authority, including a third-country authority, or the discovery of serious safety issues with our products, could have a significant adverse impact on us.

 

The FDA and similar foreign governmental authorities have the authority to require the recall of commercialized products in the event of material deficiencies or defects in design or manufacture. In this case, the FDA, the authority to require a recall must be based on an FDA finding that there is reasonable probability that the device would cause serious injury or death. In addition, foreign governmental bodies have the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. Manufacturers may, under their own initiative, recall a product if any material deficiency in a device is found. The FDA requires that certain classifications of recalls be reported to the FDA within 10 working days after the recall is initiated. A government-mandated or voluntary recall by us or one of our international distributors could occur as a result of an unacceptable risk to health, component failures, malfunctions, manufacturing errors, design or labeling defects or other deficiencies and issues. Recalls of any of our products would divert managerial and financial resources and have an adverse effect on our reputation, results of operations and financial condition, which could impair our ability to produce our products in a cost-effective and timely manner in order to meet our customers’ demands. We may also be subject to liability claims, be required to bear other costs, or take other actions that may have a negative impact on our future sales and our ability to generate profits. Companies are required to maintain certain records of recalls, even if they are not reportable to the FDA or another third-country competent authority. We may initiate voluntary recalls involving our products in the future that we determine do not require notification of the FDA or another third-country competent authority. If the FDA disagrees with our determinations, they could require us to report those actions as recalls. A future recall announcement could harm our reputation with customers and negatively affect our sales. In addition, the FDA could take enforcement action for failing to report the recalls when they were.

 

We are also required to follow detailed recordkeeping requirements for all firm-initiated medical device corrections and removals. In addition, in December of 2012, the FDA issued a draft guidance intended to assist the FDA and industry in distinguishing medical device recalls from product enhancements. Per the guidance, if any change or group of changes to a device addresses a violation of the Federal Food, Drug, and Cosmetic Act, that change would generally constitute a medical device recall and require submission of a recall report to the FDA.

 

 

 

 12 

 

 

We outsource almost all of our operational and development activities, and if any party to which we have outsourced certain essential functions fails to perform its obligations under agreements with us, the development and commercialization of our lead product candidate and any future product candidates that we may develop could be delayed or terminated.

 

We generally rely on third-party consultants or other vendors to manage and implement the day-to-day conduct of our operations, including conducting clinical trials and manufacturing our current product candidates and any future product candidates that we may develop. Accordingly, we are and will continue to be dependent on the timeliness and effectiveness of their efforts. Our dependence on third parties includes key suppliers and third-party service providers supporting the development, manufacture and regulatory approval of our products as well as support for our information technology systems and other infrastructure. While our management team oversees these vendors, failure of any of these third parties to meet their contractual, regulatory and other obligations or the development of factors that materially disrupt the performance of these third parties could have a material adverse effect on our business. For example, all of the key oversight responsibilities for the development and manufacture of our lead product candidate are conducted by our management team but all activities are the responsibility of third-party vendors.

 

If a clinical research organization that we utilize is unable to allocate sufficient qualified personnel to our studies in a timely manner or if the work performed by it does not fully satisfy the requirements of the FDA or other regulatory agencies, we may encounter substantial delays and increased costs in completing our development efforts. Any manufacturer that we select may encounter difficulties in the manufacture of new products in commercial quantities, including problems involving product yields, product stability or shelf life, quality control, adequacy of control procedures and policies, compliance with FDA regulations and the need for further FDA approval of any new manufacturing processes and facilities. If any of these occur, the development and commercialization of our product candidates could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue such development and commercialization on our own. If we rely on only one source for the manufacture of the clinical or commercial supplies of any of our product candidates or products, any production problems or supply constraints with that manufacturer could adversely impact the development or commercialization of that product candidate or product.

  

If we or our contractors or service providers fail to comply with regulatory laws and regulations, we or they could be subject to regulatory actions, which could affect our ability to develop, market and sell our product candidates and any other or future product candidates that we may develop and may harm our reputation.

 

If we or our manufacturers or other third-party contractors fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to regulatory actions, which could affect our ability to develop, market and sell our current product candidates or any future product candidates under development successfully and could harm our reputation and lead to reduced or non-acceptance of our proposed product candidates by the market. Even technical recommendations or evidence by the FDA through letters, site visits, and overall recommendations to academia or biotechnology companies may make the manufacturing of a clinical product extremely labor intensive or expensive, making the product candidate no longer viable to manufacture in a cost-efficient manner. The mode of administration may make the product candidate not commercially viable. The required testing of the product candidate may make that candidate no longer commercially viable. The conduct of clinical trials may be critiqued by the FDA, or a clinical trial site’s Institutional Review Board or Institutional Biosafety Committee, which may delay or make impossible clinical testing of a product candidate. The Institutional Review Board for a clinical trial may stop a trial or deem a product candidate unsafe to continue testing. This may have a material adverse effect on the value of the product candidate and our business prospects.

 

We will need to outsource and rely on third parties for the clinical development and manufacture, sales and marketing of our current product candidates or any future product candidates that we may develop, and our future success will be dependent on the timeliness and effectiveness of the efforts of these third parties.

 

We do not have the required financial and human resources to carry out on our own all the pre-clinical and clinical development for our current product candidates or any other or future product candidates that we may develop, and do not have the capability and resources to manufacture, market or sell our current product candidates or any future product candidates that we may develop. Our business model calls for the partial or full outsourcing of the clinical and other development and manufacturing, sales and marketing of our product candidates in order to reduce our capital and infrastructure costs as a means of potentially improving our financial position. Our success will depend on the performance of these outsourced providers. If such providers fail to perform adequately, our development of product candidates may be delayed and any delay in the development of our product candidates would have a material and adverse effect on our business prospects.

 

 

 

 13 

 

 

We are and will be exposed to product liability risks, and clinical and preclinical liability risks, which could place a substantial financial burden upon us should we be sued.

 

Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical devices. We cannot be sure that claims will not be asserted against us. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.

 

We cannot give assurances that we will be able to continue to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against potential liabilities. Claims or losses in excess of any product liability insurance coverage that we may obtain could have a material adverse effect on our business, financial condition and results of operations.

 

Our Hemopurifier products may be used in connection with medical procedures in which it is important that those products function with precision and accuracy. If our products do not function as designed, or are designed improperly, we may be forced by regulatory agencies to withdraw such products from the market. In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to function as designed, or our products are designed inappropriately, we may be subject to lawsuits seeking significant compensatory and punitive damages. The risk of product liability claims, product recalls and associated adverse publicity is inherent in the testing, manufacturing, marketing and sale of medical products. We have recently obtained general clinical trial liability insurance coverage. We cannot give assurances that our insurance coverage will to be adequate or available. We may not be able to secure product liability insurance coverage on acceptable terms or at reasonable costs when needed. Any product recall or lawsuit seeking significant monetary damages may have a material effect on our business and financial condition. Any liability for mandatory damages could exceed the amount of our coverage. Moreover, a product recall could generate substantial negative publicity about our products and business and inhibit or prevent commercialization of other future product candidates.

  

We have not received, and may never receive, approval from the FDA to market a medical device in the United States.

 

Before a new medical device can be marketed in the U.S., it must first receive either premarket approval, or a PMA, or 510(k) clearance from the FDA, unless an exemption exists. A PMA submission, which is a higher standard than a 501(k) clearance, is used to demonstrate to the FDA that a new or modified device is safe and effective. The 510(k) is used to demonstrate that a device is “substantially equivalent” to a predicate device (one that has been cleared by the FDA). We expect that any product we seek regulatory approval for will require a PMA. The FDA approval process involves, among other things, successfully completing clinical trials and filing for and obtaining a PMA. The PMA process requires us to prove the safety and effectiveness of our products to the FDA’s satisfaction. This process, which includes preclinical studies and clinical trials, can take many years and requires the expenditure of substantial resources and may include post-marketing surveillance to establish the safety and efficacy of the product. Notwithstanding the effort and expense incurred, the process may never result in the FDA granting a PMA. Data obtained from preclinical studies and clinical trials are subject to varying interpretations that could delay, limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in governmental policies for medical devices during the period of product development. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:

 

  · our inability to demonstrate safety or effectiveness to the FDA’s satisfaction;
  · insufficient data from our preclinical studies and clinical trials to support approval;
  · failure of the facilities of our third-party manufacturer or suppliers to meet applicable requirements;
  · inadequate compliance with preclinical, clinical or other regulations;
  · our failure to meet the FDA’s statistical requirements for approval; and
  · changes in the FDA’s approval policies, or the adoption of new regulations that require additional data or additional clinical studies.

 

Modifications to products that are approved through a PMA application generally need FDA approval. Similarly, some modifications made to products cleared through a 510(k) may require a new 510(k). The FDA’s 510(k) clearance process usually takes from three to 12 months, but may last longer. The process of obtaining a PMA is much costlier and uncertain than the 510(k) clearance process and generally takes from one to three years, or even longer, from the time the application is submitted to the FDA until an approval is obtained. Any of our products considered to be a class III device, which are considered to pose the greatest risk and the approval of which is governed by the strictest guidelines, will require the submission and approval of a PMA in order for us to market it in the U.S. We also may design new products in the future that could require the clearance of a 510(k).

 

 

 

 14 

 

 

Although we have received approval to proceed with clinical trials in the U.S. under the investigational device exemption, we cannot assure you that the current approval from the FDA to proceed will not be revoked, that the study will be successful, or that the FDA PMA approval will eventually be obtained and not revoked. Even if we obtain approval, the FDA or other regulatory authorities may require expensive or burdensome post-market testing or controls. Any delay in, or failure to receive or maintain, clearance or approval for our future products could prevent us from generating revenue from these products or achieving profitability. Additionally, the FDA and other regulatory authorities have broad enforcement powers. Regulatory enforcement or inquiries, or other increased scrutiny on us, could dissuade some physicians from using our products and adversely affect our reputation and the perceived safety and efficacy of our products.

 

The approval requirements for medical products used to fight bioterrorism are still evolving, and we cannot be certain any products we develop for such uses would meet these requirements.

 

We are advancing product candidates under governmental policies that regulate the development and commercialization of medical treatment countermeasures against bioterror and pandemic threats.  While we intend to pursue FDA market clearance to treat infectious bioterror and pandemic threats, it is often not feasible to conduct human studies against these deadly high threat pathogens. Thus, we may not be able to demonstrate the effectiveness of our treatment countermeasures through controlled human efficacy studies. Additionally, a change in government policies could impair our ability to obtain regulatory approval and there is no assurance that the FDA will approve any of our product candidates.

  

The results of our clinical trials may not support our product candidate claims or may result in the discovery of adverse side effects.

 

Any research and development, pre-clinical testing and clinical trial activities involving any products that we are or may develop will be subject to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. In the future, we may conduct clinical trials to support approval of new products. Clinical studies must be conducted in compliance with FDA regulations or the FDA may take enforcement action. The data collected from these clinical studies may ultimately be used to support market clearance for these products. Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims or that the FDA will agree with our conclusions regarding them. Success in pre-clinical studies and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later trials will replicate the results of prior trials and pre-clinical studies. The clinical trial process may fail to demonstrate that our product candidates are safe and effective for the proposed indicated uses, which could cause us to abandon a product candidate and may delay development of others. Any delay or termination of our clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our product candidates and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects that are not currently part of the product candidate’s profile.

 

U.S. legislative or FDA regulatory reforms may make it more difficult and costly for us to obtain regulatory approval of our product candidates and to manufacture, market and distribute our products after approval is obtained.

 

From time to time, legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the regulatory approval, manufacture and marketing of regulated products or the reimbursement thereof. In addition, FDA regulations and guidance are often revised or reinterpreted by the FDA in ways that may significantly affect our business and our products. Any new regulations or revisions or reinterpretations of existing regulations may impose additional costs or lengthen review times of future products. In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and our products. It is impossible to predict whether legislative changes will be enacted or FDA regulations, guidance or interpretations changed, and what the impact of such changes, if any, may be.

 

 

 

 15 

 

 

Should our products be approved for commercialization, lack of third-party coverage and reimbursement for our devices could delay or limit their adoption.

 

In both the U.S. and international markets, the use of medical devices is dependent in part on the availability of reimbursement from third-party payors, such as government and private insurance plans. Healthcare providers that use medical devices generally rely on third-party payors to pay for all or part of the costs and fees associated with the medical procedures being performed or to compensate them for their patient care services. Should our products be approved for commercialization by the FDA, we cannot assure you that our future products will be considered cost-effective, that reimbursement will be available in other sites or in other countries, including the U.S., if approved, or that reimbursement will be sufficient to allow sales of our future products on a profitable basis. The coverage decisions of third-party payors will be significantly influenced by the assessment of our future products by health technology assessment bodies. Such assessments are outside our control and we cannot assure you that such evaluations will be conducted or that they will have a favorable outcome.

  

If approved for use in the U.S., we expect that any products that we develop will be purchased primarily by medical institutions, which will in turn bill various third-party payors for the health care services provided to patients at their facility. Payors may include the Centers for Medicare & Medicaid Services, or CMS, which administers the Medicare program and works in partnership with state governments to administer Medicaid, other government programs and private insurance plans. The process involved in applying for coverage and incremental reimbursement from CMS is lengthy and expensive. Further, Medicare coverage is based on our ability to demonstrate the treatment is “reasonable and necessary” for Medicare beneficiaries. Even if products utilizing our Aethlon Hemopurifier technology receive FDA and other regulatory clearance or approval, they may not be granted coverage and reimbursement by any payor, including by CMS. For some governmental programs, such as Medicaid, coverage and reimbursement differ from state to state and some state Medicaid programs may not pay adequate amounts for the procedure necessary to utilize products utilizing our technology system, or any payment at all. Moreover, many private payors use coverage decisions and payment amounts determined by CMS as guidelines in setting their coverage and reimbursement policies and amounts. If CMS or other agencies limit coverage or decrease or limit reimbursement payments for doctors and hospitals, this may affect coverage and reimbursement determinations by many private payors.

 

Should our products be approved for commercialization, adverse changes in reimbursement policies and procedures by payors may impact our ability to market and sell our products.

 

Healthcare costs have risen significantly over the past decade, and there have been and continue to be proposals by legislators, regulators and third-party payors to decrease costs. Third-party payors are increasingly challenging the prices charged for medical products and services and instituting cost containment measures to control or significantly influence the purchase of medical products and services.

 

For example, in the U.S., the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, PPACA, among other things, reduced and/or limited Medicare reimbursement to certain providers. The Budget Control Act of 2011, as amended by subsequent legislation, further reduces Medicare’s payments to providers by 2 percent through fiscal year 2024. These reductions may reduce providers’ revenues or profits, which could affect their ability to purchase new technologies. Furthermore, the healthcare industry in the U.S. has experienced a trend toward cost containment as government and private insurers seek to control healthcare costs by imposing lower payment rates and negotiating reduced contract rates with service providers. Legislation could be adopted in the future that limits payments for our products from governmental payors. In addition, commercial payors such as insurance companies, could adopt similar policies that limit reimbursement for medical device manufacturers’ products. Therefore, we cannot be certain that our product or the procedures or patient care performed using our product will be reimbursed at a cost-effective level. We face similar risks relating to adverse changes in reimbursement procedures and policies in other countries where we may market our products. Reimbursement and healthcare payment systems vary significantly among international markets. Our inability to obtain international reimbursement approval, or any adverse changes in the reimbursement policies of foreign payors, could negatively affect our ability to sell our products and have a material adverse effect on our business and financial condition.

 

 

 

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Should our products be approved for commercialization, our financial performance may be adversely affected by medical device tax provisions in the healthcare reform laws.

 

PPACA currently imposes, among other things, an excise tax of 2.3% on any entity that manufactures or imports medical devices offered for sale in the U.S. Under these provisions, the Congressional Research Service predicts that the total cost to the medical device industry may be up to $20 billion over the next decade. The Internal Revenue Service issued final regulations implementing the tax in December 2012, which requires, among other things, bi-monthly payments and quarterly reporting.

 

The Consolidated Appropriations Act, 2016 (Pub. L. 114-113), signed into law on Dec. 18, 2015, included a two-year moratorium on the medical device excise tax imposed by Internal Revenue Code section 4191. This moratorium was then extended by an additional two years in January 2018. Currently, the medical device excise tax does not apply to the sale of a taxable medical device by the manufacturer, producer, or importer of the device until January 1, 2020.

 

Once we market products, if this regulation is not repealed, we will be subject to this or any future excise tax on our sales of certain medical devices in the U.S. We anticipate that primarily all of our sales, once commenced, of medical devices in the U.S. will be subject to this 2.3% excise tax.

  

Risks Related to Our Intellectual Property and Related Litigation

 

We rely upon licenses and patent rights from third parties which are subject to termination or expiration.

 

We rely upon third-party licenses and ownership rights assigned from third parties for the development of specific uses for our Hemopurifier devices. For example, we are researching, developing and testing cancer-related applications for our devices under patents assigned from the London Health Science Center Research, Inc. Should any of our licenses be prematurely terminated for any reason, or if the patents and intellectual property assigned to us or owned by such entities that we have licensed should be challenged or defeated by third parties, our research efforts could be materially and adversely affected. We cannot assure you that any of our licenses or patents assigned to us will continue in force for as long as we require for our research, development and testing of cancer treatments. We cannot assure you that, should our licenses terminate, should the underlying patents and intellectual property be challenged or defeated, or should patents and intellectual property assigned to us be challenged or defeated, suitable replacements can be obtained or developed on terms acceptable to us, if at all. There is also the related risk that we may not be able to make the required payments under any patent license or assignment agreement, in which case we may lose to ability to use one or more of the licensed or assigned patents.

 

We could become subject to intellectual property litigation that could be costly, result in the diversion of management’s time and efforts, require us to pay damages, prevent us from selling our commercially available products and/or reduce the margins we may realize from our products.

 

The medical devices industry is characterized by extensive litigation and administrative proceedings over patent and other intellectual property rights. Whether a product infringes a patent involves complex legal and factual issues, and the determination is often uncertain. There may be existing patents of which we are unaware that our products under development may inadvertently infringe. The likelihood that patent infringement claims may be brought against us increases as the number of participants in the infectious market increases and as we achieve more visibility in the market place and introduce products to market.

 

Any infringement claim against us, even if without merit, may cause us to incur substantial costs, and would place a significant strain on our financial resources, divert the attention of management from our core business, and harm our reputation. In some cases, litigation may be threatened or brought by a patent holding company or other adverse patent owner who has no relevant product revenues and against whom our patents may provide little or no deterrence. If we were found to infringe any patents, we could be required to pay substantial damages, including triple damages if an infringement is found to be willful. We also could be required to pay royalties and could be prevented from selling our products unless we obtain a license or are able to redesign our products to avoid infringement. We may not be able to obtain a license enabling us to sell our products on reasonable terms, or at all, and we cannot assure you that we would be able to redesign our products in a way that would not infringe those patents. If we fail to obtain any required licenses or make any necessary changes to our technologies or the products that incorporate them, we may be unable to commercialize one or more of our products or may have to withdraw products from the market, all of which would have a material adverse effect on our business, financial condition and results of operations.

 

 

 

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If the combination of patents, trade secrets and contractual provisions upon which we rely to protect our intellectual property is inadequate, our ability to commercialize our products successfully will be harmed.

 

Our success depends significantly on our ability to protect our proprietary rights to the technologies incorporated in our products. We currently have five issued U.S. patents and seven pending U.S. patent applications. We also have twenty six issued foreign patents and have applied for nine additional international patents. Our issued patents begin to expire in 2019, with the last of these patents expiring in 2029, although terminal disclaimers, patent term extension or patent term adjustment can shorten or lengthen the patent term. We rely on a combination of patent protection, trade secret laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these may not adequately protect our rights or permit us to gain or keep any competitive advantage.

 

The issuance of a patent is not conclusive as to its scope, validity or enforceability. The scope, validity or enforceability of our issued patents can be challenged in litigation or proceedings before the U.S. Patent and Trademark Office or foreign patent offices where our applications are pending. The U.S. Patent and Trademark Office or foreign offices may deny or require significant narrowing of claims in our pending patent applications. Patents issued as a result of the pending patent applications, if any, may not provide us with significant commercial protection or be issued in a form that is advantageous to us. Proceedings before the U.S. Patent and Trademark Office or foreign offices could result in adverse decisions as to the priority of our inventions and the narrowing or invalidation of claims in issued patents. The laws of some foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S., if at all. Some of our patents may expire before we receive FDA approval to market our products in the U.S. or we receive approval to market our products in a foreign country. Although we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier treatment technology, we cannot assure you that this protection will be sufficient to protect us during the development of that technology.

  

Our competitors may successfully challenge and invalidate or render unenforceable our issued patents, including any patents that may issue in the future, which could prevent or limit our ability to market our products and could limit our ability to stop competitors from marketing products that are substantially equivalent to ours. In addition, competitors may be able to design around our patents or develop products that provide outcomes that are comparable to our products but that are not covered by our patents.

 

We have also entered into confidentiality and assignment of intellectual property agreements with all of our employees, consultants and advisors directly involved in the development of our technology as one of the ways we seek to protect our intellectual property and other proprietary technology. However, these agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.

 

In the event a competitor infringes upon any of our patents or other intellectual property rights, enforcing our rights may be difficult, time consuming and expensive, and would divert management’s attention from managing our business. We cannot assure you that we will be successful on the merits in any enforcement effort. In addition, we may not have sufficient resources to litigate, enforce or defend our intellectual property rights.

 

We may rely on licenses for new technology, which may affect our continued operations with respect thereto.

 

As we develop our technology, we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon a particular development path, which could seriously harm our business, financial position and results of our operations.

 

 

 

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New technology may lead to our competitors developing superior products which would reduce demand for our products.

 

Research into technologies similar to ours is proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in the development of products similar to ours. These new technologies may, if successfully developed, offer significant performance or price advantages when compared with our technologies. There is no assurance that our existing patents or our pending and proposed patent applications will offer meaningful protection if a competitor develops a novel product based on a new technology.

 

If we are unable to protect our proprietary technology and preserve our trade secrets, we will increase our vulnerability to competitors which could materially adversely impact our ability to remain in business.

 

Our ability to successfully commercialize our products will depend on our ability to protect those products and our technology with domestic and foreign patents. We will also need to continue to preserve our trade secrets. The issuance of a patent is not conclusive as to its validity or as to the enforceable scope of the claims of the patent. The patent positions of technology companies, including us, are uncertain and involve complex legal and factual issues. We cannot assure you that our patents will prevent other companies from developing similar products or products which produce benefits substantially the same as our products, or that other companies will not be issued patents that may prevent the sale of our products or require us to pay significant licensing fees in order to market our products.

 

From time to time, we may need to obtain licenses to patents and other proprietary rights held by third parties in order to develop, manufacture and market our products. If we are unable to timely obtain these licenses on commercially reasonable terms, our ability to commercially exploit such products may be inhibited or prevented. Additionally, we cannot assure investors that any of our products or technology will be patentable or that any future patents we obtain will give us an exclusive position in the subject matter claimed by those patents. Furthermore, we cannot assure investors that our pending patent applications will result in issued patents, that patent protection will be secured for any particular technology, or that our issued patents will be valid or enforceable or provide us with meaningful protection.

  

If we are required to engage in expensive and lengthy litigation to enforce our intellectual property rights, such litigation could be very costly and the results of such litigation may not be satisfactory.

 

Although we have entered into invention assignment agreements with our employees and with certain advisors, and we routinely enter into confidentiality agreements with our contract partners, if those employees, advisors or contract partners develop inventions or processes independently that may relate to products or technology under development by us, disputes may arise about the ownership of those inventions or processes. Time-consuming and costly litigation could be necessary to enforce and determine the scope of our rights under these agreements. In addition, we may be required to commence litigation to enforce such agreements if they are violated, and it is certainly possible that we will not have adequate remedies for breaches of our confidentiality agreements as monetary damages may not be sufficient to compensate us. In addition, we may be unable to fund the costs of such litigation to a satisfactory conclusion, which could leave us without recourse to enforce contracts that protect our intellectual property rights.

 

Other companies may claim that our technology infringes on their intellectual property or proprietary rights and commence legal proceedings against us which could be time-consuming and expensive and could result in our being prohibited from developing, marketing, selling or distributing our products.

 

Because of the complex and difficult legal and factual questions that relate to patent positions in our industry, we cannot assure you that our products or technology will not be found to infringe upon the intellectual property or proprietary rights of others. Third parties may claim that our products or technology infringe on their patents, copyrights, trademarks or other proprietary rights and demand that we cease development or marketing of those products or technology or pay license fees. We may not be able to avoid costly patent infringement litigation, which will divert the attention of management away from the development of new products and the operation of our business. We cannot assure investors that we would prevail in any such litigation. If we are found to have infringed on a third-party’s intellectual property rights, we may be liable for money damages, encounter significant delays in bringing products to market or be precluded from manufacturing particular products or using particular technology.

 

 

 

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Other parties may challenge certain of our foreign patent applications. If such parties are successful in opposing our foreign patent applications, we may not gain the protection afforded by those patent applications in particular jurisdictions and may face additional proceedings with respect to similar patents in other jurisdictions, as well as related patents. The loss of patent protection in one jurisdiction may influence our ability to maintain patent protection for the same technology in other jurisdictions.

 

Risks Related to U.S. Government Contracts

 

We may not obtain additional U.S. Government contracts to further develop our technology.

 

We can give no assurances that we will be successful in obtaining additional government grants or contracts. The process of obtaining government contracts is lengthy with the uncertainty that we will be successful in obtaining announced grants or contracts for therapeutics as a medical device technology. Accordingly, we cannot be certain that we will be awarded any additional U.S. Government grants or contracts utilizing our Hemopurifier platform technology.

 

U.S. Government agencies have special contracting requirements including a right to audit us which create additional risksa negative audit would be detrimental to us.

 

Our business plan to utilize the Aethlon Hemopurifier technology is likely to continue to involve contracts with the U.S. Government. Such contracts typically contain unfavorable termination provisions and are subject to audit and modification by the government at its sole discretion, which subjects us to additional risks. These risks include the ability of the U.S. Government to unilaterally:

 

  · 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;
     
  · audit and object to our contract-related costs and fees, including allocated indirect costs;
     
  · control and potentially prohibit the export of our products; and
     
  · change certain terms and conditions in our contracts.

  

As a U.S. Government contractor, we are required to comply with applicable laws, regulations and standards relating to our accounting practices and would be subject to periodic audits and reviews. As part of any such audit or review, the U.S. Government may review the adequacy of, and our compliance with, our internal control systems and policies, including those relating to our purchasing, property, estimating, compensation and management information systems. Based on the results of its audits, the U.S. Government may adjust our contract-related costs and fees, including allocated indirect costs. In addition, if an audit or review uncovers any improper or illegal activity, we would possibly be subject to civil and criminal penalties and administrative sanctions, including termination of our contracts, forfeiture of profits, suspension of payments, fines and suspension or prohibition from doing business with the U.S. Government. We could also suffer serious harm to our reputation if allegations of impropriety were made against us. Although we have not had any government audits and reviews to date, future audits and reviews could cause adverse effects. In addition, under U.S. Government purchasing regulations, some of our costs, including most financing costs, amortization of intangible assets, portions of our research and development costs, and some marketing expenses, would possibly not be reimbursable or allowed under such contracts. Further, as a U.S. Government contractor, we would be subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which purely private sector companies are not.

 

 

 

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As a U.S. Government contractor, we are subject to a number of procurement rules and regulations.

 

Government contractors must comply with specific procurement regulations and other requirements. These requirements, although customary in government contracts, impact our performance and compliance costs. In addition, current U.S. Government budgetary constraints could lead to changes in the procurement environment, including the Department of Defense’s recent initiative focused on efficiencies, affordability and cost growth and other changes to its procurement practices. If and to the extent such changes occur, they could impact our results of operations and liquidity, and could affect whether and, if so, how we pursue certain opportunities and the terms under which we are able to do so.

 

In addition, failure to comply with these regulations and requirements could result in reductions of the value of contracts, contract modifications or termination, and the assessment of penalties and fines, which could negatively impact our results of operations and financial condition. Our failure to comply with these regulations and requirements could also lead to suspension or debarment, for cause, from government contracting or subcontracting for a period of time. Among the causes for debarment are violations of various statutes, including those related to procurement integrity, export control, government security regulations, employment practices, protection of the environment, accuracy of records and the recording of costs, and foreign corruption. The termination of our government contract as a result of any of these acts could have a negative impact on our results of operations and financial condition and could have a negative impact on our reputation and ability to procure other government contracts in the future.

 

Risks Relating to Our Common Stock and Our Corporate Governance

 

Historically we have not paid dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future.

 

We have never paid cash dividends on our common stock. We intend to retain our future earnings, if any, to fund operational and capital expenditure needs of our business, and do not anticipate paying any cash dividends in the foreseeable future. Furthermore, future financing instruments may do the same. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for our common stockholders in the foreseeable future.

 

Our stock price is speculative, and there is a risk of litigation.

 

The trading price of our common stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:

 

  · revenue or results of operations in any quarter failing to meet the expectations, published or otherwise, of the investment community;
     
  · reduced investor confidence in equity markets, due in part to corporate collapses in recent years;
     
  · speculation in the press or analyst community;
     
  · wide fluctuations in stock prices, particularly with respect to the stock prices for other medical device companies;
     
  · announcements of technological innovations by us or our competitors;
     
  · new products or the acquisition of significant customers by us or our competitors;
     
  · changes in interest rates;
     
  · changes in investors’ beliefs as to the appropriate price-earnings ratios for us and our competitors;

 

 

 

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  · changes in recommendations or financial estimates by securities analysts who track our common stock or the stock of other medical device companies;
     
  · changes in management;
     
  · sales of common stock by directors and executive officers;
     
  · rumors or dissemination of false or misleading information, particularly through Internet chat rooms, instant messaging, and other rapid-dissemination methods;
     
  · conditions and trends in the medical device industry generally;
     
  · the announcement of acquisitions or other significant transactions by us or our competitors;
     
  · adoption of new accounting standards affecting our industry;
     
  · general market conditions;
     
  · domestic or international terrorism and other factors; and
     
  · the other factors described in this section.

 

Fluctuations in the price of our common stock may expose us to the risk of securities class action lawsuits. Although no such lawsuits are currently pending against us and we are not aware that any such lawsuit is threatened to be filed in the future, there is no assurance that we will not be sued based on fluctuations in the price of our common stock. Defending against such suits could result in substantial cost and divert management’s attention and resources. In addition, any settlement or adverse determination of such lawsuits could subject us to significant liability.

 

If at any time our common stock is subject to the Securities and Exchange Commission’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.

 

If at any time our common stock is not listed on a national securities exchange or we have net tangible assets of $5,000,000 or less and our common stock has a market price per share of less than $5.00, transactions in our common stock will be subject to the Securities and Exchange Commission’s, or SEC’s, “penny stock” rules. If our common stock is subject to the “penny stock” rules promulgated under the Exchange Act, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. For any transaction involving a penny stock, unless exempt, the rules require:

 

  · that a broker or dealer approve a person’s account for transactions in penny stocks; and
     
  · the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.

  

In order to approve a person’s account for transactions in penny stocks, the broker or dealer must:

 

  · obtain financial information and investment experience objectives of the person; and
     
  · make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

 

 

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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Securities and Exchange Commission relating to the penny stock market, which, in highlight form:

 

  · sets forth the basis on which the broker or dealer made the suitability determination; and
     
  · that the broker or dealer received a signed, written agreement from the investor prior to the transaction.

 

Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.

 

Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Our common stock has had an unpredictable trading volume which means you may not be able to sell our shares at or near trading prices or at all.

 

Trading in our common shares historically has been volatile and often has been thin, meaning that the number of persons interested in purchasing our common shares at or near trading prices at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the fact that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common shares will develop or be sustained, or that current trading levels will be sustained.

 

The market price for our common stock is volatile; you may not be able to sell our common stock at or above the price you have paid for them, which may result in losses to you.

 

The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. In fact, during the 52-week period ended March 31, 2018, the high and low closing sale prices of a share of our common stock were $3.03 and $0.80, respectively. The volatility in our share price is attributable to a number of factors. First, as noted above, trading in our common shares often has been thin. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative investment due to our limited operating history, limited amount of revenue, lack of profit to date, and the uncertainty of future market acceptance for our potential products. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. The following factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual operating results; acceptance of our proprietary technology as a viable method of augmenting the immune response of clearing viruses and toxins from human blood; government regulations, announcements of significant acquisitions, strategic partnerships or joint ventures; our capital commitments and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our common shares regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.

 

 

 

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Our directors and officers own or control approximately 6.0% of our outstanding common shares which may limit your ability to propose new management or influence the overall direction of the business; this concentration of control may also discourage potential takeovers that could otherwise provide a premium to you.

 

As of June 8, 2018, our officers and directors beneficially own or control approximately 6.0% of our outstanding common shares (assuming the exercise of all outstanding options, restricted stock units and warrants held by our officers and directors). These persons will have the ability to substantially influence all matters submitted to our stockholders for approval and to control our management and affairs, including extraordinary transactions such as mergers and other changes of corporate control, and going private transactions.

  

A large number of our common shares are issuable upon exercise of outstanding convertible securities which, if exercised or converted, would be dilutive to your holdings.

 

As of March 31, 2018, there are outstanding purchase options and warrants entitling the holders to purchase 6,331,618 common shares at a weighted average exercise price of $1.96 per share. This includes 26,105 warrants that are conditional upon the exercise of other warrants. As of March 31, 2018, there are 349,431 shares underlying promissory notes convertible into common stock at a weighted average exercise price of $3.00. Additionally, as of March 31, 2018, we had reserved 369,000 shares of common stock for issuance under our restricted stock unit program.

 

The exercise price for all of our outstanding options and warrants, or the conversion price of our convertible notes, may be less than your cost to acquire our common shares. In the event of the exercise or conversion of these securities, you could suffer substantial dilution of your investment in terms of your percentage ownership in us as well as the book value of your common shares. In addition, the holders of the convertible notes, common share purchase options or warrants may sell common shares in tandem with their exercise or conversion of those securities to finance that exercise or conversion, or may resell the shares purchased in order to cover any income tax liabilities that may arise from their exercise of the options or warrants or conversion of the notes.

 

Our issuance of additional common shares, or convertible securities, would be dilutive to your holdings.

 

We are entitled under our Articles of Incorporation to issue up to 30,000,000 shares of common stock. We have reserved for issuance 7,160,004 shares of common stock for existing restricted stock units, options, warrants and convertible notes. As of March 31, 2018, we have issued and outstanding 17,739,511 shares of common stock. As a result, as of March 31, 2018 we had 5,100,485 common shares available for issuance to new investors or for use to satisfy indebtedness or pay service providers.

 

Our Board of Directors may generally issue shares of common stock, restricted stock units or options or warrants to purchase those shares, without further approval by our stockholders based upon such factors as our Board of Directors may deem relevant at that time. It is likely that we will be required to issue a large amount of additional securities to raise capital to further our development. It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our stock plans. We cannot give you any assurance that we will not issue additional shares of common stock, or options or warrants to purchase those shares, under circumstances we may deem appropriate at the time.

 

Our issuance of additional shares of common stock in satisfaction of services, or to repay indebtedness, would be dilutive to your holdings.

 

Our Board of Directors may generally issue shares of common stock to pay for debt or services, without further approval by our stockholders based upon such factors that our Board of Directors may deem relevant at that time. For the past four fiscal years (ending March 31, 2018), we issued a total of 1,102,741 shares of common stock to pay for debt to reduce our obligations. In the fiscal year ended March 31, 2018 we issued 120,922 shares of common stock to pay for debt to reduce our obligations.

 

During the fiscal year ended March 31, 2018, we issued 15,000 shares to pay for services valued at $33,600. While we did not issue any shares as payment for services in the fiscal years ended March 31, 2017 and 2016, it is likely that we will issue additional securities to pay for services and to reduce debt in the future. We cannot give you any assurance that we will not issue additional shares of common stock at various discounts under circumstances we may deem appropriate at the time.

 

 

 

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Our officers and directors are entitled to indemnification from us for liabilities under our articles of incorporation, which could be costly to us and may discourage the exercise of stockholder rights.

 

Our Articles of Incorporation contains provisions which eliminate the liability of our directors for monetary damages to our company and stockholders. Our by-laws also require us to indemnify our officers and directors. We may also have contractual indemnification obligations under our agreements with our directors, officers and employees. The foregoing indemnification obligations could result in our company incurring substantial expenditures to cover the cost of settlement or damage awards against directors, officers and employees that we may be unable to recoup. These provisions and resultant costs may also discourage our company from bringing a lawsuit against directors, officers and employees for breaches of their fiduciary duties, and may similarly discourage the filing of derivative litigation by our stockholders against our directors, officers and employees even though such actions, if successful, might otherwise benefit our company and stockholders.

  

Our by-laws and Nevada law may discourage, delay or prevent a change of control of our company or changes in our management, would have the result of depressing the trading price of our common stock.

 

Provisions of Nevada anti-takeover law (NRS 78.378 et seq.) could have the effect of delaying or preventing a third-party from acquiring us, even if the acquisition arguably could benefit our stockholders. Various provisions of our by-laws may delay, defer or prevent a tender offer or takeover attempt of us that a stockholder might consider in his or her best interest. Our by-laws may be adopted, amended or repealed by the affirmative vote of the holders of at least a majority of our outstanding shares of capital stock entitled to vote for the election of directors, and except as provided by Nevada law, our Board of Directors shall have the power to adopt, amend or repeal the by-laws by a vote of not less than a majority of our directors. The interests of these stockholders and directors may not be consistent with your interests, and they may make changes to the by-laws that are not in line with your concerns.

 

Our authorized but unissued shares of common stock are available for our Board or Directors to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, however, faced with an attempt to obtain control of us by means of a proxy context, tender offer, merger or other transaction our Board of Directors acting alone and without approval of our stockholders can issue large amounts of capital stock as part of a defense to a take-over challenge.

 

The existence of the foregoing provisions and other potential anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

We incur substantial costs as a result of being a public company and our management expects to devote substantial time to public company compliance programs.

 

As a public company, we incur significant legal, insurance, accounting and other expenses, including costs associated with public company reporting. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment will result in increased general and administrative expenses and may divert management’s time and attention from product development and commercialization activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed. These laws and regulations could make it more difficult and costly for us to obtain director and officer liability insurance for our directors and officers, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and qualified members of our Board of Directors, particularly to serve on our audit and compensation committees. In addition, if we are unable to continue to meet the legal, regulatory and other requirements related to being a public company, we may not be able to maintain the quotation of our common stock on the Nasdaq Capital Market or on any other senior market to which we may apply for listing, which would likely have a material adverse effect on the trading price of our common stock.

 

 

 

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If securities or industry analysts do not publish research or reports about our business, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.

 

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. Our research coverage by industry and financial analysts is currently limited. Even if our analyst coverage increases, if one or more of the analysts who cover us downgrade our stock, our stock price would likely decline. If one or more of these analysts cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

 

Risks Relating to this Offering

 

There is no minimum offering amount required to consummate this offering.

 

There is no minimum offering amount which must be raised in order for us to consummate this offering. Accordingly, the amount of money raised may not be sufficient for us to meet our business objectives. Moreover, if only a small amount of money is raised, all or substantially all of the offering proceeds may be applied to cover the offering expenses and we will not otherwise benefit from the offering. In addition, because there is no minimum offering amount required, investors will not be entitled to a return of their investment if we are unable to raise sufficient proceeds to meet our business objectives.

 

The exclusive jurisdiction and waiver of trial by jury clauses set forth in the form of securities purchase agreement and warrants to be issued to purchasers in this offering may have the effect of limiting a purchaser’s rights to bring legal action against us and could limit a purchaser’s ability to obtain a favorable judicial forum for disputes with us.

 

Section 5.9 of the securities purchase agreement, which may be executed by purchasers of at least $500,000 of securities in this offering, provides for investors to consent to exclusive jurisdiction to courts located in New York, New York and Section 5.21 provides for a waiver of the right to a trial by jury.   These provisions are also set forth in Section 5(e) of the warrants to be issued to purchasers in this offering (forms of which have been filed as exhibits 4.29 and 4.31 of the Registration Statement on Form S-1 to which this prospectus forms a part). These provisions may have the effect of limiting the ability of investors to bring a legal claim against us due to geographic limitations and/or preference for a trial by jury and may limit an investor’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.

 

Management will have broad discretion as to the use of the net proceeds from this offering, and we may not use these proceeds effectively.

 

We have not designated any portion of the net proceeds from this offering to be used for any particular purposes. Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. Accordingly, you will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Our failure to apply these funds effectively could have a material adverse effect on our business, delay the development of our product candidates and cause the price of our common stock to decline.

 

You will experience immediate and substantial dilution in the net tangible book value per share of the common stock you purchase.

 

Since the public offering price per share of our common stock and related warrant being offered is expected to be substantially higher than the net tangible book value per share of our common stock, you will suffer substantial dilution in the net tangible book value of the common stock you purchase in this offering. Our net tangible book value as of June 30, 2017 was approximately $(1,033,000), or $(0.12) per share. After giving effect to the assumed sale of shares of our common stock in this offering at an assumed combined public offering price of $1.57 per share of common stock and related warrant (the closing bid price of our common stock on September 7, 2017), and after deducting the estimated placement agent fees and estimated offering expenses payable by us, and attributing no value to the warrants sold in this offering, if you purchase shares of our common stock in this offering, you will suffer immediate and substantial dilution of $0.11 per share in the net tangible book value of the common stock you acquire. In the event that you exercise your warrants, you will experience additional dilution to the extent that the exercise price of the warrants is higher than the tangible book value per share of our common stock. See the section titled “Dilution” below for a more detailed discussion of the dilution you would incur if you purchase shares of our common stock in this offering.

 

 

 

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In addition, we have a significant number of stock options, common stock underlying convertible notes, and warrants outstanding. To the extent that outstanding stock options or warrants, including the warrants offered in this prospectus, have been or may be exercised or other shares issued, including shares underlying convertible notes, you may experience further dilution.

 

Holders of our warrants will have no rights as a common stockholder until they acquire our common stock.

 

Until you acquire shares of our common stock upon exercise of your warrants, you will have no rights with respect to shares of our common stock issuable upon exercise of your warrants. Upon exercise of your warrants, you will be entitled to exercise the rights of a common stockholder only as to matters for which the record date occurs after the exercise date.

 

A large number of shares issued in this offering may be sold in the market following this offering, which may depress the market price of our common stock.

 

A large number of shares issued in this offering may be sold in the market following this offering, which may depress the market price of our common stock. Sales of a substantial number of shares of our common stock in the public market following this offering could cause the market price of our common stock to decline. If there are more shares of common stock offered for sale than buyers are willing to purchase, then the market price of our common stock may decline to a market price at which buyers are willing to purchase the offered shares of common stock and sellers remain willing to sell the shares. All of the shares of common stock issued in the offering will be freely tradable without restriction or further registration under the Securities Act of 1933.

 

If our common stock is not listed on a national securities exchange, U.S. holders of the warrants may not be able to exercise their warrants without compliance with applicable state securities laws and the value of your warrants may be significantly reduced.

 

If our common stock is not approved for listing on the NASDAQ Capital Market, or if our common stock is subsequently delisted from the NASDAQ Capital Market and is not eligible to be listed on another national securities exchange, the exercise of the warrants by U.S. holders may not be exempt from state securities laws. As a result, depending on the state of residence of a holder of the warrants, a U.S. holder may not be able to exercise its warrants unless we comply with any state securities law requirements necessary to permit such exercise or an exemption applies. Although we plan to use our reasonable efforts to assure that U.S. holders will be able to exercise their warrants under applicable state securities laws if no exemption exists, there is no assurance that we will be able to do so. As a result, in the event that our common stock is not approved for listing on the NASDAQ Capital Market or our common stock is delisted from the NASDAQ Capital Market and is not eligible to be listed on another securities exchange, your ability to exercise your warrants may be limited. The value of the warrants may be significantly reduced if U.S. holders are not able to exercise their warrants under applicable state securities laws.

 

There is no public market for the common warrants or the pre-funded warrants to purchase shares of our common stock included in the units and the pre-funded units being offered by us in this offering.

 

There is no established public trading market for the common warrants or the pre-funded warrants included in the units and the pre-funded units being offered in this offering, and we do not expect a market to develop. In addition, we do not intend to apply to list the common warrants or the pre-funded warrants on any national securities exchange or other nationally recognized trading system, including The NASDAQ Capital Market. Without an active market, the liquidity of the common warrants and the pre-funded warrants will be limited.

 

 

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to us. The forward-looking statements are contained principally in, but not limited to, the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

  · Our ability to continue as a going concern;

 

  · our ability to achieve sufficient market acceptance of any of our products or product candidates;

 

  · our perception of the growth in the size of the potential market for our products and product candidates;

 

  · our estimate of the advantages of our products;

 

  · our ability to become a profitable company;

 

  · our estimates regarding our needs for additional financing and our ability to obtain such additional financing on suitable terms;

 

  · our ability to succeed in obtaining FDA clearance or approvals for our product candidates;

 

  · the timing, costs and other limitations involved in obtaining regulatory clearance or approval for any of our product candidates and, thereafter, continued compliance with governmental regulation of our existing products and activities;

 

  · our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;

 

  · our ability to obtain sufficient quantities and satisfactory quality of raw materials to meet our manufacturing needs;

 

  · our ability to secure manufacturing capacity to meet future demand;

 

  · the timing of and our ability to conduct clinical trials;

 

  · our ability to perform under our government contracts and accurately estimate our fixed costs under such contracts;

 

  · our ability to attract and retain a qualified management team, research team, scientific advisors and other qualified personnel; and

 

  · our liquidity.

 

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements.

 

Any forward-looking statement in this prospectus reflects our current views with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry and future growth. Except as required by law, we assume no obligation to publicly update or revise any forward-looking statements contained in this prospectus, whether as a result of new information, future events or otherwise. The Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933 do not protect any forward-looking statements that we make in connection with this offering.

 

 

 

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USE OF PROCEEDS

(as of September 29, 2017)

 

We estimate the net proceeds from this offering will be approximately $5.3 million, from the sale of our securities in this offering, based on the offering price of $1.10 per unit and assuming the sale of 5,454,546 units and no sale of any pre-funded units in this offering, after deducting estimated placement agent’s fees and expenses and our estimated offering expenses. We do not intend to pay any proceeds of this offering to any of our affiliates. The public offering price per unit and pre-funded unit will be determined between us and the placement agent based on market conditions at the time of pricing, and may be at a discount to the current market price of our common stock. This estimate excludes the proceeds, if any, from the exercise of common warrants in this offering. If all of the common warrants sold in this offering were to be exercised in cash at the exercise price of $1.10 per share, we would receive additional net proceeds of approximately $6.0 million. We cannot predict when or if these common warrants will be exercised. It is possible that these common warrants may expire and may never be exercised. We intend to use the net proceeds of this offering to continue the clinical development of our product candidates and for working capital and other general corporate purposes. We cannot state with specificity the amount of funds raised which will be utilized for clinical development. The cost of completing an efficacy trial for our device is almost entirely a function of the number of patients and sites the FDA decides is necessary for our device. We do not expect to receive that guidance from the FDA for a number of months. Should the FDA decide to approve our device for certain highly virulent viruses for which clinical trials cannot be conducted, then we will not incur clinical trial costs related to those indications.

 

Pending these uses, we intend to invest the net proceeds of this offering primarily in investment grade, interest-bearing instruments. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds we will have upon completion of the offering. Accordingly, we will retain broad discretion over the use of these proceeds.

 

The securities purchase agreement being entered into with certain purchasers in this offering limit our ability to raise capital both (i) for 90 days whatsoever, and (ii) for so long as warrants issued hereunder are outstanding, in any sort of variable priced financing. Even without receipt of proceeds from this offering, we have sufficient cash to operate for the next 90 days, and we do not intend to enter into any sort of variable priced financing in the future due to the highly dilutive nature of those financings. Because we do not intend to enter into any variable priced financings, we would not forsee a need for a forward or reverse split of our stock in the next 12 months.

 

Pending these uses, we intend to invest the net proceeds of this offering primarily in investment grade, interest-bearing instruments. As of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds we will have upon completion of the offering. Accordingly, we will retain broad discretion over the use of these proceeds.

 

If our gross proceeds from this offering is less than $6 million, we will need to raise additional capital from other sources.The securities purchase agreement being entered into with certain purchasers in this offering limit our ability to raise capital both (i) for 90 days whatsoever, and (ii) for so long as warrants issued hereunder are outstanding, in any sort of variable priced financing. Even without receipt of proceeds from this offering, we have sufficient cash to operate for the next 90 days, and we do not intend to enter into any sort of variable priced financing in the future due to the highly dilutive nature of those financings. Because we do not intend to enter into any variable priced financings, we would not forsee a need for a forward or reverse split of our stock in the next 12 months.

 

 

 

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MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Our common stock is quoted on the Nasdaq Capital Market under the trading symbol "AEMD." Trading in our common stock historically has been volatile and often has been thin. On July 7, 2015, The NASDAQ Stock Market LLC approved our application for listing our common stock on the Nasdaq Capital Market under the symbol “AEMD,” and we commenced trading on the Nasdaq Capital Market on July 13, 2015. Previously, our common stock was quoted on the OTCQB Marketplace under the trading symbol “AEMD.”

 

The following table sets forth for the calendar periods indicated the quarterly high and low closing or bid, as applicable, prices for our common stock as reported by the Nasdaq Capital Market and/or the OTCQB Marketplace. The prices represent quotations between dealers, without adjustment for retail markup, mark down or commission, and do not necessarily represent actual transactions.

 

   CLOSING/BID PRICE 
PERIOD  HIGH   LOW 
         
Calendar 2018:          
First Quarter  $1.90   $1.13 
Second Quarter
   1.55    1.21 
Third Quarter   1.379    0.9335 
           
Calendar 2017:          
Fourth Quarter  $1.45   $0.80 
Third Quarter   2.70    1.14 
Second Quarter   3.03    1.60 
First Quarter   4.75    3.19 
           
Calendar 2016:          
Fourth Quarter  $5.14   $4.11 
Third Quarter   7.70    4.77 
Second Quarter   6.14    4.70 
First Quarter   7.01    4.34 

 

There were approximately 89 record holders of our common stock at November 26, 2018. The number of registered stockholders includes any beneficial owners of common shares held in street name.

 

The transfer agent and registrar for our common stock is Computershare Investor Services, located at 350 Indiana Street, Suite 800, Golden, Colorado 80401.

 

We have not paid any dividends on our common stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the board of directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.

 

 

 

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Recent Sales of Unregistered Securities

 

We have sold or issued the following equity securities not registered under the Securities Act of 1933, or Securities Act, in reliance upon the exemption from registration pursuant to Section 4(a)(2) of the Securities Act or Regulation D of the Securities Act during the fiscal year ended March 31, 2018 and subsequent thereto through the date of filing this report. Except as stated below, no underwriting discounts or commissions were payable with respect to any of the following transactions.

  

Aethlon Medical, Inc. Equity Transactions in the Fiscal Year Ended March 31, 2018.

 

Common Stock Sales Agreement with H.C. Wainwright

 

On June 28, 2016, we entered into a Common Stock Sales Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock from time to time as set forth in the Agreement. The Agreement provides for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000 (the “Shares”).

 

Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the Shares under the Agreement unless terminated earlier by either party as permitted under the Agreement.

  

Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.

 

In the fiscal year ended March 31, 2018, we raised aggregate net proceeds of $2,104,968 (net of $65,280 in commissions to H.C. Wainwright and $5,748 in other offering expenses) under this agreement through the sale of 941,504 shares at an average price of $2.24 per share of net proceeds.

 

October 2017 Public Offering

 

On October 4, 2017, we consummated a public offering of 5,454,546 shares of common stock and warrants to purchase 5,454,546 shares of common stock, for total gross proceeds of $6.0 million. The offering was priced at $1.10 per unit with each unit comprised of one share of common stock and one common stock purchase warrant. Neither the warrants nor the units are listed on an exchange and therefore do not trade. The warrants carry a five-year term with an exercise price of $1.10 per share. The net proceeds of the offering were $5,289,735. H.C. Wainwright & Co. acted as exclusive placement agent for the offering.

 

Warrant Exercises

 

In fiscal year ended March 31, 2018, investors that participated in the October 2017 Public Offering exercised 2,160,350 warrants for aggregate cash proceeds to us of $2,160,350 before expenses.

 

Restricted Shares Issued for Services

 

During the nine months ended December 31, 2017, we issued 15,000 shares of restricted common stock at a price of $2.24 per share, the market price at time of issuance, in payment for investor relations consulting services valued at $33,600 based on the grant date closing market price of our common stock.

 

 

 

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Share for Warrant Exchanges

 

During the fiscal year ended March 31, 2018, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993 warrants and we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in exchange for the cancellation of 77,125 warrants held by those investors. We also agreed with those institutional investors that they would extend the expiration dates of convertible notes held by those investors from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share.

 

Additionally, we entered into an agreement with a former placement agent to issue 5,500 restricted shares in exchange for the cancellation of 11,000 warrants held by that placement agent. We measured the fair value of the shares issued and the fair value of the warrants exchanged for those shares and recorded losses for each of those exchanges based on the changes in fair value between the instruments exchanged. Based upon the fair value of the shares issued and warrants exchanged, we recorded a loss of $130,215 during the fiscal year ended March 31, 2018 for all of the above share for warrant exchanges.

 

Stock Option Issuances

 

During the fiscal year ended March 31, 2018, we issued options to four of our employees to purchase 34,500 shares of common stock at an exercise price of $1.68 per share, the closing price on the date of the approval of the option grants by our compensation committee.

 

Termination of Restricted Share Grant

 

During the fiscal year ended March 31, 2018, we terminated a previously recorded but unissued share issuance of 68,000 shares under a fully vested restricted stock grant to our CEO and issued to him 32,674 shares as a net settlement of shares and the Company paid the withholding taxes associated with that share issuance in return for the cancellation of 35,326 shares. The compensation cost of that restricted stock grant had been fully recorded during prior fiscal years, therefore no expense was recorded regarding this net issuance.

 

Restricted Stock Unit Grants to Directors and Executive Officers

 

On August 9, 2016, our Board of Directors granted RSUs to certain of our officers and directors and during the fiscal year ended March 31, 2018, 168,309 additional RSUs were granted to our directors pursuant to the 2012 Non-Employee Directors Compensation Program. The RSUs represent the right to be issued on a future date shares of our common stock for vested RSUs.

 

During the fiscal year ended March 31, 2018, 184,500 vested RSUs held by our executives were exchanged into the same number of shares of our common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 97,238 of the RSUs were cancelled and we issued a net 87,262 shares to our executives (see Note 9).

 

During the fiscal year ended March 31, 2018, 168,309 RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As three of our four outside directors elected to return 40% of their RSUs in exchange for cash in order to pay their withholding taxes on the share issuances, 44,983 of the RSUs were cancelled and we paid $52,998 in cash to those outside directors.

 

On June 14, 2018, our Board approved the issuances of additional RSUs of $35,000 in value to each of our independent directors per the 2012 Non-Employee Directors Compensation Program (the “2012 Program”) as the stock-based compensation element of their overall directors’ compensation for the fiscal year ending March 31, 2019. The Board also approved the issuance of $50,000 of RSUs to a prospective director, if he chose to join our Board again per the 2012 Program. Finally, the Board approved the issuance of $30,000 of RSU’s to our Chief Financial Officer. The Board approval called for all of those RSUs to be priced based on the five day trailing averages of our closing stock price leading up to the acceptance of the Board seat by the prospective director, which occurred on June 19, 2018. That average price was $1.31 per share for the RSU calculations. Therefore, a total of 107,196 RSUs were issued to our existing independent directors, 38,285 RSUs were issued to Mr. Cipriani and 22,971 RSUs were issued to our Chief Financial Officer. All of those RSUs vest ratably on September 30, 2018, December 31, 2018 and March 31, 2019.

 

 

 

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The above noted RSUs were granted under our Amended 2010 Stock Incentive Plan and we recorded expense of $334,032 in the six months ended September 30, 2018 related to the RSU grants.

 

RSUs outstanding that have vested and are expected to vest as of September 30, 2018 are as follows:

 

   Number of RSUs 
Vested   46,125 
Expected to vest   342,926 
Total   389,051 

  

During the six months ended September 30, 2018, 148,401 RSUs held by our executives and directors were exchanged into the same number of shares of our common stock. As our executives and certain of our directors elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes (or in the case of directors issuing the cash equivalent of the estimated withholding taxes) on the share issuance, 68,352 of the RSUs were cancelled and we issued a net 80,049 shares to our executives.

 

 

 

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EQUITY COMPENSATION PLANS

 

SUMMARY EQUITY COMPENSATION PLAN DATA

 

Equity Compensation Plans

 

Summary equity compensation plan data

 

The following table sets forth information, as of March 31, 2018, about our equity compensation plans (including the potential effect of debt instruments convertible into common stock) in effect as of that date:

 

Plan category  (a) 
Number of securities
to be issued
upon exercise
of outstanding
options, warrants
and rights
(1)(2)
   (b)
Weighted-average 
exercise price of 
outstanding options
   (c)
Number of securities
remaining available
for future issuance
under equity 
compensation plans
(excluding securities
reflected in column 
(a))
 
             
Equity compensation plans approved by security holders (3)(4)(5)   396,000   $1.68    2,272,393 
                
Equity compensation plans not approved by security holders (1)(3)(4)   295,470   $10.07    9,800 
                
Totals   691,470   $10.07    2,282,193 

_____________

(1) The description of the material terms of non-plan issuances of equity instruments is discussed in Note 5 to the accompanying consolidated financial statements.

 

(2) Net of equity instruments forfeited, exercised or expired.

 

(3) Includes restricted stock unit grants to our officers and directors in August 2016, and to our directors during the fiscal year ended March 31, 2018.

 

(4) On March 31, 2018 we had 2,272,393 shares available under our 2010 Stock Incentive Plan.

 

(5) 3,000,000 share increase to the 2010 Stock Incentive Plan approved by shareholders.

  

 

 

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2000 Stock Option Plan

 

Our 2000 Stock Option Plan provides for the grant of incentive stock options to our full-time employees (who may also be directors) and nonstatutory stock options to non-employee directors, consultants, customers, vendors or providers of significant services. The exercise price of any incentive stock option may not be less than the fair market value of the common stock on the date of grant or, in the case of an optionee who owns more than 10% of the total combined voting power of all classes of our outstanding stock, not be less than 110% of the fair market value on the date of grant. The exercise price, in the case of any nonstatutory stock option, must not be less than 75% of the fair market value of the common stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is 10,000 options.

 

At March 31, 2018, all of the grants previously made under the 2000 Stock Option Plan had expired and 200 common shares had been issued under the plan, with 9,800 available for future issuance.

 

2010 Stock Incentive Plan

 

In August 2010, we adopted the 2010 Stock Incentive Plan, which provides incentives to attract, retain and motivate employees and directors whose present and potential contributions are important to our success by offering them an opportunity to participate in our future performance through awards of options, the right to purchase common stock, stock bonuses and stock appreciation rights and other awards. We initially reserved a total of 70,000 common shares for issuance under the 2010 Stock Incentive Plan.

 

In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 70,000 common shares issuable under this plan under the Securities Act, and in July 2012, we filed a registration statement on Form S-8 for the purpose of registering 100,000 common shares issuable under this plan under the Securities Act.

 

On January 26, 2016, our Board of Directors approved an amendment to the 2010 Stock Incentive Plan to increase the total number of shares of common stock reserved for issuance under the plan to 3,170,000 shares, subject to amendment of our Articles of Incorporation to increase our authorized common stock. On March 29, 2016, we held an annual stockholders meeting, at which our stockholders approved the Amended 2010 Stock Incentive Plan and an amendment of our Articles of Incorporation to increase our authorized common stock to 30,000,000 shares. On March 31, 2016, we filed a Certificate of Amendment to our Articles of Incorporation to effect the increase in our authorized common stock. As a result of such amendment, the Amended 2010 Stock Incentive Plan became effective on March 31, 2016.

 

At March 31, 2018, we had 2,272,393 shares available under this plan.

 

2012 Directors Compensation Program

 

In July 2012, our Board of Directors approved a board compensation program that modified and superseded the 2005 Directors Compensation Program, which was previously in effect. Under the 2012 program, in which only non-employee directors may participate, an eligible director will receive a grant of $35,000 worth of ten-year options to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. In addition, under this program, eligible directors will receive cash compensation equal to $500 for each committee meeting attended and $1,000 for each formal board meeting attended.

 

On June 6, 2014, our Board of Directors approved certain changes to the 2012 program. Under this modified program, a new eligible director will receive an initial grant of $50,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. These options will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program also will receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary of the date of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The modified 2012 program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Nominating Committee Chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000, Nominating Committee member $4,000 and lead independent director - $15,000.

 

 

 

 35 

 

 

On August 9, 2016, the Board approved further modifications to the program. Under the modified 2012 Program, in which only non-employee directors may participate, a new eligible director will receive an initial grant of $50,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued based on the average of the closing prices of the Common Stock for the five trading days preceding and including the date of grant and will vest at a rate determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of the closing prices of the Common Stock for the five trading days preceding and including the date of grant. Such options will have a term of ten years and will vest at a rate determined by the Board in its discretion.

 

At the beginning of each fiscal year, each existing director eligible to participate in the 2012 Program will receive a grant of $35,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year) and will vest at a rate determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year). Such options will have a term of ten years and will vest at a rate determined by the Board in its discretion.

 

The RSU grants and the changes to the 2012 Program were approved and recommended by our Compensation Committee prior to approval by the Board.

 

Dr. Fisher will be compensated $90,000 per year for his services as Chairman of the Board, which the Company’s Board considers to be fees payable as a member of the Board or a Committee of the Board for purposes of Section 10A-3 of the rules promulgated under the Securities Exchange Act of 1934, as amended. To the extent payment of such fees are construed to not be fees payable as a member of the Board or a Committee of the Board, then the Board considers that Dr. Fisher may act as a member of its Audit Committee under Nasdaq Rule 5605(c)(2)(B) as the Board has determined that it is in the best interests of the Company and its stockholders for Dr. Fisher to continue to serve on its Audit Committee.

 

Stand-alone grants

 

From time to time our Board of Directors grants common stock or common share purchase options or warrants to selected directors, officers, employees and consultants as equity compensation to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually negotiated. There were no stock option grants on a stand-alone basis to either employees or directors during the fiscal years ended March 31, 2018 and March 31, 2017.

 

 

 

 36 

 

 

CAPITALIZATION

(as of September 29, 2017)

 

The following table sets forth our cash and cash equivalents and our capitalization as of June 30, 2017:

 

  · on an actual basis; and

 

  · on an as adjusted basis, based upon the offering price of $1.10 per share of common stock and corresponding warrant, to give effect to the sale of 5,454,546 shares of common stock in this offering, after deducting the estimated placement agent discounts and commissions and estimated offering expenses payable by us.

 

Based on the offering price of $1.10 per share and associated warrant. The as adjusted information below is only for illustrative purposes. You should read this table in conjunction with “Use of Proceeds” above as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and financial statements and the related notes appearing elsewhere in this prospectus.

 

   June 30, 2017 
   Unaudited   Unaudited 
   Actual   As Adjusted 
   (in thousands except share amounts) 
         
Assets:          
           
Cash & Cash Equivalents  $327,206   $5,657,206 
           
Liabilities:          
           
Total Liabilities  $1,459,216   $1,459,216 
           
Stockholders’ Equity:          
           
Common Stock, par value of $0.001  $8,869   $14,324 
           
Additional Paid-in-capital   94,745,740    100,070,285 
           
Retained Earnings (Deficit)   (95,619,939)   (95,619,939)
           
Total Stockholders’ Equity Before Noncontrolling Interests  $(865,330)  $4,464,670 

 

 

 

 37 

 

 

The total number of shares of our common stock outstanding in the table above is based on 8,869,571 shares outstanding as of June 30, 2017, and excludes as of that date, the following:

 

(1) The number of shares of our common stock outstanding prior to and to be outstanding immediately after this offering, as set forth in the above table, is based on 8,869,571 shares of our common stock outstanding as of June 30, 2017 and excludes as of that date:

 

  · 466,547 shares of common stock issuable upon exercise of outstanding stock options under our stock incentive plans at a weighted average exercise price of $10.30 per share;

 

  · 2,475,737 additional shares of common stock reserved for issuance under outstanding warrants with a weighted average exercise price of $3.53 per share;

 

  · 507,375 additional shares of common stock reserved for future issuance under our stock incentive plans;

 

  · 443,644 additional shares of common stock issuable under convertible notes, which includes accrued interest through June 30, 2017;

 

  · shares of common stock issuable upon exercise of the warrants offered hereby; and

 

  · shares of common stock issuable upon exercise of warrants to be issued to the placement agent in connection with this offering.

 

DIVIDEND POLICY

 

We have not paid any dividends on our common stock to date and do not anticipate that we will pay dividends in the foreseeable future. Any payment of cash dividends on our common stock in the future will be dependent upon the amount of funds legally available, our earnings, if any, our financial condition, our anticipated capital requirements and other factors that the board of directors may think are relevant. However, we currently intend for the foreseeable future to follow a policy of retaining all of our earnings, if any, to finance the development and expansion of our business and, therefore, do not expect to pay any dividends on our common stock in the foreseeable future.

 

DILUTION

(as of September 29, 2017)

 

If you purchase shares of our securities in this offering, you will experience dilution to the extent of the difference between the price per share you pay in this offering and the net tangible book value per share of our common stock immediately after this offering, assuming no value is attributed to the warrants and such warrants are accounted for and classified as equity. Our net tangible book value as of June 30, 2017 was approximately $(1,033,000), or approximately $(0.12) per share. Net tangible book value per share represents our total tangible assets less total tangible liabilities, divided by the number of shares of common stock outstanding as of June 30, 2017.

 

 

 

 

 38 

 

 

After giving effect to the sale by us of 5,454,546 shares of our common stock and warrants to purchase 5,454,546 shares of our common stock in this offering at the combined public offering price of $1.10 per share of our common stock and related warrant, and after deducting the estimated placement agent fees and estimated offering expenses payable by us, our as adjusted net tangible book value as of June 30, 2017 would have been approximately $4.3 million, or approximately $0.30 per share of common stock. This represents an immediate increase in net tangible book value of approximately $0.42 per share to existing shareholders and an immediate dilution of approximately $0.80 per share to new investors, attributing none of the combined public offering price to the warrants offered hereby. The following table illustrates this per share dilution:

 

Combined public offering price per share and related warrant       $ 1.10  
Net tangible book value per share as of June 30, 2017  $(0.12)        
Increase in net tangible book value per share attributable to new investors  $0.42         
As adjusted net tangible book value per share as of June 30, 2017, after giving effect to this offering       $ 0.30  
Dilution per share to new investors in the offering       $ 0.80  

 

This table does not take into account further dilution to new investors that could occur upon the exercise of outstanding options and warrants, including the warrants offered in this offering, having a per share exercise price less than the public offering price per share in this offering.

 

(1)       The number of shares of our common stock outstanding prior to and to be outstanding immediately after this offering, as set forth in the above table, is based on 8,951,081 shares of our common stock outstanding as of September 7, 2017 and excludes as of that date:

 

  · 466,547 shares of common stock issuable upon exercise of outstanding stock options under our stock incentive plans at a weighted average exercise price of $10.30 per share;

 

  · 2,464,739 additional shares of common stock reserved for issuance under outstanding warrants with a weighted average exercise price of $3.48 per share;

 

  · 507,375 additional shares of common stock reserved for future issuance under our stock incentive plans;

 

  · 451,786 additional shares of common stock issuable under convertible notes, which includes accrued interest through September 8, 2017;

 

  · shares of common stock issuable upon exercise of the warrants offered hereby; and

 

  · shares of common stock issuable upon exercise of warrants to be issued to the placement agent in connection with this offering.

 

 

 

 39 

 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

  Page
Consolidated Financial Statements (10-K, March 31, 2018)  
   
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of March 31, 2018 and 2017 F-3
   
Consolidated Statements of Operations for the Years Ended March 31, 2018 and 2017 F-4
   
Consolidated Statements of Equity for the Years Ended March 31, 2018 and 2017 F-5
   
Consolidated Statements of Cash Flows for the Years Ended March 31, 2018 and 2017 F-6
   
Notes to Consolidated Financial Statements F-7

 

 

Condensed Consolidated Financial Statements (10-Q, September 30, 2018)  
   
Condensed Consolidated Balance Sheets as of September 30, 2018 and March 31, 2018 F-34
   
Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2018 and 2017 F-35
   
Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended September 30, 2018 and 2017 F-36
   
Notes to Condensed Consolidated Financial Statements F-37

 

 

 

 

 

 

 

 

 F-1 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of Aethlon Medical, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Aethlon Medical, Inc. and its subsidiary (the Company) as of March 31, 2018 and 2017, the related consolidated statements of operations, equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2018 and 2017, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Squar Milner LLP

 

We have served as the Company's auditor since 2001.

 

San Diego, California

June 8, 2018

 

 

 

 F-2 

 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2018   March 31, 2017 
ASSETS          
CURRENT ASSETS          
Cash  $6,974,070   $1,559,701 
Accounts receivable   74,813     
Prepaid expenses and other current assets   181,367    37,551 
           
TOTAL CURRENT ASSETS   7,230,250    1,597,252 
           
Property and equipment, net   27,552    29,223 
Patents, net   75,832    84,996 
Deposits   18,270    14,897 
           
TOTAL ASSETS  $7,351,904   $1,726,368 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
Accounts payable  $124,450   $484,423 
Due to related parties   90,366    57,866 
Other current liabilities   263,141    69,467 
           
TOTAL CURRENT LIABILITIES   477,957    611,756 
           
Convertible notes payable, net   841,153    519,200 
           
TOTAL LIABILITIES   1,319,110    1,130,956 
           
COMMITMENTS AND CONTINGENCIES (Note 12)          
           
STOCKHOLDERS’ EQUITY          
Common stock, $0.001 par value, 30,000,000 shares authorized at March 31, 2018 and 2017; 17,739,511 and 8,797,086 issued and outstanding at March 31, 2018 and 2017, respectively   17,740    8,796 
Additional paid-in capital   105,574,014    94,445,739 
Accumulated deficit   (99,457,714)   (93,778,156)
           
TOTAL AETHLON MEDICAL, INC. STOCKHOLDERS’ EQUITY BEFORE NONCONTROLLING INTERESTS   6,134,040    676,379 
           
NONCONTROLLING INTERESTS   (101,246)   (80,967)
           
TOTAL STOCKHOLDERS’ EQUITY   6,032,794    595,412 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $7,351,904   $1,726,368 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 F-3 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

 

   Years Ended March 31, 
   2018   2017 
REVENUES:        
Government contract revenue  $149,625   $392,073 
Total revenues   149,625    392,073 
           
OPERATING COSTS AND EXPENSES          
Professional fees   1,553,204    2,161,592 
Payroll and related expenses   2,634,937    3,479,347 
General and administrative   792,600    849,491 
Total operating expenses   4,980,741    6,490,430 
           
OPERATING LOSS   (4,831,116)   (6,098,357)
           
OTHER EXPENSE          
Loss on debt extinguishment   376,909    558,198 
Warrant repricing expense       345,841 
Loss on share for warrant exchanges   130,215     
Interest and other expenses   361,597    304,330 
Total other expense   868,721    1,208,369 
           
NET LOSS BEFORE NONCONTROLLING INTERESTS   (5,699,837)   (7,306,726)
           
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS   (20,279)   (30,613)
           
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS  $(5,679,558)  $(7,276,113)
           
Basic and diluted net loss per share available to common stockholders  $(0.46)  $(0.94)
           
Weighted average number of common shares outstanding - basic and diluted   12,317,074    7,764,237 

 

See accompanying notes to the consolidated financial statements.

 

 

 

 F-4 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EQUITY

FOR THE YEARS ENDED MARCH 31, 2018 AND 2017

 

   ATTRIBUTABLE TO AETHLON MEDICAL, INC.           
   COMMON STOCK  

ADDITIONAL

PAID IN

   ACCUMULATED    NON-
CONTROLLING
    TOTAL 
   SHARES   AMOUNT   CAPITAL   DEFICIT    INTERESTS    EQUITY 
BALANCE - MARCH 31, 2016   7,622,393   $7,621   $88,047,142   $(86,502,043)   $(50,354)   $1,502,366 
                                 
Issuances of common stock for cash under at the market program   216,078    216    954,889              955,105 
                                 
Issuances of common stock and warrants under registered direct financing   773,000    773    1,803,477              1,804,250 
                                 
Issuances of common stock under conversions of convertible notes and related accrued interest   33,091    33    144,686              144,719 
                                 
Warrant repricing expense           345,841              345,841 
                                 
Loss on debt extinguishment           558,198              558,198 
                                 
Debt discount on convertible notes payable           783,868              783,868 
                                 
Issuance of common shares for repurchase of restricted stock units.   149,864    150    (378,668)             (378,518)
                                 
Exercise of cashless warrants   2,660    3    (3)              
                                 
Stock-based compensation expense           2,186,309              2,186,309 
                                 
Net loss               (7,276,113)    (30,613)    (7,306,726)
                                 
BALANCE - MARCH 31, 2017   8,797,086   $8,796   $94,445,739   $(93,778,156)   $(80,967)   $595,412 
                                 
Issuances of common stock for cash under at the market program   941,504    941    2,104,027              2,104,968 
                                 
Issuances of common stock for cash under warrant exercises   2,160,350    2,160    2,231,642              2,233,802 
                                 
Issuances of common stock under conversions of convertible notes and related accrued interest   120,922    121    362,642              362,763 
                                 
Issuance of common stock in public offering   5,454,546    5,455    5,284,280              5,289,735 
                                 
Issuance of common shares for repurchase of restricted stock units.   175,262    175    (278,808)             (278,633)
                                 
Common stock issued for services   15,000    15    33,585              33,600 
                                 
Issuance of common shares pursuant to warrant exchanges   74,841    77    130,138              130,215 
                                 
Stock-based compensation expense           1,260,769              1,260,769 
                                 
Net loss               (5,679,558)    (20,279)    (5,699,837)
                                 
BALANCE - MARCH 31, 2018   17,739,511   $17,740   $105,574,014   $(99,457,714)   $(101,246)   $6,032,794 

  

See accompanying notes to the consolidated financial statements.

 

 

 

 F-5 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED MARCH 31, 2018 AND 2017

 

   2018   2017 
Cash flows from operating activities:          
Net loss  $(5,699,837)  $(7,306,726)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   35,658    32,413 
Warrant repricing expense       345,841 
Loss on share for warrant exchanges   130,215     
Loss on debt extinguishment   376,909    558,198 
Stock based compensation   1,260,769    2,186,309 
Amortization of debt discount and deferred financing costs   245,663    220,439 
Fair market value of common stock issued for services   33,600     
           
Changes in operating assets and liabilities:          
Accounts receivable   (74,813)   199,471 
Prepaid expenses and other current assets   (143,816)   15,743 
Other assets   (3,374)   7,518 
Accounts payable and other current liabilities   (104,154)   322,140 
Due to related parties   32,500    (87,246)
Net cash used in operating activities   (3,910,680)   (3,505,900)
           
Cash flows from investing activities:          
Purchases of property and equipment   (24,823)   (16,433)
Net cash used in investing activities   (24,823)   (16,433)
           
Cash flows from financing activities:          
Cash paid for repurchase of restricted stock units   (278,633)   (378,518)
Proceeds from the issuance of convertible notes payable       577,460 
Net proceeds from the issuance of common stock and warrants   9,628,505    2,759,355 
Net cash provided by financing activities   9,349,872    2,958,297 
           
Net increase (decrease) in cash   5,414,369    (564,036)
           
Cash at beginning of year   1,559,701    2,123,737 
           
Cash at end of year  $6,974,070   $1,559,701 
           
Supplemental information of non-cash investing and financing activities:          
Conversion of debt, accrued liabilities and accrued interest to common stock  $362,763   $144,719 
Reclassification of accrued interest to convertible notes payable  $   $85,031 
Issuance of shares for warrants  $   $198 
Issuance of shares under vested restricted stock units  $211   $150 
Issuance of shares under cashless warrant exercises  $   $3 
Debt discount on convertible notes payable  $   $783,868 

  

See accompanying notes to the consolidated financial statements.

 

 

 

 F-6 

 

 

Aethlon Medical, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 

1. ORGANIZATION, LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

ORGANIZATION

 

Aethlon Medical, Inc. and subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”) is a medical technology company focused on addressing unmet needs in global health and biodefense. The Aethlon Hemopurifier® is an early clinical-stage therapeutic device designed for the single-use removal of life-threatening viruses from the circulatory system of infected individuals. We believe the Hemopurifier can be a part of the broad-spectrum treatment of life-threatening highly glycosylated viruses that are not addressed with an already approved treatment countermeasure objectives set forth by the U.S. Government to protect citizens from bioterror and pandemic threats. In small-scale or early feasibility human studies, the Hemopurifier has been administered to individuals infected with HIV, Hepatitis-C, and Ebola. Additionally, the Hemopurifier has been validated to capture Zika virus, Lassa virus, MERS-CoV, Cytomegalovirus, Epstein-Barr virus, Herpes Simplex virus, Chikungunya virus, Dengue virus, West Nile virus, Smallpox-related viruses, H1N1 Swine Flu virus, H5N1 Bird Flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these validations were conducted in collaboration with leading government or non-government research institutes. Domestically, we are focused on the clinical advancement of the Hemopurifier through investigational device exemptions (IDEs) approved by FDA. We recently concluded a feasibility study to demonstrate the safety of our device in health-compromised individuals infected with a viral pathogen.

 

We are also the majority owner of Exosome Sciences, Inc. (ESI), a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases. Included among ESI’s endeavors is the advancement of a TauSomeTM biomarker candidate to diagnose Chronic Traumatic Encephalopathy (CTE) in the living. ESI previously documented that TauSome levels in former NFL players to be nine times higher than same age-group control subjects.

 

Successful outcomes of human trials will also be required by the regulatory agencies of certain foreign countries where we intend to sell this device. Some of our patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier treatment technology.

 

Our executive offices are located at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. Our website address is www.aethlonmedical.com.

 

Our common stock is quoted on the Nasdaq Capital Market under the symbol “AEMD.”

 

LIQUIDITY AND GOING CONCERN

 

Management expects existing cash as of March 31, 2018 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these consolidated financial statements.

 

PRINCIPLES OF CONSOLIDATION

 

The accompanying consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned (80% ownership) and controlled subsidiary, Exosome Sciences, Inc. (ESI). All significant intercompany balances and transactions have been eliminated in consolidation. The Company has classified the (20% ownership) noncontrolling interests in ESI as part of consolidated net loss in the fiscal years ended March 31, 2018 and 2017 and includes the accumulated amount of noncontrolling interests as part of equity.

 

The losses at ESI during the fiscal year ended March 31, 2018 reduced the noncontrolling interests on our consolidated balance sheet by $20,279 from $(80,967) at March 31, 2017 to $(101,246) at March 31, 2018.

 

 

 

 F-7 

 

 

RISKS AND UNCERTAINTIES

 

We operate in an industry that is subject to intense competition, government regulation and rapid technological change. Our operations are subject to significant risk and uncertainties including financial, operational, technological, regulatory, and including the potential risk of business failure.

 

USE OF ESTIMATES

 

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting periods. Significant estimates made by management include, among others, realization of long-lived assets, estimating fair value associated with debt and equity transactions and valuation of deferred tax assets. Actual results, whether in the near, medium or long-term future, could differ from those estimates.

 

CASH AND CASH EQUIVALENTS

 

Accounting standards define “cash and cash equivalents” as any short-term, highly liquid investment that is both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. For the purpose of financial statement presentation, we consider all highly liquid investment instruments with original maturities of three months or less when purchased, or any investment redeemable without penalty or loss of interest to be cash equivalents. As of March 31, 2018 and 2017, we had no assets that were classified as cash equivalents.

 

FAIR VALUE OF FINANCIAL INSTRUMENTS

 

The carrying amount of our cash, accounts receivable, accounts payable, and other current liabilities approximates their estimated fair values due to the short-term maturities of those financial instruments. The carrying amount of the notes payable approximates their fair value due to the short maturity of the notes and since the interest rates approximate current market interest rates for similar instruments.

  

Management has concluded that it is not practical to determine the estimated fair value of amounts due to related parties because the transactions cannot be assumed to have been consummated at arm's length, the terms are not deemed to be market terms, there are no quoted values available for these instruments, and an independent valuation would not be practicable due to the lack of data regarding similar instruments, if any, and the associated potential costs.

 

We follow Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) in connection with financial assets and liabilities measured at fair value on a recurring basis subsequent to initial recognition.

 

ASC 820 requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

 

Level 1: Quoted market prices in active markets for identical assets or liabilities.

 

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

 

Level 3: Unobservable inputs that are not corroborated by market data.

 

The hierarchy noted above requires us to minimize the use of unobservable inputs and to use observable market data, if available, when determining fair value.

 

We do not have any assets or liabilities that are measured at fair value on a recurring basis and, during the years ended March 31, 2018 and 2017, and did not have any assets or liabilities that were measured at fair value on a nonrecurring basis.

 

 

 

 F-8 

 

 

CONCENTRATIONS OF CREDIT RISKS

 

Cash is maintained at one financial institution in checking accounts. Accounts at this institution are secured by the Federal Deposit Insurance Corporation up to $250,000. Our March 31, 2018 cash balances were approximately $6,722,000 over such insured amount. We do not believe that the Company is exposed to any significant risk with respect to its cash.

 

All of our accounts receivable at March 31, 2018 and 2017 and all of our revenue in the fiscal years ended March 31, 2018 and 2017 were directly from the National Cancer Institute or the U.S. Department of Defense or from a subcontract under Battelle, which is a prime contractor with the U.S. Department of Defense.

 

PROPERTY AND EQUIPMENT

 

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from two to five years. Repairs and maintenance are charged to expense as incurred while improvements are capitalized. Upon the sale or retirement of property and equipment, the accounts are relieved of the cost and the related accumulated depreciation with any gain or loss included in the consolidated statements of operations.

 

INCOME TAXES

 

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the difference between the consolidated financial statements and their respective tax basis. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is more likely than not that some portion of the deferred tax assets may not be realized.

 

LONG-LIVED ASSETS

 

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash flows from such asset, an impairment loss is recognized. We believe no impairment charges were necessary during the fiscal years ended March 31, 2018 and 2017.

  

LOSS PER SHARE

 

Basic loss per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period of computation. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential common shares have been excluded as their effect would be antidilutive.

 

As of March 31, 2018 and 2017, a total of 7,160,004 and 3,908,292 potential common shares, consisting of shares underlying outstanding stock options, restricted stock units, warrants and convertible notes payable were excluded as their inclusion would be antidilutive.

 

SEGMENTS

 

Historically, we operated in one segment that was based on our development of therapeutic devices. However, in the December 2013 quarter, we initiated the operations of ESI to develop diagnostic tests. As a result, we now operate in two segments, Aethlon for therapeutic applications and ESI for diagnostic applications (See Note 10).

 

We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating results in order to make decisions about resources to be allocated to the ESI segment and to assess its performance.

 

 

 

 F-9 

 

 

 

DEFERRED FINANCING COSTS

 

Costs related to the issuance of debt are capitalized as a deduction to our convertible notes based on the new accounting standard on imputation of interest, and amortized to interest expense over the life of the related debt using the effective interest method. We recorded amortization expense related to our deferred financing costs of $27,641 during the fiscal year ended March 31, 2017. There was no amortization related to our deferred financing costs in the fiscal year ended March 31, 2018.

 

REVENUE RECOGNITION

 

For our contracts with the National Institutes of Health (“NIH”) and with DARPA, we adopted the Milestone method of revenue recognition under ASC 605-28 “Revenue Recognition – Milestone Method” (“ASC 605-28”) and we believe we met the requirements under ASC 605-28 for reporting contract revenue under the Milestone Method for the fiscal years ended March 31, 2018 and 2017.

 

We identify the deliverables included within the contract and evaluate which deliverables represent separate units of accounting based on if certain criteria are met, including whether the delivered element has standalone value to the collaborator. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units.

 

A milestone is an event having all of the following characteristics:

 

(1) There is substantive uncertainty at the date the arrangement is entered into that the event will be achieved. A vendor’s assessment that it expects to achieve a milestone does not necessarily mean that there is not substantive uncertainty associated with achieving the milestone.

 

(2) The event can only be achieved based in whole or in part on either: (a) the vendor’s performance; or (b) a specific outcome resulting from the vendor’s performance.

 

(3) If achieved, the event would result in additional payments being due to the vendor.

 

A milestone does not include events for which the occurrence is either: (a) contingent solely upon the passage of time; or (b) the result of a counterparty’s performance.

  

The policy for recognizing deliverable consideration contingent upon achievement of a milestone must be applied consistently to similar deliverables.

 

The assessment of whether a milestone is substantive is performed at the inception of the arrangement. The consideration earned from the achievement of a milestone must meet all of the following for the milestone to be considered substantive:

 

(1) The consideration is commensurate with either: (a) the vendor’s performance to achieve the milestone; or (b) the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the vendor’s performance to achieve the milestone;

 

(2) The consideration relates solely to past performance; and

 

(3) The consideration is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement.

 

A milestone is not considered substantive if any portion of the associated milestone consideration relates to the remaining deliverables in the unit of accounting (i.e., it does not relate solely to past performance). To recognize the milestone consideration in its entirety as revenue in the period in which the milestone is achieved, the milestone must be substantive in its entirety. Milestone consideration cannot be bifurcated into substantive and nonsubstantive components. In addition, if a portion of the consideration earned from achieving a milestone may be refunded or adjusted based on future performance, the related milestone is not considered substantive.

 

NIH Contract - We entered into a contract with the NIH on September 15, 2017. This award is under the NIH’s Small Business Innovation Research (SBIR) program which is designed to fund early stage small businesses that are seeking to commercialize innovative biomedical technologies. The title of the award is SBIR Topic 359 Phase 1 Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.

 

The award from NIH is a firm, fixed-price contract with potential total payments to us of $299,250 over the course of nine months.

 

 

 

 F-10 

 

 

Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also has the unilateral right to require us to perform additional work under an option period for an additional fixed amount of $49,800.

 

Under the terms of the contract, we must perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts.

 

In the fiscal year ended March 31, 2018, we completed the first two milestones on this contract and invoiced NIH for two milestones in the amount of $149,625. In the fiscal year ended March 31, 2018, we performed work under the contract completing the majority of the first two technical objectives of the contract (Aim 1: To validate the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma and Aim 2: To validate a method of melanoma exosome isolation consisting of the Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes). As a result we invoiced NIH for $149,625.

 

DARPA Contract -- We entered into a government contract with DARPA and recognized revenue of $387,438 under that contract during the fiscal year ended March 31, 2017.

 

Battelle Subcontract -- We entered into a subcontract agreement with Battelle Memorial Institute (“Battelle”) in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original DARPA contract and we are one of several subcontractors on that systems integration project. The Battelle subcontract is cost-reimbursable under a time and materials basis. We began generating revenues under the subcontract during the three months ended September 30, 2013 and for the fiscal year ended March 31, 2017, we recorded revenue of $4,635, under the Battelle subcontract.

 

Our revenue under this contract was a function of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees). Battelle engaged us as needed. Each payment required approval by the program manager at Battelle.

 

STOCK-BASED COMPENSATION

 

Employee stock options and rights to purchase shares under stock participation plans are accounted for under the fair value method. Accordingly, share-based compensation is measured when all granting activities have been completed, generally the grant date, based on the fair value of the award. The exercise price of options is generally equal to the market price of the Company's common stock (defined as the closing price as quoted on the Nasdaq Capital Market or OTCBB on the date of grant). Compensation cost recognized by the Company includes (a) compensation cost for all equity incentive awards granted prior to April 1, 2006, but not yet vested, based on the grant-date fair value estimated in accordance with the original provisions of the then current accounting standards, and (b) compensation cost for all equity incentive awards granted subsequent to March 31, 2006, based on the grant-date fair value estimated in accordance with the provisions of subsequent accounting standards. We use a Binomial Lattice option pricing model for estimating fair value of options granted (see Note 5).

 

The following table summarizes share-based compensation expenses relating to shares and options granted and the effect on loss per common share during the years ended March 31, 2018 and 2017:

 

Our total stock-based compensation for fiscal years ended March 31, 2018 and 2017 included the following:

  

   Fiscal Years Ended 
   March 31, 2018   March 31, 2017 
Vesting of Stock Options and Restricted Stock Units  $1,212,794   $2,076,535 
    47,975    109,773 
Total Stock-Based Compensation Expense  $1,260,769   $2,186,309 
           
Weighted average number of common shares outstanding – basic and diluted   12,317,074    7,764,237 
           
Basic and diluted loss per common share  $(0.10)  $(0.28)

 

 

 

 F-11 

 

 

We account for transactions involving services provided by third parties where we issue equity instruments as part of the total consideration using the fair value of the consideration received (i.e. the value of the goods or services) or the fair value of the equity instruments issued, whichever is more reliably measurable. In transactions, when the value of the goods and/or services are not readily determinable and (1) the fair value of the equity instruments is more reliably measurable and (2) the counterparty receives equity instruments in full or partial settlement of the transactions, we use the following methodology:

 

a) For transactions where goods have already been delivered or services rendered, the equity instruments are issued on or about the date the performance is complete (and valued on the date of issuance).

 

b) For transactions where the instruments are issued on a fully vested, non-forfeitable basis, the equity instruments are valued on or about the date of the contract.

 

c) For any transactions not meeting the criteria in (a) or (b) above, we re-measure the consideration at each reporting date based on its then current stock value.

 

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate for all expense amortization after March 31, 2007 is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the fiscal year ended March 31, 2018 was insignificant.

 

PATENTS

 

Patents include both foreign and domestic patents. We capitalize the cost of patents, some of which were acquired, and amortize such costs over the shorter of the remaining legal life or their estimated economic life, upon issuance of the patent. The unamortized costs of patents are subject to our review for impairment under our long-lived asset policy above.

 

STOCK PURCHASE WARRANTS

 

We grant warrants in connection with the issuance of convertible notes payable and the issuance of common stock for cash. When such warrants are classified as equity and issued in connection with debt, we measure the relative estimated fair value of such warrants and record it as a discount from the face amount of the convertible notes payable. Such discounts are amortized to interest expense over the term of the notes using the effective interest method. Warrants issued in connection with common stock for cash, if classified as equity, are considered issued in connection with equity transactions and the warrant fair value is recorded to additional paid-in-capital.

 

BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

 

The convertible feature of certain notes payable provides for a rate of conversion that is below market value. Such feature is normally characterized as a "Beneficial Conversion Feature" ("BCF"). We measure the estimated fair value of the BCF in circumstances in which the conversion feature is not required to be separated from the host instrument and accounted for separately, and record that value in the consolidated financial statements as a discount from the face amount of the notes. Such discounts are amortized to interest expense over the term of the notes.

  

RESEARCH AND DEVELOPMENT EXPENSES

 

Our research and development costs are expensed as incurred. We incurred approximately $586,000 and $673,000 of research and development expenses for the years ended March 31, 2018 and 2017, respectively, which are included in various operating expenses in the accompanying consolidated statements of operations.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial statements.

 

 

 

 F-12 

 

 

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

 

During the fiscal year ended March 31, 2017, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, the new accounting standard on imputation of interest, simplifying the presentation of debt issuance costs. As a result of the adoption of that pronouncement, our deferred financing costs at March 31, 2016 were reclassified from current assets to an offset against our convertible notes. We did not have any unamortized deferred financing costs at March 31, 2017.

 

During the fiscal year ended March 31, 2017, we also adopted FASB ASU 2015-01, the new accounting standard on income statement - extraordinary and unusual items (Subtopic 225-20): simplifying income statement presentation by eliminating the concept of extraordinary items and FASB ASU 2014-15, the new accounting standard on the presentation of financial statements - going concern (Subtopic 205-40): disclosure of uncertainties about an entity's ability to continue as a going concern.

 

The adoption of FASB ASU 2015-01 did not have a material impact on our consolidated financial statements for the fiscal years ended March 31, 2018 and 2017 as we did not have any extraordinary or unusual items in those fiscal years and we believe this accounting pronouncement will not have a significant impact on the our consolidated financial statements in the future. The adoption of FASB ASU 2014-15 did not have a material impact on our consolidated financial statements for the fiscal years ended March 31, 2018 and 2017.

 

During the fiscal year ended March 31, 2018, we adopted FASB ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which amended Accounting Standards Codification ("ASC") Topic 718, Compensation – Stock Compensation. This pronouncement simplified several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. We adopted this ASU effective April 1, 2017 and the adoption did not have a material impact on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 201 4-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In addition, the standard provided guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers upon transfer of control. ASU 2014-09 supersedes the revenue requirements in Revenue Recognition (Topic 605) and most industry-specific guidance throughout the Industry Topics of the Codification. ASU 2014-09 was to be effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and is to be applied retrospectively, with early application not permitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”), which deferred the effective date of ASU 2014-09 by one year. Early adoption is permitted after December 31, 2016. We elected to adopt the standard effective April 1, 2017, and the adoption did not have a material impact on our financial statements as existing government contracts are not in scope of Topic 606.

 

ASU 2016-02, Leases (Topic 842) changes the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU 2016-02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We do not expect the adoption of ASU No. 2016-02 to have a significant impact on our consolidated financial statements.

 

2. PROPERTY AND EQUIPMENT

 

Property and equipment, net, consist of the following:

 

   March 31, 2018   March 31, 2017 
Furniture and office equipment, at cost  $376,907   $352,085 
Accumulated depreciation   (349,355)   (322,862)
   $27,552   $29,223 

 

 

 

 F-13 

 

 

Depreciation expense for the years ended March 31, 2018 and 2017 was $26,494 and $23,248, respectively.

 

3. PATENTS

 

Patents consist of the following:

 

   March 31, 2018   March 31, 2017 
Patents  $211,645   $211,645 
Accumulated amortization   (135,813)   (126,649)
   $75,832   $84,996 

 

Amortization expense for patents for the years ended March 31, 2018 and 2017 was $9,164 and $9,165, respectively. Future amortization expense on patents is estimated to be approximately $9,000 per year based on the estimated life of the patents. The weighted average remaining life of our patents is approximately 3.2 years.

  

4. CONVERTIBLE NOTES PAYABLE

 

Convertible Notes Payable, Net consisted of the following at March 31, 2018:

 

   Principal   Unamortized
Discount
   Net
Amount
   Accrued
Interest
 
Convertible Notes Payable, Net – Non-Current Portion:                    
November 2014 10% Convertible Notes (due July 1, 2019)  $612,811   $(93,590)  $519,221   $34,386 
December 2016 10% Convertible Notes (due July 1, 2019)   379,780    (57,848)   321,932    21,315 
Total Convertible Notes Payable, Net  $992,591   $(151,438)  $841,153   $55,701 

 

During the fiscal year ended March 31, 2018, we recorded interest expense of $112,456 related to the contractual interest rates of our convertible notes and interest expense of $245,664 related to the amortization of the note discount for a total interest expense of $358,120 related to our convertible notes in the fiscal year ended March 31, 2018. All of the unamortized discount at March 31, 2018 related to the note discount established upon the second amendment to the November 2014 10% Convertible Notes and to the December 2016 10% Convertible Notes (see below). Accrued interest is included in other current liabilities (see Note 7).

 

Convertible Notes Payable, Net consisted of the following at March 31, 2017:

 

   Principal   Unamortized
Discount
   Net
Amount
   Accrued
Interest
 
Convertible Notes Payable, Net – Non-Current Portion:                    
November 2014 10% Convertible Notes (due July 1, 2019)  $612,811   $(275,363)  $337,448   $2,555 
December 2016 10% Convertible Notes (due July 1, 2019)   680,400    (498,648)   181,752    2,836 
Total Convertible Notes Payable, Net  $1,293,211   $(774,011)  $519,200   $5,391 

 

During the fiscal year ended March 31, 2017, we recorded interest expense of $81,102 related to the contractual interest rates of our convertible notes, interest expense of $27,641 related to the amortization of deferred financing costs and interest expense of $192,798 related to the amortization of the note discount for a total interest expense of $301,541 related to our convertible notes in the fiscal year ended March 31, 2017. All of the unamortized discount at December 31, 2016 related to the note discount established upon the second amendment to the November 2014 10% Convertible Notes and to the December 2016 10% Convertible Notes (see below). Accrued interest is included in other current liabilities (see Note 7).

 

 

 

 F-14 

 

 

NOVEMBER 2014 10% CONVERTIBLE NOTES

 

In November 2014, we entered into a subscription agreement with two accredited investors providing for the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $527,780 (the “Notes”) and (ii) five year warrants to purchase up to 47,125 shares of common stock at a fixed exercise price of $8.40 per share (the “Warrants”). These Notes bear interest at the annual rate of 10% and originally matured on April 1, 2016.

 

The aggregate gross cash proceeds to us were $415,000 after subtracting legal fees of $35,000, a $27,780 due diligence fee and an original issuance discount of $50,000. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence fee and original issuance discount and will amortize those costs over the life of the Notes using the effective interest method.

 

These Notes are convertible at the option of the holders into shares of our common stock at a fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of common stock. There are no registration requirements with respect to the shares of common stock underlying the Notes or the Warrants.

 

The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized as additional interest expense over the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value of these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on the date of issuance, we recorded an additional debt discount of $287,647 related to the beneficial conversion feature.

 

Initial Amendment of the November 2014 10% Convertible Note Terms

 

On November 12, 2015, we entered into an amendment of terms (“Amendment of Terms”) with the two investors that participated in the November 2014 10% Convertible Notes. The Amendment of Terms modified the terms of the subscription agreement, Notes and Warrants held by those investors to, among other things, extended the maturity date of the Notes from April 1, 2016 to June 1, 2016, temporarily reduced the number of shares that we must reserve with respect to conversion of the Notes, and temporarily suspended the time period during which one of the investors may exercise its Warrants. In exchange for the investors’ agreements in the Amendment of Terms, we paid one of the investors a cash fee of $90,000, which we recorded as deferred financing costs and amortized over the remaining term of the notes.

 

Second Amendment and Extension of the November 2014 10% Convertible Notes

 

On June 27, 2016, we and certain investors entered into further Amendments (the “Amendments”) to the Notes and the Warrants. The Amendments provide that the Maturity Date (as defined in the Notes) was extended from June 1, 2016 to July 1, 2017 and that the conversion price per share of the Notes was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In addition, we reduced the purchase price (as defined in the Warrants) from $8.40 per share to $5.00 per share of common stock. In connection with these modifications, each of the investors signed a Consent and Waiver providing its consent under certain restrictive provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a Securities Purchase Agreement dated June 23, 2015, (the “2015 SPA”) to which we, the investors and certain other investors are parties, in order to facilitate an at-the-market equity program (see Note 6).

 

The Amendments also increase the principal amount of the Notes to $692,811 (in the aggregate) to (i) include accrued and unpaid interest through June 15, 2016, and (ii) increase the principal amount by $80,000 (in the aggregate) as an extension fee for the extended maturity date of the Notes. With respect to each Note, we entered into an Allonge to Convertible Promissory Note (each, an “Allonge”) reflecting the changes in the principal amount, Maturity Date and conversion price of the Note.

 

We also issued to the investors new warrants (the “New Warrants”) to purchase an aggregate of 30,000 shares of common stock with a Purchase Price (as defined in the New Warrants) of $5.00 per share of common stock. We issued the New Warrants in substantially the same form as the prior Warrants, and the New Warrants will expire on November 6, 2019, the same date on which the prior Warrants will expire.

 

 

 

 F-15 

 

 

The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40, “Debt Modification and Extinguishments” (“ASC 470-50-40”). Therefore, according to the guidance, the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. As a result, we recorded a loss on debt extinguishment of $536,889 and recognized an extension fee expense of $80,000, which are included in other (income) expenses in the accompanying condensed consolidated statements of operations. The debt extinguishment is comprised from the fair value of prior warrants issued in connection with the Notes of $287,676, as well as $325,206 related to beneficial conversion feature and offset by debt discount of $75,993. The beneficial conversion feature is a result of the effective conversion price of the new Notes being less than the market price of the underlying common stock on the date of modification.

 

Third Amendment and Extension of the November 2014 10% Convertible Notes

 

In connection with the issuance of the December 2016 10% Convertible Notes, the conversion price of the November 2014 10% Convertible Notes was reduced from $5.00 to $4.00 per share and the expiration date of the November 2014 10% Convertible Notes was extended from July 1, 2017 to July 1, 2018.

 

The modification of the Notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. As a result, we recorded a gain on debt extinguishment of $58,691, which is included in other (income) expenses in the accompanying condensed consolidated statements of operations. The recording of the modified Notes resulted in a beneficial conversion of $233,748 which is the result of the effective conversion price of the new Notes being less than the market price of the underlying common stock on the date of modification.

  

June 2017 Amendment to the November 2014 10% Convertible Notes

 

In June 2017, we agreed with the holders of the November 2014 10% Convertible Notes to an extension of the expiration dates of the notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share. The modification of the Notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $178,655 and recalculated a revised debt discount on the notes.

 

The following table shows the changes to the principal balance of the November 2014 10% Convertible Notes:

 

Activity in the November 2014 10% Convertible Notes
Initial principal balance  $527,780 
Increase in principal balance under the second amendment (see above)   165,031 
Conversions during the fiscal year ended March 31, 2017   (80,000)
Balance as of March 31, 2017 & March 31, 2018  $612,811 

  

DECEMBER 2016 10% CONVERTIBLE NOTES

 

In December 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited investors (collectively, the “Holders”), pursuant to which the Holders purchased an aggregate of $680,400 principal amount of Notes (inclusive of due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400) for an aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the “Warrants”).

 

The Notes bear interest at the rate of 10% per annum, and the principal amount and all accrued and unpaid interest thereon is convertible into shares of our common stock at a $4.00 per share conversion price, which is subject to customary adjustment provisions for stock splits, dividends, recapitalizations and the like. The Notes mature on July 1, 2018 and are subject to customary and usual terms for events of default and the like. Each Holder has contractually agreed to restrict its ability to convert its Note such that the number of shares of the Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.

 

 

 

 F-16 

 

 

The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of $4.50, subject to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a cashless basis. In the event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the Warrants is subject to customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has contractually agreed to restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.

 

The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is being amortized as additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative fair value of these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on the date of issuance, we recorded an additional debt discount of $262,718 related to the beneficial conversion feature. We also recorded deferred financing costs of $102,940, which was composed of an 8% original issue discount of $50,400, a $30,000 due diligence fee (which was paid in the form of a note), $22,500 in legal fees, and a $40 bank charge. The combination of the above items led to a combined discount against the convertible notes of $598,376.

 

June 2017 Amendment to the December 2016 10% Convertible Notes

 

In June 2017, we agreed with the holders of the December 2016 10% Convertible Notes to an extension of the expiration dates of the notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share. The modification of the notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $198,254 and recalculated a revised debt discount on the notes.

 

The following table shows the changes to the principal balance of the December 2016 10% Convertible Notes:

 

Activity in the December 2016 10% Convertible Notes
Initial principal balance  $680,400 
Conversions during the fiscal year ended March 31, 2018   (300,620)
Balance as of March 31, 2018  $379,780 

  

5. EQUITY TRANSACTIONS

 

ISSUANCES OF COMMON STOCK AND WARRANTS

 

Equity Transactions in the Fiscal Year Ended March 31, 2018.

 

Common Stock Sales Agreement with H.C. Wainwright

 

On June 28, 2016, we entered into a Common Stock Sales Agreement (the “Agreement”) with H.C. Wainwright & Co., LLC (“H.C. Wainwright”) which establishes an at-the-market equity program pursuant to which we may offer and sell shares of our common stock from time to time as set forth in the Agreement. The Agreement provides for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000 (the “Shares”).

 

Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright will use its commercially reasonable efforts consistent with its normal trading and sales practices to sell the Shares from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights, and H.C. Wainwright will be entitled to a commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Share sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the Shares under the Agreement unless terminated earlier by either party as permitted under the Agreement.

  

Sales of the Shares, if any, under the Agreement shall be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under the Securities Act, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.

 

 

 

 F-17 

 

 

In the fiscal year ended March 31, 2018, we raised aggregate net proceeds of $2,104,968 (net of $65,280 in commissions to H.C. Wainwright and $5,748 in other offering expenses) under this agreement through the sale of 941,504 shares at an average price of $2.24 per share of net proceeds.

 

October 2017 Public Offering

 

On October 4, 2017, we consummated a public offering of 5,454,546 shares of common stock and warrants to purchase 5,454,546 shares of common stock, for total gross proceeds of $6.0 million. The offering was priced at $1.10 per unit with each unit comprised of one share of common stock and one common stock purchase warrant. Neither the warrants nor the units are listed on an exchange and therefore do not trade. The warrants carry a five-year term with an exercise price of $1.10 per share. The net proceeds of the offering were $5,289,735. H.C. Wainwright & Co. acted as exclusive placement agent for the offering.

 

Warrant Exercises

 

In fiscal year ended March 31, 2018, investors that participated in the October 2017 Public Offering exercised 2,160,350 warrants for aggregate cash proceeds to us of $2,233,802 before expenses.

 

Restricted Shares Issued for Services

 

During the nine months ended December 31, 2017, we issued 15,000 shares of restricted common stock at a price of $2.24 per share, the market price at time of issuance, in payment for investor relations consulting services valued at $33,600 based on the grant date closing market price of our common stock.

 

Share for Warrant Exchanges

 

During the fiscal year ended March 31, 2018, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993 warrants and we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in exchange for the cancellation of 77,125 warrants held by those investors. We also agreed with those institutional investors that they would extend the expiration dates of convertible notes held by those investors from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share (see Note 5).

 

Additionally, we entered into an agreement with a former placement agent to issue 5,500 restricted shares in exchange for the cancellation of 11,000 warrants held by that placement agent. We measured the fair value of the shares issued and the fair value of the warrants exchanged for those shares and recorded losses for each of those exchanges based on the changes in fair value between the instruments exchanged. Based upon the fair value of the shares issued and warrants exchanged, we recorded a loss of $130,215 during the fiscal year ended March 31, 2018 for all of the above share for warrant exchanges.

 

Stock Option Issuances

 

During the fiscal year ended March 31, 2018, we issued options to four of our employees to purchase 34,500 shares of common stock at an exercise price of $1.68 per share, the closing price on the date of the approval of the option grants by our compensation committee (see Note 9).

 

Termination of Restricted Share Grant

 

During the fiscal year ended March 31, 2018, we terminated a previously recorded but unissued share issuance of 68,000 shares under a fully vested restricted stock grant to our CEO and issued to him 32,674 shares as a net settlement of shares and the Company paid the withholding taxes associated with that share issuance in return for the cancellation of 35,326 shares. The compensation cost of that restricted stock grant had been fully recorded over prior fiscal years, therefore no expense was recorded regarding this net issuance.

 

 

 

 F-18 

 

 

Restricted Stock Unit Grants to Directors and Executive Officers

 

On August 9, 2016, our Board of Directors granted RSUs to certain of our officers and directors and during the fiscal year ended March 31, 2017, 168,309 additional RSUs were granted to our directors pursuant to the 2012 Non-Employee Directors Compensation Program. The RSUs represent the right to be issued on a future date shares of our common stock for vested RSUs.

 

During the fiscal year ended March 31, 2018, 184,500 vested RSUs held by our executives were exchanged into the same number of shares of our common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 97,238 of the RSUs were cancelled and we issued a net 87,262 shares to our executives (see Note 9).

 

During the fiscal year ended March 31, 2018, 168,309 RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As three of our four outside directors elected to return 40% of their RSUs in exchange for cash in order to pay their withholding taxes on the share issuances, 44,983 of the RSUs were cancelled and we paid $52,998 in cash to those outside directors (see Note 9).

 

Equity Transactions in the Fiscal Year Ended March 31, 2017.

 

Common Stock Sales Agreement with H.C. Wainwright

  

In July 2016, we commenced sales of common stock under our Common Stock Sales Agreement with H.C. Wainwright. In the fiscal year ended March 31, 2017, we raised aggregate net proceeds of $955,206 (net of $29,831 in commissions to H.C. Wainwright and $9,432 in other offering expenses) under this agreement through the sale of 216,078 shares at an average price of $4.42 per share of net proceeds.

  

Warrant Issuances in July 2016

 

In July 2016, we issued an aggregate of 2,660 shares of common stock to three investors upon the exercise of previously issued warrants. The warrants were exercised on a cashless or “net” basis. Accordingly, we did not receive any proceeds from such exercises. The cashless exercise of such warrants resulted in the cancellation of previously issued warrants to purchase an aggregate of 19,563 shares of common stock.

 

Restricted Stock Unit Grants to Directors and Executive Officers

 

During the fiscal year ended March 31, 2017, 149,864 Restricted Stock Units (“RSUs”) held by our outside directors and executive officers were exchanged into the same number of shares of our common stock (see Stock-Based Compensation below).

 

Amendment of Warrants Issued in Conjunction with the November 2014 10% Convertible Notes

 

Under the Second Amendment and Extension of the November 2014 10% Convertible Notes dated June 27, 2016 (See Note 4), we reduced the purchase price of 47,125 Warrants from $8.40 per share to $5.00 per share.

 

We also issued to the investors new warrants to purchase an aggregate of 30,000 shares of common stock with a purchase price of $5.00 per share of common stock. We issued the new warrants in substantially the same form as the prior Warrants, and the new warrants will expire on November 6, 2019, the same date on which the prior warrants will expire (See Note 4).

 

 

 

 F-19 

 

 

Amendment of December 2014 Warrants

 

On June 27, 2016, we and certain investors (the “Unit Investors”) entered into Consent and Waiver and Amendment agreements (the “CWAs”), relating to an aggregate of 264,000 Warrants to Purchase Common Stock (the “Unit Warrants”) we had issued to the Unit Investors on December 2, 2014 pursuant to a Securities Purchase Agreement dated November 26, 2014 (the “2014 SPA”). In the CWAs, each of the Unit Investors provided its consent under certain restrictive provisions, and waived certain rights, including a right to participate in certain offerings made by us, under the 2014 SPA in order to facilitate the at-the-market equity program described above. Pursuant to the CWAs, we reduced the Exercise Price (as defined in the Unit Warrants) from $15.00 per share of common stock to $5.00 per share of common stock. At any time that the shares of common stock underlying the Unit Warrants are covered by an effective registration statement that permits the public resale of the shares, if the Unit Investors exercise the Unit Warrants, they must do so by a cash exercise, which could yield up to $1,320,000 in proceeds to us.

 

On June 27, 2016, each of the Unit Investors also entered into a Consent and Waiver providing its consent under certain provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under the 2015 SPA in order to facilitate the at-the-market equity program described above.

 

In accordance with applicable GAAP for warrant modifications, we measured the change in fair value that arose from the reduction in exercise price and recognized an expense of $345,841, which is included in other (income) expenses in the accompanying condensed consolidated statements of operations.

 

Warrants Issued in Conjunction with the December 2016 10% Convertible Notes

 

On December 30, 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited investors (collectively, the “Holders”), pursuant to which the Purchasers purchased an aggregate of $680,400 principal amount of Notes (inclusive of due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400) for an aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the “Warrants”) (See Note 4).

 

The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of $4.50, subject to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a cashless basis. In the event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the Warrants is subject to customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has contractually agreed to restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.

 

The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized as additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative fair value of these Warrants.

 

MARCH 2017 EQUITY FINANCING

 

On March 22, 2017, we entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain institutional investors (the “Investors”) for the sale of 575,000 shares (the “Common Shares”) of our common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $3.50 per share, in a registered direct offering. Concurrently with the sale of the Common Shares, pursuant to the Purchase Agreement, we also sold in a private placement warrants to purchase 575,000 shares of Common Stock (the “Warrants”). The aggregate gross proceeds for the sale of the Common Shares and Warrants will be approximately $2 million. Subject to certain ownership limitations, the Warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to $3.95 per share of Common Stock, subject to adjustments as provided under the terms of the Warrants. The Warrants will be exercisable for five years from the initial exercise date.

 

The net proceeds to us from the transactions, after deducting the placement agent’s fees and expenses (not including the Wainwright Warrants, as defined below), our estimated offering expenses, and excluding the proceeds, if any, from the exercise of the Warrants, were $1,804,250. We intend to use the net proceeds from the transactions for general corporate purposes.

 

 

 

 F-20 

 

 

The Common Shares (but not the Warrants or shares issuable upon exercise of the Warrant) were sold by us pursuant to an effective shelf registration statement on Form S-3, which was filed with the Securities and Exchange Commission (the “SEC”) on May 5, 2016 and subsequently declared effective on May 12, 2016 (File No. 333-211151) (the “Registration Statement”), and the base prospectus dated as of May 12, 2016 contained therein. We filed a prospectus supplement and the accompanying prospectus with the SEC in connection with this sale of the Common Shares.

 

The purchase agreement also covered the exchange of 264,000 warrants issued to the purchasers thereunder in December 2014 for 198,000 shares of our common stock. Further, in exchange for certain waivers given by the purchasers and certain other investors in a private placement of the Company in June 2015, the warrants issued in such private placement were amended to (i) reduce the exercise price to $3.95 per share, (ii) make the warrants non-exercisable for a period of six months from the date of amendment, and (iii) extend the term of those warrants by six months. As all of these warrant-related elements were integral to the March 2017 Equity Financing, we accounted for all of these elements as adjustments to additional paid-in capital.

 

The Warrants and the shares issuable upon exercise of the Warrants were sold and issued without registration under the Securities Act of 1933 (the “Securities Act”) in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving a public offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar exemptions under applicable state laws.

 

We also entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC (“Rodman”), pursuant to which Rodman agreed to serve as exclusive placement agent for the issuance and sale of the Common Shares and Warrants. We paid Rodman an aggregate fee equal to 6% of the gross proceeds received by us from the sale of the securities in the transactions. Pursuant to the Engagement Letter, we also agreed to grant to Rodman or its designees warrants to purchase up to 3% of the aggregate number of shares sold in the transaction (the “Rodman Warrants”). The Engagement Letter has a nine month tail and right of first offer periods, indemnity and other customary provisions for transactions of this nature. The Rodman Warrants have substantially the same terms as the Warrants, except that the exercise price is 125% of $3.50. We also paid Rodman a reimbursement for non-accountable expenses in the amount of $50,000.

  

WARRANTS:

 

During the fiscal year ended March 31, 2018, we issued 5,618,182 warrants, including 163,636 warrants issued to the placement agent, H.C. Wainwright & Co., in connection with our October 2017 Public Offering (see Note 6). Those warrants have a five year term and have an exercise price of $1.10 per share.

 

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models, issued during the fiscal year ended March 31, 2018:

 

Risk free interest rate   1.38% - 1.92% 
Average expected life   5 years 
Expected volatility   100.2% - 111.1% 
Expected dividends   None 

 

Based on the above assumptions, we valued the warrants issued during the fiscal year ended March 31, 2018 as follows:

 

  · The 5,618,182 warrants issued in our October 2017 Public Offering were valued at $3,988,909 and we classified that fair value as equity.

 

During the fiscal year ended March 31, 2017, we issued warrants in connection with three financing arrangements. The first warrant issuance during the fiscal year was the issuance of 30,000 warrants with an exercise price of $5.00 per share in June 2016. Those 30,000 warrants were issued in connection with the Amendment of November 2014 Investment Documents (see Note 4).

 

The second warrant issuance was the issuance of 127,575 warrants with an exercise price of $4.50 per share in December 2016. Those 127,575 warrants were issued in connection with the issuance of our December 2016 10% Convertible Notes (see Note 4).

 

 

 

 F-21 

 

 

The third warrant issuance during the fiscal year was our March 22, 2017 equity financing with certain institutional investors (the “Investors”) for the sale of 575,000 shares (the “Common Shares”) of our common stock, par value $0.001 per share (the “Common Stock”), at a purchase price of $3.50 per share, in a registered direct offering. Concurrently with the sale of the Common Shares, pursuant to the Purchase Agreement, we also sold in a private placement warrants to purchase 575,000 shares of Common Stock (the “Warrants”). Subject to certain ownership limitations, the Warrants will be initially exercisable commencing six months from the issuance date at an exercise price equal to $3.95 per share of Common Stock, subject to adjustments as provided under the terms of the Warrants. The Warrants will be exercisable for five years from the initial exercise date.

 

The purchase agreement also covered the exchange of 264,000 warrants issued to the purchasers thereunder in December 2014 for 198,000 shares of our common stock. Further, in exchange for certain waivers given by the purchasers and certain other investors in a private placement of the Company in June 2015, the warrants issued in such private placement were amended to (i) reduce the exercise price to $3.95 per share, (ii) make the warrants non-exercisable for a period of six months from the date of amendment, and (iii) extend the term of those warrants by six months.

 

We also entered into an engagement letter (the “Engagement Letter”) with Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC (“Rodman”), pursuant to which Rodman agreed to serve as exclusive placement agent for the issuance and sale of the Common Shares and Warrants. In addition to a cash placement fee equal to 6% of the gross proceeds received by us from the sale of the securities in the transaction, we also agreed to grant to Rodman or its designees warrants to purchase up to 3% of the aggregate number of shares sold in the transaction (the “Rodman Warrants”). The Rodman Warrants have substantially the same terms as the Warrants, except that the exercise price is 125% of $3.50.

 

Based on the above assumptions, we valued the warrants issued during the fiscal year ended March 31, 2017 as follows:

 

  · The 30,000 warrants issued in June 2016 were valued at $111,900 and we classified that fair value as equity.

 

  ·

The 127,575 warrants issued in December 2016 were valued at $380,174 and we classified $232,718 of that fair value as debt discount and the remainder as equity. 

     
  · The 575,000 warrants issued in March 2017 were valued at $1,493,390 and we classified that fair value as equity.
     
  · In connection with our March 2017 financing, we agreed to reduce the exercise price on 547,620 warrants from $6.30 to $3.44. We valued the change in fair value due to the change in exercise price at $219,048 and classified that fair value as equity.
     
  · Also in connection with our March 2017 financing, we agreed with the investor in that financing to exchange 198,000 shares for the return and cancellation of 264,000 warrants. We calculated the fair value of those 264,000 warrants at $528,000 and classified the impact of this share for warrant exchange as equity due to the integral connection with the March 2017 financing.

 

A summary of the aggregate warrant activity for the years ended March 31, 2018 and 2017 is presented below:

 

   Fiscal Year Ended March 31, 
   2018   2017 
   Warrants   Weighted
Average
Exercise Price
   Warrants   Weighted
Average
Exercise Price
 
Outstanding, beginning of year   2,604,096   $3.64    2,164,094   $6.68 
Granted   5,618,182   $1.10    749,825   $4.10 
Exercised   (2,160,350)  $1.10    (2,660)  $6.25 
Cancelled/Forfeited   (139,357)  $6.52    (307,163)  $5.18 
Outstanding, end of year   5,922,571   $1.80    2,604,096   $3.64 
Exercisable, end of year   5,922,571   $1.80    2,604,096   $3.64 
Weighted average estimated fair value of warrants granted       $0.71        $2.65 

 

 

 

 F-22 

 

 

The following outlines the significant weighted average assumptions used to estimate the fair value of warrants granted utilizing the Binomial Lattice option pricing model:

 

    Year Ended March 31, 
    2018    2017 
Risk free interest rate   1.38% - 1.92%    0.7% - 1.93% 
Average expected life   5 years    3.42 – 5.5 years 
Expected volatility   100.2% - 111.1%    88.2% - 96.0% 
Expected dividends   None    None 

 

The expected volatility was based on the historic volatility. The expected life of options granted was based on the "simplified method" as described in the SEC's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical grants.

 

The detail of the warrants outstanding and exercisable as of March 31, 2018 is as follows:

 

    Warrants Outstanding         Warrants Exercisable 
Range of
Exercise Prices
   Number
Outstanding
    Weighted
Average
Remaining
Life (Years)
    Weighted
Average
Exercise Price
    Number
Outstanding
    Weighted
Average
Exercise Price
 
$2.10 or Below   3,863,722    4.13   $1.21    3,863,722   $1.21 
3.95 - $4.94   1,377,087    3.59   $4.06    1,377,087   $4.06 
$5.20 - $12.05   681,762    2.07   $6.57    681,762   $6.57 
    5,922,571              5,922,571      

 

STOCK-BASED COMPENSATION:

 

2000 STOCK OPTION PLAN

 

Our 2000 Stock Option Plan provides for the grant of incentive stock options to our full-time employees (who may also be directors) and nonstatutory stock options to non-employee directors, consultants, customers, vendors or providers of significant services. The exercise price of any incentive stock option may not be less than the fair market value of the common stock on the date of grant or, in the case of an optionee who owns more than 10% of the total combined voting power of all classes of our outstanding stock, not be less than 110% of the fair market value on the date of grant. The exercise price, in the case of any nonstatutory stock option, must not be less than 75% of the fair market value of the common stock on the date of grant. The amount reserved under the 2000 Stock Option Plan is 10,000 options.

  

At March 31, 2018, all of the grants previously made under the 2000 Stock Option Plan had expired and 200 unregistered shares had been issued under the plan, with 9,800 available for future issuance.

 

2010 STOCK INCENTIVE PLAN

 

In August 2010, we adopted the 2010 Stock Incentive Plan, which provides incentives to attract, retain and motivate employees and directors whose present and potential contributions are important to our success by offering them an opportunity to participate in our future performance through awards of options, the right to purchase common stock, stock bonuses and stock appreciation rights and other awards. A total of 70,000 common shares were initially reserved for issuance under the 2010 Stock Incentive Plan.

 

In August 2010, we filed a registration statement on Form S-8 for the purpose of registering 70,000 common shares issuable under this plan under the Securities Act, and in July 2012, we filed a registration statement on Form S-8 for the purpose of registering 100,000 common shares issuable under this plan under the Securities Act.

 

 

 

 F-23 

 

 

On January 26, 2016, our Board of Directors approved an amendment to the 2010 Stock Incentive Plan to increase the total number of shares of common stock reserved for issuance under the plan to 3,170,000 shares, subject to amendment of our Articles of Incorporation to increase our authorized common stock. On March 29, 2016, we held an annual stockholders meeting, at which our stockholders approved the Amended 2010 Stock Incentive Plan and an amendment of our Articles of Incorporation to increase our authorized common stock to 30,000,000 shares.

 

At March 31, 2018, we had 2,272,393 shares available under this plan.

 

2012 DIRECTORS COMPENSATION PROGRAM

 

In July 2012, our Board of Directors approved a board compensation program that modifies and supersedes the 2005 Directors Compensation Program, which was previously in effect. Under the 2012 program, in which only non-employee directors may participate, an eligible director will receive a grant of $35,000 worth of ten-year options to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. In addition, under this program, eligible directors will receive cash compensation equal to $500 for each committee meeting attended and $1,000 for each formal board meeting attended.

 

On June 6, 2014, our Board of Directors approved certain changes to the 2012 program. Under this modified program, a new eligible director will receive an initial grant of $50,000 worth of options to acquire shares of common stock, with such grant being valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. These options will have a term of ten years and will vest 1/3 upon grant and 1/3 upon each of the first two anniversaries of the date of grant. In addition, at the beginning of each fiscal year, each existing director eligible to participate in the modified 2012 program also will receive a grant of $35,000 worth of options valued at the exercise price based on the average of the closing bid prices of the common stock for the five trading days preceding the first day of the fiscal year. Such options will vest on the first anniversary of the date of grant. In lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $30,000. The modified 2012 program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and lead independent director - $15,000.

 

RESTRICTED STOCK UNIT GRANTS TO DIRECTORS AND EXECUTIVE OFFICERS

 

On August 9, 2016, our Board of Directors (the “Board”) granted RSUs to certain of our officers and directors as set forth below. The RSUs represent the right to be issued on a future date shares of our common stock for vested RSUs. Our Compensation Committee recommended the grants based on a compensation assessment provided by a third-party compensation consulting firm engaged by us that developed a peer group of companies for market assessment and analyzed compensation at such companies. That compensation assessment also recommended annual cash bonus targets of 50% of base salary.

  

The consultant recommended beneficial ownership targets, which we previously disclosed in our Proxy Statement filed on February 23, 2016, in connection with our Annual Meeting of Stockholders held on March 29, 2016. In connection with the Annual Meeting, our stockholders approved our Amended 2010 Stock Incentive Plan, which included an increase in the number of shares available for grant under the plan in part to accommodate equity awards recommended by the Compensation Committee, and our stockholders approved our executive compensation as disclosed in the Proxy Statement pursuant to Item 402 paragraphs (m) through (q) of Regulation S-K as shown below:

 

To Mr. James A. Joyce, an aggregate of 634,000 RSUs of which 158,500 were deemed vested upon grant and an additional 39,625 RSUs will vest each quarter beginning on January 1, 2017. This grant is intended to increase Mr. Joyce’s beneficial ownership of our common stock to 9.0%, which long term target was recommended in 2015 and in June 2016 by the compensation consultant engaged by us. Previously, in 2004, the Board had approved a long term beneficial ownership target of 15% for Mr. Joyce. However, Mr. Joyce has agreed to the modified long term target of 9.0%.

 

 

 

 F-24 

 

 

To Mr. Rodney S. Kenley, an aggregate of 52,000 RSUs of which 13,000 were deemed vested upon grant and an additional 3,250 RSUs will vest each quarter beginning on January 1, 2017. This grant is intended to increase Mr. Kenley’s beneficial ownership of our common stock to 0.5%, which long term target was recommended in 2015 and in June 2016 by the compensation consultant engaged by us.

 

To Mr. James B. Frakes, an aggregate of 52,000 RSUs of which 13,000 were deemed vested upon grant and an additional 3,250 RSUs will vest each quarter beginning on January 1, 2017. This grant is intended to increase Mr. Frakes’ beneficial ownership of our common stock to 0.5%, which long term target was recommended in 2015 and in June 2016 by the compensation consultant engaged by us.

 

To each of our non-employee directors, Mr. Franklyn S. Barry, Jr., Mr. Edward G. Broenniman and Dr. Chetan S. Shah, 16,432 RSUs valued at an aggregate of $105,000, based on the average of the closing prices of the common stock for the five trading days preceding and including August 9, 2016. These grants represent (a) $70,000 worth of RSUs representing two years of grants under the amended 2012 Non-Employee Directors Compensation Program (the “2012 Program”) because more than two years have elapsed since Messrs. Barry and Broenniman and Dr. Shah received grants under the program, all of which RSUs are deemed vested upon grant and (b) $35,000 worth of RSUs representing the grant covering the fiscal year ending March 31, 2017, of which one-quarter were deemed vested upon grant and the remaining portion vested ratably at September 30, 2016, at December 31, 2016 and at March 31, 2017.

 

The RSUs were granted under our Amended 2010 Stock Incentive Plan and we recorded expense of $2,076,535 in the fiscal year ended March 31, 2017 related to the RSU grants.

 

CHANGES TO 2012 NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM

 

In July 2012, the Board approved the 2012 Program, which modified and superseded the 2005 Directors Compensation Program that had been in effect previously. On June 6, 2014, the Board approved certain changes to the 2012 Program, and on August 9, 2016, the Board approved further modifications to the program. Under the modified 2012 Program, in which only non-employee directors may participate, a new eligible director will receive an initial grant of $50,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued based on the average of the closing prices of the Common Stock for the five trading days preceding and including the date of grant and will vest at a rate determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of the closing prices of the Common Stock for the five trading days preceding and including the date of grant. Such options will have a term of ten years and will vest at a rate determined by the Board in its discretion.

 

At the beginning of each fiscal year, each existing director eligible to participate in the 2012 Program will receive a grant of $35,000 worth of RSUs or, at the discretion of the Board, options to acquire shares of Common Stock. RSUs granted under this provision will be valued based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year) and will vest at a rate determined by the Board in its discretion. Options granted under this provision will be valued at the exercise price, which will be based on the average of the closing prices of the Common Stock for the five trading days preceding and including the first day of the fiscal year (or preceding and including the date of grant, if such grant is not made on the first day of the fiscal year). Such options will have a term of ten years and will vest at a rate determined by the Board in its discretion.

 

In lieu of per meeting fees, under the 2012 Program eligible directors will receive an annual Board retainer fee of $30,000. The modified 2012 Program also provides for the following annual retainer fees: Audit Committee Chair - $5,000, Compensation Committee chair - $5,000, Nominating Committee Chair - $5,000, Audit Committee member - $4,000, Compensation Committee member - $4,000 and Lead independent director (currently an open position) - $15,000.

 

Dr. Fisher will be compensated $90,000 per year for his services as Chairman of the Board, which the Company’s Board considers to be fees payable as a member of the Board or a Committee of the Board for purposes of Section 10A-3 of the rules promulgated under the Securities Exchange Act of 1934, as amended. To the extent payment of such fees are construed to not be fees payable as a member of the Board or a Committee of the Board, then the Board considers that Dr. Fisher may act as a member of its Audit Committee under Nasdaq Rule 5605(c)(2)(B) as the Board has determined that it is in the best interests of the Company and its stockholders for Dr. Fisher to continue to serve on its Audit Committee.

 

 

 

 F-25 

 

 

The RSU grants and the changes to the 2012 Program were approved and recommended by our Compensation Committee prior to approval by the Board.

 

RSUs outstanding that have vested and are expected to vest as of March 31, 2018 are as follows:

 

   Number of RSUs 
Vested   46,125 
Expected to vest   322,875 
Total   369,000 

 

Additionally, during the fiscal year ended March 31, 2018, we terminated a previously recorded but unissued share issuance of 68,000 shares under a fully vested restricted stock grant to our CEO and issued to him 32,674 shares as a net settlement of shares and the Company paid the withholding taxes associated with that share issuance in return for the cancellation of 35,326 shares. The compensation cost of that restricted stock grant had been fully recorded over prior fiscal years, therefore no expense was recorded regarding this net issuance.

 

During the fiscal year ended March 31, 2018, 168,309 RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As three of our four outside directors elected to return 40% of their RSU’s in exchange for cash in order to pay their withholding taxes on the share issuances, 44,983 of the RSUs were cancelled and we paid a total of $52,998 in cash to those two outside directors.

 

Also during the fiscal year ended March 31, 2018, 184,500 RSUs held by our executives were exchanged into the same number of shares of our common stock. Upon vesting, the RSUs held by our executives were net share-settled to cover the required withholding tax and the remaining amount is converted into an equivalent number of shares of common stock. Total payments for the employees’ tax obligations to the taxing authorities are reflected as a financing activity within the Consolidated Statements of Cash Flows. These net-share settlements had the effect of share repurchases by the Company as they reduced and retired the number of shares that would have otherwise been issued as a result of the vesting and did not represent an expense to the Company. As a result of the net share-settlements, 97,238 of the RSUs were cancelled and we issued a net 87,262 shares to our executives.

 

STAND-ALONE GRANTS

 

From time to time our Board of Directors grants common stock or common share purchase options or warrants to selected directors, officers, employees and consultants as equity compensation to such persons on a stand-alone basis outside of any of our formal stock plans. The terms of these grants are individually negotiated.

 

STOCK OPTION ACTIVITY

 

During the fiscal year ended March 31, 2018, we issued options to four of our employees to purchase 34,500 shares of common stock at a price of $1.68 per share, the closing price on the date of the approval of the option grants by our compensation committee. There were no stock option grants during the fiscal year ended March 31, 2017.

 

The following is a summary of the stock options outstanding at March 31, 2018 and 2017 and the changes during the years then ended:

 

    Fiscal Year Ended March 31,  
    2018   2017  
    Options     Weighted
Average
Exercise Price
    Options     Weighted
Average
Exercise Price
 
Outstanding, beginning of year     432,047     $ 10.98       438,547     $ 10.94  
Granted     34,500     $            1.68           $ N/A  
Exercised           N/A           $ N/A  
Cancelled/Forfeited     (57,500 )   $ 15.87       (6,500 )   $ 7.96  
Outstanding, end of year     409,047     $ 9.51       432,047     $ 10.98  
Exercisable, end of year     382,047     $ 10.07       414,547     $ 11.24  
Weighted average estimated fair value of options granted           1.46             $ N/A  

 

 

 

 F-26 

 

 

The detail of the options outstanding and exercisable as of March 31, 2018 is as follows:

 

    Options Outstanding     Options Exercisable  
Exercise Prices   Number
Outstanding
    Weighted
Average
Remaining
Life (Years)
    Weighted
Average
Exercise
Price
    Number
Outstanding
    Weighted
Average
Exercise
Price
 
$1.68 - $9.50     211,047       6.26 years     $ 5.42       184,047     $ 5.96  
$12.50     163,000       2.39 years     $ 12.50       163,000     $ 12.50  
$20.50     35,000       0.42 years     $ 19.03       35,000     $ 19.03  
      409,047                       382,047          

 

We recorded stock-based compensation expense related to restricted stock unit issuances and to options granted totaling $1,260,769 and $2,186,309 for the fiscal years ended March 31, 2018 and 2017, respectively. These expenses were recorded as stock compensation included in payroll and related expenses in the accompanying consolidated statement of operations for the years ended March 31, 2018 and 2017.

 

Our total stock-based compensation for fiscal years ended March 31, 2018 and 2017 included the following:

 

   Fiscal Year Ended 
   March 31, 2018   March 31, 2017 
Vesting of restricted stock units  $1,212,794   $2,076,535 
Vesting of stock options   47,975    109,774 
Total Stock-Based Compensation  $1,260,769   $2,186,309 

 

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the fiscal year ended March 31, 2018 was insignificant.

 

As of March 31, 2018, we had $1,900,983 of remaining unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average remaining vesting period of 1.27 years.

 

On March 31, 2018, our stock options had a negative intrinsic value since the closing price on that date of $1.19 per share was below the weighted average exercise price of our stock options.

 

6. RELATED PARTY TRANSACTIONS

 

DUE TO RELATED PARTIES

 

Historically, certain of our officers and other related parties have advanced us funds, agreed to defer compensation and/or paid expenses on our behalf to cover working capital deficiencies. There were no such related party transactions during the fiscal year ended March 31, 2018 except that we had accrued unpaid Board fees of $60,750 owed to our outside directors as of March 31, 2018.

 

7. OTHER CURRENT LIABILITIES

 

Other current liabilities were comprised of the following items:

 

   March 31, 2018   March 31, 2017 
Accrued interest  $55,701   $5,391 
Accrued professional fees   207,440    64,076 
Total other current liabilities  $263,141   $69,467 

  

 

 

 F-27 

 

 

8. INCOME TAXES

 

On December 22, 2017, Public Law No. 115-97, commonly referred to as the 2017 Tax Act, was enacted into law. The 2017 Tax Act includes a number of changes to existing U.S. tax laws that impact the Company, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017.

 

ASC 740 requires the Company to recognize the effect of the 2017 Tax Act in the first interim period including the date of enactment. The tax rate change was administratively effective at the beginning of the Company’s 2018 fiscal year utilizing a blended statutory federal rate for the annual period. As a result, the blended federal statutory tax rate for fiscal year 2018 is 30.75%. The lower federal corporate tax rate also required the Company to remeasure its U.S. deferred tax assets and liabilities as well as reassess the realizability of its deferred tax assets and liabilities. The Company recognized the income tax effects in its fiscal 2018 financial statements in accordance with SAB 118 as described in Note 2. . In accordance with SAB 118, the Company recorded a decrease in its net deferred tax assets of $7.6 million with a corresponding decrease to its valuation allowance to account for this rate reduction.

 

For the years ended March 31, 2018 and 2017, we had no income tax expense due to our net operating losses and 100% deferred tax asset valuation allowance.

 

At March 31, 2018 and 2017, we had net deferred tax assets as detailed below. These deferred tax assets are primarily composed of capitalized research and development costs and tax net operating loss carryforwards. Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a 100% valuation has been established to offset the net deferred tax assets.

 

Significant components of our net deferred tax assets at March 31, 2018 and 2017 are shown below:

 

   YEAR ENDED MARCH 31, 
   2018   2017 
Deferred tax assets:          
Capitalized research and development  $3,442,000   $3,442,000 
Net operating loss carryforwards   16,257,000    22,060,000 
Stock compensation   575,000    318,000 
Total deferred tax assets   20,274,000    25,820,000 
           
Total deferred tax liabilities        
           
Net deferred tax assets   20,274,000    25,820,000 
Valuation allowance for deferred tax assets   (20,274,000)   (25,820,000)
           
Net deferred tax assets  $   $ 

 

At March 31, 2018, we had tax net operating loss carryforwards for federal and state purposes approximating $61 million and $49 million, which begin to expire in the year 2021.

 

 

 

 

 

 F-28 

 

 

The provision for income taxes on earnings subject to income taxes differs from the statutory federal rate for the years ended March 31, 2018 and 2017 due to the following:

 

   2018   2017 
         
Income taxes (benefit) at federal statutory rate of 30.75%  $(1,753,000)  $(2,484,000)
State income tax, net of federal benefit   (349,000)   (438,000)
Tax effect on non-deductible expenses and credits   74,000    382,000 
Change in valuation allowance1   (5,546,000)   2,540,000 
Change in tax rate   7,574,000      
   $   $ 

______________

(1) Pursuant to Internal Revenue Code Sections 382, use of our tax net operating loss carryforwards may be limited.

 

ASC 740, “Income Taxes”, clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements, and prescribes recognition thresholds and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the years ended March 31, 2018 and 2017, we did not recognize any interest or penalties relating to tax matters.

  

At and for the years ended March 31, 2018 and 2017, management does not believe the Company has any uncertain tax positions. Accordingly, there are no unrecognized tax benefits at March 31, 2018 or March 31, 2017.

 

Our tax returns remain open for examination by the applicable authorities, generally 3 years for federal and 4 years for state. We are currently not under examination by any taxing authorities 

 

9. GOVERNMENT CONTRACTS AND RELATED REVENUE RECOGNITION

 

National Institutes of Health (“NIH”)

 

We entered into a contract with the NIH on September 15, 2017. This award is under the NIH’s Small Business Innovation Research (SBIR) program which is designed to fund early stage small businesses that are seeking to commercialize innovative biomedical technologies. The title of the award is SBIR Topic 359 Phase 1 Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.

 

The award from NIH is a firm, fixed-price contract with potential total payments to us of $299,250 over the course of nine months.

 

Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also has the unilateral right to require us to perform additional work under an option period for an additional fixed amount of $49,800.

 

 

 

 

 F-29 

 

 

Under the terms of the contract, we must perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts.

 

In the fiscal year ended March 31, 2018, we performed work under the contract completing the majority of the first two technical objectives of the contract (Aim 1: To validate the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma and Aim 2: To validate a method of melanoma exosome isolation consisting of the Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes). As a result we invoiced NIH for $149,625.

 

Defense Advanced Research Projects Agency (“DARPA”)

 

As discussed in Note 1, we entered into a contract with DARPA on September 30, 2011. Under the DARPA award, we have been engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract, we performed certain incremental work towards the achievement of specific milestones against which we invoiced the government for fixed payment amounts.

 

Originally, only the base year (year one of the contract) was effective for the parties; however, DARPA subsequently exercised its option on the remaining years of the contract. The milestones were comprised of planning, engineering and clinical targets, the achievement of which in some cases required the participation and contribution of third-party participants under the contract. We commenced work under the contract in October 2011 and completed the contract in September 2016.

 

In February 2014, DARPA reduced the scope of our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and blood processing instrumentation. This scope reduction reduced the possible payments under the contract by $858,469 over years three through five.

 

In the fiscal year ended March 31, 2017, we invoiced the U.S. Government for the final two milestones under our DARPA contract in the aggregate amount of $387,438. In the fiscal year ended March 31, 2016, we invoiced the U.S. Government for four milestones under our DARPA contract in the amount of $863,011.

 

The details of those milestones were as follows:

 

Milestone 2.6.1.3 - Quantify the degree to which the MERS virus can be extracted from circulation in vitro using miniature Hemopurifiers. The milestone payment was $193,719. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We quantified the degree to which the MERS virus can be extracted from circulation in vitro using miniature Hemopurifiers. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.

 

Milestone 2.6.1.4 – Prepare and present Final Report for DARPA. The milestone payment was $193,719. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We prepared and presented the Final Report for DARPA. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.

 

 

 

 F-30 

 

 

10. SEGMENTS

 

We operate our businesses principally through two reportable segments: Aethlon, which represents our therapeutic business activities, and ESI, which represents our diagnostic business activities. Our reportable segments have been determined based on the nature of the potential products being developed. We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating results in order to make decisions about resources to be allocated to the ESI segment and to assess its performance.

 

Aethlon’s revenue is generated primarily from government contracts to date and ESI does not yet have any revenues. We have not included any allocation of corporate overhead to the ESI segment.

 

The following tables set forth certain information regarding our segments:

 

    Fiscal Years Ended March 31,  
    2018     2017  
Revenues:            
Aethlon   $ 149,625     $ 392,073  
ESI            
Total Revenues   $ 149,625     $ 392,073  
                 
Operating Losses:                
Aethlon   $ (4,729,719 )   $ (5,945,293 )
ESI     (101,397 )     (153,064 )
Total Operating Loss   $ (4,831,116 )   $ (6,098,357 )
                 
Net Losses:                
Aethlon   $ (5,598,440 )   $ (7,153,662 )
ESI     (101,397 )     (153,064 )
Net Loss Before Non-Controlling Interests   $ (5,699,837 )   $ (7,306,726 )
                 
Cash:                
Aethlon   $ 6,972,450     $ 1,558,667  
ESI     1,620       1,034  
Total Cash   $ 6,974,070     $ 1,559,701  
                 
Total Assets:                
Aethlon   $ 7,350,284     $ 1,698,249  
ESI     1,620       28,119  
Total Assets   $ 7,351,904     $ 1,726,368  
                 
Capital Expenditures:                
Aethlon   $ 24,823     $ 16,433  
ESI            
Capital Expenditures   $ 24,823     $ 16,433  
                 
Depreciation and Amortization:                
Aethlon   $ 35,658     $ 22,370  
ESI     --       10,043  
Total Depreciation and Amortization   $ 35,658     $ 32,413  
                 
Interest Expense:                
Aethlon   $ 361,597     $ 304,330  
ESI            
Total Interest Expense   $ 361,597     $ 304,330  

 

 

 

 F-31 

 

 

11. SUBSEQUENT EVENTS

 

Management has evaluated events subsequent to March 31, 2018 through the date that the accompanying consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

 

NIH Contract -- In April 2018, we invoiced NIH for $74,813 under the NIH contract and received $74,813 related to an invoice that we billed in the March 2018 quarter. In May 2018, we invoiced NIH an additional $37,406 and also received the $74,813 that we billed in April.

 

Restricted Stock Unit (“RSU”) Issuances – In April 2018, 46,125 RSUs held by our executives were exchanged into the same number of shares of our common stock. As our executives elected to net settle a portion of their RSUs in exchange for the Company paying the related withholding taxes on the share issuance, 24,430 of the RSUs were cancelled, and we issued a net 21,695 shares to our executives.

 

Office Lease Extension – In May 2018, we extended our office lease for an additional 39 months (see Note 12). The initial rental rate under the lease extension is $7,986 per month. Such lease expires in on August 31, 2021. We believe this leased facility will be satisfactory for our office needs over the term of the lease.

 

12. COMMITMENTS AND CONTINGENCIES

 

EMPLOYMENT CONTRACTS

 

We entered into an employment agreement with our Chief Executive Officer (“CEO”) effective April 1, 1999. The agreement, which is cancelable by either party upon sixty days’ notice, will be in effect until the CEO retires or ceases to be employed by us. Under the terms of the agreement, if the CEO is terminated he may become eligible to receive a salary continuation payment in the amount of at least twelve months' base salary, which was increased to $385,000 per year in September 2015.

 

LEASE COMMITMENTS

 

We currently lease approximately 2,600 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123 under a 39-month gross plus utilities lease that commenced on December 1, 2014 and was extended in May 2018 (see Note 11). The initial rental rate under the lease extension is $7,986 per month. Such lease expires in on August 31, 2021. We believe this leased facility will be satisfactory for our office needs over the term of the lease.

 

We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $4,548 per month on a one-year lease that expires on November 30, 2018. Our current plans are to renew the lease prior to expiration or to secure alternative lab space in the San Diego area.

 

Rent expense, which is included in general and administrative expenses, approximated $136,000 and $151,000 for the fiscal years ended March 31, 2017 and 2016, respectively.

 

 

 

 F-32 

 

 

As of March 31, 2018, our commitments under the lease agreements are as follows:

 

   2019   2020 
9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123 office lease  $6,620   $ 
           
11585 Sorrento Valley Road, Suite 109, San Diego, CA 92121 office lease   36,380     
Total Lease Commitments  $43,000   $ 

 

Following an extension in May 2018 of our lease relating to our Granite Ridge Drive space (see Note 11), our commitments under our lease agreements are as follows:

 

   Fiscal Years Ending March 31, 
   2019   2020   2021   2022   2023 
9635 Granite Ridge Drive, Suite 100, San Diego, CA
92123 office lease
  $94,543   $98,902   $98,622   $102,074   $43,670 
                          
11585 Sorrento Valley Road, Suite 109, San Diego, CA 92121 office lease   36,380                 
Total Lease Commitments  $130,923   $98,902   $98,622   $102,074   $43,670 

 

LEGAL MATTERS

 

From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities.

 

The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that period or future periods. We are not presently a party to any pending or threatened legal proceedings.

 

 

 

 

 

 

 

 

 

 F-33 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,
2018
   March 31,
2018
 
   (Unaudited)      
ASSETS          
Current assets          
Cash  $5,078,605   $6,974,070 
Accounts receivable       74,813 
Prepaid expenses and other current assets   89,343    181,367 
Total current assets   5,167,948    7,230,250 
           
Property and equipment, net   16,094    27,552 
Patents, net   71,250    75,832 
Deposits   17,131    18,270 
Total assets  $5,272,423   $7,351,904 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities          
Accounts payable  $91,879   $124,450 
Due to related parties   98,866    90,366 
Convertible notes payable, net   901,727     
Other current liabilities   168,356    263,141 
Total current liabilities   1,260,828    477,957 
           
Convertible notes payable, net       841,153 
           
Total liabilities   1,260,828    1,319,110 
           
Commitments and Contingencies (Note 13)          
           
Stockholders’ Equity          
Common stock, par value $0.001 per share; 30,000,000 shares authorized as of September 30, 2018 and March 31, 2018; 17,834,560 and 17,739,511 shares issued and outstanding as of September 30, 2018 and March 31, 2018, respectively   17,835    17,740 
Additional paid-in capital   106,107,157    105,574,014 
Accumulated deficit   (101,997,287)   (99,457,714)
Total Aethlon Medical, Inc. stockholders’ equity before noncontrolling interests   4,127,705    6,134,040 
           
Noncontrolling interests   (116,110)   (101,246)
           
Total stockholders’ equity   4,011,595    6,032,794 
           
Total liabilities and stockholders’ equity  $5,272,423   $7,351,904 

 

 

See accompanying notes.

 

 

 F-34 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Month Periods Ended September 30, 2018 and 2017

(Unaudited)

 

 

 

   Three Months
Ended
September 30,
2018
   Three Months
Ended
September 30,
2017
   Six Months
Ended
September 30,
2018
   Six Months
Ended
September 30,
2017
 
                 
REVENUES                    
                     
Government contract revenue  $   $   $149,625   $ 
                     
OPERATING EXPENSES                    
                     
Professional fees   403,044    383,178    852,479    726,201 
Payroll and related expenses   672,279    618,081    1,274,844    1,248,308 
General and administrative   271,631    234,914    466,528    421,913 
Total operating expenses   1,346,954    1,236,173    2,593,851    2,396,422 
OPERATING LOSS   (1,346,954)   (1,236,173)   (2,444,226)   (2,396,422)
                     
OTHER EXPENSE                    
Interest and other debt expenses   55,106    61,979    110,210    250,583 
Loss on share for warrant exchanges       10,425        130,214 
Loss on debt extinguishment               376,909 
Total other expense   55,106    72,404    110,210    757,706 
NET LOSS   (1,402,060)   (1,308,577)   (2,554,436)   (3,154,128)
                     
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS   (8,715)   (4,671)   (14,864)   (8,439)
                     
NET LOSS ATTRIBUTABLE TO AETHLON MEDICAL, INC.  $(1,393,345)  $(1,303,906)  $(2,539,572)  $(3,145,689)
                     
BASIC AND DILUTED LOSS PER COMMON SHARE  $(0.08)  $(0.14)  $(0.14)  $(0.35)
                     
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED   17,789,236    9,032,157    17,771,918    8,939,624 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 F-35 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Six Months Ended September 30, 2018 and 2017

(Unaudited)

 

   Six Months
Ended
September 30, 2018
   Six Months
Ended
September 30, 2017
 
Cash flows from operating activities:          
Net loss  $(2,554,436)  $(3,154,128)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   16,040    18,651 
Stock based compensation   599,658    564,445 
Common stock issued for services   19,350    33,600 
Loss on share for warrant exchanges       130,214 
Loss on debt extinguishment       376,909 
Amortization of debt discount   60,574    185,089 
Changes in operating assets and liabilities:          
Accounts receivable   74,813     
Prepaid expenses and other current assets   93,163    (54,186)
Accounts payable and other current liabilities   (127,358)   (194,421)
Due to related parties   8,500    (9,250)
Net cash used in operating activities   (1,809,696)   (2,103,077)
           
Cash flows from investing activities:          
Purchases of property and equipment       (23,705)
Net cash used in investing activities       (23,705)
           
Cash flows from financing activities:          
Proceeds from the issuance of common stock, net       1,650,314 
Tax withholding payments for net share settlement of restricted stock units   (85,769)   (163,161)
Net cash (used in) provided by financing activities   (85,769)   1,487,153 
           
Net decrease in cash   (1,895,465)   (639,629)
           
Cash at beginning of period   6,974,070    1,559,701 
           
Cash at end of period  $5,078,605   $920,072 
           
Supplemental disclosures of cash flow information:          
           
Cash paid during the period for:          
           
Interest  $95,388   $ 
           
Supplemental disclosures of non-cash investing and financing activities:          
Issuance of shares under conversions of convertible notes payable and related accrued interest  $   $362,765 
Issuance of shares from vesting of restricted stock units  $58   $45 

 

 

See accompanying notes.

 

 

 

 F-36 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2018

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

ORGANIZATION

 

Aethlon Medical, Inc. and subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”) is a medical technology company focused on addressing unmet needs in global health and biodefense. The Aethlon Hemopurifier® is an early clinical-stage therapeutic device designed for the single-use removal of life-threatening viruses from the circulatory system of infected individuals. We believe the Hemopurifier can be a part of the broad-spectrum treatment of life-threatening highly glycosylated viruses that are not addressed with an already approved treatment countermeasure objectives set forth by the U.S. Government to protect citizens from bioterror and pandemic threats. In small-scale or early feasibility human studies, the Hemopurifier has been administered to individuals infected with HIV, Hepatitis-C, and Ebola. Additionally, the Hemopurifier has been validated to capture Zika virus, Lassa virus, MERS-CoV, Cytomegalovirus, Epstein-Barr virus, Herpes Simplex virus, Chikungunya virus, Dengue virus, West Nile virus, Smallpox-related viruses, H1N1 Swine Flu virus, H5N1 Bird Flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these validations were conducted in collaboration with leading government or non-government research institutes. Domestically, we are focused on the clinical advancement of the Hemopurifier through investigational device exemptions (IDEs) approved by FDA. We recently concluded a feasibility study to demonstrate the safety of our device in health-compromised individuals infected with a viral pathogen.

 

We are also the majority owner of Exosome Sciences, Inc. (ESI), a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases. Included among ESI’s endeavors is the advancement of a TauSomeTM biomarker candidate to diagnose Chronic Traumatic Encephalopathy (CTE) in the living. ESI previously documented that TauSome levels in former NFL players to be nine times higher than same age-group control subjects.

 

Successful outcomes of human trials will also be required by the regulatory agencies of certain foreign countries where we intend to sell this device. Some of our patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier treatment technology.

 

Our executive offices are located at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. Our website address is www.aethlonmedical.com.

 

Our common stock is listed on the Nasdaq Capital Market under the symbol “AEMD.”

 

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

During the six months ended September 30, 2018, there have been no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

  

 

 

 

 

 

 F-37 

 

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 8 of the Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto for the year ended March 31, 2018, included in the Company's Annual Report on Form 10-K filed with the SEC on June 8, 2018. The accompanying unaudited condensed consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the condensed consolidated financial statements as of and for the six months ended September 30, 2018, and the condensed consolidated statement of cash flows for the six months ended September 30, 2018. Estimates were made relating to useful lives of fixed assets, impairment of assets, share-based compensation expense and accruals for clinical trial and research and development expenses. Actual results could differ materially from those estimates. The accompanying condensed consolidated balance sheet at March 31, 2018 has been derived from the audited consolidated balance sheet at March 31, 2018, contained in the above referenced 10-K. The results of operations for the six months ended September 30, 2018 are not necessarily indicative of the results to be expected for the full year or any future interim periods.

  

LIQUIDITY

 

Management expects existing cash as of September 30, 2018 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these condensed consolidated financial statements.

 

2. LOSS PER COMMON SHARE

 

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period of computation. The weighted average number of common shares outstanding for the three and six months ended September 30, 2018 and 2017 includes 46,125 vested restricted stock units. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional dilutive common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential common shares have been excluded as their effect would be antidilutive.

 

As of September 30, 2018 and 2017, a total of 6,556,699 and 3,725,423 potential common shares, consisting of shares underlying outstanding stock options, warrants, unvested restricted stock units and convertible notes payable were excluded as their inclusion would be antidilutive.

  

3. RESEARCH AND DEVELOPMENT EXPENSES

 

Our research and development costs are expensed as incurred. We incurred research and development expenses during the three and six month periods ended September 30, 2018 and 2017, which are included in various operating expense line items in the accompanying condensed consolidated statements of operations. Our research and development expenses in those periods were as follows:

 

    September 30,   September 30, 
    2018   2017 
 Three months ended   $207,782   $168,570 
 Six months ended   $402,566   $333,433 

 

 

 

 

 

 

 F-38 

 

 

4. FUTURE ACCOUNTING PRONOUNCEMENTS

 

ASU 2016-02, Leases (Topic 842) changes the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption of ASU 2016-02 as of its issuance is permitted. We do not expect the adoption of ASU No. 2016-02 to have a significant impact on our consolidated financial statements.

  

5. CONVERTIBLE NOTES PAYABLE, NET

 

Convertible Notes Payable, Net consisted of the following at September 30, 2018:

 

   Principal   Unamortized
Discount
   Net
Amount
   Accrued
Interest
 
Convertible Notes Payable, Net:                    
November 2014 10% Convertible Notes (due July 1, 2019)  $612,811   $(56,098)  $556,713   $6,668 
December 2016 10% Convertible Notes (due July 1, 2019)   379,780    (34,766)   345,014    3,275 
Total Convertible Notes Payable, Net  $992,591   $(90,864)  $901,727   $9,943 

 

During the six months ended September 30, 2018, we recorded interest expense of $49,630 related to the contractual interest rates of our convertible notes and interest expense of $60,574 related to the amortization of the note discount for a total interest expense of $110,204 related to our convertible notes in the six months ended September 30, 2018. All of the unamortized discount at September 30, 2018 related to the note discount established upon the June 2017 amendment to the November 2014 10% Convertible Notes and to the December 2016 10% Convertible Notes (see below).

 

Convertible Notes Payable, Net consisted of the following at March 31, 2018:

 

   Principal   Unamortized
Discount
   Net
Amount
   Accrued
Interest
 
Convertible Notes Payable, Net – Non-Current Portion:                    
November 2014 10% Convertible Notes (due July 1, 2019)  $612,811   $(93,590)  $519,221   $34,386 
December 2016 10% Convertible Notes (due July 1, 2019)   379,780    (57,848)   321,932    21,315 
Total Convertible Notes Payable, Net  $992,591   $(151,438)  $841,153   $55,701 

 

During the six months ended September 30, 2017, we recorded interest expense of $62,826 related to the contractual interest rates of our convertible notes and interest expense of $185,089 related to the amortization of the note discount for a total interest expense of $247,915 related to our convertible notes in the six months ended September 30, 2017. All of the unamortized discount at March 31, 2018 related to the note discount established upon the June 2017 amendment to both the November 2014 10% Convertible Notes and the December 2016 10% Convertible Notes (see below).

 

NOVEMBER 2014 10% CONVERTIBLE NOTES

 

In November 2014, we entered into a subscription agreement with two accredited investors providing for the issuance and sale of (i) convertible promissory notes in the aggregate principal amount of $527,780 (the “Notes”) and (ii) five year warrants to purchase up to 47,125 shares of common stock at a fixed exercise price of $8.40 per share (the “Warrants”). These Notes bear interest at the annual rate of 10% and originally matured on April 1, 2016.

        

 

 

 

 

 F-39 

 

 

The aggregate gross cash proceeds to us were $415,000 after subtracting legal fees of $35,000, a $27,780 due diligence fee and an original issuance discount of $50,000. We recorded deferred financing costs of $112,780 to reflect the legal fees, due diligence fee and original issuance discount and will amortize those costs over the life of the Notes using the effective interest method.

 

These Notes are convertible at the option of the holders into shares of our common stock at a fixed price of $5.60 per share, for up to an aggregate of 94,246 shares of common stock. There are no registration requirements with respect to the shares of common stock underlying the Notes or the Warrants.

 

The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is amortized as additional interest expense over the term of the underlying debt. We recorded debt discount of $240,133 based on the relative fair value of these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on the date of issuance, we recorded an additional debt discount of $287,647 related to the beneficial conversion feature.

  

Initial Amendment of the November 2014 10% Convertible Note Terms

 

On November 12, 2015, we entered into an amendment of terms (“Amendment of Terms”) with the two investors that participated in the November 2014 10% Convertible Notes. The Amendment of Terms modified the terms of the subscription agreement, Notes and Warrants held by those investors to, among other things, extended the maturity date of the Notes from April 1, 2016 to June 1, 2016, temporarily reduced the number of shares that we must reserve with respect to conversion of the Notes, and temporarily suspended the time period during which one of the investors may exercise its Warrants. In exchange for the investors’ agreements in the Amendment of Terms, we paid one of the investors a cash fee of $90,000, which we recorded as deferred financing costs and amortized over the remaining term of the notes.

 

Second Amendment and Extension of the November 2014 10% Convertible Notes

 

On June 27, 2016, we and certain investors entered into further Amendments (the “Amendments”) to the Notes and the Warrants. The Amendments provide that the Maturity Date (as defined in the Notes) was extended from June 1, 2016 to July 1, 2017 and that the conversion price per share of the Notes was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In addition, we reduced the purchase price (as defined in the Warrants) from $8.40 per share to $5.00 per share of common stock. In connection with these modifications, each of the investors signed a Consent and Waiver providing its consent under certain restrictive provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a Securities Purchase Agreement dated June 23, 2015, (the “2015 SPA”) to which we, the investors and certain other investors are parties, in order to facilitate an at-the-market equity program (see Note 6).

 

The Amendments also increase the principal amount of the Notes to $692,811 (in the aggregate) to (i) include accrued and unpaid interest through June 15, 2016, and (ii) increase the principal amount by $80,000 (in the aggregate) as an extension fee for the extended maturity date of the Notes. With respect to each Note, we entered into an Allonge to Convertible Promissory Note (each, an “Allonge”) reflecting the changes in the principal amount, Maturity Date and conversion price of the Note.

 

We also issued to the investors new warrants (the “New Warrants”) to purchase an aggregate of 30,000 shares of common stock with a Purchase Price (as defined in the New Warrants) of $5.00 per share of common stock. We issued the New Warrants in substantially the same form as the prior Warrants, and the New Warrants will expire on November 6, 2019, the same date on which the prior Warrants will expire.

  

 

 

 

 F-40 

 

 

The modification of the Notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40, “Debt Modification and Extinguishments” (“ASC 470-50-40”). Therefore, according to the guidance, the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. As a result, we recorded a loss on debt extinguishment of $536,889 and recognized an extension fee expense of $80,000, which are included in other (income) expenses in the accompanying condensed consolidated statements of operations. The debt extinguishment is comprised from the fair value of prior warrants issued in connection with the Notes of $287,676, as well as $325,206 related to beneficial conversion feature and offset by debt discount of $75,993. The beneficial conversion feature is a result of the effective conversion price of the new Notes being less than the market price of the underlying common stock on the date of modification.

 

Third Amendment and Extension of the November 2014 10% Convertible Notes

 

In connection with the issuance of the December 2016 10% Convertible Notes, the conversion price of the November 2014 10% Convertible Notes was reduced from $5.00 to $4.00 per share and the expiration date of the November 2014 10% Convertible Notes was extended from July 1, 2017 to July 1, 2018.

 

The modification of the Notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. As a result, we recorded a gain on debt extinguishment of $58,691, which is included in other (income) expenses in the accompanying condensed consolidated statements of operations. The recording of the modified Notes resulted in a beneficial conversion of $233,748 which is the result of the effective conversion price of the new Notes being less than the market price of the underlying common stock on the date of modification.

   

June 2017 Amendment to the November 2014 10% Convertible Notes

 

In June 2017, we agreed with the holders of the November 2014 10% Convertible Notes to an extension of the expiration dates of the notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share. The modification of the Notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $178,655 and recalculated a revised debt discount on the notes.

 

The following table shows the changes to the principal balance of the November 2014 10% Convertible Notes:

 

Activity in the November 2014 10% Convertible Notes
Initial principal balance  $527,780 
Increase in principal balance under the second amendment (see above)   165,031 
Conversions during the fiscal year ended March 31, 2017   (80,000)
Balance as of September 30, 2018 and March 31, 2018  $612,811 

  

DECEMBER 2016 10% CONVERTIBLE NOTES

 

In December 2016, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with two accredited investors (collectively, the “Holders”), pursuant to which the Holders purchased an aggregate of $680,400 principal amount of Notes (inclusive of due diligence fee of $30,000 deemed paid as a subscription amount in the form of a Note in the principal amount of $32,400) for an aggregate cash subscription amount of $600,000 and (b) warrants to purchase 127,575 shares of Common Stock (collectively, the “Warrants”).

 

 

 

 

 

 F-41 

 

 

The Notes bear interest at the rate of 10% per annum, and the principal amount and all accrued and unpaid interest thereon is convertible into shares of our common stock at a $4.00 per share conversion price, which is subject to customary adjustment provisions for stock splits, dividends, recapitalizations and the like. The Notes mature on July 1, 2018 and are subject to customary and usual terms for events of default and the like. Each Holder has contractually agreed to restrict its ability to convert its Note such that the number of shares of the Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.

  

The Warrants issued to the Holders are exercisable for a period of five years from the date of issuance at an exercise price of $4.50, subject to adjustment. A Holder may exercise a Warrant by paying the exercise price in cash or by exercising the Warrant on a cashless basis. In the event a Holder exercises a Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the Warrants is subject to customary adjustments provision for stock splits, stock dividends, recapitalizations and the like. Each Holder has contractually agreed to restrict its ability to exercise its Warrant such that the number of shares of the Common Stock held by the Holder and its affiliates after such exercise does not exceed 4.99% of our then issued and outstanding shares of Common Stock.

 

The estimated relative fair value of Warrants issued in connection with the Notes was recorded as a debt discount and is being amortized as additional interest expense over the term of the underlying debt. We recorded debt discount of $232,718 based on the relative fair value of these Warrants. In addition, as the effective conversion price of the Notes was less than market price of the underlying common stock on the date of issuance, we recorded an additional debt discount of $262,718 related to the beneficial conversion feature. We also recorded deferred financing costs of $102,940, which was composed of an 8% original issue discount of $50,400, a $30,000 due diligence fee (which was paid in the form of a note), $22,500 in legal fees, and a $40 bank charge. The combination of the above items led to a combined discount against the convertible notes of $598,376.

 

June 2017 Amendment to the December 2016 10% Convertible Notes

 

In June 2017, we agreed with the holders of the December 2016 10% Convertible Notes to an extension of the expiration dates of the notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share. The modification of the notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $198,254 and recalculated a revised debt discount on the notes.

  

The following table shows the changes to the principal balance of the December 2016 10% Convertible Notes:

 

Activity in the December 2016 10% Convertible Notes
Initial principal balance  $680,400 
Conversions during the fiscal year ended March 31, 2018   (300,620)
Balance as of September 30, 2018 and March 31, 2018  $379,780 

  

6. EQUITY TRANSACTIONS IN THE SIX MONTHS ENDED SEPTEMBER 30, 2018

 

Shares Issued for Services

 

During the six months ended September 30, 2018, we issued 15,000 shares of restricted common stock at a price of $1.29 per share, the market price at time of issuance, in payment for investor relations consulting services valued at $19,350 based on the value of the services provided.

 

Restricted Stock Unit Grants to Executive Officers and Directors

 

During the six months ended September 30, 2018, 148,401 Restricted Stock Units (“RSUs”) held by our executives and directors were exchanged into the same number of shares of our common stock. As our executives and certain of our directors elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes (or in the case of directors issuing the cash equivalent of the estimated withholding taxes) on the share issuance, 68,352 of the RSUs were cancelled and we issued a net 80,049 shares to our executives and directors (see Note 9).

 

On June 14, 2018, our Board of Directors approved the issuances of additional RSUs to certain officers and directors (see Note 9).

 

 

 

 

 

 F-42 

 

 

7. RELATED PARTY TRANSACTIONS

 

DUE TO RELATED PARTIES

 

During the six months September 30, 2018 we accrued unpaid Board fees of $69,750 owed to our outside directors as of September 30, 2018.

  

8. OTHER CURRENT LIABILITIES

 

Other current liabilities were comprised of the following items:

 

   September 30,   March 31, 
   2018   2018 
Accrued interest  $9,943   $55,701 
Accrued professional fees   158,413    207,440 
Total other current liabilities  $168,356   $263,141 

   

9. STOCK COMPENSATION

 

The following tables summarize share-based compensation expenses relating to RSUs and options granted and the effect on basic and diluted loss per common share during the three and six month periods ended September 30, 2018 and 2017:

 

   Three Months
Ended
September 30,
2018
   Three Months
Ended
September 30,
2017
   Six Months
Ended
September 30,
2018
   Six Months
Ended
September 30,
2017
 
Vesting of stock options and restricted stock units  $336,496   $283,534   $599,658   $564,445 
Total stock-based compensation expense  $336,496   $283,534   $599,658   $564,445 
                     
Weighted average number of common shares outstanding – basic and diluted   17,789,236    9,032,157    17,771,918    8,939,624 
                     
Basic and diluted loss per common share attributable to stock-based compensation expense  $(0.02)  $(0.03)  $(0.03)  $(0.06)

 

All of the stock-based compensation expense recorded during the six months ended September 30, 2018 and 2017, which totaled $599,658 and $564,445, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during the six months ended September 30, 2018 and 2017 represented an impact on basic and diluted loss per common share of $(0.03) and $(0.06), respectively.

  

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the six months ended September 30, 2018 was insignificant.

 

 

 

 

 F-43 

 

 

Restricted Stock Unit Grants to Directors and Executive Officers

 

On August 9, 2016, our Board of Directors (the “Board”) granted RSUs to certain of our officers and directors. The RSUs represent the right to be issued on a future date shares of our common stock for vested RSUs. Our Compensation Committee recommended the grants based on a compensation assessment provided by a third-party compensation consulting firm engaged by us that developed a peer group of companies for market assessment and analyzed compensation at such companies.

 

On June 14, 2018, our Board approved the issuances of additional RSUs of $35,000 in value to each of our independent directors per the 2012 Non-Employee Directors Compensation Program (the “2012 Program”) as the stock-based compensation element of their overall directors’ compensation for the fiscal year ending March 31, 2019. The Board also approved the issuance of $50,000 of RSUs to a prospective director, if he chose to join our Board again per the 2012 Program. Finally, the Board approved the issuance of $30,000 of RSU’s to our Chief Financial Officer. The Board approval called for all of those RSUs to be priced based on the five day trailing averages of our closing stock price leading up to the acceptance of the Board seat by the prospective director, which occurred on June 19, 2018. That average price was $1.31 per share for the RSU calculations. Therefore, a total of 107,196 RSUs were issued to our existing independent directors, 38,285 RSUs were issued to Mr. Cipriani and 22,971 RSUs were issued to our Chief Financial Officer. All of those RSUs vest ratably on September 30, 2018, December 31, 2018 and March 31, 2019.

 

The above noted RSUs were granted under our Amended 2010 Stock Incentive Plan and we recorded expense of $334,032 in the six months ended September 30, 2018 related to the RSU grants. 

 

RSUs outstanding that have vested and are expected to vest as of September 30, 2018 are as follows:

 

   Number of RSUs 
Vested   46,125 
Expected to vest   342,926 
Total   389,051 

  

During the six months ended September 30, 2018, 148,401 RSUs held by our executives and directors were exchanged into the same number of shares of our common stock. As our executives and certain of our directors elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes (or in the case of directors issuing the cash equivalent of the estimated withholding taxes) on the share issuance, 68,352 of the RSUs were cancelled and we issued a net 80,049 shares to our executives.

 

Stock Option Activity

 

There were no stock option grants during the six months ended September 30, 2018. During the six months ended September 30, 2017, we issued options to four of our employees to purchase 34,500 shares of common stock at a price of $1.68 per share, the closing price on the date of the approval of the option grants by our compensation committee.

  

Options outstanding that have vested and are expected to vest as of September 30, 2018 are as follows:

 

   Number of
Shares
   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term in
Years
 
             
Vested   356,047   $8.83    3.84 
Expected to vest   18,000   $1.68    8.71 
Total   374,047           

  

 

 

 

 F-44 

 

 

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to stock option grants utilizing the Binomial Lattice option pricing models at, and during the six months ended September 30, 2017:

 

Risk free interest rate 2.21%
Average expected life 10 years
Expected volatility 92.14%
Expected dividends  None

 

The expected volatility was based on the historic volatility. The expected life of options granted was based on the "simplified method" as described in the SEC's guidance due to changes in the vesting terms and contractual life of current option grants compared to our historical grants.

 

A summary of stock option activity during the six months ended September 30, 2018 is presented below:

 

   Amount   Range of
Exercise Price
   Weighted
Average
Exercise
Price
 
Stock options outstanding at March 31, 2018   409,047    $1.68-$20.50   $9.51 
Exercised          $ 
Granted          $ 
Cancelled/Expired   35,000   $20.50   $20.50 
Stock options outstanding at September 30, 2018   374,047    $1.68 – $12.50   $8.48 
Stock options exercisable at September 30, 2018   356,047    $1.68 – $12.50   $8.83 

 

On September 30, 2018, our stock options had no intrinsic value since the closing price on that date of $1.18 per share was below the weighted average exercise price of our stock options.

 

At September 30, 2018, there was approximately $1,476,992 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 1.1 years.

   

10. WARRANTS

 

During the six months ended September 30, 2018 and 2017, we did not issue any warrants.

 

A summary of warrant activity during the six months ended September 30, 2018 is presented below:

 

      Amount     Range of
Exercise
Price
    Weighted
Average
Exercise
Price
 
  Warrants outstanding at March 31, 2018       5,922,571       $1.10 - $12.05     $ 1.83  
  Exercised             n/a       n/a  
  Issued             n/a       n/a  
  Cancelled/Expired       (463,146 )     $2.10 – $6.25     $ 2.61  
  Warrants outstanding at September 30, 2018       5,459,425       $1.10 – $12.05     $ 1.77  
  Warrants exercisable at September 30, 2018       5,459,425       $1.10 – $12.05     $ 1.77  

   

 

 

 

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11. GOVERNMENT CONTRACTS AND RELATED REVENUE RECOGNITION

 

We entered into a contract with the National Cancer Institute, part of the National Institutes of Health (“NIH”) on September 15, 2017. This award is under the NIH’s Small Business Innovation Research (SBIR) program which is designed to fund early stage small businesses that are seeking to commercialize innovative biomedical technologies. The title of the award is SBIR Topic 359 Phase 1 Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.

 

The award from NIH is a firm, fixed-price contract with potential total payments to us of $299,250 over the course of nine months.

 

Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also has the unilateral right to require us to perform additional work under an option period for an additional fixed amount of $49,800.

  

Under the terms of the contract, we must perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts.

 

In the six months ended September 30, 2018, we performed work under the contract covering the remainder of the technical objectives of the contract (Aim 1: To validate the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma and Aim 2: To validate a method of melanoma exosome isolation consisting of the Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes and Aim 3: To evaluate the functional integrity of melanoma exosomes purified by the Hemopurifier and immunocapture isolation steps). As a result we invoiced NIH for $149,625 during the six months ended September 30, 2018.

  

12. SEGMENTS

 

We operate our businesses principally through two reportable segments: Aethlon, which represents our therapeutic business activities, and ESI, which represents our diagnostic business activities. Our reportable segments have been determined based on the nature of the potential products being developed. We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating results in order to make decisions about resources to be allocated to the ESI segment and to assess its performance.

 

Aethlon’s revenue is generated primarily from government contracts to date and ESI does not yet have any revenues. We have not included any allocation of corporate overhead to the ESI segment.

   

 

 

 

 

 

 

 

 F-46 

 

 

The following tables set forth certain information regarding our segments:

 

   Six Months Ended September 30, 
   2018   2017 
Revenues:        
Aethlon  $149,625   $ 
ESI        
Total Revenues  $149,624   $ 
           
Operating Losses:          
Aethlon  $(2,369,907)  $(2,373,066)
ESI   (74,319)   (23,356)
Total Operating Loss  $(2,444,226)  $(2,396,422)
           
Net Losses:          
Aethlon  $(2,480,117)  $(3,130,772)
ESI   (74,319)   (23,356)
Net Loss Before Non-Controlling Interests  $(2,554,436)  $(3,154,128)
           
Cash:          
Aethlon  $5,076,872   $919,612 
ESI   1,733    460 
Total Cash  $5,078,605   $920,072 
           
Total Assets:          
Aethlon  $5,270,690   $1,118,433 
ESI   1,733    27,545 
Total Assets  $5,272,423   $1,145,978 
           
Capital Expenditures:          
Aethlon  $   $23,705 
ESI        
Capital Expenditures  $   $23,705 
           
Depreciation and Amortization:          
Aethlon  $16,040   $18,651 
ESI        
Total Depreciation and Amortization  $16,040   $18,651 
           
Interest Expense:          
Aethlon  $(110,210)  $(250,583)
ESI        
Total Interest Expense  $(110,210)  $(250,583)

  

 

 

 

 

 F-47 

 

 

13. COMMITMENTS AND CONTINGENCIES

 

LEASE COMMITMENTS

 

We currently lease approximately 2,600 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123 under a 39-month gross plus utilities lease that commenced on December 1, 2014 and expires in August 31, 2021. The current rental rate under the lease extension is $7,986 per month. We believe this leased facility will be satisfactory for our office needs over the term of the lease.

 

We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $4,548 per month on a one-year lease that expires on November 30, 2018. In October 2018, we entered into a lease extension for an additional twelve months running from December 1, 2018 through November 30, 2019 at the rate of $4,700 per month (see Note 14).

 

Rent expense, which is included in general and administrative expenses, approximated $84,000 and $77,000 for the six month periods ended September 30, 2018 and 2017, respectively.

 

LEGAL MATTERS

 

From time to time, claims are made against us in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from selling one or more products or engaging in other activities.

 

The occurrence of an unfavorable outcome in any specific period could have a material adverse effect on our results of operations for that period or future periods. We are not presently a party to any pending or threatened legal proceedings.

 

14. SUBSEQUENT EVENTS

 

Management has evaluated events subsequent to September 30, 2018 through the date that the accompanying condensed consolidated financial statements were filed with the Securities and Exchange Commission for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

 

In October 2018, we entered into a lease extension for our laboratory facility for an additional twelve months running from December 1, 2018 through November 30, 2019 at the rate of $4,700 per month (see Note 13).

 

In October 2018, 46,125 RSUs held by our executives were exchanged into the same number of shares of our common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 24,142 of the RSUs were cancelled and we issued a net 21,983 shares to our executives.

 

 

 

 

 

 F-48 

 

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (from 10-K 3/31/18)

 

The following discussion and analysis should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual Report.

 

Overview

 

We are a medical device company focused on creating innovative devices that address unmet medical needs in global health and biodefense. The Aethlon Hemopurifier® is a clinical-stage therapeutic device that eliminates life-threatening viruses from the circulatory system of infected individuals.

 

In June 2013, the U.S. Food and Drug Administration, or FDA, approved our investigational device exemption application to initiate a ten-patient human clinical trial in one location in the U.S. to treat dialysis patients who are infected with the Hepatitis C virus. Successful outcomes of that human trial as well as at least one follow-on human trial will be required by the FDA in order to commercialize our products in the U.S. The regulatory agencies of certain foreign countries where we intend to sell this device will also require one or more human clinical trials.

 

Some of our patents may expire before we receive FDA approval to market our products in the U.S. or we receive approval to market our products in a foreign country. However, we believe that certain patent applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier treatment technology.

 

Through our majority-owned subsidiary, Exosome Sciences, Inc., or Exosome, we are also studying potential diagnostic techniques for identifying and monitoring neurological conditions and cancer. We consolidate Exosome’s activities in our consolidated financial statements.

  

Fiscal Years Ended March 31, 2018 and 2017

 

Results of Operations

 

Revenues

 

We recorded government contract revenue in the fiscal years ended March 31, 2018 and 2017.  This revenue arose from work performed under our government contracts with the National Institutes of Health, or NIH, with the Defense Advanced Research Projects Agency, or DARPA and our subcontract with Battelle Memorial Institute, or Battelle (both of which are now completed), as follows:

 

   Fiscal Year
Ended
3/31/18
   Fiscal year
Ended
3/31/17
   Change in
Dollars
 
NCI contract  $149,625   $   $149,625 
DARPA contract       387,438    (387,438)
Battelle subcontract       4,635    (4,635)
Total government contract revenue  $149,625   $392,073   $(242,448)

 

NCI Contract

 

We entered into a contract with the NIH on September 15, 2017. This award is under the NIH’s Small Business Innovation Research (SBIR) program which is designed to fund early stage small businesses that are seeking to commercialize innovative biomedical technologies. The title of the award is SBIR Topic 359 Phase 1 Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.

...

 40 

 

 

The award from NIH is a firm, fixed-price contract with potential total payments to us of $299,250 over the course of nine months.

 

Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each period of the contract. The NIH also has the unilateral right to require us to perform additional work under an option period for an additional fixed amount of $49,800.

 

Under the terms of the contract, we must perform certain incremental work towards the achievement of specific milestones against which we will invoice the government for fixed payment amounts.

 

In the fiscal year ended March 31, 2018, we performed work under the contract completing the majority of the first two technical objectives of the contract (Aim 1: To validate the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma and Aim 2: To validate a method of melanoma exosome isolation consisting of the Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes). As a result we invoiced NIH for $149,625.

 

DARPA Contract

 

We entered into a contract with DARPA on September 30, 2011. Under the DARPA award, we were engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers. The award from DARPA was a fixed-price contract with potential total payments to us of $6,794,389 over the course of five years. Fixed price contracts require the achievement of multiple, incremental milestones to receive the full award during each year of the contract. Under the terms of the contract, we performed certain incremental work towards the achievement of specific milestones against which we invoiced the government for fixed payment amounts.

 

Originally, only the base year (year one of the contract) was effective for the parties; however, DARPA subsequently exercised its option on the remaining years of the contract. The milestones were comprised of planning, engineering and clinical targets, the achievement of which in some cases required the participation and contribution of third-party participants under the contract. We commenced work under the contract in October 2011 and completed the contract in September 2016.

 

In February 2014, DARPA reduced the scope of our contract in years three through five of the contract. The reduction in scope focused our research on exosomes, viruses and blood processing instrumentation. This scope reduction reduced the possible payments under the contract by $858,469 over years three through five.

 

In the fiscal year ended March 31, 2017, we invoiced the U.S. Government for the final two milestones under our DARPA contract in the aggregate amount of $387,438. In the fiscal year ended March 31, 2016, we invoiced the U.S. Government for four milestones under our DARPA contract in the amount of $863,011.

 

Battelle Subcontract

 

We entered into a subcontract agreement with Battelle in March 2013. Battelle was chosen by DARPA to be the prime contractor on the systems integration portion of the original DARPA contract, and we are one of several subcontractors on that systems integration project. The Battelle subcontract is under a time and materials basis and we began generating revenues under the subcontract in the three months ended September 30, 2013. That contract has now concluded. The Battelle subcontract was our first cost-reimbursable contract.

 

Our revenue under this contract was a function of cost reimbursement plus an overhead mark-up for hours devoted to the project by specific employees (with specific hourly rates for those employees), for travel expenses related to the project, for any equipment purchased for the project and for the cost of any consultants hired by us to perform work on the project. Each payment required approval by the program manager at Battelle.

 

 

 

 41 

 

 

Operating Costs and Expenses

 

Consolidated operating expenses were $4,980,741 for the fiscal year ended March 31, 2018 compared to $6,490,430 in the fiscal year ended March 31, 2017, a decrease of $1,509,689. The $1,509,689 decrease was due to reductions in payroll and related expenses of $844,410, in professional fees of $608,388 and in general and administrative expense of $56,891.

  

The $844,410 decrease in payroll and related expenses was principally driven by a $925,540 decrease in our stock-based compensation due to the vesting of restricted stock units granted during the fiscal year, which was partially offset by an $81,130 increase in cash payroll and related expenses due to headcount additions in our scientific staff.

 

The $608,388 decrease in our professional fees was due to reductions in our non-DARPA-related professional fees of $545,694, in our DARPA-related professional fees of $38,928 and in Exosome’s professional fees of $23,766. The primary factors in the $545,694 decrease in our non-DARPA-related professional fees were a $223,636 reduction in legal fees due to a reduction in registration statement and financing activity in FY’18 compared to FY’17, a $145,692 reduction in clinical trial expense due to the conclusion of our clinical trial and a $114,000 reduction in business development expense. The primary factor in our $38,928 decrease in our DARPA-related professional fees was the completion of our DARPA contract in September 2016.

 

The $56,891 decrease in general and administrative expenses primarily arose from reductions in the general and administrative expenses in our DARPA-related activities of $101,757 and in the general and administrative expenses at Exosome of $29,664, which were partially offset by increases in our non-DARPA-related activities of $74,530.

 

Other Expense

 

In the fiscal year ended March 31, 2018, we recognized other expenses of $868,721 compared to $1,208,369 of other expense in the fiscal year ended March 31, 2017. The following table breaks out the various components of our other expense over the fiscal years ended March 31, 2018 and 2017:

 

   Components of Other Expense
in Fiscal Year Ended
 
   March 31,
2018
   March 31,
2017
   Change 
             
Loss on debt extinguishment  $376,909   $558,198   $(181,289)
                
Loss on share for warrant exchanges   130,215        130,215 
                
Interest and other debt expenses   361,597    304,330    57,267 
                
Warrant repricing expense       345,841    (345,841)
                
Total other expense  $868,721   $1,208,369   $(339,648)

 

Loss on Debt Extinguishment

 

Our loss on debt extinguishment for the fiscal year ended March 31, 2018 arose from a $376,909 loss associated with the June 2017 amendments to our convertible notes. This compared to a loss of debt extinguishment of $558,198 for the fiscal year ended March 31, 2017 - see below for additional information.

 

 

 

 42 

 

 

June 2017 Amendments – The $376,909 loss on debt extinguishment in the six months ended September 30, 2017 arose from an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in exchange for the cancellation of 77,125 warrants held by those investors (see Loss on Share for Warrant Exchanges below). Additionally, we agreed with those investors that they would extend the expiration dates of the convertible notes held by those investors from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share. The modification of the notes was evaluated under FASB Accounting Standards Codification (“ASC”) Topic No. 470-50-40, “Debt Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting.

 

June 2016 Amendments - This loss on debt extinguishment arose from the Amendments (the “Amendments”) to our November 2014 convertible notes The Amendments provided that the maturity date of the notes was extended from June 1, 2016 to July 1, 2017 and that the conversion price was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In addition, we reduced the purchase price of warrants issued in connection with the notes from $8.40 per share to $5.00 per share. In connection with these modifications, each of the Investors signed a consent and waiver providing its consent under certain restrictive provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a securities purchase agreement dated June 23, 2015, (the “2015 SPA”) to which we, the Investors and certain other investors are parties, in order to facilitate an at-the-market equity program described in the liquidity and capital resources section of this report below. This loss also included an $80,000 fee to extend the November 2014 convertible notes from June 1, 2016 to July 1, 2017. The $80,000 amount was not a cash payment but rather was added to the principal of the notes.

 

This modification of the notes was also evaluated under ASC Topic No. 470-50-40, “Debt Modification and Extinguishments”. Therefore, according to the guidance, the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting.

 

Loss on Share for Warrant Exchanges

 

During the fiscal year ended March 31, 2018, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993 warrants and we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in exchange for the cancellation of 77,125 warrants held by those investors. Additionally, we entered into an agreement with a former placement agent to issue 5,500 restricted shares in exchange for the cancellation of 11,000 warrants held by that placement agent. We measured the fair value of the shares issued and the fair value of the warrants exchanged for those shares and recorded losses for each of those exchanges based on the changes in fair value between the instruments exchanged.

Loss on Warrant Repricing

 

On June 27, 2016, we and certain investors (the “Unit Investors”) entered into Consent and Waiver and Amendment agreements (the “CWAs”), relating to an aggregate of 264,000 Warrants to Purchase Common Stock (the “Unit Warrants”) we had issued to the Unit Investors on December 2, 2014 pursuant to a Securities Purchase Agreement dated November 26, 2014 (the “2014 SPA”). In the CWAs, each of the Unit Investors provided its consent under certain restrictive provisions, and waived certain rights, including a right to participate in certain offerings made by us, under the 2014 SPA in order to facilitate the at-the-market equity program described in the notes to the Financial Statements. Pursuant to the CWAs, we reduced the Exercise Price (as defined in the Unit Warrants) from $15.00 per share of common stock to $5.00 per share of common stock.

 

On June 27, 2016, each of the Unit Investors also entered into a Consent and Waiver providing its consent under certain provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under the 2015 SPA in order to facilitate the at-the market equity program described in the notes to the Financial Statements.

 

We measured the change in fair value that arose from the reduction in exercise price from $15.00 to $5.00 and recorded a charge of $345,841 to our other expense to reflect this change.

 

 

 

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Interest and other debt expenses

 

Our interest and other debt expense increased by $57,267 from the fiscal year ended March 31, 2017 to the fiscal year ended March 31, 2018. The following table breaks out the various components of our interest expense over the fiscal years ended March 31, 2018 and 2017:

 

   Components of Interest Expense and Other Debt
Expenses in Fiscal Year Ended
 
   March 31,
2018
   March 31,
2017
   Change 
             
Interest expense  $115,934   $83,891   $32,043 
                
Amortization of deferred financing costs       27,641    (27,641)
           &