This Annual Report on Form
10-K, or Form 10-K, contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of
1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which
are subject to the safe harbor created by those sections.
We may, in some cases, use
words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would” or the negative of these terms, and similar expressions that convey uncertainty of future events or outcomes to identify
these forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking
statements and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by
their nature, are inherently uncertain and beyond our control. Such statements, include, but are not limited to, statements contained
in this Form 10-K relating to our business, business strategy, products and services we may offer in the future, the timing and results
of future regulatory filings, the timing and results of future clinical trials, and capital outlook. Forward-looking statements are based
on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward looking statements
relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. Our
actual results may differ materially from those contemplated by the forward-looking statements. They are neither statement of historical
fact nor guarantees of assurance of future performance. We caution you therefore against relying on any of these forward-looking statements.
Important factors that could cause actual results to differ materially from those in the forward looking statements include, but are not
limited to, a decline in general economic conditions nationally and internationally; the ability to protect our intellectual property
rights; competition from other providers and products; risks in product development; inability to raise capital to fund continuing operations;
changes in government regulation; the ability to complete capital raising transactions, and other factors (including the risks contained
in Item 1A of this Form 10-K under the heading “Risk Factors”) relating to our industry, our operations and results of operations
and any businesses that may be acquired by us. Should one or more of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended or
planned.
Factors or events that could
cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them, nor can we assess
the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements we may make. Given these uncertainties, you should not place undue reliance
on these forward-looking statements. We cannot guarantee future results, levels of activity, performance or achievements. Except as required
by applicable law, we undertake no obligation to and do not intend to update any of the forward-looking statements to conform these statements
to actual results.
ITEM 1. DESCRIPTION OF BUSINESS
Unless otherwise indicated
or the context otherwise requires, references to the “Company”, “Aethlon”, “we”, “us”
and “our” refer to Aethlon Medical, Inc., combined with its majority-owned subsidiary, Exosome Sciences, Inc.
Overview and Corporate History
We are a medical technology
company focused on developing products to diagnose and treat life and organ threatening diseases. The Aethlon Hemopurifier®, or Hemopurifier,
is a clinical-stage immunotherapeutic device designed to combat cancer and life-threatening viral infections. In cancer, the Hemopurifier
is designed to deplete the presence of circulating tumor-derived exosomes that promote immune suppression, seed the spread of metastasis
and inhibit the benefit of leading cancer therapies. The U.S. Food and Drug Administration, or FDA, has designated the Hemopurifier as
a “Breakthrough Device” for two independent indications:
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the treatment of individuals with advanced or metastatic cancer who are either unresponsive to or intolerant of standard of care therapy, and with cancer types in which exosomes have been shown to participate in the development or severity of the disease; and
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the treatment of life-threatening viruses that are not addressed with approved therapies.
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We believe the Hemopurifier
can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote
the growth and spread of tumors through multiple mechanisms. We are currently conducting a clinical trial in patients with advanced and
metastatic head and neck cancer. We are initially focused on the treatment of solid tumors, including head and neck cancer, gastrointestinal
cancers and other cancers. As we advance our clinical trials, we are in close contact with our clinical sites to navigate and assess the
impact of the COVID-19 global pandemic on our clinical trials and current timelines.
On October 4, 2019, the FDA
approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier
in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda). The primary endpoint for the EFS,
which will enroll 10 to 12 subjects at a single center, will be safety, with secondary endpoints including measures of exosome clearance
and characterization, as well as response and survival rates. This study, which is being conducted at the UPMC Hillman Cancer Center in
Pittsburgh, PA, has been approved by the Institutional Review Board, or IRB, and is in the process of recruiting and treating patients.
We also believe the Hemopurifier
can be part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not addressed
with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat individuals
infected with human immunodeficiency virus, or HIV, hepatitis-C, and Ebola.
Additionally, in-vitro,
the Hemopurifier has been demonstrated 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 studies were conducted in collaboration with leading government or non-government
research institutes.
On June 17, 2020, the FDA
approved a supplement to our open IDE for the Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients with
SARS-CoV-2/COVID-19 in a New Feasibility Study. That study is designed to enroll up to 40 subjects
at up to 20 centers in the U.S. Subjects will have established laboratory diagnosis of COVID-19, be admitted to an intensive care unit,
or ICU, and will have acute lung injury and/or severe or life threatening disease, among other criteria. Endpoints for this study, in
addition to safety, will include reduction in circulating virus as well as clinical outcomes (NCT # 04595903). The initial sites for this
trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital – Irvine in Irvine, CA and Loma Linda Hospital
in Loma Linda, CA, have completed clinical trial agreements, and have received IRB approval in the case of the Hoag hospitals, and are
preparing to open for patient enrollment. Under Single Patient Emergency Use regulations, the Company has also treated two patients with
COVID-19 with the Hemopurifier.
We are also the majority owner
of Exosome Sciences, Inc., or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening
diseases. Included among ESI’s activities is the advancement of a TauSomeTM biomarker candidate to diagnose chronic traumatic
encephalopathy, or CTE, in the living. ESI previously documented TauSome levels in former NFL players to be nine times higher than same
age-group control subjects. Through ESI, we are also developing exosome based biomarkers in patients with, or at risk for, a number of
cancers. We consolidate ESI’s activities in our consolidated financial statements.
Successful outcomes of human
trials will also be required by the regulatory agencies of certain foreign countries where we plan to sell the Hemopurifier. 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.
In addition to the foregoing,
we are monitoring closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the health
and safety of our employees while continuing our operations. Given the level of uncertainty regarding the duration and impact of the COVID-19
pandemic on capital markets and the U.S. economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and the resulting
COVID-19 pandemic on our timelines and future access to capital. We are continuing to monitor the spread of COVID-19 and its potential
impact on our operations. The full extent to which the COVID-19 pandemic will impact our business, results of operations, financial condition,
clinical trials, and preclinical research will depend on future developments that are highly uncertain, including actions taken to contain
or treat COVID-19 and their effectiveness, as well as the economic impact on national and international markets.
We were formed on March 10,
1999. 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.
The Mechanism of the Hemopurifier
The Hemopurifier is an affinity
hemofiltration device designed for the single-use removal of exosomes and 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, or CDRH, the branch of FDA responsible for the premarket approval of all medical devices.
In application, our Hemopurifier
can be used on the established infrastructure of continuous renal replacement therapy, or CRRT, and dialysis instruments located in hospitals
and clinics worldwide. It could also potentially be developed as part of a proprietary closed system with its own pump and tubing set,
negating the requirement for dialysis infrastructure. Incorporated within the Hemopurifier is a protein called a lectin that binds to
a glycosylated, or sugar substituted, membrane, which exosomes and most infectious viruses share.
The Hemopurifier - Clinical Trials In Viral Infections
The initial development of
the Hemopurifier was focused on viral infections. In non-clinical bench experiments using a laboratory version of the Hemopurifier, performed
in Company labs as well as multiple other outside labs including the Centers for Disease Control, or CDC, the United States Army Medical
Research Institute of Infectious Diseases, or USAMRIID, Battelle Memorial Research Institute and others, we have demonstrated that the
mini-Hemopurifier can bind and clear multiple different glycosylated, or containing sugar molecules on their membranes, viruses. These
viruses include HIV, hepatitis C, or HCV, Dengue, West Nile, multiple strains of influenza, Ebola, Chikungunya, multiple herpes viruses,
a MERS-CoV related pseudovirus and others.
Initial clinical trials on
the Hemopurifier were conducted overseas on dialysis patients with HCV, with a subsequent Early Feasibility Study conducted in the U.S.
under an FDA approved Investigational Device Exemption, or IDE.
On March 13, 2017, we concluded
an FDA-approved early feasibility study under an IDE in end stage renal disease patients on dialysis who were infected with HCV. The study
was conducted at DaVita MedCenter Dialysis in Houston, Texas. 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 four-hour treatments. Prior to this approval, we collected supporting Hemopurifier data through
investigational human studies conducted overseas.
SARS-CoV-2/COVID-19
SARS-COV-2, the causative
agent of COVID-19 is a member of the coronavirus family, which includes the original SARS virus, SARS-CoV, and the MERS virus. SARS-CoV-2,
like all coronaviruses, is glycosylated. This suggests that the Hemopurifier could potentially clear it from biologic fluids, including
blood.
On June 17, 2020, the FDA
approved a supplement to our open IDE for the Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients with
SARS-CoV-2/COVID-19 in a New Feasibility Study. That study is designed to enroll up to 40 subjects
at up to 20 centers in the U.S. Subjects will have established laboratory diagnosis of COVID-19, be admitted to an intensive care unit,
or ICU, and will have acute lung injury and/or severe or life threatening disease, among other criteria. Endpoints for this study, in
addition to safety, will include reduction in circulating virus as well as clinical outcomes (NCT # 04595903). The initial sites for this
trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital – Irvine in Irvine, CA and Loma Linda Hospital
in Loma Linda, CA, have completed clinical trial agreements, and have received IRB approval in the case of the Hoag hospitals, and are
preparing to open for patient enrollment.
Under
Single Patient Emergency Use regulations, the Company has also treated two patients with COVID-19 with the Hemopurifier. The Company recently
published a manuscript reviewing case studies covering those treatments entitled “Removal of COVID-19 Spike Protein, Whole Virus,
Exosomes and Exosomal microRNAs by the Hemopurifier® Lectin-Affinity Cartridge in Critically Ill Patients with COVID-19 Infection.”
The
manuscript described the use of the Hemopurifier for a total of nine sessions in two critically ill COVID-19 patients. The first case
study demonstrated the improvement in the patient who was a SARS-COV-2 positive COVID-19 present at entry to the hospital, with associated
coagulopathy (CAC), lung injury, inflammation, and tissue injury despite the absence of demonstrable COVID-19 viremia at the start of
treatment at Day 22 and having demonstrated strong viremia earlier in the patient’s disease cycle, suggesting that the significant
removal of exosomes contributed to the patient’s recovery. This patient received eight Hemopurifier treatments without complications
and eventually was weaned from a ventilator and was discharged from the hospital.
The
second patient case study demonstrated in vivo removal of SARS-CoV-2 virus from the blood stream of an infected patient. This patient
completed a six-hour Hemopurifier treatment without complications and subsequently was placed on Continuous Renal Replacement Therapy
(CRRT). The patient ultimately expired three hours after being placed on CRRT because of the advanced stage of the patient’s disease.
The Hemopurifier – Clinical Trials Conducted Overseas in Viral
Infections
EBOLA Virus
In December of 2014, Time
Magazine named the Hemopurifier a “Top 25 Invention” as the result of treating an Ebola-infected physician at Frankfurt University
Hospital in Germany. The physician was comatose with multiple organ failure at the time of treatment with the Hemopurifier. At the American
Society of Nephrology Annual Meeting, Dr. Helmut Geiger, Chief of Nephrology at Frankfurt University Hospital reported that the patient
received a single 6.5 hour Hemopurifier treatment. Prior to treatment, viral load was measured at 400,000 copies/ml. Post-treatment viral
load reported to be at 1,000 copies/ml. Dr. Geiger also reported that 242 million copies of Ebola virus were captured within the Hemopurifier
during treatment. The patient ultimately made a full recovery. Based on this experience, the Company filed an Expanded Access protocol
with the FDA to treat Ebola virus infected patients in up to ten centers in the U.S. and a corresponding protocol was approved by HealthCanada.
These protocols remain open allowing Hemopurifier treatment to be offered to patients presenting for care in both countries. In 2018,
we applied for and were granted a Breakthrough Designation by the FDA “… for the treatment of life-threatening viruses that
are not addressed with approved therapies.”
Hepatitis C Virus (HCV)
Prior to FDA approval of the
IDE feasibility study, we conducted investigational HCV treatment studies at the Apollo Hospital, Fortis Hospital and the Medanta Medicity
Institute in India. In the Medanta Medicity Institute study, twelve HCV-infected individuals were enrolled to receive three six-hour Hemopurifier
treatments during the first three days of a 48-week peginterferon+ribavirin treatment regimen. The study was conducted under the leadership
of Dr. Vijay Kher. Dr. Kher’s staff reported that Hemopurifier therapy was well tolerated and without device-related adverse events
in the twelve treated patients.
Of these twelve patients,
ten completed the Hemopurifier-peginterferon+ribavirin treatment protocol, including eight genotype-1 patients and two genotype-3 patients.
Eight of the ten patients achieved a sustained virologic response, which is the clinical definition of treatment cure and is defined as
undetectable HCV in the blood 24 weeks after the completion of the 48-week peginterferon+ribavirin drug regimen. Both genotype-3 patients
achieved a sustained virologic response, while six of the eight genotype-1 patients achieved a sustained virologic response, which defines
a cure of the infection.
Hemopurifier - Human Immunodeficiency Virus (HIV)
In addition to treating Ebola
and HCV-infected individuals, we also conducted a single proof-of-principle treatment study at the Sigma New Life Hospital in an AIDS
patient who was not being administered HIV antiviral drugs. In the study, viral load was reduced by 93% as the result of 12 Hemopurifier
treatments (each four hours in duration) that were administered over the course of one month.
The Hemopurifier in Cancer
While hepatitis C is no longer
a major commercial opportunity in developed markets due to the wide availability of curative, oral direct acting anti-viral agents, we
continue to investigate potential viral targets for the Hemopurifier. Recently, however, our primary focus has been on the evaluation
of the Hemopurifier in cancer, where we have shown in non-clinical studies that it is capable of clearing exosomes, which are subcellular
particles that are secreted by both normal and malignant cells. Tumor derived exosomes, have been shown in multiple laboratories to be
critical components in the progression of cancers. They can mediate resistance to chemotherapy, resistance to targeted agents such as
trastuzumab (Herceptin), metastasis and resistance to the newer immuno-oncology agents, such as pembrolizumab (Keytruda). Based on these
observations and data, in November 2019 the FDA granted us a second Breakthrough Designation “…for the treatment of individuals
with advanced or metastatic cancer who are either unresponsive to or intolerant of standard of care therapy, and with cancer types in
which exosomes have been shown to participate in the development or severity of the disease.”
On October 4, 2019, the FDA
approved our IDE application to initiate an EFS of the Hemopurifier in patients with head and neck cancer in combination with standard
of care pembrolizumab (Keytruda). The primary endpoint for the EFS, which will enroll 10 to 12 subjects at a single center, will be safety,
with secondary endpoints including measures of exosome clearance and characterization, as well as response and survival rates. This study,
which is being conducted at the UPMC Hillman Cancer Center in Pittsburgh, PA, has been approved by the IRB and is in the process of recruiting
and treating patients.
Exosome Sciences, Inc. – Majority Owned Biomarker Discovery
Company
We are the majority owner
of Exosome Sciences, Inc., or 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 neurodegenerative diseases that
involve the abnormal accumulation of tau protein in the brain. These diseases, known as tauopathies, are a family of 21 different neurological
disorders that include Alzheimer’s disease and Chronic Traumatic Encephalopathy, or CTE. Related to CTE, the ESI team was invited
to participate in a National Institutes of Health, or NIH, funded research study with The Boston University CTE Center. In the study,
ESI researchers investigated an exosomal tau biomarker, or TauSome, as a candidate to diagnose and monitor CTE in living individuals.
At the present time, CTE can only be diagnosed through post-mortem brain autopsy.
The results of the study indicated
that TauSome levels in the blood of former professional American football players, a 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,
or 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.
In September 2019, we announced
that ESI had entered into a collaboration with the Hoag Hospital Presbyterian in Newport Beach, California to identify and characterize
potential early disease markers for cancer diagnostics, cancer progression and treatment resistance. The Principal Investigator on this
study is Michael Demeure, M.D., program director of Precision Medicine at Hoag. Samples from patients at Hoag will be analyzed by ESI
scientists to identify and characterize exosomal “liquid biopsy” markers of cancer incidence and progression. We believe that
our recently announced NCI-SBIR Phase II contract to develop a benchtop instrument to isolate and characterize exosomes could substantially
expand the capabilities of the ESI programs.
U.S. GOVERNMENT CONTRACTS
We have recognized revenue
under the following three government contracts/grants over the past two years:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the
National Cancer Institute, or NCI, part of the National Institutes of Health, or NIH, awarded to us an SBIR Phase II Award Contract, for
NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma Exosomes for Diagnostics and Treatment Monitoring”,
or the Award Contract. The Award Contract amount is $1,860,561 and runs for the period from September 16, 2019 through September 15, 2021.
The work to be performed pursuant
to this Award Contract focuses on melanoma exosomes. This work follows from our completion of a phase I contract for the Topic 359 solicitation
that ran from September 2017 through June 2018. Following on the phase I work, the deliverables in the phase II program involve the design
and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.
During the fiscal year ended
March 31, 2021, we completed the milestones relevant to the first nine months of the fiscal year. As a result, we recorded $436,427 of
government contract revenue on the Phase 2 Melanoma Cancer Contract in the fiscal year ended March 31, 2021. During the three
month period ended March 31, 2021, we did not complete all of the milestones relevant to that time period, as a result, we recorded $114,849
as deferred revenue related to the Phase 2 Melanoma Cancer Contract.
Breast Cancer Grant
In the fiscal year ended March
31, 2021, we completed and submitted the final reports applicable to this NCI grant (number 1R43CA232977-01). The title of this Small
Business Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes
from the Blood Circulation,” or the Breast Cancer Grant.
This NCI Phase I grant period
originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month extension
on this grant; through August 31, 2020. The total amount of the firm grant was $298,444. The grant called for two subcontractors to work
with us. Those subcontractors were University of Pittsburgh and Massachusetts General Hospital.
During the fiscal year ended
March 31, 2021, we recorded the remaining $188,444 of revenue related to the Breast Cancer Grant, as we achieved two of the three milestones
related to the Breast Cancer Grant. We concluded in our final report to the SBIR that our pre-clinical results demonstrated that our work
under the grant provided support that the Hemopurifier has the capacity to clear exosomes from breast cancer patients. That amount previously
was recorded as deferred revenue.
As of March 31, 2021, we received
all of the funds allocated to the Breast Cancer Grant and have submitted the final reports applicable to this grant.
Subaward with University of Pittsburgh
In 2020, we entered into a cost reimbursable subaward
arrangement with the University of Pittsburgh in connection with an NIH contract entitled “Depleting Exosomes to Improve Responses
to Immune Therapy in HNNCC.” Our share of the award is $256,750. We recorded $34,233 of revenue related to this subaward in the
fiscal year ended March 31, 2021.
Research and Development Costs
A substantial portion of our
operating budget is used for research and development activities. The cost of research and development, all of which has been charged
to operations, amounted to approximately $2,072,000 and $927,000 in the fiscal years ended March 31, 2021 and 2020, respectively.
Intellectual Property
We currently own or have license
rights to a number of U.S. and foreign patents and patent applications and endeavor to continually improve our intellectual property position.
We consider the protection of our technology, whether owned or licensed, to the exclusion of use by others, to be vital to our business.
While we intend to focus primarily on patented or patentable technology, we also rely on trade secrets, unpatented property, know-how,
regulatory exclusivity, patent extensions and continuing technological innovation to develop our competitive position. We also own certain
trademarks.
Our success depends in large
part on our ability to protect our proprietary technology, including the Hemopurifier® product platform, and to operate without infringing
the proprietary rights of third parties. We rely on a combination of patent, trade secret, copyright and trademark laws, as well as confidentiality
agreements, licensing agreements and other agreements, to establish and protect our proprietary rights. Our success also depends, in part,
on our ability to avoid infringing patents issued to others. If we were judicially determined to be infringing on any third-party patent,
we could be required to pay damages, alter our products or processes, obtain licenses or cease sales of products or certain activities.
To protect our proprietary
medical technologies, including the Hemopurifier® product platform and other scientific discoveries, we have a portfolio of over 50
issued patents and pending applications worldwide. We currently have five issued U.S. patents and 35 issued patents in countries outside
of the United States. In addition, we have 11 patent applications pending worldwide related to our Hemopurifier® product platform
and other technologies. We are seeking additional patents on our scientific discoveries.
It is possible that our pending
patent applications may not result in issued patents, that we will not develop additional proprietary products that are patentable, that
any patents issued to us may not provide us with competitive advantages or will be challenged by third parties and that the patents of
others may prevent the commercialization of products incorporating our technology. Furthermore, others may independently develop similar
products, duplicate our products or design around our patents. U.S. patent applications are not immediately made public, so it is possible
that a third party may obtain a patent on a technology we are actively using.
There is a risk that any patent
applications that we file and any patents that we hold or later obtain could be challenged by third parties and declared invalid or unenforceable.
For many of our pending applications, patent interference proceedings may be instituted with the U.S. Patent and Trademark Office, or
the USPTO, when more than one person files a patent application covering the same technology, or if someone wishes to challenge the validity
of an issued patent. At the completion of the interference proceeding, the USPTO will determine which competing applicant is entitled
to the patent, or whether an issued patent is valid. Patent interference proceedings are complex, highly contested legal proceedings,
and the USPTO’s decision is subject to appeal. This means that if an interference proceeding arises with respect to any of our patent
applications, we may experience significant expenses and delays in obtaining a patent, and if the outcome of the proceeding is unfavorable
to us, the patent could be issued to a competitor rather than to us. Third parties can file post-grant proceedings in the USPTO,
seeking to have issued patent invalidated, within nine months of issuance. This means that patents undergoing post-grant proceedings may
be lost, or some or all claims may require amendment or cancellation, if the outcome of the proceedings is unfavorable to us. Post-grant
proceedings are complex and could result in a reduction or loss of patent rights. The institution of post-grant proceedings against our
patents could also result in significant expenses.
Patent law outside the United
States is uncertain and in many countries, is currently undergoing review and revisions. The laws of some countries may not protect our
proprietary rights to the same extent as the laws of the United States. Third parties may attempt to oppose the issuance of patents to
us in foreign countries by initiating opposition proceedings. Opposition proceedings against any of our patent filings in a foreign country
could have an adverse effect on our corresponding patents that are issued or pending in the United States. It may be necessary or useful
for us to participate in proceedings to determine the validity of our patents or our competitors’ patents that have been issued
in countries other than the United States. This could result in substantial costs, divert our efforts and attention from other aspects
of our business, and could have a material adverse effect on our results of operations and financial condition. Outside of the United
States, we currently have pending patent applications or issued patents in Europe, India, Russia, Canada and Hong Kong.
In addition to patent protection,
we rely on unpatented trade secrets and proprietary technological expertise. It is possible that others could independently develop or
otherwise acquire substantially equivalent technology, somehow gain access to our trade secrets and proprietary technological expertise
or disclose such trade secrets, or that we may not successfully ultimately protect our rights to such unpatented trade secrets and proprietary
technological expertise. We rely, in part, on confidentiality agreements with our marketing partners, employees, advisors, vendors and
consultants to protect our trade secrets and proprietary technological expertise. We cannot assure you that these agreements will not
be breached, that we will have adequate remedies for any breach or that our unpatented trade secrets and proprietary technological expertise
will not otherwise become known or be independently discovered by competitors.
Patents
The following table lists our issued patents and
patent applications, including their ownership status:
Patents Issued in the United States
PATENT #
|
PATENT NAME
|
ISSUANCE
DATE
|
OWNED OR
LICENSED
|
EXPIRATION
DATE
|
9,707,333
|
Extracorporeal removal of microvesicular particles
|
7/18/17
|
Owned
|
1/6/29
|
9,364,601
|
Extracorporeal removal of microvesicular particles
|
6/14/16
|
Owned
|
10/2/29
|
8,288,172
|
Extracorporeal removal of microvesicular particles
|
10/16/12
|
Owned
|
3/30/29
|
7,226,429
|
Method for removal of viruses from blood by lectin affinity hemodialysis
|
6/5/07
|
Owned
|
1/20/24
|
10,022,483
|
Method for removal of viruses from blood by lectin affinity hemodialysis
|
7/17/18
|
Owned
|
1/20/24
|
Patent Applications Pending in the United States
APPLICATION #
|
APPLICATION NAME
|
FILING
DATE
|
OWNED OR
LICENSED
|
16/415,713
|
Affinity capture of circulating biomarkers
|
5/17/19
|
Owned
|
16/506,864
|
Brain specific exosome based diagnostics and extracorporeal therapies
|
7/09/19
|
Owned
|
17/301,666
|
Method for removal of viruses from blood by lectin affinity hemodialysis
|
4/09/21
|
Owned
|
16/459,220
|
Methods and compositions for quantifying exosomes
|
7/01/19
|
Owned
|
16/883,624
|
Plasma exosomal tau as a biomarker for chronic traumatic encephalopathy
|
5/26/20
|
Owned
|
Foreign Patents
PATENT #
|
PATENT NAME
|
ISSUANCE
DATE
|
OWNED OR
LICENSED
|
EXPIRATION
DATE
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Denmark)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (France)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Germany)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Ireland)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Great Britain)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Sweden)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Netherlands)
|
5/16/18
|
Owned
|
9/12/36
|
3110977
|
Brain specific exosome based diagnostics and extracorporeal therapies (Switzerland)
|
5/16/18
|
Owned
|
9/12/36
|
2353399
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Russia)
|
4/27/09
|
Owned
|
1/20/24
|
1624785
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Belgium)
|
7/17/13
|
Owned
|
1/20/24
|
1624785
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Ireland)
|
7/17/13
|
Owned
|
1/20/24
|
1624785
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Italy)
|
7/17/13
|
Owned
|
1/20/24
|
1624785
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Great Britain)
|
7/17/13
|
Owned
|
1/20/24
|
1624785
|
Method for removal of viruses from blood by lectin affinity hemodialysis (France)
|
7/17/13
|
Owned
|
1/20/24
|
1624785
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Germany)
|
7/17/13
|
Owned
|
1/20/24
|
2516403
|
Method for removal of viruses from blood by lectin affinity hemodialysis (Canada)
|
8/12/14
|
Owned
|
1/20/24
|
2591359
|
Methods for quantifying exosomes (Germany)
|
3/01/17
|
Owned
|
7/07/31
|
2591359
|
Methods for quantifying exosomes (France)
|
3/01/17
|
Owned
|
7/07/31
|
2591359
|
Methods for quantifying exosomes (Great Britain)
|
3/01/17
|
Owned
|
7/07/31
|
2591359
|
Methods for quantifying exosomes (Spain)
|
3/01/17
|
Owned
|
7/07/31
|
2644855
|
Extracorporeal removal of microvesicular particles (Canada)
|
11/19/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Germany)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Switzerland)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Spain)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (France)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Great Britain)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Italy)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Netherlands)
|
4/24/19
|
Owned
|
1/20/24
|
1993600
|
Extracorporeal removal of microvesicular particles (Sweden)
|
4/24/19
|
Owned
|
1/20/24
|
1126138
|
Extracorporeal removal of microvesicular particles (Hong Kong)
|
6/19/20
|
Owned
|
1/20/24
|
3517151
|
Extracorporeal removal of microvesicular particles (Europe – not yet validated)
|
4/21/21
|
Owned
|
1/20/24
|
3366784
|
Brain specific exosome based diagnostics and extracorporeal therapies (Great Britain)
|
11/13/19
|
Owned
|
9/12/36
|
3366784
|
Brain specific exosome based diagnostics and extracorporeal therapies (France)
|
11/13/19
|
Owned
|
9/12/36
|
3366784
|
Brain specific exosome based diagnostics and extracorporeal therapies (Germany)
|
11/13/19
|
Owned
|
9/12/36
|
3366784
|
Brain specific exosome based diagnostics and extracorporeal therapies (Netherlands)
|
11/13/19
|
Owned
|
9/12/36
|
Foreign Patent Applications
APPLICATION #
|
APPLICATION
NAME
|
FILING DATE
|
OWNED OR LICENSED
|
DE 112016001400.7
|
Methods of delivering regional citrate anticoagulation (RCA) during extracorporeal blood treatments
|
10/23/17
|
Owned
|
8139/DELNP/2008
|
Extracorporeal removal of microvesicular particles (exosomes) (India)
|
3/9/07
|
Owned
|
3061952
|
Extracorporeal removal of microvesicular particles (Canada)
|
11/18/19
|
Owned
|
2939652
|
Brain specific exosome based diagnostics and extracorporeal therapies (Canada)
|
8/12/06
|
Owned
|
16867003.2
|
Plasma exosomal tau as a biomarker for chronic traumatic encephalopathy
|
11/16/16
|
Owned
|
International Patent Applications
APPLICATION #
|
APPLICATION NAME
|
FILING
DATE
|
OWNED OR
LICENSED
|
PCT/US2021/
026377
|
Devices and methods for treating a coronavirus infection and symptoms thereof
|
4/08/21
|
Owned
|
Licensing and Assignment Agreements
On November 7, 2006, we executed
an assignment agreement with the London Health Science Center Research, Inc. under which an invention and related patent rights for a
method to treat cancer were assigned to us. The invention provides for the "Extracorporeal removal of microvesicular particles"
for which the U.S. Patent and Trademark Office granted a patent (Patent No.8,288,172) in the U.S. as of October 2012. The agreement provided
for an upfront payment of 53 shares of unregistered common stock and a 2% royalty on any future net sales of all products or services,
the sale of which would infringe in the absence of the assignment granted under this agreement. We are also responsible for paying certain
patent application and filing costs. Under the assignment agreement, we own the patents until their respective expirations. Under certain
circumstances, ownership of the patents may revert to the London Health Science Center Research, Inc. if there is an uncured substantial
breach of the assignment agreement.
Industry & Competition
The industry for treating
infectious disease and cancer is extremely competitive, and companies developing new treatment procedures face significant capital and
regulatory challenges. As our Hemopurifier is a clinical-stage device, we have the additional challenge of establishing medical industry
support, which will be driven by treatment data resulting from human clinical studies. Should our device become market cleared by FDA
or the regulatory body of another country, we may face significant competition from well-funded pharmaceutical organizations. Additionally,
we would likely need to establish large-scale production of our device in order to be competitive. We believe that our Hemopurifier is
a first-in-class therapeutic candidate and we are not aware of any affinity hemofiltration device being market cleared in any country
for the single-use removal of circulating viruses or tumor-derived exosomes.
Government Regulation
The Hemopurifier is subject
to regulation by numerous regulatory bodies, primarily the FDA, and comparable international regulatory agencies. These agencies require
manufacturers of medical devices to comply with applicable laws and regulations governing the development, testing, manufacturing, labeling,
marketing, storage, distribution, advertising and promotion, and post-marketing surveillance reporting of medical devices. As the primary
mode of action of the Hemopurifier is attributable to the device component of this combination product, the FDA’s Center for Devices
and Radiological Health, or the CDRH, has primary jurisdiction over its premarket development, review and approval. Failure to comply
with applicable requirements may subject a device and/or its manufacturer to a variety of administrative sanctions, such as issuance of
warning letters, import detentions, civil monetary penalties and/or judicial sanctions, such as product seizures, injunctions and criminal
prosecution.
FDA’s Pre-market Clearance and Approval
Requirements
Each medical device we seek
to commercially distribute in the United States will require either a prior 510(k) clearance, unless it is exempt, or a pre-market approval
from the FDA. Generally, if a new device has a predicate that is already on the market under a 510(k) clearance, the FDA will allow that
new device to be marketed under a 510(k) clearance; otherwise, a premarket approval, or PMA, is required. Medical devices are classified
into one of three classes—Class I, Class II or Class III—depending on the degree of risk associated with each
medical device and the extent of control needed to provide reasonable assurance of safety and effectiveness. Class I devices are
deemed to be low risk and are subject to the general controls of the Federal Food, Drug and Cosmetic Act, such as provisions that relate
to: adulteration; misbranding; registration and listing; notification, including repair, replacement, or refund; records and reports;
and good manufacturing practices. Most Class I devices are classified as exempt from pre-market notification under section 510(k)
of the FD&C Act, and therefore may be commercially distributed without obtaining 510(k) clearance from the FDA. Class II devices
are subject to both general controls and special controls to provide reasonable assurance of safety and effectiveness. Special controls
include performance standards, post market surveillance, patient registries and guidance documents. A manufacturer may be required to
submit to the FDA a pre-market notification requesting permission to commercially distribute some Class II devices. Devices deemed
by the FDA to pose the greatest risk, such as life-sustaining, life-supporting or implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are placed in Class III. A Class III device cannot be marketed in the United
States unless the FDA approves the device after submission of a PMA. However, there are some Class III devices for which FDA has
not yet called for a PMA. For these devices, the manufacturer must submit a pre-market notification and obtain 510(k) clearance in orders
to commercially distribute these devices. The FDA can also impose sales, marketing or other restrictions on devices in order to assure
that they are used in a safe and effective manner. We believe that the Hemopurifier will be classified as a Class III device and as such
will be subject to PMA submission and approval.
Pre-market Approval Pathway
A pre-market approval application
must be submitted to the FDA for Class III devices for which the FDA has required a PMA. The pre-market approval application process
is much more demanding than the 510(k) pre-market notification process. A pre-market approval application must be supported by extensive
data, including but not limited to technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s
satisfaction reasonable evidence of safety and effectiveness of the device.
After a pre-market approval
application is submitted, the FDA has 45 days to determine whether the application is sufficiently complete to permit a substantive review
and thus whether the FDA will file the application for review. The FDA has 180 days to review a filed pre-market approval application,
although the review of an application generally occurs over a significantly longer period of time and can take up to several years. During
this review period, the FDA may request additional information or clarification of the information already provided. Also, an advisory
panel of experts from outside the FDA may be convened to review and evaluate the application and provide recommendations to the FDA as
to the approvability of the device.
Although the FDA is not bound
by the advisory panel decision, the panel’s recommendations are important to the FDA’s overall decision making process. In
addition, the FDA may conduct a preapproval inspection of the manufacturing facility to ensure compliance with the Quality System Regulation,
or QSR. The agency also may inspect one or more clinical sites to assure compliance with FDA’s regulations.
Upon completion of the PMA
review, the FDA may: (i) approve the PMA which authorizes commercial marketing with specific prescribing information for one or more
indications, which can be more limited than those originally sought; (ii) issue an approvable letter which indicates the FDA’s
belief that the PMA is approvable and states what additional information the FDA requires, or the post-approval commitments that must
be agreed to prior to approval; (iii) issue a not approvable letter which outlines steps required for approval, but which are typically
more onerous than those in an approvable letter, and may require additional clinical trials that are often expensive and time consuming
and can delay approval for months or even years; or (iv) deny the application. If the FDA issues an approvable or not approvable
letter, the applicant has 180 days to respond, after which the FDA’s review clock is reset.
Emergency Use Authorizations,
or EUAs, are granted by FDA in public health emergencies but allow use of the authorized device only during the period of the respective
public health emergency, and do not change the requirement to ultimately seek PMA approval after the authorization period has ended.
Clinical Trials
Clinical trials are almost
always required to support pre-market approval and are sometimes required for 510(k) clearance. In the United States, for significant
risk devices, these trials require submission of an application for an IDE to the FDA. The IDE application must be supported by appropriate
data, such as animal and laboratory testing results, showing it is safe to test the device in humans and that the testing protocol is
scientifically sound. The IDE must be approved in advance by the FDA for a specific number of patients at specified study sites. During
the trial, the sponsor must comply with the FDA’s IDE requirements for investigator selection, trial monitoring, reporting and recordkeeping.
The investigators must obtain patient informed consent, rigorously follow the investigational plan and study protocol, control the disposition
of investigational devices and comply with all reporting and recordkeeping requirements. Clinical trials for significant risk devices
may not begin until the IDE application is approved by the FDA and the appropriate institutional review boards, or IRBs, at the clinical
trial sites. An IRB is an appropriately constituted group that has been formally designated to review and monitor medical research involving
subjects and which has the authority to approve, require modifications in, or disapprove research to protect the rights, safety and welfare
of human research subjects. The FDA or the IRB at each site at which a clinical trial is being performed may withdraw approval of a clinical
trial at any time for various reasons, including a belief that the risks to study subjects outweigh the benefits or a failure to comply
with FDA or IRB requirements. Even if a trial is completed, the results of clinical testing may not demonstrate the safety and effectiveness
of the device, may be equivocal or may otherwise not be sufficient to obtain approval or clearance of the product.
Ongoing Regulation by the FDA
Even after a device receives clearance or approval
and is placed on the market, numerous regulatory requirements apply. These include:
|
·
|
establishment registration and device listing;
|
|
·
|
the QSR, which requires manufacturers, including third-party manufacturers, to follow stringent design, testing, control, documentation and other quality assurance procedures during all aspects of the manufacturing process;
|
|
·
|
labeling regulations and the FDA prohibitions against the promotion of products for uncleared, unapproved or “off-label” uses and other requirements related to promotional activities;
|
|
·
|
medical device reporting regulations, which require that manufactures report to the FDA if their device may have caused or contributed to a death or serious injury, or if their device malfunctioned and the device or a similar device marketed by the manufacturer would be likely to cause or contribute to a death or serious injury if the malfunction were to recur;
|
|
·
|
corrections and removal reporting regulations, which require that manufactures report to the FDA field corrections or removals if undertaken to reduce a risk to health posed by a device or to remedy a violation of the FDCA that may present a risk to health; and
|
|
·
|
post market surveillance regulations, which apply to certain Class II or III devices when necessary to protect the public health or to provide additional safety and effectiveness data for the device.
|
Some changes to an approved
PMA device, including changes in indications, labeling or manufacturing processes or facilities, require submission and FDA approval of
a new PMA or PMA supplement, as appropriate, before the change can be implemented. Supplements to a PMA often require the submission of
the same type of information required for an original PMA, except that the supplement is generally limited to that information needed
to support the proposed change from the device covered by the original PMA. The FDA uses the same procedures and actions in reviewing
PMA supplements as it does in reviewing original PMAs.
Failure by us or by our suppliers
to comply with applicable regulatory requirements can result in enforcement action by the FDA or state authorities, which may include
any of the following sanctions:
|
·
|
warning or untitled letters, fines, injunctions, consent decrees and civil penalties;
|
|
·
|
customer notifications, voluntary or mandatory recall or seizure of our products;
|
|
·
|
operating restrictions, partial suspension or total shutdown of production;
|
|
·
|
delay in processing submissions or applications for new products or modifications to existing products;
|
|
·
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withdrawing approvals that have already been granted; and
|
The Medical Device Reporting
laws and regulations require us to provide information to the FDA when we receive or otherwise become aware of information that reasonably
suggests our device may have caused or contributed to a death or serious injury as well as a device malfunction that likely would cause
or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being
marketed for off-label use. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label
uses, and a company that is found to have improperly promoted off-label uses may be subject to significant liability, including substantial
monetary penalties and criminal prosecution.
Newly discovered or developed
safety or effectiveness data may require changes to a product’s labeling, including the addition of new warnings and contraindications,
and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting
from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory clearance or
approval of our products under development.
Healthcare Regulation
In addition to the FDA’s
restrictions on marketing of pharmaceutical products, the U.S. healthcare laws and regulations that may affect our ability to operate
include: the federal fraud and abuse laws, including the federal anti-kickback and false claims laws; federal data privacy and security
laws; and federal transparency laws related to payments and/or other transfers of value made to physicians (defined to include doctors,
dentists, optometrists, podiatrists and chiropractors) and other healthcare professionals (beginning January 1, 2022) and teaching hospitals.
Many states have similar laws and regulations that may differ from each other and federal law in significant ways, thus complicating compliance
efforts. For example, states have anti-kickback and false claims laws that may be broader in scope than analogous federal laws and may
apply regardless of payor. In addition, state data privacy laws that protect the security of health information may differ from each other
and may not be preempted by federal law. Moreover, several states have enacted legislation requiring pharmaceutical manufacturers to,
among other things, establish marketing compliance programs, file periodic reports with the state, make periodic public disclosures on
sales and marketing activities, report information related to drug pricing, require the registration of sales representatives, and prohibit
certain other sales and marketing practices. These laws may adversely affect our sales, marketing and other activities with respect to
any product candidate for which we receive approval to market in the United States by imposing administrative and compliance burdens on
us.
Because of the breadth of
these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business
activities, particularly any sales and marketing activities after a product candidate has been approved for marketing in the United States,
could be subject to legal challenge and enforcement actions. If our operations are found to be in violation of any of the federal and
state laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal, and
administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare
programs, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to
resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely
affect our ability to operate our business and our results of operations.
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. 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 and imposed an annual excise tax of 2.3% on any entity that manufactures or imports
medical devices offered for sale in the United States, with limited exceptions. However, the 2020 federal spending package permanently
eliminated, effective January 1, 2020, this PPACA-mandated medical device tax. On December 14, 2018, a Texas U.S. District Court Judge
ruled that the PPACA is unconstitutional in its entirety because the “individual mandate” was repealed by Congress as part
of the legislation enacted in 2017, informally titled the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S.
Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the
case back to the District Court to determine whether the remaining provisions of the PPACA are invalid as well. The U.S. Supreme Court
is currently reviewing the case, although it is unclear when a decision will be made or how the Supreme Court will rule. In addition,
the Budget Control Act of 2011, as amended by subsequent legislation, further reduces Medicare’s payments to providers by two percent
through fiscal year 2030. However, COVID-19 relief legislation suspended the two percent Medicare sequester from May 1, 2020 through December
31, 2021. 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. It is possible that additional governmental
action will be taken to address the COVID-19 pandemic.
Coverage and Reimbursement
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 Hemopurifier or any other products under development be approved for commercialization by the FDA, any such products may not be considered
cost-effective, reimbursement may not be available in the U.S. or other countries, if approved, and reimbursement may not 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. If approved for use in the U.S., we expect that any products
that we develop, including the Hemopurifier, 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 reimbursement from CMS is lengthy and
expensive. Further, Medicare coverage is based on our ability to demonstrate that 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. Many private payors use coverage decisions
and payment amounts determined by CMS as guidelines in setting their coverage and reimbursement policies and amounts. However, no uniform
policy for coverage and reimbursement for medical devices exists among third-party payors in the United States. Therefore, coverage and
reimbursement can differ significantly from payor to payor.
Manufacturing
Manufacturing of our Hemopurifier
occurs in collaboration with two contract manufacturers based in California under Good Manufacturing Practice, or GMP, regulations promulgated
by the FDA. Our contract manufacturers are registered with the FDA. To date, our manufacture of the Hemopurifier has been limited
to quantities necessary to support our clinical studies.
Our costs of compliance with federal, state and
local environmental laws have been immaterial to date.
Sources and Availability of Raw Materials and the Names
of Principal Suppliers
Our Hemopurifiers are currently
assembled by Aethlon personnel in a GMP manufacturing facility provided by Life Science Outsourcing, Inc, or LSO. In the future, we plan
to bring our manufacturing operations in-house. Aethlon personnel assemble the various components of the Hemopurifier with materials from
our various suppliers, which are purchased and released by Aethlon and stored at LSO prior to use in manufacturing. Specifically, the
Hemopurifier contains three critical components with limited available suppliers. The base cartridge on which the Hemopurifier is constructed
is sourced from Medica S.p.A and we are dependent on the continued availability of these cartridges. Although there are other suppliers,
the process of qualifying a new supplier takes time and regulatory approvals must be obtained. We currently purchase the diatomaceous
earth from Janus Scientific, Inc., as the distributor; however, the product is manufactured by Imerys Minerals Ltd. There potentially
are other suppliers of this product, but as with the cartridges, qualifying and obtaining required regulatory approvals takes time and
resources. The GNA lectin is sourced from Vector Laboratories Inc. and also is available from other suppliers; however, Sigma Aldrich
is the only approved back up supplier at this time. A business interruption at any of these sources could have a material impact on our
ability to manufacture the Hemopurifier.
Sales and Marketing
We do not currently have any
sales and marketing capability. With respect to commercialization efforts in the future, we intend to build or contract for distribution,
sales and marketing capabilities for any product candidate that is approved. From time to time, we have had and are having strategic discussions
with potential collaboration partners for our product candidates, although no assurance can be given that we will be able to enter into
one or more collaboration agreements for our product candidates on acceptable terms, if at all.
Product Liability
The risk of product liability
claims, product recalls and associated adverse publicity is inherent in the testing, manufacturing, marketing and sale of medical products.
We have limited clinical trial liability insurance coverage. It is possible that future insurance coverage may not be adequate or available.
We may not be able to secure product liability insurance coverage on acceptable terms or at reasonable costs when needed. Any liability
for mandatory damages could exceed the amount of our coverage. A successful product liability claim against us could require us to pay
a substantial monetary award. Moreover, a product recall could generate substantial negative publicity about our products and business
and inhibit or prevent commercialization of other future product candidates.
Employees
We have ten full-time employees.
All of our employees are located in the United States. We do intend to hire additional employees. We utilize, whenever appropriate, consultants
in order to conserve cash and resources.
We believe our employee relations
are good. None of our employees are represented by a labor union or are subject to collective-bargaining agreements.
ITEM 1A. RISK FACTORS
An investment in our securities
involves a high degree of risk. You should carefully consider the risks described below as well as the other information in this Annual
Report before deciding to invest in or maintain your investment in our company. The risks described below are not intended to be an all-inclusive
list of all of the potential risks relating to an investment in our securities. Any of the risk factors described below could significantly
and adversely affect our business, prospects, financial condition and results of operations. Additional risks and uncertainties not currently
known or that are currently considered to be immaterial may also materially and adversely affect our business. As a result, the trading
price or value of our securities could be materially adversely affected and you may lose all or part of your investment.
Risks Relating to Our Financial Position and Need for Additional
Capital
We have incurred significant losses and expect to continue to
incur losses for the foreseeable future.
We have never been profitable.
We have generated revenues during the fiscal years ended March 31, 2021 and March 31, 2020, in the amounts of $659,104, and $650,187,
respectively, primarily from our contracts with the NIH. Our revenues, from research grants, continue to be insufficient to cover our
cost of operations. It is possible that we may not be able to enter into future government contracts beyond our current contract with
the NIH. 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 may not be able to successfully
commercialize the Hemopurifier or any other products, and even if commercialization is successful, we may never be profitable.
We will require additional financing to sustain our operations.
We will require significant
additional financing for our operations and for expected additional future clinical trials in the U.S., as well as to fund all of our
continued research and development activities for the Hemopurifier and other future products. In addition, as we expand our activities,
our overhead costs to support personnel, laboratory materials and infrastructure will increase. If the financing we may require to sustain
our working capital needs is unavailable to us on reasonable terms, or at all, we may be unable to support our research and FDA development
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 or continue our business.
We also will need to raise additional funds
through debt or equity financings to achieve our business objectives and to satisfy our cash obligations, which may 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 potential 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 could 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.
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. We believe that because the field of exosome research is burgeoning, multiple competitors are or
will be developing competing technologies to address exosomes in cancer. Progress is constant in the treatment and prevention of viral
diseases, so the opportunities for the Hemopurifier may be reduced there as well. Diagnostic technology may be developed that can supplant
diagnostics we are developing for neurodegenerative diseases and cancer. Our commercial opportunities will be reduced or eliminated if
our competitors develop and market products for any of the diseases we target that:
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have fewer or less severe adverse side effects;
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are more adaptable to various modes of dosing;
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are easier to administer; or
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are less expensive than the products or product candidates we are developing.
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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 any 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. It is possible that manufacturing and control problems will arise as we attempt
to commercialize our products and that manufacturing may not be completed in a timely manner or at a commercially reasonable cost. In
addition, we may not 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 if they obtain regulatory clearances, we may never generate
revenue from product sales and we may never be profitable.
Our Hemopurifier technology may become obsolete.
Our Hemopurifier product may
be made unmarketable prior to commercialization by us by new scientific or technological developments by others with new treatment modalities
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. Our products may not remain
competitive with products based on new technologies.
Our success is dependent in part on our
executive officers.
Our success depends to a critical
extent on the continued services of our Chief Executive Officer, Charles J. Fisher, Jr., M.D., our Chief Financial Officer, James B. Frakes,
our Chief Medical Officer, Steven LaRosa, M.D., and our Chief Business Officer, Guy Cipriani. If any 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 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.
Our inability to attract and retain qualified
personnel could impede our ability to achieve our business objectives.
We have ten full-time employees,
consisting of our Chief Executive Officer, our Chief Financial Officer, a Chief Medical Officer, a Chief Business Officer, a Vice President,
Manufacturing and Product Development, a Vice President, Clinical Operations, a Project Manager, and three research scientists. 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 may not be able to engage the services of 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 expand our operations, which
may strain our resources; our inability to manage our growth could delay or derail implementation of our business objectives.
We will need to significantly
expand our operations to implement our longer-term business plan and growth strategies. We will also be required to manage multiple relationships
with various strategic partners, technology licensors, customers, manufacturers and suppliers, consultants and other third parties. This
expansion and these expanded relationships will require us to significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between our various corporate functions; and to manage, train,
motivate and maintain a growing employee base. The time and costs to effectuate these steps may place a significant strain on our management
personnel, systems and resources, particularly given the limited amount of financial resources and skilled employees that may be available
at the time. We cannot assure you that we will institute, in a timely manner or at all, the improvements to our managerial, operational
and financial systems, procedures and controls necessary to support our anticipated increased levels of operations and to coordinate our
various corporate functions, or that we will be able to properly manage, train, motivate and retain our anticipated increased employee
base. If we cannot manage our growth initiatives, we will be unable to commercialize our products on a large-scale in a timely manner,
if at all, and our business could fail.
As a public company with limited financial resources undertaking
the launch of new medical technologies, we may have difficulty attracting and retaining executive management and directors.
The directors and management
of publicly traded corporations are increasingly concerned with the extent of their personal exposure to lawsuits and stockholder claims,
as well as governmental and creditor claims which may be made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and directors. Due to these perceived risks, directors and management
are also becoming increasingly concerned with the availability of directors’ and officers’ liability insurance to pay on a
timely basis the costs incurred in defending such claims. While we currently carry directors’ and officers’ liability insurance,
such insurance is expensive and difficult to obtain. If we are unable to continue or provide directors’ and officers’ liability
insurance at affordable rates or at all, it may become increasingly more difficult to attract and retain qualified outside directors to
serve on our Board of Directors. We may lose potential independent board members and management candidates to other companies in the biotechnology
field that have greater directors’ and officers’ liability insurance to insure them from liability or to biotechnology companies
that have revenues or have received greater funding to date which can offer greater compensation packages. The fees of directors are also
rising in response to their increased duties, obligations and liabilities. In addition, our products could potentially be harmful to users,
and we are exposed to claims of product liability including for injury or death. We have limited insurance and may not be able to afford
robust coverage even as our products are introduced into the market. As a company with limited resources and potential exposures to management,
we will have a more difficult time attracting and retaining management and outside independent directors than a more established public
or private company due to these enhanced duties, obligations and potential liabilities.
If we fail to comply with extensive regulations
of U.S. and foreign regulatory agencies, the commercialization of our products could be delayed or prevented entirely.
Our Hemopurifier product is
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 Hemopurifier has not received required regulatory approval
from the FDA, or any foreign regulatory agencies, to be commercially marketed and sold. The process of obtaining and complying with FDA
and other governmental regulatory approvals and regulations in the U.S. and in foreign countries is costly, time consuming, uncertain
and subject to unanticipated delays. Obtaining such regulatory approvals, if any, can take several years. Despite the time and expense
exerted, regulatory approval is never guaranteed. We also are subject to the following risks and obligations, among others:
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the FDA may refuse to approve an application if it believes that applicable regulatory criteria are not satisfied;
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the FDA may require additional testing for safety and effectiveness;
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the FDA may interpret data from pre-clinical testing and clinical trials in different ways than we interpret them;
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if regulatory approval of a product is granted, the approval may be limited to specific indications or limited with respect to its distribution; and
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the FDA may change its approval policies and/or adopt new regulations.
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Failure to comply with these
or other regulatory requirements of the FDA may subject us to administrative or judicially imposed sanctions, including:
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product seizure or detention;
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total or partial suspension of productions.
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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, including our ongoing Early Feasibility trial in 10 to 12 patients in head
and neck cancer and our study in Covid-19 patients, obtain satisfactory results, obtain required regulatory approvals and successfully
commercialize our Hemopurifier product candidate. Completion of our clinical trials, announcement of results of the trials and our ability
to obtain regulatory approvals could be delayed for a variety of reasons, including:
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slow patient enrollment;
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serious adverse events related to our medical device candidates;
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unsatisfactory results of any clinical trial;
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the failure of our principal third-party investigators to perform our clinical trials on our anticipated schedules;
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different interpretations of our pre-clinical and clinical data, which could initially lead to inconclusive results; and
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delays resulting from the coronavirus pandemic.
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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:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
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unanticipated expenditures to address or defend such actions;
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customer notifications or repair, replacement, refunds, recall, detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown of production;
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refusing or delaying our requests for 510(k) clearance or premarket approval of new products or modified products;
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withdrawing 510(k) clearances or premarket approvals that have already been granted;
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refusal to grant export approval for our products; or
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criminal prosecution.
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Moreover, the FDA strictly
regulates the promotional claims that may be made about approved products. In particular, a product may not be promoted for uses that
are not approved by the FDA as reflected in the product’s approved labeling. However, companies may share truthful and not misleading
information that is otherwise consistent with a product’s FDA approved labeling. The FDA and other agencies actively enforce the
laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses
may be subject to significant civil, criminal and administrative penalties. The COVID-19 pandemic could also potentially affect the business
of the FDA and comparable authorities in other countries, which could result in delays in meetings related to planned clinical trials
and ultimately of reviews and approvals of our product candidates.
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.
Delays, interruptions or the cessation of
production by our third-party suppliers of important materials or delays in qualifying new materials, may prevent or delay our ability
to manufacture or process our Hemopurifier.
Most
of the raw materials used in the process for manufacturing our Hemopurifier are available from more than one supplier. However, there
are materials within the manufacturing and production process that come from single suppliers. We do not have written contracts with all
of our single source suppliers, and at any time they could stop supplying our orders. FDA review of a new supplier may be required if
these materials become unavailable from our current suppliers. Although there may be other suppliers that have equivalent materials that
would be available to us, FDA review of any alternate suppliers, if required, could take several months or more to obtain, if able to
be obtained at all. Any delay, interruption or cessation of production by our third-party suppliers of important materials, or any delay
in qualifying new materials, if necessary, would prevent or delay our ability to manufacture our Hemopurifiers. In addition, an uncorrected
impurity, a supplier’s variation in a raw material or testing, either unknown to us or incompatible with its manufacturing process,
or any other problem with our materials, testing or components, would prevent or delay the release of our Hemopurifiers for use in our
clinical trials.
For example, in late 2020,
we identified during our device quality review procedures prior to product release that one of our critical suppliers had produced a Hemopurifier
component that was not produced to our specifications. Although no affected Hemopurifiers were released to us or to any trial sites, we
are working to resolve the issue, and concurrently are working to identify alternative suppliers for this component. We believe that our
current Hemopurifier inventory is sufficient for the conduct of our current ongoing clinical trials, but it is possible that the need
for our Hemopurifiers could increase or the resolution of the issue with one of our current suppliers and identification of an alternative
supplier could take longer than expected. Although we intend to procure alternative supply sources for our component and our current supplier
intends to correct their issue, we can provide no assurance that we will do so in a timely manner. Any such delays could limit our ability
to meet demand for the Hemopurifier and delay our ongoing clinical trials, which would have a material adverse impact on our business,
results of operations and financial condition.
Difficulties in manufacturing our Hemopurifier
could have an adverse effect upon our expenses and our product revenues.
We currently outsource most
of the manufacturing of our Hemopurifier. The manufacturing of our Hemopurifier is difficult and complex. To support our current clinical
trial needs, we comply with and intend to continue to comply with cGMP in the manufacture of our product. Our ability to adequately manufacture
and supply our Hemopurifier in a timely matter is dependent on the uninterrupted and efficient operation of our facilities and those of
third-parties producing raw materials and supplies upon which we rely in our manufacturing. The manufacture of our products may be impacted
by:
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availability or contamination of raw materials
and components used in the manufacturing process, particularly those for which we have no other source or supplier;
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our ability to comply with new regulatory requirements,
including our ability to comply with cGMP;
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inclement weather and natural disasters;
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changes in forecasts of future demand for product
components;
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potential facility contamination by microorganisms
or viruses;
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updating of manufacturing specifications;
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product quality success rates and yields; and
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global viruses and pandemics, including the current
COVID-19 pandemic.
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If efficient manufacture and
supply of our Hemopurifier is interrupted, we may experience delayed shipments or supply constraints. If we are at any time unable to
provide an uninterrupted supply of our products for our clinical trials, our ongoing clinical trials may be delayed, which could materially
and adversely affect our business, results of operations and financial conditions.
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.
We outsource many 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 rely on third-party consultants
or other vendors to manage and implement the much of the day-to-day conduct of conducting clinical trials and manufacturing our current
product candidates. Accordingly, we are and will continue to be dependent on the timeliness and effectiveness of the efforts of these
third parties. Our dependence on third parties includes key suppliers and third-party service providers supporting the development, manufacture
and regulatory approval of our Hemopurifier, 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 Hemopurifier are conducted
by our management team, but all other activities are the responsibility of third-party vendors. It is possible that the current COVID-19
epidemic might constrain the ability of needed third-party vendors to provide services that we require.
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 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 successfully develop, market and sell our Hemopurifier product candidate or any
future product candidates under development 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 would 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 Hemopurifier 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 Hemopurifier product candidate
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 Hemopurifier product candidate 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 these providers fail to perform adequately, our development of product candidates may be
delayed and any delay in the development of our product candidates would have a material and adverse effect on our business prospects.
We are and will be exposed to product liability risks, and clinical
and preclinical liability risks, which could place a substantial financial burden upon us should we be sued.
Our business exposes us to
potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of medical devices.
Claims may 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 may not be able to continue to obtain or maintain adequate product
liability insurance on acceptable terms, if at all, and such insurance may not 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 product candidate
may be used in connection with medical procedures in which it is important that those products function with precision and accuracy. If
our product candidates, including our Hemopurifier, 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. However, our insurance coverage may not 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 a PMA or 510(k) clearance from the FDA, unless an exemption applies. A PMA submission,
which is a higher standard than a 510(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, including the Hemopurifier, will require a PMA. The FDA approval
process involves, among other things, successfully completing clinical trials and filing for and obtaining a PMA. The PMA process requires
us to prove the safety and effectiveness of our products to the FDA’s satisfaction. This process, which includes preclinical studies
and clinical trials, can take many years and requires the expenditure of substantial resources and may include post-marketing surveillance
to establish the safety and efficacy of the product. Notwithstanding the effort and expense incurred, the process may never result in
the FDA granting a PMA. Data obtained from preclinical studies and clinical trials are subject to varying interpretations that could delay,
limit or prevent regulatory approval. Delays or rejections may also be encountered based upon changes in governmental policies for medical
devices during the period of product development. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
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our inability to demonstrate safety or effectiveness of the Hemopurifier or any other product we develop to the FDA’s satisfaction;
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insufficient data from our preclinical studies and clinical trials, including for our Hemopurifier, to support approval;
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failure of the facilities of our third-party manufacturer or suppliers to meet applicable requirements;
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inadequate compliance with preclinical, clinical or other regulations;
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our failure to meet the FDA’s statistical requirements for approval; and
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changes in the FDA’s approval policies, or the adoption of new regulations that require additional data or additional clinical studies.
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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 more uncertain than the 510(k) clearance process and generally takes from one to three
years, or even longer, from the time the application is submitted to the FDA until an approval is obtained. Any of our products considered
to be a class III device, which are considered to pose the greatest risk and the approval of which is governed by the strictest guidelines,
will require the submission and approval of a PMA in order for us to market it in the U.S. We also may design new products in the future
that could require the clearance of a 510(k).
Although we have received
approval to proceed with clinical trials of the Hemopurifier in the U.S. under the investigational device exemption, the current approval
from the FDA to proceed could be revoked, the study could be unsuccessful, or the FDA PMA approval may not be obtained or could be 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 and pandemics are still evolving, and any products we develop for such uses may not 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. For example, the Hemopurifier is an investigational
device that has not yet received FDA approval for any indication. We continue to investigate the potential for the use of the Hemopurifier
in viral diseases under an open IDE and our FDA Breakthrough Designation for “…the treatment of life-threatening glycosylated
viruses that are not addressed with an approved therapy.” We currently have an open FDA approved Expanded Access Protocol for the
treatment of Ebola infected patients in the U.S. and a corresponding HealthCanada approval in Canada. Based on our studies to date, the
Hemopurifier can potentially clear many viruses that are pathogenic in humans, including HCV, HIV and Ebola. We do have preclinical data
suggesting that it could clear a closely related coronavirus (MERS).
On June 17, 2020, the FDA
approved a supplement to our open IDE for the Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients with
SARS-CoV-2/COVID-19 in a New Feasibility Study. That study’s plan is to enroll up to 40 subjects
at up to 20 centers in the U.S. Subjects will have established laboratory diagnosis of COVID-19, be admitted to an intensive care unit,
or ICU, and will have acute lung injury and/or severe or life threatening disease, among other criteria. Endpoints for this study, in
addition to safety, will include reduction in circulating virus as well as clinical outcomes (NCT # 04595903). The initial sites for this
trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital – Irvine in Irvine, CA and Loma Linda Hospital
in Loma Linda, CA, have completed clinical trial agreements, and have received IRB approval in the case of the Hoag hospitals, and are
preparing to open for patient enrollment. Under Single Patient Emergency Use regulations, the Company has also treated two patients with
COVID-19 with the Hemopurifier.
Additionally, we have a very
limited supply of Hemopurifiers and therefore any use in this pandemic will be only investigational in a very small number of patients,
even if it appears that the device can help those patients.
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 the FDA may not 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 our Hemopurifier and any additional products that we may develop are subject
to extensive regulation and review by numerous governmental authorities both in the U.S. and abroad. 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, the results of these trials
may not support our product candidate claims and the FDA may not agree with our conclusions regarding the trial results. Success in pre-clinical
studies and early clinical trials does not ensure that later clinical trials will be successful, and the later trials may not 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. 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 or
new product development efforts.
Our current and future business activities
are subject to applicable anti-kickback, fraud and abuse, false claims, physician payment transparency, health information privacy and
security and other healthcare laws and regulations, which could expose us to significant penalties.
We are currently and will
in the future be subject to healthcare regulation and enforcement by the U.S. federal government and the states in which we will conduct
our business once our product candidates are approved by the FDA and commercialized in the United States. In addition to the FDA’s
restrictions on marketing of approved products, the U.S. healthcare laws and regulations that may affect our ability to operate include:
the federal fraud and abuse laws, including the federal anti-kickback and false claims laws; federal data privacy and security laws; and
federal transparency laws related to payments and/or other transfers of value made to physicians (defined to include doctors, dentists,
optometrists, podiatrists and chiropractors) and other healthcare professionals (beginning January 1, 2022) and teaching hospitals. Many
states have similar laws and regulations that may differ from each other and federal law in significant ways, thus complicating compliance
efforts. These laws may adversely affect our sales, marketing and other activities with respect to any product candidate for which we
receive approval to market in the United States by imposing administrative and compliance burdens on us.
Because of the breadth of
these laws and the narrowness of available statutory exceptions and regulatory safe harbors, it is possible that some of our business
activities, particularly any sales and marketing activities after a product candidate has been approved for marketing in the United States,
could be subject to legal challenge and enforcement actions. If our operations are found to be in violation of any of the federal and
state laws described above or any other governmental regulations that apply to us, we may be subject to significant civil, criminal, and
administrative penalties, including, without limitation, damages, fines, imprisonment, exclusion from participation in government healthcare
programs, additional reporting obligations and oversight if we become subject to a corporate integrity agreement or other agreement to
resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations, any of which could adversely
affect our ability to operate our business and our results of operations.
We are subject to stringent and changing
privacy laws, regulations and standards as well as policies, contracts and other obligations related to data privacy and security. Our
actual or perceived failure to comply with such obligations could lead to government enforcement actions (that could include fines and
penalties), a disruption of our clinical trials or commercialization of our products, private litigation, harm to our reputation, or other
adverse effects on our business or prospects.
We collect, receive, store,
process, use, generate, transfer, disclose, make accessible, protect and share personal information and other information, including information
we collect in connection with clinical trials, or “Process” or “Processing”, as necessary to operate our business,
for legal and marketing purposes, and for other business-related purposes.
There are numerous federal,
state, local and international laws, regulations and guidance regarding privacy, information security and Processing, the number and scope
of which is changing, subject to differing applications and interpretations, and which may be inconsistent. We are, or may become, subject
to these laws, regulations, and guidance, and we are also subject to the terms of our external and internal privacy and security policies,
representations, certifications, standards, publications, frameworks, and contractual obligations to third parties related to privacy,
information security and Processing, or Data Protection Obligations.
If we fail, or are perceived
to have failed, to address or comply with Data Protection Obligations, it could: increase our compliance and operational costs; expose
us to regulatory scrutiny, actions, fines and penalties; result in reputational harm; interrupt or stop our clinical trials; result in
litigation and liability; result in an inability to process personal data or to operate in certain jurisdictions; harm our business operations
or financial results or otherwise result in a material harm to our business, or each, a Material Adverse Impact. Additionally, given that
Data Protection Obligations impose complex and burdensome obligations and that there is substantial uncertainty over the interpretation
and application of these obligations, we may be required to incur material costs, divert management attention, and change our business
operations, including our clinical trials, in an effort to comply, which could materially adversely affect our business operations and
financial results.
The California Consumer Privacy
Act of 2018, CCPA, is an example of the increasingly stringent data protection legislation in the United States. The CCPA gives California
residents expanded rights to access and require deletion of their personal information, opt-out of certain personal information sharing,
and receive detailed information about how their personal information is used. The CCPA provides for civil penalties for violations, as
well as a private right of action for data breaches and statutory damages ranging from $100 to $750 per violation, which is expected to
increase data breach class action litigation and result in significant exposure to costly legal judgements and settlements. Although there
are limited exemptions for clinical trial data under the CCPA, the CCPA and other similar laws could impact our business activities depending
on how they are interpreted.
The European Union’s
General Data Protection Regulation, or GDPR, is an example of the type of data protection legislation being passed in international jurisdictions.
The GDPR requires covered businesses to, among other requirements, provide detailed disclosures, contractually commit to data protection
measures in our contracts, maintain adequate data security measures, notify regulators and affected individuals of certain data breaches
and meet extensive privacy governance and documentation requirements. Companies that violate the GDPR can face private litigation, restrictions
on data processing, and fines of up to the greater of 20 million Euros or 4% of their worldwide annual revenue. In addition, the GDPR
includes restrictions on cross-border data transfers. A Recent decision by the Court of Justice of the European Union, or the “Schrems
II” ruling, however, has created substantial uncertainty regarding how to legally transfer personal data from Europe to the United
States. There are few, if any, viable options for us or our vendors to legally transfer personal data from Europe to the United States,
which could materially impact our business.
If our security measures, or those maintained
on our behalf, are compromised, or the security, confidentiality, integrity or availability of our information technology, software, services,
networks, communications or data is compromised, limited or fails, this could result in a Material Adverse Impact.
In the ordinary course of
our business, we Process proprietary, confidential and sensitive information, including personal data, intellectual property, trade secrets,
and proprietary business information owned or controlled by ourselves or other third parties, or collectively, Sensitive Information.
We may use and share Sensitive Information with service providers and subprocessors and other third parties upon whom we rely to help
us operate our business. If we, our service providers, partners, or other relevant third parties have experienced, or in the future experience,
any security incident(s) that result in any data loss; deletion or destruction; unauthorized access to; loss, unauthorized acquisition,
disclosure, or exposure of, Sensitive Information, or compromise related to the security, confidentiality, integrity of our (or their)
information technology, software, services, communications or data (any, a “Security Breach”), it may result in a Material
Adverse Impact (as defined above), including the diversion of funds to address the breach, and interruptions, delays, or outages in our
operations and development programs.
Cyberattacks, malicious internet-based
activity and online and offline fraud are prevalent and continue to increase. In addition to threats from traditional computer “hackers,”
threat actors, software bugs, malicious code (such as viruses and worms), employee theft or misuse, denial-of-service attacks (such as
credential stuffing) and ransomware attacks, sophisticated nation-state and nation-state supported actors now engage in attacks (including
advanced persistent threat intrusions). We may also be the subject of phishing attacks, viruses, malware installation, server malfunction,
software or hardware failures, loss of data or other computer assets, or other similar issues.
We may be required to expend
significant resources, fundamentally change our business activities and practices, or modify our operations, including clinical trial
activities, or information technology in an effort to protect against Security Breaches and to mitigate, detect and remediate actual and
potential vulnerabilities. Applicable Data Protection Obligations (as defined above) may require us to implement specific security measures
or use industry-standard or reasonable measures to protect against Security Breaches. There can be no assurances that our security measures
or those of third parties upon whom we rely will be effective in protecting against Security Incidents.
Applicable Data Protection
Obligations (as defined above) may require us to notify relevant stakeholders of Security Breaches, including affected individuals, partners,
collaborators, regulators, law enforcement agencies and others. Such disclosures are costly, and the disclosures or the failure to comply
with such requirements could lead to Material Adverse Impacts. There can be no assurances that any limitations or exclusions of liability
in our contracts would be adequate or would otherwise protect us from liabilities or damages if we fail to comply with Data Protection
Obligations related to information security or Security Breaches.
We cannot be sure that our
insurance coverage, if any, will be adequate or otherwise protect us from or adequately mitigate liabilities or damages with respect to
claims, costs, expenses, litigation, fines, penalties, business loss, data loss, regulatory actions or Material Adverse Impacts arising
out of our Processing operations, privacy and security practices, or Security Breaches that we may experience. The successful assertion
of one or more large claims against us that exceeds our available insurance coverage, or results in changes to our insurance policies
(including premium increases or the imposition of large excess or deductible or co-insurance requirements), could have a Material Adverse
Impact.
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 under development be approved for commercialization by the FDA, any such products may not be considered cost-effective, reimbursement
may not be available in the U.S. or other countries, if approved, and reimbursement may not be sufficient to allow sales of our future
products, including the Hemopurifier, 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. These assessments are outside our control and any such
evaluations may not be conducted or have a favorable outcome.
If approved for use in the
U.S., we expect that any products that we develop, including the Hemopurifier, 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 that 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 adequate 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. However, no uniform policy requirement for coverage and reimbursement for medical devices exists among third-party
payors in the United States. Therefore, coverage and reimbursement can differ significantly from payor to payor. 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 for any products that we develop.
Should any of our potential products, including
the Hemopurifier, 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. However, on December 14, 2018, a Texas
U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate”
was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for
the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District
Court to determine whether the remaining provisions of the PPACA are invalid as well. The U.S. Supreme Court is currently reviewing the
case, although it is unclear when a decision will be made or how the Supreme Court will rule. The Budget Control Act of 2011, as amended
by subsequent legislation, further reduces Medicare’s payments to providers by two percent through fiscal year 2030. However, COVID-19
relief legislation suspended the two percent Medicare sequester from May 1, 2020 through December 31, 2021. 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. It is possible that additional governmental action is taken to address the COVID-19
pandemic. In addition, commercial payors such as insurance companies, could adopt similar policies that limit reimbursement for medical
device manufacturers’ products. Therefore, it is possible that our product or the procedures or patient care performed using our
product will not 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.
Our ability to use net operating loss carryforwards
and certain other tax attributes to offset future taxable income or taxes may be limited.
Under the Tax Cuts and Jobs
Act of 2017, as modified by the CARES Act, federal net operating losses incurred in tax years beginning after December 31, 2017, may be
carried forward indefinitely, but the deductibility of such federal net operating losses in tax years beginning after December 31, 2020,
is limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act of
2017 or the CARES Act. In addition, under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, and corresponding provisions
of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change in
its equity ownership value over a three-year period, the corporation’s ability to use its pre-change net operating loss carryforwards
and other pre-change tax attributes to offset its post-change income or taxes may be limited. We believe we have not experienced an ownership
change in the past three years, however, we could experience ownership changes in the future as a result of subsequent shifts in our stock
ownership, some of which may be outside of our control. If we achieve profitability and an ownership change occurs and our ability to
use our net operating loss carryforwards is materially limited, it would harm our future operating results by effectively increasing our
future tax obligations. In addition, at the state level, there may be periods during which the use of net operating loss carryforwards
is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed. For example, California imposed limits
on the usability of California state net operating losses to offset taxable income in tax years beginning after 2019 and before 2023.
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, which inspects 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 $5,000,000 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 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. For the FDA, the authority to require a recall must be based on a 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 recalls. We are also required to follow detailed recordkeeping requirements
for all firm-initiated medical device corrections and removals.
Our business is subject to risks arising
from the recent COVID-19 pandemic.
The current COVID-19 worldwide
pandemic has presented substantial public health and economic challenges and is affecting our employees, patients, communities and business
operations, as well as the U.S. and global economy and financial markets.
International and U.S. governmental
authorities in impacted regions are taking actions in an effort to slow the spread of COVID-19, including issuing varying forms of “stay-at-home”
orders, and restricting business functions outside of one’s home. In response, we have implemented a work from home policy for all
non-laboratory employees, following the guidelines or directives issued by federal, state and local government agencies in the U.S.
To date, we do not currently
anticipate any interruptions in supply. In addition, while we are continuing the process of getting our clinical trial underway, we expect
that COVID-19 precautions may directly or indirectly impact the timeline for the trial. As the COVID-19 pandemic continues to spread around
the globe, we may experience disruptions that could severely impact our business, clinical trials and manufacturing and supply chains,
including:
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delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff;
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diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials;
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interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others or interruption of clinical trial subject visits and study procedures, which may impact the integrity of subject data and clinical study endpoints;
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interruption of, or delays in receiving, supplies of our product candidates from our contract manufacturing organizations due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems;
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delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials and interruption in global shipping that may affect the transport of clinical trial materials;
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limitations on employee resources that would otherwise be focused on the conduct of our clinical trials, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people;
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delays in receiving feedback or approvals from the FDA or other regulatory authorities with respect to future clinical trials or regulatory submissions;
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changes in local regulations as part of a response to COVID-19 which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether;
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delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees;
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refusal of the FDA to accept data from clinical trials in affected geographies; and
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difficulties launching or commercializing products, including due to reduced access to doctors as a result of social distancing protocols.
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In addition, the spread of
COVID-19 has had and may continue to impact the trading price of shares of our common stock and could further negatively impact our ability
to raise additional capital on a timely basis or at all.
The COVID-19 pandemic continues
to rapidly evolve. The extent to which COVID-19 may impact our business, including our clinical trials, manufacturing and supply chains
and financial condition will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as
the continued geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United
States and other countries, continued business closures or business disruptions and the effectiveness of actions taken in the United States
and other countries to contain and treat the disease.
Our products are manufactured with raw materials
that are sourced from specialty suppliers with limited competitors and we may therefore be unable to access the materials we need to manufacture
our products.
Specifically, the Hemopurifier
contains three critical components with limited supplier numbers. The base cartridge on which the Hemopurifier is constructed is sourced
from Medica S.p.A and we are dependent on the continued availability of these cartridges. We currently purchase the diatomaceous earth
from Janus Scientific Inc., our distributor; however, the product is manufactured by Imerys Minerals Ltd., which is the only supplier
of this product. The Galanthus nivalis agglutinin, or GNA, is sourced from Vector Laboratories, Inc. and also is available from other
suppliers; however, Sigma Aldrich is the only approved back up supplier at this time. A business interruption at any of these sources,
including interruption resulting from the coronavirus pandemic, could have a material impact on our ability to manufacture the Hemopurifier.
Even though we have received breakthrough
device designation for the Hemopurifier for two independent indications, this designation may not expedite the development or review of
the Hemopurifier and does not provide assurance ultimately of PMA submission or approval by the FDA.
The Breakthrough Devices Program
is a voluntary program intended to expedite the review, development, assessment and review of certain medical devices that provide for
more effective treatment or diagnosis of life-threatening or irreversibly debilitating human diseases or conditions for which no approved
or cleared treatment exists or that offer significant advantages over existing approved or cleared alternatives. All submissions for devices
designated as Breakthrough Devices will receive priority review, meaning that the review of the submission is placed at the top of the
appropriate review queue and receives additional review resources, as needed.
Although breakthrough designation
or access to any other expedited program may expedite the development or approval process, it does not change the standards for approval.
Although we obtained breakthrough device designation for the Hemopurifier for two indications, we may not experience faster development
timelines or achieve faster review or approval compared to conventional FDA procedures. For example, the time required to identify and
resolve issues relating to manufacturing and controls, the acquisition of a sufficient supply of our product for clinical trial purposes
or the need to conduct additional nonclinical or clinical studies may delay approval by the FDA, even if the product qualifies for breakthrough
designation or access to any other expedited program. Access to an expedited program may also be withdrawn by the FDA if it believes that
the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review
procedure does not ensure that we will ultimately obtain regulatory approval for the product.
Compliance with laws, regulations, and related
interpretations and related legal claims or other regulatory enforcement actions could impact our business, and we face additional risks
and uncertainties related to any potential actions resulting from the Securities and Exchange Commission’s, or the SEC, ongoing
investigation, or any other investigation or action.
On February 7, 2020, the SEC
issued an Order of Suspension of Trading, or SEC Order, temporarily suspending trading in our stock for a period of ten days. The SEC
Order stated that the suspension was due to concerns regarding the accuracy and adequacy of information in the marketplace that appeared
to be disseminated by third party promotors and recent and unusual market activity since at least January 22, 2020. Although our stock
resumed trading upon expiration of the SEC Order, we are unable to predict the outcome of the SEC investigation or any other actions the
SEC may take in connection therewith. Furthermore, the Company’s reputation may be negatively impacted. As a result, the potential
impact to the Company’s business, if any, cannot be determined.
Our bylaws designate the Eighth Judicial
District Court of Clark County, Nevada, as the sole and exclusive forum for certain types of actions and proceedings that may be initiated
by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our
directors, officers, employees or agents.
Our bylaws require that, to
the fullest extent permitted by law, and unless the Company consents in writing to the selection of an alternative forum, the Eighth Judicial
District Court of Clark County, Nevada, will, to the fullest extent permitted by law, be the sole and exclusive forum for each of the
following:
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any derivative action or proceeding brought in the name or right of the Company or on its behalf,
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any action asserting a claim for breach of any fiduciary duty owed by any director, officer, employee or agent of the Company to the Company or the Company’s stockholders,
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any action arising or asserting a claim arising pursuant to any provision of NRS Chapters 78 or 92A or any provision of our articles of incorporation or bylaws, or
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any action asserting a claim governed by the internal affairs doctrine, including, without limitation, any action to interpret, apply, enforce or determine the validity of our articles of incorporation or bylaws.
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However, our bylaws provide
that the exclusive forum provisions do not apply to suits brought to enforce any liability or duty created by the Exchange Act or any
other claim for which the federal courts have exclusive jurisdiction. We note that there is uncertainty as to whether a court would enforce
the provision and that investors cannot waive compliance with the federal securities laws and the rules and regulations thereunder. Although
we believe this provision benefits us by providing increased consistency in the application of Nevada law in the types of lawsuits to
which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
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 in part 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 are challenged or defeated by third parties, our research efforts could
be materially and adversely affected. Our licenses and patents assigned to us may not continue in force for as long as we require for
our research, development and testing of cancer treatments. It is possible that, if our licenses terminate or the underlying patents and
intellectual property is challenged or defeated or the patents and intellectual property assigned to us is challenged or defeated, suitable
replacements may not 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 are 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. If we fail to obtain any required licenses or make any necessary changes to our technologies
or the products, we may be unable to commercialize one or more of our products or may have to withdraw products from the market, all of
which would have a material adverse effect on our business, financial condition and results of operations.
If the combination of patents, trade secrets
and contractual provisions upon which we rely to protect our intellectual property is inadequate, our ability to commercialize our products
successfully will be harmed.
Our success depends significantly
on our ability to protect our proprietary rights to the technologies incorporated in our products. We currently have five issued U.S.
patents and five pending U.S. patent applications. We also have 33 issued foreign patents and have applied for six additional international
patents. Our issued patents begin to expire in 2024, with the last of these patents expiring in 2036, 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, this protection may not 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 may not be successful on the merits in any enforcement effort.
In addition, we may not have sufficient resources to litigate, enforce or defend our intellectual property rights.
We may rely on licenses for new technology,
which may affect our continued operations with respect thereto.
As we develop our technology,
we may need to license additional technologies to optimize the performance of our products. We may not be able to license these technologies
on commercially reasonable terms or at all. In addition, we may fail to successfully integrate any licensed technology into our proposed
products. Our inability to obtain any necessary licenses could delay our product development and testing until alternative technologies
can be identified, licensed and integrated. The inability to obtain any necessary third-party licenses could cause us to abandon a particular
development path, which could seriously harm our business, financial position and results of our operations.
New technology may lead to our competitors
developing superior products which would reduce demand for our products.
Research into technologies
similar to ours is proceeding at a rapid pace, and many private and public companies and research institutions are actively engaged in
the development of products similar to ours. These new technologies may, if successfully developed, offer significant performance or price
advantages when compared with our technologies. Our existing patents or our pending and proposed patent applications may not 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. Our patents may not prevent other companies from developing similar products or products which produce benefits
substantially the same as our products, and other companies may 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. Our pending patent applications may not result in issued patents, patent protection may not be
secured for any particular technology, and our issued patents may not 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. We may be
unable to fund the costs of any 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, it is possible that our products or technology
could 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 may not prevail in any such
litigation. If we are found to have infringed on a third-party’s intellectual property rights, we may be liable for money damages,
encounter significant delays in bringing products to market or be precluded from manufacturing particular products or using particular
technology.
Other parties may challenge
certain of our foreign patent applications. If any 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 may not 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, although
we have obtained government contracts in the past, we may not be awarded any additional U.S. Government grants or contracts utilizing
our Hemopurifier platform technology.
U.S. Government agencies have special contracting
requirements, including a right to audit us which create additional risks; a negative audit would be detrimental to
us.
Our business plan to utilize
the Aethlon Hemopurifier technology is likely to continue to involve contracts with the U.S. Government. Many government contracts, typically
contain unfavorable termination provisions and are subject to audit and modification by the government at its sole discretion, which subjects
us to additional risks. These risks include the ability of the U.S. Government to unilaterally:
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suspend or prevent us for a period of time from receiving new contracts or extending existing contracts based on violations or suspected violations of laws or regulations;
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audit and object to our contract-related costs and fees, including allocated indirect costs;
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control and potentially prohibit the export of our products; and
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change certain terms and conditions in our contracts.
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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.
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
Our failure to meet the continued listing
requirements of The Nasdaq Capital Market could result in a de-listing of our common stock.
If we fail to satisfy the
continued listing requirements of The Nasdaq Capital Market, or Nasdaq, such as the minimum stockholders’ equity requirement or
the minimum closing bid price requirement, Nasdaq may take steps to de-list our common stock. For example, in May 2019 we received a letter
from Nasdaq indicating that Nasdaq had determined that we had failed to comply with the minimum bid price requirement of Nasdaq Listing
Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that companies listed on the Nasdaq Capital Market maintain a minimum closing
bid price of at least $1.00 per share. In July 2019, we received another letter from Nasdaq indicating that Nasdaq has determined
that we have failed to comply with the minimum stockholder’s equity requirement of Nasdaq Listing Rule 5550(b)(1). Nasdaq Listing
Rule 5550(b)(1) requires that companies listed on the Nasdaq Capital Market maintain a minimum of $2,500,000 in stockholder’s equity.
If we fail to maintain compliance with these, or any other of the continued listing requirements of The Nasdaq Capital Market, Nasdaq
may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and
would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions
to restore our compliance with Nasdaq’s listing requirements, but any such action taken by us may not be successful.
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. As a result, capital appreciation, if any, of our common stock
will be the sole source of gain for our common stockholders in the foreseeable future.
Our stock price is speculative, and there
is a risk of litigation.
The trading price of our common
stock has in the past and may in the future be subject to wide fluctuations in response to factors such as the following:
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failure to raise additional funds when needed;
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announcements regarding our ongoing development of the Hemopurifier;
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results from our clinical trials with the Hemopurifier;
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failure to meet the continued listing requirements of and maintain our listing on Nasdaq;
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results of operations or revenue in any quarter failing to meet the expectations, published or otherwise, of the investment community;
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reduced investor confidence in equity markets;
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speculation in the press or analyst community;
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wide fluctuations in stock prices, particularly with respect to the stock prices for other medical device companies;
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announcements of technological innovations by us or our competitors;
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new products or the acquisition of significant customers by us or our competitors;
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changes in interest rates;
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changes in investors’ beliefs as to the appropriate price-earnings ratios for us and our competitors;
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changes in recommendations or financial estimates by securities analysts who track our common stock or the stock of other medical device companies;
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sales of common stock by directors and executive officers;
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rumors or dissemination of false or misleading information, particularly through Internet chat rooms, instant messaging, and other rapid-dissemination methods;
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conditions and trends in the medical device industry generally;
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the announcement of acquisitions or other significant transactions by us or our competitors;
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adoption of new accounting standards affecting our industry;
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changes in the structure of healthcare payment systems;
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general market conditions;
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domestic or international terrorism and other factors, including the effects of the ongoing pandemic; and
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the other factors described in this section.
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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, future lawsuits are possible as a result of fluctuations
in the price of our common stock. Defending against any 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 SEC’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 $2,000,000 or less, or we have an average revenue
of less than $6,000,000 for the last three years, 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 SEC’s “penny stock” rules. If our common stock is subject to the “penny
stock” rules promulgated under the Exchange Act, broker-dealers may find it difficult to effectuate customer transactions and trading
activity in our securities may be adversely affected. For any transaction involving a penny stock, unless exempt, the rules require:
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that a broker or dealer approve a person’s account for transactions in penny stocks;
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furnish the investor a disclosure document describing the risks of investing in penny stocks;
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disclose to the investor the current market quotation, if any, for the penny stock;
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disclose to the investor the amount of compensation the firm and its broker will receive for the trade; and
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The broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person’s
account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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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 SEC relating to the penny stock market,
which, in highlight form:
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sets forth the basis on which the broker or dealer made the suitability determination; and
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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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. A broader or more active public trading market for our
common shares may not develop or be sustained, and current trading levels may decrease.
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 it, which may result in losses to you.
The market for our common
stock 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. During the 52-week period ended June 10, 2021, the high and low
closing sale prices for a share of our common stock were $10.79 and $1.29, respectively. The volatility in our share price is attributable
to a number of factors. First, as noted above, trading in our common stock 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 cash and
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 also
may add to the volatility in the price of our common stock: actual or anticipated variations in our quarterly or annual operating results;
announcements regarding our clinical trials and the development of the Hemopurifier; 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.
Our issuance of additional shares of common
stock or convertible securities, could be dilutive.
We are entitled under our
articles of incorporation to issue up to 30,000,000 shares of common stock. We have reserved for issuance 2,836,062 of those shares of
common stock for outstanding restricted stock units, stock options and warrants. As of March 31, 2021, we had issued and outstanding 12,150,597
shares of common stock. As a result, as of March 31, 2021 we had 15,013,341 shares of common stock 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 stock 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.
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
provide that we possess and may exercise all powers of indemnification of our officers, directors, employees, agents and other persons
and our bylaws also require us to indemnify our officers and directors as permitted under the provisions of the Nevada Revised Statutes,
or NRS. 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 and officers. 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 bylaws 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.
Certain anti-takeover provisions
of Nevada law could have the effect of delaying or preventing a third-party from acquiring us, even if the acquisition arguably could
benefit our stockholders.
Nevada’s “combinations
with interested stockholders” statutes (NRS 78.411 through 78.444, inclusive) prohibit specified types of business “combinations”
between certain Nevada corporations and any person deemed to be an “interested stockholder” for two years after such person
first becomes an “interested stockholder” unless the corporation’s board of directors approves the combination (or the
transaction by which such person becomes an “interested stockholder”) in advance, or unless the combination is approved by
the board of directors and sixty percent of the corporation’s voting power not beneficially owned by the interested stockholder,
its affiliates and associates. Further, in the absence of prior approval certain restrictions may apply even after such two year period.
However, these statutes do not apply to any combination of a corporation and an interested stockholder after the expiration of four years
after the person first became an interested stockholder. For purposes of these statutes, an “interested stockholder” is any
person who is (1) the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the outstanding voting shares
of the corporation, or (2) an affiliate or associate of the corporation and at any time within the two previous years was the beneficial
owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of the corporation. The definition
of the term “combination” is sufficiently broad to cover most significant transactions between a corporation and an “interested
stockholder.” A Nevada corporation may elect in its articles of incorporation not to be governed by these particular laws, but if
such election is not made in the corporation’s original articles of incorporation, the amendment (1) must be approved by the affirmative
vote of the holders of stock representing a majority of the outstanding voting power of the corporation not beneficially owned by interested
stockholders or their affiliates and associates, and (2) is not effective until 18 months after the vote approving the amendment and does
not apply to any combination with a person who first became an interested stockholder on or before the effective date of the amendment.
We did not make such an election in our original articles of incorporation and have not amended our articles of incorporation to so elect.
Nevada’s “acquisition
of controlling interest” statutes (NRS 78.378 through 78.3793, inclusive) contain provisions governing the acquisition of a controlling
interest in certain Nevada corporations. These “control share” laws provide generally that any person that acquires a “controlling
interest” in certain Nevada corporations may be denied voting rights, unless a majority of the disinterested stockholders of the
corporation elects to restore such voting rights. These laws would apply to us if we were to have 200 or more stockholders of record (at
least 100 of whom have addresses in Nevada appearing on our stock ledger) and do business in the State of Nevada directly or through an
affiliated corporation, unless our articles of incorporation or bylaws in effect on the tenth day after the acquisition of a controlling
interest provide otherwise. These laws provide that a person acquires a “controlling interest” whenever a person acquires
shares of a subject corporation that, but for the application of these provisions of the NRS, would enable that person to exercise (1)
one fifth or more, but less than one third, (2) one third or more, but less than a majority or (3) a majority or more, of all of the voting
power of the corporation in the election of directors. Once an acquirer crosses one of these thresholds, shares which it acquired in the
transaction taking it over the threshold and within the 90 days immediately preceding the date when the acquiring person acquired or offered
to acquire a controlling interest become “control shares” to which the voting restrictions described above apply. These laws
may have a chilling effect on certain transactions if our articles of incorporation or bylaws are not amended to provide that these provisions
do not apply to us or to an acquisition of a controlling interest, or if our disinterested stockholders do not confer voting rights in
the control shares.
Various provisions of our
bylaws 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 bylaws 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 bylaws 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 bylaws that are not in line with your concerns.
Nevada law also provides that
directors may resist a change or potential change in control if the directors determine that the change is opposed to, or not in the best
interests of, the corporation. 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.
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.