As filed with the Securities and Exchange Commission on December 20, 2016

Registration No. 333-___________




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________

FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

AEOLUS PHARMACEUTICALS, INC.
(Exact Name of Issuer in Its Charter)

Delaware
2834
56-1953785
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Number)
(I.R.S. Employer
Identification No.)

Aeolus Pharmaceuticals, Inc.
26361 Crown Valley Parkway, Suite 150
Mission Viejo, California 92691
(949) 481-9825
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
______________

John McManus
President and Chief Executive Officer
Aeolus Pharmaceuticals, Inc.
26361 Crown Valley Parkway, Suite 150
Mission Viejo, California 92691
(949) 481-9825
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
______________

Copies of all communications to:
Brian J. Lynch
Drinker Biddle & Reath LLP
One Logan Square, Suite 2000
Philadelphia, Pennsylvania 19103-6996
(215) 988-1119
______________
 
 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
       
Non-accelerated filer
o (Do not check if a smaller
        reporting company)
Smaller reporting company

 


______________________

Pursuant to Rule 429 under the Securities Act, the prospectus contained in this Registration Statement will be used as a combined prospectus in connection with (i) this Registration Statement and (ii) the Registration Statement on Form S-1 (File No. 333-209119), which became effective on February 12, 2016, and the Post-Effective Amendments to the Registration Statements on Form S-1 (File No. 333-188670 and File No. 333-181409), which became effective on June 20, 2014 (collectively, the “Prior Registration Statements”).  This Registration Statement constitutes Post-Effective Amendment No. 2 to File No. 333-188670 and Post-Effective Amendment No. 3 to File No. 333-181409.  Such post-effective amendments shall hereafter become effective concurrently with the effectiveness of this Registration Statement in accordance with Section 8(c) of the Securities Act.

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


CALCULATION OF REGISTRATION FEE
 
Title of Each Class of
Securities to be Registered
Amount
to be
Registered
(1)(6)
 
Proposed
Maximum
Offering Price
per Share
 
Proposed
Maximum
Aggregate
Offering Price
 
Amount of
Registration Fee
 
Common Stock, $0.01 par value per share
(2)   (2)    (2)    (2)  
Common Stock, $0.01 par value per share
(3)    (3)    (3)    (3)  
Common Stock, $0.01 par value per share
(4)    (4)    (4)    (4)  
Common Stock, $0.01 par value per share
   
12,067,660
   
$
0.18        (5)
   
$
2,172,178.80
   
$
251.75
 
Total
   
12,067,660
           
$
2,172,178.80
   
$
251.75
 
 
(1)
Pursuant to Rule 429 under the Securities Act of 1933, as amended, and as further described herein, shares of common stock previously registered on the registrant’s Registration Statements on Form S-1 filed with the Securities and Exchange Commission (File Nos. 333-209119, 333-188670 and 333-181409) (collectively, the “Prior Registration Statements”) are being included in this registration statement.
(2)
Consists of 73,432,471 shares of common stock previously registered under File No. 333-209119. The registration fee was previously paid in connection with the filing of such Prior Registration Statement.
(3)
Consists of 30,591,501 shares of common stock previously registered under File No. 333-188670. The registration fee was previously paid in connection with the filing of such Prior Registration Statement.
(4)
Consists of 88,714,577shares of common stock previously registered under File No. 333-181409. The registration fee was previously paid in connection with the filing of such Prior Registration Statement.
(5)
Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) of the Securities Act.
(6)
Pursuant to Rule 416 under the Securities Act, this registration statement also covers such additional shares of common stock as may hereafter be issued with respect to the shares being registered hereby as a result of stock splits, stock dividends, recapitalizations or similar adjustments.
 

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell the securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Registration Nos.:
333-209119
333-188670
333-181409
333-______

Subject to completion, dated December    , 2016
PRELIMINARY PROSPECTUS
204,809,209

Common Stock

This prospectus relates to the offer and sale from time to time by the selling stockholders identified in this prospectus of up to 204,809,209 shares of our common stock, par value $0.01 per share, including common stock issuable upon conversion of Series C Convertible Preferred Stock and shares of common stock issuable upon exercise of warrants, as set forth herein. This prospectus also relates to 50,000 shares of our common stock issuable upon the exercise of warrants that we issued in 2014. The shares of common stock, Series C Convertible Preferred Stock and warrants registered herein were issued in transactions in 2015, 2013, 2012 and previous periods in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended, which we refer to as the Securities Act, and Rule 506 promulgated thereunder.  For additional information regarding the private placements, please see “Description of the Shares included in this Prospectus” below.

We are not selling any common stock under this prospectus and will not receive any of the proceeds from the sale of shares by the selling stockholders; however, we will receive the proceeds of any cash exercise of the warrants.

The selling stockholders may sell the shares from time to time at the market price quoted on the OTC Bulletin Board (or any stock exchange on which our common stock may be listed in the future) at the time of offer and sale, or at prices related to such prevailing market prices, in negotiated transactions or in a combination of such methods of sale directly or through brokers. See “Plan of Distribution” for additional information on how the selling stockholders may conduct sales of their shares of common stock. If there are substantial sales of shares of our common stock, the price of our common stock could decline.”

Other than underwriting discounts and commissions, and transfer taxes, if any, we have agreed to bear certain expenses incurred in connection with the registration and sale of the common stock offered by the selling stockholders.

Our common stock is quoted on the OTC Bulletin Board under the symbol “AOLS.”  On December 14, 2016, the closing price of our common stock was $0.18 per share.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 8 for certain risks you should consider before purchasing any shares.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

______________

The date of this prospectus is December     , 2016
 


TABLE OF CONTENTS

   
 
Page
   
Prospectus Summary
1
   
Risk Factors
8
   
Special Note Regarding Forward-Looking Statements
25
   
Description of the Shares Included in this Prospectus
26
   
Use of Proceeds
31
   
Determination of Offering Price
32
   
Market Information / Price Range Of Common Stock / Dividends
33
   
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
   
Business
43
   
Certain Relationships and Related Party Transactions
86
   
Security Ownership of Certain Beneficial Owners and Management
88
   
Selling Stockholders
91
   
Description of Capital Stock
110
   
Plan of Distribution
114
   
Legal Matters
116
   
Experts
117
   
Additional Information
118
   
Incorporation of Certain Information by Reference
119
   
Index to Consolidated Financial Statements
F-1
 


You should only rely on the information contained in this prospectus.  We have not, and the selling stockholders have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus.  We are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted.  You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only, regardless of the time of delivery of this prospectus or of any sale of our securities.  Our business, prospects, financial condition and results of operations may have changed since that date.

This document may only be used where it is legal to sell these securities.  Certain jurisdictions may restrict the distribution of these documents and the offering of these securities.  We require persons receiving these documents to inform themselves about, and to observe any, such restrictions.  We have not taken any action that would permit an offering of these securities or the distribution of these documents in any jurisdiction that requires such action.

_________________________________

We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business. Each trademark, trade name or service mark of any other company appearing in this prospectus belongs to its holder. Use or display by us of other parties’ trademarks, trade names or service marks is not intended to and does not imply a relationship with, or endorsement or sponsorship by us of, the trademark, trade name or service mark owner

_________________________________

Industry and Market Data

Unless otherwise indicated, the market data and certain other statistical information used throughout this prospectus are based on independent industry publications, government publications, reports by market research firms or other published independent sources.  Although we believe these third-party sources are reliable, we have not independently verified the information.  Except as otherwise noted, none of the sources cited in this prospectus has consented to the inclusion of any data from its reports, nor have we sought their consent. In addition, some data are based on our good faith estimates. Such estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as our own management’s experience in the industry, and are based on assumptions made by us based on such data and our knowledge of such industry and markets, which we believe to be reasonable. However, except as otherwise noted, none of our estimates have been verified by any independent source.  Our estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section of this prospectus and the other information contained herein.  These and other factors could cause our actual results to differ materially from those expressed in the estimates and assumptions.

 
PROSPECTUS SUMMARY

This summary highlights certain information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our common stock. You should carefully read the entire prospectus, including ‘‘Risk Factors’’ and our financial statements and related notes before you decide whether to invest in our common stock.  Investing in our common stock involves risks. See ‘‘Risk Factors’’ beginning on page 8.  All dollar amounts referred to in this prospectus are in U.S. dollars unless otherwise indicated. Any discrepancies in the tables included herein between the amounts listed and the totals thereof are due to rounding.

Unless otherwise indicated or unless the context otherwise requires, all references in this document to “we,” “us,” “our,” the “Company” and similar expressions are references to Aeolus Pharmaceuticals, Inc.

Our Company and Business

We are a Southern California-based biopharmaceutical company leveraging significant U.S. Government funding to develop a platform of novel compounds for use in biodefense, fibrosis, oncology, infectious disease and diseases of the central nervous system.  The platform consists of approximately 180 compounds licensed from the University of Colorado (“UC”) Duke University (“Duke”) and National Jewish Health (“NJH”).
Our lead compound, AEOL 10150 (“10150”), is being developed under contract with the Biomedical Advanced Research and Development Authority (“BARDA” and the “BARDA Contract”), a division of the U.S. Department of Health and Human Services (“HHS”), as a medical countermeasure (“MCM”) against the pulmonary sub-syndrome of acute radiation syndrome (“Pulmonary Acute Radiation Syndrome” or “Lung-ARS”) and the delayed effects of acute radiation exposure (“DEARE”). Lung-ARS is caused by acute exposure to high levels of radiation due to a nuclear detonation or radiological event. On January 23, 2014, we announced that 10150 was granted Orphan Drug Designation by the U.S Food and Drug Administration (“FDA”) for the Lung-ARS indication.
We are also developing 10150 for the treatment of lung fibrosis, including idiopathic pulmonary fibrosis (“IPF”) and other fibrotic diseases.  This new development program was created based upon lung protection data generated from animal studies in Lung-ARS and chemical gas lung exposure under the BARDA Contract and National Institutes of Health (“NIH”) grants, as well as a company-funded study in a bleomycin lung fibrosis model.  On March 17, 2015, we announced that 10150 was granted Orphan Drug Designation by the U.S Food and Drug Administration (“FDA”) for the IPF indication. The Company plans to initiate a Phase I safety study in patients with IPF in 2017. After we have completed safety studies, we plan to initiate efficacy studies in patients with fibrosis.   AEOL 10150 has previously been tested in two Phase I human clinical trials with no drug-related serious adverse events reported.
We are also developing 10150 for use in combination with radiation therapy for cancer as a treatment to reduce side effects caused by radiation toxicity and improve local tumor control.  Pre-clinical studies at Duke, the University of Maryland and Loma Linda University have demonstrated that 10150 protects healthy, normal tissue, while not interfering with the benefit of radiation therapy or chemotherapy in prostate and lung cancer.  Additional studies have demonstrated that 10150 enhances the anti-tumor activity of chemotherapy and radiation. A significant portion of the development work funded by the BARDA contract is applicable to the development program for radiation oncology, including safety, toxicology, pharmacokinetics and Chemistry, Manufacturing and Controls (“CMC”).   After we have completed safety studies, we plan to initiate studies to demonstrate efficacy in protecting against the toxic side effects related to radiation therapy.
We are also developing 10150 as a MCM for exposure to chemical vesicants (e.g., chlorine gas, sulfur mustard gas and phosgene gas) and nerve agents (e.g., sarin gas and soman gas) with grant money from the NIH Countermeasures Against Chemical Threats (“NIH-CounterACT”) program. 10150 has consistently demonstrated safety and efficacy in animal studies of chemical gas exposure and nerve gas exposure.
The Company is developing a second compound, AEOL 11114B (“11114”), as a treatment for Parkinson’s disease.  Research funded by the Michael J Fox Foundation for Parkinson’s disease (“MJFF”) demonstrated the neuro-protective activity of 11114 in mouse and rat models of Parkinson’s disease. The compounds were invented by Brian J. Day, PhD at NJH and Manisha Patel, PhD at UC in collaboration with the Company.  We have obtained worldwide, exclusive licenses to develop the compounds from NJH and the UC.  Optimization of the manufacturing and formulation of the compound were finished in 2016, and we plan to complete the remaining work to file an Investigational New Drug (“IND”) application with the FDA during 2017.
1

In April 2015, we announced the discovery of a new compound, AEOL 20415 (“20415”), which has demonstrated anti-inflammatory and anti-infective properties, and could be effective in treating cystic fibrosis and combatting anti-biotic resistant bacteria.    The compound was developed under collaboration between Brian J. Day, PhD at NJH and Aeolus Pharmaceuticals. We have obtained a worldwide, exclusive license to develop the rights to the compound from NJH. Animal efficacy studies are underway to confirm the efficacy seen in in-vitro testing against anti-biotic resistant bacteria, and, assuming confirmation, we plan to initiate the work to file an IND application with the FDA during the first half of 2017.

Finally, we have a pipeline of approximately 180 additional compounds. We expect that the development of additional compounds in our portfolio is dependent on our finding non-dilutive capital sources to fund such pipeline opportunities.
We were incorporated in the State of Delaware in 1994. Our common stock trades on the OTCQB under the symbol “AOLS.” Our principal executive offices are located at 26361 Crown Valley Parkway, Suite 150 Mission Viejo, California 92691, and our phone number at that address is (949) 481-9825. Our website address is www.aolsrx.com. However, the information on, or that can be accessed through our website is not part of this report. We also make available, free of charge through our website, our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
Strategy

Our strategy is to pursue the development of our promising platform of anti-fibrotic, anti-inflammatory, anti-infective and anti-oxidant compounds that address important unmet medical indications of clinical and national strategic importance.  Our objective is to use non-dilutive capital whenever possible.
To date, we, and/or our research collaborators, have been awarded more than $149 million in non-dilutive U.S. government funding in the form of grants and contracts from federal agencies, such as BARDA, NIH-NIAID and NIH-CounterACT.  Additional research has been conducted on our compounds with funding from private foundations, such as the MJFF and Citizens United for Research in Epilepsy (“CURE”).
The expected benefit of this strategy is threefold.  First, safety, toxicology, pharmacokinetic and CMC work funded by the government and foundations is applicable to our traditional commercial development programs.  As an example, significant work funded under the BARDA contract for Lung-ARS has generated data that can be used to support our New Drug Applications (“NDA”) for pulmonary fibrosis and/or radiation therapy for cancer.
Second, cost-plus development contracts, like our contract with BARDA, include funds for overhead and profit.  These overhead and profit streams have significantly reduced our cash burn rate, which reduces our need to raise capital and incur dilution.
Third, some government contracts, such as the Lung-ARS contract with BARDA are designed to lead to the acquisition of the product under development by the US Government for use as a MCM in the Strategic National Stockpile (“SNS” or the “Stockpile”).  Government procurement could result in significant revenue to the Company, which could be used to further the development of the product in other indications or for the development of other promising products.  Procurements may be made if either the drug meets the requirements for approval by the U.S. FDA under the “Animal Rule” or prior to Animal Rule approval following the filing of a pre-Emergency Use Authorization (“EUA”) application.  Most of BARDA’s procurements to date have been following the filing of a pre-EUA application.
2

The amount of any potential procurement is undisclosed by BARDA at this time and is unknown to us. Based on publicly available information, as well as other procurements made by the agency after pre-EUA applications, we believe the agency may purchase sufficient courses of therapy to treat a minimum of one hundred thousand people, with options to purchase an additional two hundred thousand courses of treatment.  If purchases of such volumes occurred, the revenue to the Company could provide funding to advance numerous clinical studies, including potentially large Phase III programs in lung fibrosis and radiation therapy for cancer.  This funding could allow us to fund studies with less dependence on collaborative partnering arrangements and future equity offerings, which is consistent with our strategy to deploy non-dilutive capital wherever possible to develop our compounds for unmet medical indications and thereby generate value for our stockholders.  In addition, purchases of such volumes of drug could make the Company profitable.
Business Overview

We are developing a platform of compounds with anti-fibrotic, anti-inflammatory, anti-infective and anti-oxidant activity based on technology discovered and researched at Duke, UC and NJH, developed by Drs. Irwin Fridovich, Brian Day and others. Dr. Day is our Chief Scientific Officer.
Our lead compound, 10150, protects tissue from damage and increases survival in animal models of lung damage after exposure to radiation toxic chemicals, disease and trauma by mitigating and/or preventing cell death, inflammation and fibrosis through its action on oxidative stress (Reactive Oxygen Species, or “ROS”) and regulation of growth factors and chemokines including PTEN, TGF-β1, HIF-1α, TNF-α and IL-6, as well as impacting subsequent signaling pathways of ROS production, apoptosis and fibrosis such as NOX4, PTEN, PI3K/p-Akt and p53/Bax (for scientific definitions, see Glossary under “AEOL 10150 in Idiopathic Pulmonary Fibrosis”).  10150 is an extremely potent catalytic anti-oxidant that has been shown in scores of animal studies to reduce oxidative stress by neutralizing reactive oxygen and nitrogen species. The neutralization of these species impacts the inflammatory and fibrotic response to insults and reduces or eliminates subsequent tissue damage-signaling cascades that typically result.  We are developing 10150 as a MCM for national defense and for use in oncology and treating lung fibrosis.
Our most extensive development program to date is the advanced development of 10150 for Lung-ARS and DEARE.  On February 11, 2011, we signed a cost-plus contract with BARDA for the development of 10150 as a MCM against Lung-ARS.  BARDA is the government agency responsible for the advanced development and purchase of medical countermeasures for chemical, biological, radiological and nuclear threats.  The contract contemplates the advanced development of 10150 through approval by the FDA under 21 CFR Part 314 Subpart I and Part 601 Subpart H (the “Animal Rule.”)  The Animal Rule allows for approval of drugs using only animal studies when human clinical trials cannot be conducted ethically.  The ultimate goal of the BARDA Contract is to complete all of the work necessary to obtain FDA approval for 10150 as a MCM for Lung-ARS.  In addition, the BARDA Contract is designed to generate the data that would allow for acquisition of the drug by BARDA prior to FDA approval under a pre-EUA application.
Pursuant to the BARDA Contract, we were awarded approximately $10.4 million for the base period of the contract (from February 2011 to April 2012). On April 16, 2012, we announced that BARDA had exercised two options under the BARDA Contract worth approximately $9.1 million. On September 17, 2013, we announced that BARDA had exercised $6.0 million in additional contract options. On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1.8 million.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.   On June 26, 2015, we announced that BARDA had exercised $3.0 million in additional contract options under its advanced research and development contract for 10150. On February 8, 2016, BARDA exercised a Contract Modification worth approximately $0.1 million. On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Contract Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to estimate optimal dose, dose frequency and duration of treatment.  The total contract value exercised as of September 30, 2016 is approximately $30.8 million, of which $30.6 million has been billed.  We may receive up to an additional $87.6 million in options exercisable over the remainder of the BARDA Contract.  Options are exercised based on the progress of the development program, including the completion of clinical trials or manufacturing tasks under previously exercised options.
3

The final goal of the contract is to achieve FDA approval for 10150 and the development of commercial manufacturing capability.  In order to achieve these goals, we believe it will be necessary for BARDA to exercise the majority of the options in the contract. We also believe that BARDA is likely to continue to exercise options as long as 10150 continues to demonstrate efficacy in animal testing and safety in humans for Lung-ARS.  In the event we begin sales to the U.S. government following the filing of a pre-EUA application, we believe that BARDA is likely to exercise the majority of the remaining options under the contract.  One of the requirements of an EUA is that the development program continue towards the goal of FDA approval. If all of the options are exercised by BARDA, the total value of the contract would be approximately $118.4 million.

There are no existing treatments for Lung-ARS or DEARE and we are not aware of any compounds in development that have shown efficacy in increasing survival when administered after exposure to radiation.  10150 has demonstrated efficacy in two animal models (mouse and non-human primate) when administered after exposure to radiation.  The U.S. government’s planning scenario for a radiation incident is a 10 kiloton detonation of a nuclear device in a major American city.  It is estimated that several hundred thousand civilians would be exposed to high doses of radiation in this scenario.
The BARDA contract is also designed to complete the work necessary for 10150 to be purchased for the Stockpile. BARDA currently acquires drugs for the SNS through a Special Reserve Fund (the “SRF”) created under Project BioShield and reauthorized at $2.8 billion under the Pandemic All-Hazards Preparedness Reauthorization Act of 2013.   Although the final goal of the contract is full FDA approval under the Animal Rule, BARDA may purchase product prior to FDA approval following the filing of a pre-EUA application.  BARDA has made numerous acquisitions of compounds that were not approved by the FDA, but were the subject of a pre-EUA filing.  Procurements from BARDA following a pre-EUA application could result in a significant increase in revenues for Aeolus and potential profitability.
In August 2014, we filed an Investigational New Drug (“IND”) application with the Division of Medical Imaging Products of the U.S. Food & Drug Administration (“FDA”) for 10150 as a treatment for Lung-ARS.  On September 4, 2014, the Company announced positive results from a study in non-human primates (“NHP”) exposed to lethal radiation and treated with 10150. The study demonstrated that administration of 10150 24 hours after exposure to lethal radiation impacted survival at six months post-exposure as follows: survival in the 60 day treatment group was 50%, compared to 25% survival in the radiation only untreated control group. The data from this study, combined with development work completed in manufacturing and human safety data, will form the basis for a pre-EUA application.
On September 22, 2014, we received a letter from the FDA placing our proposed Phase I study in healthy normal volunteers for 10150 as a treatment for Lung-ARS on clinical hold. On February 19, 2016, we received notice from the FDA that the clinical hold had been lifted, thereby allowing us to proceed with a Phase I single dose study of 10150 in healthy normal volunteers.
We also benefit from research funded by grants from the NIH CounterACT program for the development of 10150 as a MCM for the effects chemical vesicant gasses (e.g., mustard gas, phosgene gas and chlorine gas) exposure. Funding for this indication is provided directly to the research institution and does not flow through our financial statements.  Continued funding is generally dependent on continuing evidence of efficacy in animal trials.  In October 2011,  NJH was awarded a $12.5 million grant from NIH CounterACT to continue the development of 10150 as a MCM against sulfur mustard and chlorine gas exposure. Also included in the grant was support for research looking at tissue plasminogen activator (“TPA”) and Silabilin, which are not Aeolus assets, as MCMs against sulfur mustard gas exposure. Work under this grant was completed in September 2016, and NJH reported in September 2016 that final studies under the grant demonstrated that 10150 treatment significantly improved acute (2 to 3 days post-exposure) and longer term (28 days post-exposure) in a rodent model of sulfur mustard gas lung exposure.  Development of a large animal model is currently being funded by the US Government, independent of Aeolus, and once that model is completed, the Company plans to enter into a Material Transfer Agreement with the US Government to test 10150 and confirm efficacy in the rodent model.  Aeolus plans to meet with the FDA during the first half of 2017 to discuss filing an IND for the sulfur mustard indication and to discuss what human safety data would be required for making a pre-EUA filing and ultimately for approval under the Animal Rule.
4

We are also funded by grant money from the NIH CounterACT program and the National Institute of Neurological Disorders and Stroke (“NINDS”) for the development of 10150 as a MCM for the effects of nerve gas (e.g., sarin and soman) exposure. NIH-CounterACT awarded a contract on September 24, 2011 worth approximately $735,000, to UC to develop 10150 as a MCM against nerve agents. Work performed with this initial funding demonstrated that 10150 significantly improved survival when administered with current treatment in a pilocarpine model for nerve gas exposure. In September 2013, we announced that Dr. Manisha Patel at UC had been awarded a $4.3 million grant from NINDS to further develop as a MCM for exposure to sarin gas and other nerve agents.  Efficacy studies in a mouse model of soman gas are ongoing, and results are expected during 2017.
Substantially all of the past costs for the Lung-ARS program have been funded by the BARDA Contract.  We may use our own capital to fund any future costs of the Lung-ARS program that are not funded by the BARDA Contract.  To date, the chlorine, phosgene, mustard gas and nerve agent programs have been funded by NIH-CounterACT and NINDS through programs at NJH, UC, and the United States Army Medical Research Institute for Chemical Defense (“USAMRICD”).
We are also developing 10150 for the treatment of lung fibrosis, including idiopathic pulmonary fibrosis (”IPF”) and other fibrotic diseases. Data demonstrating efficacy of 10150 in IPF was initially generated from animal studies in Lung-ARS and chemical gas lung exposure under the BARDA Contract and NIH grants.  Additionally, 10150 demonstrated efficacy in the bleomycin model of IPF, in a study funded by Aeolus.  On March 17, 2015, we announced that 10150 was granted Orphan Drug Designation by the U.S Food and Drug Administration (“FDA”). The Company plans to initiate a Phase I safety study in patients with IPF in 2017. After we have completed safety studies, we plan to initiate efficacy studies in patients with IPF. Although we believe that BARDA may fund a portion of the IPF development work, we may need use our own capital to fund a portion of the future costs of work associated with IPF and other fibrotic diseases.
We are also developing 10150 for use in combination with radiation therapy for cancer as a treatment to reduce side effects caused by radiation toxicity and to improve local tumor control.  Pre-clinical studies at Duke and Loma Linda University have demonstrated that 10150 does not interfere with the benefit of radiation therapy or chemotherapy in prostate and lung cancer.  Additional studies have shown that 10150 enhances the anti-tumor activity of radiation and chemotherapy.  A significant portion of the development work funded by the BARDA contract is applicable to the development program for radiation oncology, including safety, toxicology, pharmacokinetics and Chemistry, Manufacturing and Controls (“CMC”).   After we have completed safety studies, we plan to initiate studies to demonstrate efficacy in toxic side effects related to radiation therapy. We expect to fund a portion of the future costs of work related to radiation therapy opportunities from our own capital.
10150 has been tested in two human Phase I safety studies where it was well-tolerated and no adverse events were observed.  Efficacy has been demonstrated in animal models for Lung-ARS, chlorine gas exposure, phosgene gas exposure, sulfur mustard gas exposure (lungs and skin) and nerve gas exposure. In both mouse and NHP studies for Lung-ARS, 10150 treated groups showed significantly reduced weight loss, inflammation, oxidative stress, lung damage, and most importantly, mortality. Therapeutic efficacy has been demonstrated when 10150 is administered 24 hours after exposure to radiation, a requirement for consideration as a radiation MCM for the SNS.
Following the events at the Fukushima nuclear plant in Japan in 2011, we performed radiation exposure studies in mice at the request of Japanese researchers to determine how the administration of 10150 would impact the use of leukocyte growth factors (“LGF”) used to treat the hematopoietic or bone marrow syndrome of ARS (“H-ARS”).  Data showed that 10150 does not interfere with the efficacy of LGF (in this case Amgen’s Neupogen®).  Additionally, the study demonstrated that administration of Neupogen®, the current standard of care for H-ARS, increased damage to the lungs.  When 10150 was administered with Neupogen® this damage was significantly reduced.  We believe that this finding may have important implications for the potential procurement of 10150 for the SNS.  In September 2013, BARDA announced that it had entered into a procurement and inventory management agreement with Amgen to provide Neupogen® for the SNS. On March 30, 2015, the FDA approved Neupogen® for the treatment of H-ARS.
 In addition to our active IND for Lung-ARS, we have an active IND on file with the FDA for 10150 as a potential treatment for amyotrophic lateral sclerosis (“ALS”).  At this time, we do not have any plans to continue development of 10150 for ALS.
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We have already completed two Phase I safety studies in 52 humans (39 receiving drug and 13 control) demonstrating that 10150 is safe and well tolerated. CMC work has been completed, pilot lots have been prepared and production is being scaled up under the BARDA Contract.
The Company is developing a second compound, 11114, as a treatment for Parkinson’s disease.  Research funded by MJFF demonstrated the neuro-protective activity of 11114 in mouse and rat models of Parkinson’s disease. The compounds were invented by Brian J. Day, PhD at NJH and Manisha Patel, PhD at UC in collaboration with the Company.  We have obtained worldwide, exclusive licenses to develop the compounds from NJH and UC.  We plan to complete the remaining work to file an IND application with the FDA during 2017.
In April 2015, we announced the discovery of a new compound, 20415, that has demonstrated anti-inflammatory and anti-infective properties and could be effective in treating cystic fibrosis and combatting anti-biotic resistant bacteria.    The compound was developed under a collaboration between Brian J. Day, PhD at NJH and Aeolus Pharmaceuticals. We have obtained a worldwide, exclusive license to develop the rights to the compound from NJH. We plan to initiate the work to file an Investigational New Drug (“IND”) application with the FDA during 2017.

Risks Associated with Our Business

Our business is subject to numerous risks.  Please see the “Risk Factors” section beginning on page 8 of this prospectus.

Corporate Information

We were incorporated in the State of Delaware in 1994. Our common stock trades on the OTC Bulletin Board under the symbol “AOLS.” Our principal executive offices are located at 26361 Crown Valley Parkway, Suite 150, Mission Viejo, California 92691, and our phone number at that address is (949) 481-9825. Our website address is www.aeoluspharma.com. However, the information in, or that can be accessed through, our web site is not part of the registration statement of which this prospectus forms a part. We also make available free of charge through our website our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission, which we refer to as the SEC.
 
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THE OFFERING1

Common stock offered by us 
 
None
Common stock offered by selling stockholders
204,809,209, including 20,454,456 shares of common stock issuable upon conversion of Series C Convertible Preferred Stock (the “Conversion Shares”) and 52,947,877 shares of common stock issuable upon the exercise of warrants (the “Warrant Shares”).
 
Charter Amendment 
In order to facilitate the potential future issuance of Conversion Shares and Warrant Shares, the Company expects to complete a Charter Amendment (defined below).  As used in this prospectus, “Charter Amendment” means an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of common stock available for issuance by the Company or to effect a reverse common stock split without altering the number of shares of common stock previously authorized.
   
Factors affecting the issuance of Conversion Shares and Warrant Shares
The Company is not obligated to issue Conversion Shares or certain of the Warrant Shares (i) if the holder, including its affiliates, would thereby beneficially own in excess of 9.99% of the Company’s common stock and (ii) in no case prior to March 10, 2016.
 
OTC Bulletin Board Symbol 
“AOLS”
 
Proceeds to us 
We will not receive any proceeds from the sale of the shares of common stock covered by this prospectus. However, we will receive the proceeds of any cash exercise of the warrants.
 
Risk factors 
Investing in our common stock involves certain risks.  You should read “Risk Factors” beginning on page 8 for a discussion of factors that you should consider carefully before deciding whether to purchase shares of our common stock.
 



1 Note to Aeolus – Please confirm Offering numbers.
 
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RISK FACTORS

You should carefully consider the following information about risks described below, together with the other information contained in this prospectus and in our other filings with the SEC, before you decide to buy or maintain an investment in our common stock. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks actually occur, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock could decline, and you may lose all or part of your investment.

Risks Related to Our Business

We have operated at a loss and will likely continue to operate at a loss for the foreseeable future.

We have incurred significant historical losses and had an accumulated deficit of approximately $190,189,000 as of September 30, 2016. During the years ended September 30, 2016 and 2015, we incurred losses of $3,558,000 and $2,628,000, respectively. Our operating losses have been due primarily to our expenditures for research and development on our drug candidates and for general and administrative expenses and our lack of significant, or sufficient, revenues to offset all of the expenditures. We are likely to continue to incur operating losses until such time, if ever, that we generate significant recurring revenues from product sales, whether to the U.S. government for the Strategic National Stockpile or to the general healthcare community for commercial indications, like oncology, epilepsy or Parkinson’s disease. We anticipate it will take a minimum of two years (and possibly longer) for us to generate recurring revenues. We expect that it will take at least that long before the development of any of our licensed, or other current potential, products is completed, marketing approvals are obtained from the FDA and commercial sales of any of these products can begin, or that we might receive a procurement from the U.S. Government following a pre-Emergency Use Authorization application or Animal Rule Approval.
 

We may need substantial additional funding to continue our operations and may be unable to raise capital when needed, or at all, which would force us to delay, curtail or eliminate our clinical programs and our product development programs.

We may need to raise substantial additional capital to fund human clinical trials and continue our research and development, unless and until we receive a procurement of sufficient size from the U.S. Government for the Strategic National Stockpile. In addition, we may need to raise substantial additional capital to enforce our proprietary rights, defend, in litigation or otherwise, any claims that we infringe third party patents or other intellectual property rights; and commercialize, for non-government related indications, any of our products that may be approved by the FDA or any international regulatory authority.

As of September 30, 2016, we had cash of approximately $3,155,000. During fiscal year 2016, our monthly cash requirements to operate our business that are not reimbursed under the BARDA Contract were approximately $206,000. However, this historical cash burn does not include amounts described herein whereby we expect that our own capital will be used to fund part of the future costs of ongoing commercial development programs to the extent they are not funded by the BARDA Contract. To the extent we do not have sufficient cash to fund our working capital requirements, we may not be able to pay our payables timely, which may cause vendors to cease providing services to us, and we may not be able to advance certain, if not all, development programs.

In order to fund on-going operating cash requirements, or to accelerate or expand our oncology and other programs we will need to raise significant additional funds. We are continuously considering additional strategic and financial options available to us, including public or private equity offerings, debt financings or collaboration arrangements. If we raise additional funds by issuing equity securities, our stockholders will experience dilution of their ownership interest. Debt financings, if available, may involve restrictive covenants and require significant interest payments. If we do not receive additional financing to fund our operations not reimbursed under the BARDA Contract, or if BARDA does not exercise any additional options under the BARDA Contract, and we are unable to raise sufficient capital for operations, we would have to discontinue some or all of our activities, merge with or sell, lease or license some or all of our assets to another company, or cease operations entirely, and our stockholders might lose all or part of their investments.
 
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In addition, if our catalytic antioxidant program shows scientific progress, we will need significant additional funds to move our compounds through continued development and clinical trials. If we are unable to raise the amount of capital necessary, or do not receive a sufficient procurement from the U.S. Government for the Strategic National Stockpile, to complete development and reach commercialization of any of our catalytic antioxidant products, we will need to delay or cease development of one or more of these products or partner with another company for the development and commercialization of these products.

We have a history of operating losses and expect to continue to incur substantial losses and may never become profitable.

We have no products approved for commercialization in the United States or abroad. Our drug candidates are still being developed, and all but 10150 are still in early stages of development. Our drug candidates will require significant additional development, clinical trials, regulatory clearances or approvals by the FDA and additional investment before they can be commercialized in the United States.

Our likelihood of achieving profitability will depend on numerous factors, including success in:
 developing our existing drug candidates and developing and testing new drug candidates;
 protecting our intellectual property;
 establishing our competitive position;
 achieving third-party collaborations;
 receiving regulatory approvals;
 manufacturing and marketing products; and
 receiving government funding and identifying new government funding opportunities.

Many of these factors will depend on circumstances beyond our control. We may not achieve sufficient revenues for profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than we anticipate, or if operating expenses exceed our expectations or cannot be adjusted accordingly, then our business, results of operations, financial condition and cash flows will be materially and adversely affected.

As of September 30, 2016, we had an accumulated deficit of $190,189,000 from our research, development and other activities. We have not generated material revenues from product sales and do not expect to generate product revenues sufficient to support us for at least several more years.  As a result, we may not be successful in obtaining sufficient financing on commercially reasonable terms, or at all. Our requirements for additional capital may be substantial and will be dependent on many factors, including the success of our research and development efforts, our ability to commercialize and market products, our ability to successfully pursue our licensing and collaboration strategy, the receipt of government funding, competing technological developments, costs associated with the protection of our intellectual property and any future change in our business strategy.

Our research and development (“R&D”) activities are at an early stage and therefore might never result in viable products.

Our research and development program is in the early stages of development, involves unproven technology, requires significant further R&D and regulatory approvals and is subject to the risks of failure inherent in the development of products or therapeutic procedures based on innovative technologies. These risks include the possibilities that:

any or all of these proposed products or procedures are found to be unsafe or ineffective or otherwise fail to receive necessary regulatory approvals;
the proposed products or procedures are not economical to market or do not achieve broad market acceptance;
third parties hold proprietary rights that preclude us from marketing the proposed products or procedures; and
third parties market a superior or equivalent product.
 
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Further, the timeframe for commercialization of any product is long and uncertain because of the extended testing and regulatory review process required before marketing approval can be obtained. We may not be able to successfully develop or market any of our proposed products or procedures.  If we are not able to successfully market any product, our business will suffer.

Our ability to advance our commercialization objectives may be limited by limitation on our access to capital and the absence of any internal marketing capabilities and external marketing arrangements.
In light of the limited number of employees we currently have, our limited resources, and the early stage of our commercial development efforts, our future success may be limited.  In addition, there are significant uncertainties as to our ability to access potential sources of capital, and we may not be able to enter into industry partner collaborations that would provide us with liquidity sources on terms acceptable to us, or at all. These uncertainties may be due to a variety of factors, including evolving or adverse conditions in the pharmaceutical industry or in the economy in general or based on the prospects of our commercial programs. Even if we are successful in obtaining collaboration for our commercial programs, we may have to relinquish rights to technologies, product candidates or markets that we might otherwise develop ourselves. These same risks apply to any attempt to out-license our compounds. Finally, our product candidates are being developed for large therapeutic markets. We believe these markets are best approached by partnering with established biotechnology or pharmaceutical companies that have broad sales and marketing capabilities. We are pursuing marketing collaborations of this type as part of our search for development partners. However, we may not be able to enter into any marketing arrangements for any of our products on satisfactory terms or at all.

If our products are not successfully developed and eventually approved by the FDA, we may be forced to reduce or terminate our operations.
 
All of our drug candidates are at various stages of development and must be approved by the FDA or similar foreign governmental agencies before they can be marketed. The process for obtaining FDA and foreign regulatory approval is both time-consuming and costly, with no certainty of a successful outcome. This process typically requires extensive preclinical and clinical testing, which may take longer or cost more than we anticipate, and may prove unsuccessful due to numerous factors. Drug candidates that may appear to be promising at early stages of development may not successfully reach the market for a number of reasons. The results of preclinical and initial clinical testing of these drug candidates may not necessarily indicate the results that will be obtained from later or more extensive testing. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in advanced clinical trials, even after obtaining promising results in earlier trials.
 
Numerous factors could affect the timing, cost or outcome of our drug development efforts, including the following:

 difficulty in securing research laboratories to conduct research activities;
 difficulty in securing centers to conduct trials;
 difficulty in enrolling patients in conformity with required protocols or projected timelines;
 unexpected adverse reactions by patients in trials;
 difficulty in obtaining clinical supplies of the product;
 changes in the FDA’s or other regulatory body’s requirements for our testing during the course of that testing;
 inability to generate statistically significant data confirming the efficacy of the product being tested;
 modification of the drug during testing; and
 reallocation of our limited financial and other resources to other clinical programs.

It is possible that none of the products we develop will obtain the regulatory approvals necessary for us to begin commercializing them. The time required to obtain FDA and other approvals is unpredictable but often can take years following the commencement of clinical trials, depending upon the nature of the drug candidate. Any analysis we perform on data from clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. Any delay or failure in obtaining required approvals could have a material adverse effect on our ability to generate revenues from the particular drug candidate and we may not have the financial resources to continue to develop our drug candidates and, as a result, may have to terminate our operations.
 
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If we do not reach the market with our products before our competitors offer products for the same or similar uses, or if we are not effective in marketing our products, our revenues from product sales, if any, will be reduced.

We face intense competition in our development activities. Many of our competitors are fully integrated pharmaceutical companies, biotechnology companies or more established bioterrorism product companies, which have substantially greater financial, technical, sales and marketing and human resources than we do. These companies might succeed in obtaining regulatory approval for competitive products more rapidly than we can for our products. In addition, competitors might develop technologies and products that are less expensive and perceived to be safer or more effective than those being developed by us, which could impair our product development and render our technology obsolete.

We are and expect to remain dependent upon collaborations with third parties for the development of new products, and adverse events involving these collaborations could prevent us from developing and commercializing our drug candidates and achieving profitability.

We currently license from third parties, and do not own, rights under patents and certain related intellectual property for the development of our drug candidates. In addition, we expect to enter into agreements with third parties to license rights to our drug candidates. We might not be able to enter into or maintain these agreements on terms favorable to us, if at all. Further, if any of our current licenses were to expire or terminate, our business, prospects, financial condition and results of operations could be materially and adversely affected.

Our research and development activities rely on technology licensed from third parties, and termination of any of those licenses would result in loss of significant rights to develop and market our products, which would impair our business, prospects, financial condition and results of operations.

We have exclusive worldwide rights to our antioxidant small molecule technology through license agreements with Duke, NJH and UC. Each license generally may be terminated by the licensor if we fail to perform our obligations under the agreement, including obligations to develop the compounds and technologies under license. If terminated, we would lose the right to develop the products, which could adversely affect our business, prospects, financial condition and results of operations. The license agreements also generally require us to meet specified milestones or show reasonable diligence in development of the technology. If disputes arise over the definition of these requirements or whether we have satisfied the requirements in a timely manner, or if any other obligations in the license agreements are disputed by the other party, the other party could terminate the agreement, and we could lose our rights to develop the licensed technology.
 
If new technology is developed from these licenses, we may be required to negotiate certain key financial and other terms, such as royalty payments, for the licensing of this future technology with these research institutions, and it might not be possible to obtain any such license on terms that are satisfactory to us, or at all.

We now rely, and will continue to rely, heavily on third parties for product and clinical development, manufacturing, marketing and distribution of our products.

 We currently depend heavily and will depend heavily in the future on third parties for support in product development, clinical development, manufacturing, marketing and distribution of our products. The termination of some or all of our existing collaborative arrangements, or our inability to establish and maintain collaborative arrangements, could have a material adverse effect on our ability to continue or complete clinical development of our products.
 
We rely on contract clinical research organizations (“CROs”) for various aspects of our clinical development activities including clinical trial monitoring, data collection and data management. As a result, we have had and continue to have less control over the conduct of clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if we were relying entirely upon our own staff. Although we rely on CROs to conduct our clinical trials, we are responsible for confirming that each of our clinical trials is conducted in accordance with the investigational plan and protocol. Moreover, the FDA and foreign regulatory agencies require us to comply with GCPs for conducting, recording and reporting the results of clinical trials to assure that the data and results are credible and accurate and that the trial participants are adequately protected. Our reliance on third parties does not relieve us of these responsibilities and requirements.
 
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The third parties on which we rely may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected cost increases that are beyond our control. Any failure of such CROs to successfully accomplish clinical trial monitoring, data collection and data management and the other services they provide for us in a timely manner and in compliance with regulatory requirements could have a material adverse effect on our ability to complete clinical development of our products and obtain regulatory approval. Problems with the timeliness or quality of the work of a CRO may lead us to seek to terminate the relationship and use an alternate service provider. However, making such changes may be costly and would likely delay our trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be difficult to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.

If BARDA opts not to exercise its options under the BARDA Contract, we would be dependent upon grants from NIH for continued development of 10150 for Lung-ARS, or we would need to curtail our development program in this area significantly and we may be placed at a competitive disadvantage in addressing this market opportunity.

During the fiscal years ended September 30, 2016 and 2015, we received 100% of our revenues from our agreement with BARDA, for the development of 10150 as a MCM against Lung-ARS. These revenues have funded some of our personnel and other R&D costs and expenses. Pursuant to the BARDA Contract, we were awarded approximately $10.4 million for the base period of the contract (from February 2011 to April 2012). On April 16, 2012, we announced that BARDA had exercised two options under the BARDA Contract worth approximately $9.1 million. On September 17, 2013, we announced that BARDA had exercised $6.0 million in additional contract options. On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1.8 million.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.   On June 26, 2015, we announced that BARDA had exercised $3.0 million in additional contract options under its advanced research and development contract for 10150.  On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to determine optimal dose, dose frequency and duration of treatment.  The total contract value exercised as of September 30, 2016 is approximately $30.8 million, of which $30.6 million has been billed. We may receive up to an additional $87.6 million in options exercisable over the remainder of the BARDA Contract.  Options are exercised based on the progress of the development program, including the completion of clinical trials or manufacturing tasks under previously exercised options.
 
Under the terms of the BARDA Contract, BARDA may elect not to exercise some or all of the additional options. Because a significant portion of our current revenues are generated from the BARDA Contract, if BARDA does not exercise its options under the BARDA Contract, our ability to develop 10150 as an MCM for Lung-ARS could be negatively impacted, which could harm our competitive position and materially and adversely affect our business, financial condition and results of operations.  In general, we believe that future exercise of options under the contract will depend on successful completion of tasks under exercised options and continued demonstration of efficacy.

Necessary reliance on the “Animal Rule” in conducting trials is time-consuming and expensive.

To obtain FDA approval for our drug candidate for a bioterrorism indication under current FDA regulations, we are required to utilize animal model studies for efficacy and provide animal and human safety data under the “Animal Rule.” For many of the biological and chemical threats, animal models are not yet available, and as such we are developing, or will have to develop, appropriate animal models, which is a time-consuming and expensive research effort. Further, we may not be able to sufficiently demonstrate the animal correlation to the satisfaction of the FDA, as these corollaries are difficult to establish and are often unclear. The FDA may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies, refuse to approve our products, or place restrictions on our ability to commercialize those products. Further, other countries do not, at this time, have established criteria for review and approval of these types of products outside their normal review process; i.e., there is no “Animal Rule” equivalent, and consequently we may not be able to make a submission for marketing approval in foreign countries based on such animal data.
 
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Additionally, few facilities in the U.S. and internationally have the capability to test animals with radiation, nerve agents, or other lethal biotoxins or chemical agents or otherwise assist us in qualifying the requisite animal models. We have to compete with other biodefense companies for access to this limited pool of highly specialized resources. We therefore may not be able to secure contracts to conduct the testing in a predictable timeframe, cost-effectively or at all.

Even if we succeed in commercializing our drug candidates, we may not become profitable and manufacturing problems or side effects discovered at later stages can further increase costs of commercialization.

Any drugs resulting from our research and development efforts may not become commercially available. Even if we succeed in developing and commercializing our drug candidates, we may never generate sufficient or sustainable revenues to enable us to be profitable. Even if effective, a product that reaches the market may be subject to additional clinical trials, changes to or re-approvals of our manufacturing facilities or a change in labeling if we or others identify side effects or manufacturing problems after a product is on the market. This could harm sales of the affected products and could increase the cost and expenses of commercializing and marketing them. It could also lead to the suspension or revocation of regulatory approval for the products.
 
We and our contract manufacturing organizations (“CMOs”) will also be required to comply with the applicable FDA current good manufacturing practice (“cGMP”) regulations. These regulations include requirements relating to quality control and quality assurance as well as the corresponding maintenance of records and documentation. Manufacturing facilities are subject to inspection by the FDA. These facilities must be approved to supply licensed products to the commercial marketplace. We and our contract manufacturers may not be able to comply with the applicable cGMP requirements and other FDA regulatory requirements. Should we or our contract manufacturers fail to comply, we could be subject to fines or other sanctions or could be prohibited from marketing any products we develop.
 
Political or social factors may delay or impair our ability to market our products and our business may be materially adversely affected.

Products developed to treat diseases caused by, or to combat the threat of, bioterrorism will be subject to changing political and social environments. The political and social responses to bioterrorism have been unpredictable. Political or social pressures may delay or cause resistance to bringing our products to market or limit pricing of our products, which would harm our business. Changes to favorable laws, such as Project BioShield, could have a material adverse effect on our business, prospects, financial condition and results of operations.
Legislation limiting or restricting liability for medical products used to fight bioterrorism is new, and we cannot be certain that any such protection will apply to our products or if applied what the scope of any such coverage will be.

The U.S. Public Readiness Act was signed into law in December 2005 (the “Public Readiness Act”) and creates general immunity for manufacturers of countermeasures, including security countermeasures (as defined in Section 319F-2(c)(1)(B) of the Public Readiness Act), when the U.S. Secretary of Health and Human Services issues a declaration for their manufacture, administration or use. The declaration is meant to provide general immunity from all claims under state or federal law for loss arising out of the administration or use of a covered countermeasure. Manufacturers are excluded from this protection in cases of willful misconduct. The Secretary of Health and Human Services may not make declarations that would cover any of our other drug candidates or the U.S. Congress may not act in the future to reduce coverage under the Public Readiness Act or it may repeal it altogether.
 
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Upon a declaration by the Secretary of Health and Human Services, a compensation fund would be created to provide “timely, uniform and adequate compensation to eligible individuals for covered injuries directly caused by the administration or use of a covered countermeasure.” The “covered injuries” to which the program applies are defined as serious physical injuries or death. Individuals are permitted to bring a willful misconduct action against a manufacturer only after they have exhausted their remedies under the compensation program. A willful misconduct action could be brought against us if an individual(s) has exhausted his or her remedies under the compensation program, which could thereby expose us to liability. Furthermore, the Secretary of Health and Human Services may not issue a declaration under the Public Readiness Act to establish a compensation fund. We may also become subject to standard product liability suits and other third party claims if products we develop which fall outside of the Public Readiness Act cause injury or if treated individuals subsequently become infected or otherwise suffer adverse effects from such products.

Healthcare reform measures and other statutory or regulatory changes could adversely affect our business.

The pharmaceutical and biotechnology industries are subject to extensive regulation, and from time to time legislative bodies and governmental agencies consider changes to such regulations that could have significant impact on industry participants. For example, in light of certain highly-publicized safety issues regarding certain drugs that had received marketing approval, the U.S. Congress has considered various proposals regarding drug safety, including some which would require additional safety studies and monitoring and could make drug development more costly. We are unable to predict what additional legislation or regulation, if any, relating to safety or other aspects of drug development may be enacted in the future or what effect such legislation or regulation would have on our business.
 
The business and financial condition of pharmaceutical and biotechnology companies are also affected by the efforts of governments, third-party payors and others to contain or reduce the costs of healthcare to consumers. In the United States and various foreign jurisdictions there have been, and we expect that there will continue to be, a number of legislative and regulatory proposals aimed at changing the healthcare system, such as the Affordable Care Act and proposals relating to the reimportation of drugs into the U.S. from other countries (where they are then sold at a lower price) and government control of prescription drug pricing. The roll-out, pendency or approval of such proposals could affect our commercialization efforts and result in a decrease in our share price or limit our ability to raise capital or to obtain strategic collaborations or licenses.

We will need to enter into collaborative arrangements for the manufacturing and marketing of our drug candidates, or we will have to develop the expertise, obtain the additional capital and invest the resources to perform those functions internally.

We do not have the staff or facilities to manufacture or market any of the drug candidates being developed in our catalytic antioxidant program. As a result, we will need to enter into collaborative arrangements to commercialize, manufacture and market products that we expect to emerge from our catalytic antioxidant program, or develop the expertise within Aeolus. We might not be successful in entering into such third party arrangements on terms acceptable to us, if at all. If we are unable to obtain or retain third-party manufacturing or marketing on acceptable terms, we may be delayed in our ability to commercialize products, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Substantial additional funds and personnel would be required if we needed to establish our own manufacturing or marketing operations. We may not be able to obtain adequate funding or establish these capabilities in a cost-effective or timely manner, which could have a material adverse effect on our business, prospects, financial condition and results of operations.

A failure to obtain or maintain patent and other intellectual property rights would allow others to develop and sell products similar to ours, which could impair our business, prospects, financial condition and results of operations.

 The success of our business depends, in part, on our ability to establish and maintain adequate protection for our intellectual property, whether owned by us or licensed from third parties. We rely primarily on patents in the United States and in other key markets to protect our intellectual property. If we do not have adequate patent protection, other companies could develop and sell products that compete directly with ours, without incurring any liability to us. Patent prosecution, maintenance and enforcement on a global basis are time-consuming and expensive, and many of these costs must be incurred before we know whether a product covered by the claims can be successfully developed or marketed.
 
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Even if we expend considerable time and money on patent prosecution, a patent application may never issue as a patent. We can never be certain that we were the first to invent the particular technology or that we were the first to file a patent application for the technology because patent applications in the United States and elsewhere are not typically published for public inspection for at least 18 months from the date when they are filed. It is always possible that a competitor is pursuing a patent for the same invention in the United States as we are and has an earlier invention date. In some jurisdictions outside of the United States, priority of invention is determined by the earliest effective filing date, not the date of invention. Consequently, if a third party pursues the same invention and has an earlier filing date, patent protection outside the United States would be unavailable to us. Also, outside the United States, an earlier date of invention cannot overcome a date of publication that precedes the earliest effective filing date. Accordingly, the patenting of our proposed products would be precluded outside the United States if a prior publication anticipates the claims of a pending application, even if the date of publication is within a year of the filing of the pending application.
 
Even if patents issue, the patent claims allowed might not be sufficiently broad to offer adequate protection for our technology against competitive products. Patent protection differs from country to country, giving rise to increased competition from other products in countries where patent coverage is either unavailable, weak or not adequately enforced, if enforced at all. Once a patent issues, we still face the risk that others will try to design around our patent or will try to challenge the validity of the patent. The cost of defending against a challenge to one or more of our patents could be substantial and even if we prevailed, there could be no assurance that we would recover damages.

If a third party were to bring an infringement claim against us, we would incur significant costs in our defense; if the claim were successful, we would need to develop non-infringing technology or obtain a license from the successful patent holder, if available.

Our business also depends on our ability to develop and market products without infringing on the proprietary rights of others or being in breach of our license agreements. The pharmaceutical industry is characterized by a large number of patents, patent filings and frequent and protracted litigation regarding patent and other intellectual property rights. Many companies have numerous patents that protect their intellectual property rights. Third parties might assert infringement claims against us with respect to our drug candidates and future products. If litigation were required to determine the validity of a third party’s claims, we could be required to spend significant time and financial resources, which could distract our management and prevent us from furthering our core business activities, regardless of the outcome. If we did not prevail in the litigation, we could be required to pay damages, license a third party’s technology, which may not be possible on terms acceptable to us, or at all, or discontinue our own activities and develop non-infringing technology, any of which could prevent or significantly delay pursuit of our development activities.

Protection of trade secret and confidential information is difficult, and loss of confidentiality could eliminate our competitive advantage.

In addition to patent protection, we rely on trade secrets, proprietary know-how and confidential information to protect our technology. We use confidentiality agreements with our employees, consultants and collaborators to maintain the proprietary nature of this technology. However, confidentiality agreements can be breached by the other party, which would make our trade secrets and proprietary know-how legally available for use by others. There is generally no adequate remedy for breach of confidentiality obligations. In addition, the competitive advantage afforded by trade secrets is limited because a third party can independently discover or develop something identical to our own trade secrets or know-how, without incurring any liability to us.
 
In addition, if our current or former employees, consultants or collaborators were to use information improperly obtained from others (even if unintentional), we may be subject to claims as to ownership and rights in any resulting know-how or inventions.
 
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If we cannot retain or hire qualified personnel or maintain our collaborations, our programs could be delayed and may be discontinued.
 
As of September 30, 2016, we had four full-time employees. We utilize consultants to assist with our operations and are highly dependent on the services of our executive officers. We do not maintain “key person” life insurance on any of our personnel. We also are dependent on our collaborators for our research and development activities. The loss of key executive officers or collaborators could delay progress in our research and development activities or result in their termination entirely.

We believe that our future success will depend in large part upon our ability to attract and retain highly skilled scientific and managerial personnel. We face intense competition for these kinds of personnel from other companies, research and academic institutions, government entities and other organizations. If we fail to identify, attract and retain personnel, we may be unable to continue the development of our drug candidates, which would have a material adverse effect on our business, prospects, financial condition and results of operations.

We face the risk of product liability claims that could exceed our insurance coverage and deplete our cash resources.

The pharmaceutical and biotechnology industries expose us to the risk of product liability claims alleging that use of our drug candidates caused an injury or harm. These claims can arise at any point in the development, testing, manufacture, marketing or sale of pharmaceutical products and may be made directly by patients involved in clinical trials of our products, by consumers or healthcare providers or by organizations selling our products. Product liability claims can be expensive to defend, even if the product did not actually cause the alleged injury or harm.

Insurance covering product liability claims becomes increasingly expensive as a product candidate moves through the development pipeline to commercialization. We have limited product liability insurance coverage for our clinical trials and this coverage may not be sufficient to cover us against some or all potential losses due to liability, if any, or to the expenses associated with defending against liability claims. A product liability claim successfully asserted against us could exceed our insurance coverage, require us to use our own cash resources and have a material adverse effect on our business, financial condition and results of operations.

In addition, some of our licensing and other agreements with third parties require or might require us to maintain product liability insurance. If we cannot maintain acceptable amounts of coverage on commercially reasonable terms in accordance with the terms set forth in these agreements, the corresponding agreements would be subject to termination.

The costs of compliance with environmental, safety and similar laws could increase our cost of doing business or subject us to liability in the event of noncompliance.

Our business is subject to regulation under state and federal laws regarding occupational safety, laboratory practices, environmental protection and the use, generation, manufacture, storage and disposal of hazardous substances. We may be required to incur significant costs in the future to comply with existing or future environmental and health and safety regulations. Our research activities involve the use of hazardous materials, chemicals and radioactive compounds. Although we believe that our procedures for handling such materials comply with applicable state and federal regulations, we cannot eliminate the risk of contamination or injury from these materials. In the event of contamination, we could be liable for any resulting damages, which could have a material adverse effect on our business, financial condition and results of operations.

We are subject to intense competition that could materially impact our operating results.

We may be unable to compete successfully against our current or future competitors. The pharmaceutical, biopharmaceutical, biotechnology and bioterrorism industries are characterized by intense competition and rapid and significant technological advancements. Many companies, research institutions and universities are working in a number of areas similar to our primary fields of interest to develop new products. There also is intense competition among companies seeking to acquire products that already are being marketed. Many of the companies with which we compete have or are likely to have substantially greater research and product development capabilities and financial, technical, scientific, manufacturing, marketing, distribution and other resources than at least some of our present or future strategic partners or licensees.
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As a result, these competitors may:

 succeed in developing competitive products sooner than us or our strategic partners or licensees;
 obtain FDA and other regulatory approvals (including EUA approvals) for their products before approval of any of our products;
 obtain patents that block or otherwise inhibit the development and commercialization of our drug candidates;
 develop products that are safer or more effective than our products;
 devote greater resources to marketing or selling their products;
 introduce or adapt more quickly to new technologies or scientific advances;
 introduce products that render our products obsolete;
 withstand price competition more successfully than us or our strategic partners or licensees;
 negotiate third-party strategic alliances or licensing arrangements more effectively; or
 take advantage of other opportunities more readily.
 
Currently, as discussed under “Competition” in “Business” there are no drugs approved for Lung-ARS.  Two drugs, Ebsriet (Roche) and OFEV (Boehringer-Ingelheim) are approved for use in treating IPF.  There is one drug, Amifostine, approved for use in reducing side effects from radiation therapy. However, there are also many companies working to develop pharmaceuticals that act as radiation protection agents and as treatments for IPF.

Acceptance of our products in the marketplace is uncertain, and failure to achieve market acceptance will harm our business.

Even if approved for marketing, our products may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors, including:

 the receipt of regulatory approvals for the indications that we are studying;
 the establishment and demonstration in the medical community of the safety, clinical efficacy and cost-effectiveness of our products and their potential advantages over existing therapeutic products;
 marketing and distribution support;
 the introduction, market penetration and pricing strategies of competing and future products; and
 coverage and reimbursement policies of governmental and other third-party payors such as insurance companies, health maintenance organizations and other plan administrators.

Physicians, patients, payors or the medical community in general may be unwilling to accept, purchase, utilize or recommend any of our products.

We may be required to make milestone payments and other payments relating to the commercialization of our products.

Our agreements by which we acquired rights to our drug candidates provide for milestone payments by us upon the occurrence of certain regulatory filings and approvals related to the acquired products. In the event that we successfully develop our drug candidates, these milestone payments could be significant. In addition, our agreements require us to pay a royalty interest on worldwide sales. Also, any future license, collaborative or other agreements we may enter into in connection with our development and commercialization activities may require us to pay significant milestone, license and other payments in the future.

We are continually evaluating our business strategy, and may modify this strategy in light of developments in our business and other factors.

We continue to evaluate our business strategy and, as a result, may modify this strategy in the future. In this regard, we may, from time to time, focus our development efforts on different drug candidates or may delay or halt the development of our drug candidates. In addition, as a result of changes in our strategy, we may also change or refocus our existing drug discovery, development, commercialization and manufacturing activities.
 
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Our short-term investments, marketable securities and restricted investments, if any, are subject to certain risks which could materially adversely affect our overall financial position.

We invest our cash in accordance with an established internal policy and customarily in instruments which historically have been highly liquid and carried relatively low risk. We maintain a portfolio of investments in short-term investments, marketable debt securities and restricted investments, which are recorded at fair value. Certain of these transactions expose us to credit risk in the event of default of the issuer. To minimize our exposure to credit risk, we invest in securities with strong credit ratings. Should any of our short-term investments, marketable securities or restricted investments lose value or have their liquidity impaired, it could materially and adversely affect our overall financial position by imperiling our ability to fund our operations and forcing us to seek additional financing sooner than we would otherwise. Such financing may not be available on commercially attractive terms or at all.

Our insurance policies are expensive and protect us only from some business risks, which could leave us exposed to significant, uninsured liabilities.

We do not carry insurance for all categories of risk that our business may encounter. We currently maintain general liability, property, auto, workers’ compensation, products liability, fiduciary and directors’ and officers’ insurance policies. We do not know, however, if we will be able to maintain existing insurance with adequate levels of coverage. For example, the premiums for our directors’ and officers’ insurance policy have increased in the past and may increase in the future, and this type of insurance may not be available on acceptable terms or at all in the future. Any significant uninsured liability may require us to pay substantial amounts, which would adversely affect our cash position and results of operations.

We may have a limitation on the use of net operating loss carryforwards and tax credits.

Our ability to utilize our net operating loss carryforwards, or NOLs, and tax credits may be limited if we undergo or have undergone an ownership change, as defined in Section 382 of the Internal Revenue Code, as a result of changes in the ownership of outstanding stock. An ownership change generally occurs if the percentage of stock owned by one or more stockholders who own, directly or indirectly, 5% or more of the value of our outstanding stock (or are otherwise treated as 5% stockholders under Section 382 and the regulations promulgated thereunder) has increased by more than 50 percentage points over the lowest percentage of our outstanding stock owned by these stockholders at any time during the testing period, which is generally the three-year period preceding the potential ownership change. In the event of an ownership change, Section 382 imposes an annual limitation on the amount of post-ownership change taxable income a corporation may offset with pre-ownership change NOLs.

We are exposed to risks if we are unable to comply with changes to laws affecting public companies, including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and also to increased costs associated with complying with such laws.

Laws and regulations affecting public companies in the U.S., including the provisions of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, will cause us to incur increased costs as we evaluate the implications of new rules and respond to new requirements. Delays or a failure to comply with the new laws, rules and regulations could result in enforcement actions, the assessment of other penalties and civil suits. These laws and regulations make it more expensive for us under indemnities provided by us to our officers and directors and may make it more difficult for us to obtain certain types of insurance, including liability insurance for directors and officers; as such, we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, or as executive officers. We may be required to hire additional personnel and utilize additional outside legal, accounting and advisory services — all of which could cause our general and administrative costs to increase beyond what we currently have planned.
 
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Our corporate compliance program cannot guarantee that we are in compliance with all potentially applicable regulations.

The development, manufacturing, pricing, sales, coverage and reimbursement of our products, together with our general operations, are subject to extensive regulation by federal, state and other authorities within the United States and numerous entities outside of the United States. While we have developed and instituted a corporate compliance program based on what we believe are the current best practices, governmental authorities may not find that our business practices comply with current or future administrative or judicial interpretations of potentially applicable laws and regulations. If we fail to comply with any of these laws and regulations, we could be subject to a range of regulatory actions, including suspension or termination of clinical trials, the failure to approve a product candidate, restrictions on our products or manufacturing processes, withdrawal of products from the market, significant fines, or other sanctions or litigation.

Risks Related to Our Dependence on U.S. Government Grants and Contracts

Even with the BARDA Contract, we may not be able to fully fund our research and development of 10150 as a MCM for Lung-ARS.

The BARDA Contract is a cost-plus-fixed-fee reimbursement contract that only reimburses certain specified activities that have been previously authorized by BARDA. Additional activities may be needed and, if so, BARDA may not reimburse us for these activities. Performance under the BARDA Contract requires that we comply with appropriate regulations and operational mandates. Our ability to be regularly and fully reimbursed for our activities will depend on our ability to comply and demonstrate compliance with such requirement.

The BARDA Contract award does not guarantee that we will be successful in future clinical trials or that 10150 will be approved by the FDA.

The BARDA Contract provides a cost-plus-fixed-fee reimbursement opportunity for certain specified clinical and development activities, but we remain fully responsible for conducting these activities. The award of BARDA Contract does not guarantee that any of these activities will be successful. Our inability to be successful with certain key clinical or development activities could jeopardize our ability to obtain FDA approval for 10150.

Most of our immediately foreseeable future revenues are contingent upon grants, contracts or purchases from the U.S. government and we may not achieve sufficient, if any, revenues from these agreements to attain profitability.

For the foreseeable future, we believe our main customer, if any, will be national governments, primarily the U.S. government. However, we may not ultimately be successful in receiving any future revenues or grants from such governments. The process of obtaining government contracts is lengthy and uncertain and we may have to compete with other companies for each contract. We may not be awarded any contracts to supply the U.S. or other governments with our drug candidates or products as such awards may be made, in whole or in part, to our competitors. If the U.S. government makes significant future contract awards for the supply to the Strategic National Stockpile of a competing product, our business will be harmed and it is unlikely that we will ultimately be able to supply that particular treatment or product to foreign governments or other third parties. Further, changes in government budgets and agendas, or advances by our competitors, may result in a decreased and de-prioritized emphasis on procuring the biodefense products we are developing.

The U.S. government’s determination to award any contracts may be challenged by an interested party, such as another bidder, at the Government Accountability Office (“GAO”) or in federal court. If such a challenge is successful, a contract may be terminated.

The laws and regulations governing procurements of goods and services by the U.S. government provide procedures by which other bidders and other interested parties may challenge the award of a government contract. If we are awarded a government contract, such challenges or protests could be filed even if there are not any valid legal grounds on which to base the protest. If any such protests are filed, the government agency may decide to suspend our performance under the contract while such protests are being considered by the GAO or the applicable federal court, thus potentially delaying delivery of goods and services and payment. In addition, we could be forced to expend considerable funds to defend any potential award. If a protest is successful, the government may be ordered to terminate the contract and reselect bids. The government could even be directed to award a potential contract to one of the other bidders.
 
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Our business may become subject to audit by the U.S. government and a negative audit could adversely affect our business.

U.S. government agencies such as the Defense Contract Audit Agency (the “DCAA”), routinely audit and investigate government contractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance with applicable laws, regulations and standards.

The DCAA also reviews the adequacy of, and a contractor’s compliance with, its internal control systems and policies, including the contractor’s purchasing, property, estimating, compensation and management information systems. Any costs found to be improperly allocated to a specific contract will not be reimbursed, while such costs already reimbursed must be refunded. If an audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including:

 termination of contracts;
 forfeiture of profits;
 suspension of payments;
 fines; and
 suspension or prohibition from conducting business with the U.S. government.

In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

Laws and regulations affecting government contracts make it more costly and difficult for us to successfully conduct our business.

We must comply with numerous laws and regulations relating to the formation, administration and performance of government contracts, which can make it more difficult for us to retain our rights under these contracts. These laws and regulations affect how we conduct business with government agencies. Among the most significant government contracting regulations that affect our business are:

the Federal Acquisition Regulations, and agency-specific regulations supplemental to the Federal Acquisition Regulations, which comprehensively regulate the procurement, formation, administration and performance of government contracts;
the business ethics and public integrity obligations, which govern conflicts of interest and the hiring of former government employees, restrict the granting of gratuities and funding of lobbying activities and incorporate other requirements such as the Anti-Kickback Act and Foreign Corrupt Practices Act;
export and import control laws and regulations; and
laws, regulations and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

Foreign governments typically also have laws and regulations governing contracts with their respective agencies. These foreign laws and regulations could affect how we conduct business and, in some instances, impose added costs on our business. Any changes in applicable laws and regulations could restrict our ability to obtain contracts, which could limit our ability to conduct our business and materially adversely affect our revenues and results of operations.

Because we depend on clinical research centers and other contractors for clinical and non-clinical testing, including testing under the “Animal Rule”, and for certain research and development activities, the results of our clinical trial, non-clinical animal efficacy studies, and research and development activities are largely beyond our control.

The nature of studies, clinical trials and our business strategy of outsourcing substantially all of our research and development and manufacturing work require that we rely on clinical research centers and other contractors to assist us with research and development, clinical and non-clinical testing (including animal efficacy studies under the “Animal Rule”), patient enrollment and other activities. As a result, our success depends largely on the success of these third parties in performing their responsibilities. Although we prequalify our contractors and believe that they are fully capable of performing their contractual obligations, we cannot directly control the adequacy and timeliness of the resources and expertise that they apply to these activities. Furthermore, we have to compete with other biodefense companies for access to this limited pool of highly specialized resources. If our contractors do not perform their obligations in an adequate and timely manner or we are unable to enter into contracts with them because of prior commitments to our competitors, the pace of clinical or non-clinical development, regulatory approval and commercialization of our drug candidates could be significantly delayed and our prospects could be adversely affected.
 
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Data obtained from clinical trials is susceptible to varying interpretations, which could delay, limit or prevent regulatory clearances.

Data already obtained, or obtained in the future, from pre-clinical studies, non-clinical studies and clinical trials does not necessarily predict the results that will be obtained from later pre-clinical studies and clinical trials. Moreover, pre-clinical and clinical data are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of an intended product under development could delay or prevent regulatory clearance of the drug candidate, which would result in delays to commercialization and could materially harm our business. Our studies and clinical trials may not demonstrate sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our drugs, and our proposed drugs may not be approved for marketing.

We may encounter delays or rejections based on additional government regulation from future legislation or administrative action or changes in FDA policy during the period of development, clinical trials and FDA regulatory review. We may encounter similar delays in foreign countries. If any of our products are approved for commercialization, sales of the products outside the U.S. would be subject to foreign regulatory approvals that vary from country to country. The time required to obtain approvals from foreign countries may be shorter or longer than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements. We may be unable to obtain requisite approvals from the FDA or foreign regulatory authorities, and even if obtained, such approvals may not be on a timely basis, or they may not cover the uses that we request.

Even if we do ultimately receive FDA approval for any of our drug candidates, these drug candidates will be subject to extensive ongoing regulation, including regulations governing manufacturing, labeling, packaging, testing, dispensing, prescription and procurement quotas, record keeping, reporting, handling, shipment and disposal of any such drug. Failure to obtain and maintain required registrations or to comply with any applicable regulations could further delay or preclude development and commercialization of our drugs and subject us to enforcement action.

Unfavorable provisions in government contracts, some of which may be customary, may harm our business, financial condition and operating results.

Government contracts customarily contain provisions that give the government substantial rights and remedies, many of which are not typically found in commercial contracts, including provisions that allow the government to:

 terminate existing contracts, in whole or in part, for any reason or no reason;
 unilaterally reduce or modify contracts or subcontracts, including equitable price adjustments;
 cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable;
 decline to exercise an option to renew a contract;
 exercise an option to purchase only the minimum amount specified in a contract;
 decline to exercise an option to purchase the maximum amount specified in a contract;
 claim rights to products, including intellectual property, developed under the contract;
 take actions that result in a longer development timeline than expected;
 audit and object to the contractor’s contract-related costs and fees, including allocated indirect costs;
 direct the course of a development program in a manner not chosen by the government contractor;
 suspend or debar the contractor from doing business with the government or a specific government agency;
 pursue criminal or civil remedies under the False Claims Act and False Statements Act; and
 control or prohibit the export of products.
 
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Generally, government contracts contain provisions permitting unilateral termination or modification, in whole or in part, at the government’s convenience. Under general principles of government contracting law, if the government terminates a contract for convenience, the terminated company may recover only its incurred or committed costs, settlement expenses and profit on work completed prior to the termination.

If the government terminates a contract for default, the defaulting company is entitled to recover costs incurred and associated profits on accepted items only and may be liable for excess costs incurred by the government in procuring undelivered items from another source. Some government contracts grant the government the right to use, for or on behalf of the U.S. government, any technologies developed by the contractor under the government contract. If we were to develop technology under a contract with such a provision, we might not be able to prohibit third parties, including our competitors, from using that technology in providing products and services to the government.

Risks Related to Owning Our Stock

Our principal stockholders own a significant percentage of our outstanding common stock and are, and will continue to be, able to exercise significant influence over our affairs.

As of September 30, 2016, Xmark Opportunity Partners, LLC (“Xmark”) possessed voting power over 63.8%, of our outstanding common stock as of such date, through its management of Goodnow Capital, L.L.C. (“Goodnow”), Xmark Opportunity Fund, L.P., Xmark Opportunity Fund, Ltd. and Xmark JV Investment Partners, LLC (collectively, the “Xmark Funds”). As a result, Xmark is able to determine a significant part of the composition of our board of directors, holds significant voting power with respect to matters requiring stockholder approval and is able to exercise significant influence over our operations. The interests of Xmark may be different than the interests of other stockholders on these and other matters. This concentration of ownership also could have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could reduce the price of our common stock.
 
David Cavalier, an employee and our Chairman of the board of directors and Mitchell D. Kaye, a Director, are affiliated with Xmark, which possessed voting power of 63.8% of our outstanding common stock as of September 30, 2016.  Accordingly, Mr. Cavalier and Mr. Kaye currently have, and will continue to have, a significant influence over the outcome of all corporate actions requiring stockholder approval.
 
Our executive officers and directors and holders of greater than five percent of our outstanding common stock, together with entities that may be deemed affiliates of, or related to, such persons or entities, beneficially owned greater than 68.0% of our outstanding common stock as of September 30, 2016.  As a result, these stockholders, acting together, may be able to control our management and affairs and matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. The interests of our current major stockholders may not always coincide with the interests of other stockholders and they may take actions to advance their respective interests to the detriment of other stockholders.

We may need to sell additional shares of our common stock, preferred stock or other securities to meet our capital requirements and these future sales could cause dilution and adversely affect our stock price.

Sales of substantial amounts of capital stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the common stock and our ability to raise capital. We may issue additional common stock in future financing transactions or as incentive compensation for our executive management and other key personnel, consultants and advisors. Issuing any equity securities would be dilutive to the equity interests represented by our then-outstanding shares of common stock. The market price for our common stock could decrease as the market takes into account the dilutive effect of any of these issuances.
 
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In the event of the conversion of our preferred stock and exercises of currently outstanding options and warrants, the ownership interests of our current stockholders could be substantially diluted, which would reduce the market price of our common stock and could make it more difficult for us to raise funds in the future.

As of September 30, 2016, we had 152,085,825 shares of common stock outstanding. We may grant to our employees, directors and consultants, options to purchase shares of our common stock under our 2016 Stock Incentive Plan. In addition, as of September 30, 2016, options to purchase 12,204,000 shares were outstanding at exercise prices ranging from $0.19 to $1.19 per share, with a weighted average exercise price of $0.38 per share, and 25,000,000 shares were reserved for issuance under the 2016 Stock Incentive Plan. In addition, as of September 30, 2016, warrants to purchase 52,947,877 shares of common stock were outstanding at exercise prices ranging from $0.22 to $0.49 per share, with a weighted exercise price of $0.23 per share.

Substantial blocks of our total outstanding common stock may be sold into the market through this registration statement.  If there are substantial sales of shares of our common stock, the price of our common stock could decline.

The price of our common stock could decline if there are substantial sales of our common stock, particularly sales by our directors, executive officers and significant stockholders. As of the date of this prospectus, substantially all of our outstanding common stock and substantially all common stock underlying outstanding warrants and Series C Convertible Preferred Stock are covered by this registration statement and/or otherwise freely tradeable without restrictions or further registration under the Securities Act. The market price of our common stock could decline as a result of the sale of a substantial number of our common stock or due to the perception in the market that the holders of a large number of shares intend to sell their common stock.

Our common stock is not listed on a national securities exchange, is illiquid and is characterized by low and/or erratic trading volume, and the intraday per share price of our common stock has fluctuated from $0.15 to $0.50 during the last two fiscal years.

Our common stock is quoted on the OTCQB under the symbol “AOLS.” An active public market for our common stock is unlikely to develop as long as we are not listed on a national securities exchange. Even if listed, the market for our stock may be impaired because of the limited number of investors, the significant ownership stake of Xmark, and our small market capitalization, which is less than that authorized for investment by many institutional investors.
 
Historically, the public market for our common stock has been characterized by low and/or erratic trading volume, often resulting in price volatility. For the fiscal year ended September 30, 2016 the average daily trading volume for our common stock was approximately 30,000 shares.  In addition, the price of our common stock has been volatile.  Our common stock had a closing price of $0.25 on October 1, 2015 and ended fiscal year 2016 at a closing price of $0.19.  During the twelve month period ended September 30, 2016, our common stock had a low closing price of $0.15, which occurred on July 5, 2016, and had a high closing price of $0.30, which occurred on November 30, 2015.

The market price of our common stock is subject to wide fluctuations due to factors that we cannot control, including the results of preclinical and clinical testing of our products under development, decisions by collaborators regarding product development, regulatory developments, market conditions in the pharmaceutical and biotechnology industries, future announcements concerning our competitors, adverse developments concerning proprietary rights, public concern as to the safety or commercial value of any products and general economic conditions.
 
Furthermore, the stock market has experienced significant price and volume fluctuation unrelated to the operating performance of particular companies. These market fluctuations can adversely affect the market price and volatility of our common stock.
 
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Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions in our amended and restated certificate of incorporation and bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a prohibition on certain actions by written consent of our stockholders and the ability of our board of directors to issue up to 7,150,000 shares of “blank check” preferred stock without stockholder approval. As a result, our board of directors has the power to issue shares without stockholder approval, and such shares can be issued with such rights, preferences, and limitations as may be determined by our board of directors.  The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of any holders of preferred stock that may be issued in the future.  In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the General Corporation Law of the State of Delaware, which prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us.  These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

We do not expect to pay cash dividends on our common stock for the foreseeable future.

We have never paid cash dividends on our common stock and do not anticipate that any cash dividends will be paid on the common stock for the foreseeable future. The payment of any cash dividend by us will be at the discretion of our board of directors and will depend on, among other things, our earnings, capital, regulatory requirements and financial condition. Furthermore, the terms of some of our financing arrangements directly limit our ability to pay cash dividends on our common stock.

A failure to maintain adequate internal controls over our financial and management systems could cause errors in our financial reporting, which could cause a loss of investor confidence and result in a decline in the price of our Common Shares.

Our public company reporting obligations and our anticipated commercial development objectives will likely strain our financial and management systems, internal controls and employees. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. If we have a future material weakness or deficiency in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. Effective internal controls are necessary for us to produce reliable financial reports and are important to prevent fraud. As a result, any future failure in this regard to satisfy these requirements on a timely basis could result in us being subject to regulatory action and a loss of investor confidence in the reliability of our financial statements, both of which in turn could cause the market value of our Common Shares to decline and affect our ability to raise capital and advance commercialization objectives.
 
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that relate to future events or our future financial performance. You can identify forward-looking statements by terminology such as “may,” “might,” “will,” “could,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “intend,” “potential” or “continue” or the negative of these terms or other comparable terminology. Our actual results might differ materially from any forward-looking statement due to various risks, uncertainties and contingencies, including but not limited to those identified herein under “Risk Factors” beginning on page 8 of this prospectus, as well as those discussed in our other filings with the Securities and Exchange Commission and the following:

our need for, and our ability to obtain, additional funds;
our ability to obtain grants to develop our drug candidates;
our ability to demonstrate efficacy and safety in human testing for Lung-Acute Radiation Syndrome (or Lung-ARS);
uncertainties relating to non-clinical studies, clinical trials and regulatory reviews and approvals;
uncertainties relating to our pre-clinical studies and trials and regulatory reviews and approvals;
uncertainties regarding our ability to successfully advance our Phase I study for Lung-ARS and other commercialization studies and projects involving AEOL 10150;
uncertainties regarding whether our compounds could inhibit formation of fibrosis in the lungs.
uncertainties concerning whether we can position our compounds for a pre-Emergency Use Authorization application or we can obtain procurements from the Biomedical Advanced Research and Development Authority following any such application;
our dependence on a limited number of therapeutic compounds;
the early stage of the drug candidates we are developing;
the acceptance of any future products by physicians and patients;
competition with and dependence on collaborative partners;
loss of key consultants, management or scientific personnel;
our ability to obtain adequate intellectual property protection and to enforce these rights; and
our ability to avoid infringement of the intellectual property rights of others.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
 
25


DESCRIPTION OF THE SHARES INCLUDED IN THIS PROSPECTUS

2015 Securities Placement Terms; Limitations on Conversion and Exercise

On December 10, 2015, we entered into securities purchase agreements with certain accredited investors to sell and issue (i) an aggregate of 10,215,275 common units issued at a purchase price of $0.22 per unit, and (ii) 4,500 preferred stock units issued to Biotechnology Value Fund, L.P. and certain other affiliates of BVF Partners, L.P., for an aggregate purchase price of $4.5 million, resulting in aggregate gross proceeds to the Company of approximately $6.75 million (the “2015 Securities Placement”).  Each common unit consisted of one share of the Company’s common stock and a five year warrant to purchase one share of the Company’s common stock, subject to adjustment. The preferred stock units collectively consist of (i) 4,500 shares of our Series C Preferred Stock that are collectively convertible into an aggregate of 20,454,546 shares of the Company’s common stock and (ii) warrants to purchase an aggregate of 20,454,546 shares of our common stock, in each case subject to adjustment.  Each of the foregoing warrants has an initial exercise price of $0.22 per share.  Neither the warrants nor the Series C Preferred Stock may be exercised or converted until after 90 days following the date of issuance.

The Series C Preferred Stock and warrants issued in the 2015 Securities Placement contain provisions restricting the conversion or exercise of such securities in circumstances where such event would result in the holder and its affiliates to beneficially own in excess of 9.99% of the Company’s outstanding common stock.

On September 29, 2015, the Company received funding in the form of convertible promissory notes (the “BVF Notes”) from Biotechnology Value Fund, L.P. and certain other affiliates of BVF Partners, L.P.  The BVF Notes (i) had an aggregate principal balance of $1,000,000, (ii) accrued interest at a rate of 6% per annum, (iii) had a scheduled maturity date of September 28, 2016 and (iv) were subject to automatic conversion into Company equity securities, provided a qualified financing of not less than $4 million occurred.  Following the completion of the 2015 Securities Placement, the principal and accrued interest amounts under the BVF Notes were converted into 5,414,402 shares of our common stock and warrants to purchase an additional 5,414,402 shares of our common stock at an exercise price per share of $0.22 subject to adjustment. As a result, the BVF Notes are no longer outstanding as of the date of this prospectus.

In connection with the 2015 Securities Placement, we entered into a Registration Rights Agreement with the investors (the “RRA”). Pursuant to the RRA, we agreed to file a registration statement with the SEC, within 45 days from closing to register the resale of the shares of our common stock and shares of common stock issuable upon exercise of the warrants issued in the 2015 Securities Placement, and shares of our common stock issuable upon conversion of the Series C Preferred Stock (collectively, the “Registrable Securities”).  We also agreed to use our best efforts to have the registration statement declared effective as promptly as possible after the filing thereof, but in any event within 120 days (150 days if the we receive comments from the SEC) from the filing date.

In the event (i) the registration statement has not been filed by the agreed upon filing date, (ii) an acceleration request has not been filed within five trading days of the date which we are notified that the registration statement will not be reviewed by the SEC staff or is not subject to further review and comment by the SEC staff, (iii) the registration statement has not been declared effective by the required effectiveness date, or (iv) sales cannot be made pursuant to such registration statement for any reason (other than by reason of a permissible delay under the terms of the RRA) after the registration statement has been declared effective by the SEC (each such event, a “Registration Default”), then we have agreed to pay each of the investors as liquidated damages an amount equal to 0.5% of the purchase price paid by each such investor with respect to any Registrable Securities then held and not registered pursuant to an effective registration statement, per each 30-day period or portion thereof during which the Registration Default remains uncured thereafter.  However, liquidated damages, if any, payable as a result of any Registration Default shall cease to accrue, in any event, after the date that is six (6) months after the closing.

We granted the investors in the 2015 Securities Placement customary indemnification rights in connection with the registration statement.  These investors have also granted us customary indemnification rights in connection with the registration statement.
 
26


The foregoing description of the 2015 Securities Placement does not purport to be complete and is qualified in its entirety by reference to the  Form of RRA, attached as Exhibit 10.2 to the Form 8-K we filed with the SEC on December 15, 2015.

Placement Agent Warrants in connection with the 2015 Securities Placement

In connection with the 2015 Securities Placement we issued an additional 1,214,027 warrants to purchase common stock to placement agents and their affiliates and employees for services rendered in connection with the 2015 Securities Placement (the “2015 Placement Agent Warrants”).

Common Stock Subject to Warrants Issued Outside of the 2015 Securities Placement

This prospectus also relates to 50,000 shares of our common stock issuable upon the exercise of warrants that we issued in 2014.

2012 Private Placement

On March 30, 2012 and April 4, 2012, we entered into a Securities Purchase Agreement, which we refer to as the 2012 Purchase Agreement, with certain accredited investors to sell and issue to such investors an aggregate of approximately 2,200,166 units, which we refer to as the 2012 Units, at a purchase price of $0.30 per unit, resulting in aggregate gross proceeds to us of approximately $660,000, we refer to this transaction throughout the prospectus as the 2012 private placement. Each 2012 Unit consists of (i) one share of common stock and (ii) a five year warrant to purchase 0.75 shares our common stock. The warrants in the 2012 private placement have an initial exercise price of $0.40 per share.

One of the investors who participated in the April 4, 2012 closing of the 2012 private placement was JJK Partners, LLC whose managing partner is Joseph Krivulka, who previously served as a member of our Board of Directors (from 2004 through December 31, 2013). JJK Partners purchased 333,333 of the 2012 Units, resulting in aggregate proceeds of $100,000 to us.

In connection with the 2012 Purchase Agreement, we entered into a Registration Rights Agreement with the investors who participated in the 2012 private placement, which we refer to as the 2012 RRA. Pursuant to the 2012 RRA, we agreed to file a registration statement with the SEC, within 45 days from closing to register the resale of the common stock and the shares issuable upon exercise of the warrants issued in the 2012 private placement (collectively, the “2012 Registrable Securities”). We also agreed to use our best efforts to have the registration statement declared effective as promptly as possible after the filing thereof, but in any event within 120 days (180 days if the we receive comments from the SEC) from the filing date. We agreed to keep the registration statement continuously effective until the earlier to occur of (i) the date after which all of the 2012 Registrable Securities registered thereunder have been sold and (ii) the date on which all of the 2012 Registrable Securities covered by the registration statement may be sold without volume restrictions pursuant to Rule 144 under the Securities Act.

We granted the investors in the 2012 private placement customary indemnification rights in connection with the registration statement. These investors have also granted us customary indemnification rights in connection with the registration statement.

The foregoing description of the 2012 private placement does not purport to be complete and is qualified in its entirety by reference to the Form of Securities Purchase Agreement, the Form of 2012 RRA and the Form of warrant, copies of which were attached as Exhibits 10.1, 10.2 and 10.3, respectively, to the Form 8-K we filed with the SEC on April 4, 2012.
 
27


2010 Private Placement

On August 11, 2010, we entered into a Securities Purchase Agreement, which we refer to as the 2010 Purchase Agreement, with two accredited institutional investors pursuant to which the Company sold and issued to such investors in a private placement an aggregate of 2,500,000 units, which we refer to as the 2010 Units, which units are comprised of an aggregate of 2,500,000 shares of common stock of the Company and warrants to purchase up to an aggregate of 1,875,000 additional shares of common stock, which we refer to as the 2010 Warrants. Each 2010 Unit represents one share of common stock and a warrant to purchase 0.75 of one share of common stock, at a purchase price of $0.40 per unit for aggregate gross proceeds of $1,000,000; we refer to this transaction throughout this prospectus as the 2010 private placement. The 2010 Warrants are exercisable for a seven-year period from their date of issuance; have an initial exercise price of $0.50 per share subject to adjustment pursuant to the 2010 Warrants; contain a “cashless exercise” feature that allows the holder to exercise the Warrants without a cash payment to the Company under certain circumstances; contain a dividend participation right which allows the holder to receive any cash dividends paid on the Common Stock without exercising the Warrant; contain a provision that provides for the reduction of the exercise price to $0.01 in the event of any payment of cash dividends by us or upon a change of control; and contain anti-dilution provisions in the event of a stock dividend or split, dividend payment or other issuance, reorganization, recapitalization or similar event. The 2010 Warrants are subject to an issuance limitation that prevents the holder of the warrants from exercising the warrants if the holder would beneficially own more than 9.99% of the shares of Common Stock then issued and outstanding, which such limitation cannot be modified by the holder before the sixty-first day after notice to the Company of the holder’s intention to waive the issuance limitation.

The net proceeds to us from the 2010 private placement, after deducting for expenses, were approximately $900,000.

We also granted to the investors in the 2010 private placement the option to acquire, collectively, up to 2,500,000 additional 2010 Units, comprised of an aggregate of 2,500,000 shares of common stock of the Company and warrants to purchase up to an aggregate of 1,875,000 additional shares of common stock at a per unit purchase price of $0.40, which we refer to as the 2010 Call Option. In addition, the investors in the 2010 private placement granted to us the option to require these investors, severally and not jointly, to acquire up to 2,500,000 additional 2010 Units, less any additional 2010 Units acquired under the 2010 Call Option, at the per unit purchase price of $0.40, which we refer to as the 2010 Put Option.

On December 28, 2010, the investors exercised their 2010 Call Option and we received $1,000,000 in proceeds in exchange for 2,500,000 common shares and 1,875,000 additional 2010 Warrants, with an initial exercise price of $0.40 per share, subject to adjustment as provided in the warrants. The net cash proceeds to us from the exercise of the 2010 Call Option, after deducting for expenses, were approximately $990,000.

In connection with the 2010 private placement, the Company also entered into a Registration Rights Agreement with the Investors, which we refer to as the 2010 RRA. Pursuant to the 2010 RRA, the Company agreed to file one or more registration statements with the SEC covering the resale of the shares of common stock issued as part of the 2010 Units and all shares of common stock issuable upon exercise of the 2010 Warrants (the “2010 Registrable Securities”) upon demand of the holders of a majority of the 2010 Registrable Securities. Pursuant to the 2010 RRA, we also granted the Investors certain piggyback registration rights, pursuant to which the investors in the 2010 private placement have elected to include the securities they acquired in this registration statement. The Company also agreed to use its commercially reasonable efforts to keep the registration statements effective for a specified period.

Affiliates of Xmark were the sole investors in the 2010 private placement. Together with its affiliates, Xmark beneficially owned approximately 67.5% of the Company's outstanding common stock prior to the 2010 private placement. Xmark is the sole manager of Goodnow and possesses sole power to vote and direct the disposition of all securities of the Company held by Goodnow. See “Selling Stockholders” below for additional information concerning Goodnow and Xmark.  Goodnow has the right to designate up to two directors for election to the Company's Board of Directors pursuant to the terms of a purchase agreement between Goodnow and the Company. David C. Cavalier, a current executive officer and director of the Company, is President of Goodnow.

The foregoing description of the 2010 private placement does not purport to be complete and is qualified in its entirety by reference to the 2010 RRA, 2010 Purchase Agreement, and 2010 Warrants attached as exhibits 4.1, 10.1 and 10.2, respectively, to the Form 8-K we filed with the SEC on August 12, 2010.
 
28


2009 Private Placement and Conversion

On October 6, 2009, we entered into a Securities Purchase and Exchange Agreement, which we refer to as the 2009 Purchase Agreement, with several accredited institutional investors pursuant to which we sold and issued to the investors in a private placement an aggregate of 5,892,857 units, which we refer to as the 2009 Units, comprised of an aggregate of 5,892,857 shares of our common stock and warrants to purchase up to an aggregate of 11,785,714 additional shares of Common, which we refer to as the 2009 Warrants, with an initial exercise price of $0.28 per share, subject to adjustment pursuant to the 2009 Warrants. Each 2009 Unit represents one share of common stock and a 2009 Warrant to purchase two shares of common stock, at a purchase price of $0.28 per Unit for aggregate gross proceeds of $1,650,000, we refer to this transaction throughout the prospectus as the 2009 private placement. The 2009 Warrants are exercisable for a seven year period from their date of issuance; contain a “cashless exercise” feature that allows the holder to exercise the 2009 Warrants without a cash payment to the Company under certain circumstances; contain a dividend participation right which allows the holder to receive any cash dividends paid on the Common Stock without exercising the 2009 Warrant and contain a provision that provides for the reduction of the exercise price to $0.01 in the event of any such payment of cash dividends by the Company or upon a change of control and contain anti-dilution provisions in the event of a stock dividend or split, dividend payment or other issuance, reorganization, recapitalization or similar event. The 2009 Warrants are subject to an issuance limitation that prevents the holder of the warrants from exercising the warrants if the holder would beneficially own more than 9.99% of the shares of Common Stock then issued and outstanding, which such limitation cannot be modified by the holder before the sixty-first day after notice to the Company of the holder’s intention to waive the issuance limitation.

The net proceeds to us from the 2009 private placement, after deducting for expenses, were approximately $1.6 million.

We also granted to the investors in the 2009 private placement the option to acquire, collectively, up to an additional 5,892,857 additional 2009 Units, comprised of an aggregate of 5,892,857 shares of common stock and warrants to purchase up to an aggregate of 11,785,714 additional shares of common stock at the per Additional Unit purchase price of $0.28, which we refer to as the 2009 Call Option. In addition, the Investors granted to us the option to require these investors, severally and not jointly, to acquire up to 5,892,857 additional 2009 Units, less any 2009 Units acquired under the 2009 Call Option, at the per unit purchase price of $0.28, which we refer to as the 2009 Put Option.

On July 30, 2010, the Company exercised the 2009 Put Option. As a result of the exercise, the Company received $1.65 million in gross proceeds from the investors in exchange for 5,892,857 additional 2009 Units, comprised of an aggregate of 5,892,857 shares of common stock and warrants to purchase up to an aggregate of 11,785,714 additional shares of common stock at a purchase price of $0.28 per share.

In addition, the investors agreed to convert all $1,000,000 of the Company’s Senior Convertible Notes issued in 2008, which we refer to as the 2008 Notes into common stock at a conversion rate of $0.35 per share, resulting in the issuance to the investors of 2,857,143 shares of common stock, which we refer to as the Conversion Shares, and to exchange their remaining option to purchase an additional $4,000,000 in Senior Convertible Notes for warrants to purchase up to 14,285,714 shares of Common Stock in substantially the same of form and terms of the 2009 Warrants issued in the 2009 private placement, including an initial exercise price of $0.28 per share, subject to adjustment pursuant to the warrants, which we refer to as the Note Warrants. As consideration for the investors to convert the 2008 Notes, the Company agreed to exchange warrants to purchase up to 2,000,000 shares of Common Stock issued to the investors in connection with the sale of the 2008 Notes, warrants to purchase up to 2,150,000 shares of Common Stock issued to the investors and one of their affiliates in connection with a financing completed in November 2005 and warrants to purchase up to 13,392,857 shares of Common Stock issued to the Investors in connection with a financing completed in March 2009 in exchange for warrants to purchase up to 17,542,857 shares of Common Stock in substantially the same form and terms of the 2009 Warrants issued in the 2009 private placement, including an initial exercise price of $0.28 per share, subject to adjustment pursuant to the warrants, we refer to these warrants as the Exchange Warrants. We refer to the series of transactions described in this paragraph collectively as the conversion.
 
On December 24, 2009, the Company entered into an amendment to the 2009 Purchase Agreement, which we refer to as the Purchase Agreement Amendment, pursuant to which the Company agreed to lower the conversion price of the 2008 Notes from $0.35 per share to $0.28 per share and as a result, issued to the investors in the 2009 private placement an additional 714,286 shares of the Company’s common stock upon conversion of the 2008 Notes. The Purchase Agreement Amendment was executed to resolve a misunderstanding regarding one of the financing terms between the investors and us. The Company did not receive any proceeds from the issuance of additional shares.
 
29

In connection with the 2009 private placement and the conversion, we also entered into a Registration Rights Agreement, which we refer to as the 2009 RRA, with the investors. Pursuant to the 2009 RRA, we agreed to file one or more registration statements with the SEC covering the resale of the shares issued in the 2009 private placement, the Conversion Shares, 5,357,143 shares of common stock issued to the same investors in a previous private placement that closed in March 30, 2009 and all shares of common stock issuable upon exercise of the 2009 Warrants, the Note Warrants and the Exchange Warrants (collectively, the “2009 Registrable Securities”) upon demand of the holders of a majority of the 2009 Registrable Securities. The Company also agreed to use its commercially reasonable efforts to keep the Registration Statements effective for a specified period.

Affiliates of Xmark were the sole investors in the 2009 private placement and, together with the Company, were the sole participants in the Conversion. Together with its affiliates, Xmark beneficially owned approximately 55% of the Company's outstanding common stock prior to the 2009 private placement and the Conversion. As disclosed above, Xmark Opportunity Partners, LLC is the sole manager of Goodnow, and possesses sole power to vote and direct the disposition of all securities of the Company held by Goodnow.  See “Selling Stockholders” below for additional information concerning Goodnow and Xmark.  Goodnow has the right to designate up to two directors for election to the Company's Board of Directors pursuant to the terms of a purchase agreement between Goodnow and the Company. David C. Cavalier, a current executive officer and director of the Company, is President of Goodnow.

The foregoing description of the 2009 private placement and conversion does not purport to be complete and is qualified in its entirety by reference to the 2009 RRA, 2009 Purchase Agreement and 2009 Warrants attached as exhibits 4.1, 10.1 and 10.2, respectively, to the Form 8-K we filed with the SEC on October 6, 2009 and by reference to the Purchase Agreement Amendment attached as exhibit 10.1 to the Form 8-K we filed with the SEC on December 28, 2009.

Each of the private placements noted above were made in reliance on Section 4(2) of the Securities Act, and Rule 506 promulgated thereunder. The investors who participated in these three private placements and the associated conversions and secondary closings, as the case may be, are referred to throughout this prospectus as the selling stockholders.

2013 Warrant Repricing, Exercise and Lockup Agreement

Effective February 15, 2013, the Company and each of Xmark JV Investment Partners, LLC, Xmark Opportunity Fund, Ltd. and Xmark Opportunity Fund, L.P. (collectively, the “Xmark Entities”) entered into a Warrant Repricing, Exercise and Lockup Agreement (the “Xmark Warrant Agreement”) pursuant to which the Company agreed to reduce the exercise price of outstanding warrants to purchase an aggregate of up to 59,149,999 shares of Common stock held by the Xmark Entities (the “Xmark Warrants”) to $0.01 per share. The Xmark Warrants were issued in connection with the transactions previously described within this section of the Prospectus. In consideration for the reduction of the exercise price of the Xmark Warrants, each of the Xmark Entities agreed to immediately exercise all of the Xmark Warrants by cashless exercise. The Xmark Warrant Agreement also provides that the Xmark Entities will not transfer the shares issuable upon exercise of the Xmark Warrants (the “Xmark Warrant Shares”) until the Company either (i) declares a cash dividend on its common stock or otherwise makes a cash distribution or (ii) effects a Change of Control, subject in each case to the terms of the Xmark Warrant Agreement.
 
30

USE OF PROCEEDS

All proceeds from the sale of our common stock covered by this prospectus will belong to the selling stockholders who offer and sell their shares. We will not receive any proceeds from the sale of the common stock by the selling stockholders.  A portion of the shares covered by this prospectus are issuable upon exercise of warrants to purchase our common stock. Upon any exercise of the warrants for cash, the selling stockholders would pay us the exercise price of the warrants.  Under certain limited conditions set forth in the warrants, the warrants are exercisable on a cashless basis. If any warrants are exercised on a cashless basis, we would not receive any cash payment from the selling stockholders upon any exercise of such warrants.
 
31


DETERMINATION OF OFFERING PRICE

This offering is being made solely to allow the selling stockholders to offer and sell shares of common stock to the public. The selling stockholders may offer for resale some or all of their shares at the time and price that they choose. On any given day, the price per share is likely to be based on the quoted price for the common stock on the OTC Bulletin Board on the date of sale, unless shares are sold in private transactions. Consequently, we cannot currently make a determination of the price at which shares offered for resale pursuant to this prospectus may be sold.
 
32


MARKET INFORMATION / PRICE RANGE OF COMMON STOCK / DIVIDENDS

Price Range of Common Stock

Our common stock is quoted on the OTC Bulletin Board under the symbol “AOLS.” The following sets forth the quarterly high and low trading prices as reported by the OTC Bulletin Board for the periods indicated. These prices are based on quotations between dealers, which do not reflect retail mark-up, markdown or commissions, and do not necessarily represent actual transactions.

   
High
   
Low
 
Fiscal Year Ending September 30, 2014
           
             
October 1, 2013 through December 31, 2013
 
$
0.29
   
$
0.23
 
January 1, 2014 through March 31, 2014
 
$
0.33
   
$
0.23
 
April 1, 2014 through June 30, 2014
 
$
0.36
   
$
0.24
 
July 1, 2014 through September 30, 2014
 
$
0.51
   
$
0.23
 
                 
Fiscal Year Ending September 30, 2015
               
                 
October 1, 2014 through December 31, 2014
 
$
0.29
   
$
0.20
 
January 1, 2015 through March 31, 2015
 
$
0.35
   
$
0.21
 
April 1, 2015 through June 30, 2015
 
$
0.41
   
$
0.28
 
July 1, 2015 through September 30, 2015
 
$
0.32
   
$
0.22
 
                 
Fiscal Year Ending September 30, 2016
               
                 
October 1, 2015 through December 31, 2015
 
$
0.30
   
$
0.17
 
January 1, 2016 through March 31, 2016
 
$
0.25
   
$
0.16
 
April 1, 2016 through June 30, 2016
 
$
0.20
   
$
0.15
 
July 1, 2016 through September 30, 2016
 
$
0.50
   
$
0.15
 
                 
                 
Fiscal Year Ending September 30, 2017
 
               
October 1, 2016 through December 14, 2016
 
$
0.22
   
$
0.15
 

On December 14, 2016, the last reported sales price of our common stock on the OTC Bulletin Board was $0.18 per share.
 
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Approximate Number of Equity Security Holders

As of September 30, 2016 the number of record holders of our common stock was 125, and we estimate that the number of beneficial owners was approximately 4,200.

Dividend Policy

We have never paid a cash dividend on our common stock and we do not anticipate paying cash dividends on our common stock in the foreseeable future. A future cash dividend, if paid, would enable the Xmark Entities to dispose of up to 59.1 million shares of common stock that were previously subject to warrants. Such parties are bound by an agreement which provides that the Xmark Entities will not transfer the shares issued upon exercise of the Xmark Warrants (the “Xmark Warrant Shares”) until the Company either (i) declares a cash dividend on its common stock or otherwise makes a cash distribution or (ii) effects a Change of Control, subject in each case to the terms of the Xmark Warrant Agreement.  See “Certain Relationships and Related Party Transactions – 2013 Warrant Repricing, Exercise and Lockup Agreement.”

Moreover, any additional preferred stock to be issued and any future credit facilities might contain restrictions on our ability to declare and pay dividends on our common stock. We plan to retain all earnings, if any, for the foreseeable future for use in the operation of our business and to fund future growth.
 
 
34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

You should read the following discussion in conjunction with our consolidated financial statements and the notes appearing elsewhere in this prospectus.  The following discussion contains forward-looking statements that involve risks and uncertainties.  Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed in “Risk Factors” and elsewhere in this prospectus.

Overview
We are developing a new class of catalytic antioxidant compounds as medical countermeasures (“MCM”) against nuclear, radiological and chemical weapons as well as for diseases and disorders of the respiratory system, central nervous system and oncology.
Our lead compound, AEOL 10150 (“10150”), is being developed:
·
as a MCM for the pulmonary and delayed effects of acute radiation exposure under contract with the U.S Government
·
as a MCM for exposure to chemical gas and nerve gas exposure with grant funding from the U.S. Government
·
as a treatment for idiopathic pulmonary fibrosis
·
as a treatment for the side effects of radiation therapy for solid tumors in oncology
Our other development programs include:
·
development AEOL 11114B (“11114”) as a treatment for Parkinson’s disease
·
development of AEOL 20415 (“20415”) as a treatment for infectious disease
We have reported positive safety results from two Phase I clinical trials of 10150 with no serious adverse events noted.
We had a net loss of $3,558,000 and $2,628,000 for the fiscal years ended September 30, 2016 and 2015, respectively. We had an accumulated deficit of approximately $190,189,000 at September 30, 2016. We have not yet generated any revenue from product sales and we cannot provide assurances that we will receive any product revenue from non-government sales in the foreseeable future, if at all.
We have not had any recurring revenue from product sales. Therefore, we have relied on public or private equity offerings, debt financings, collaboration arrangements and grants to finance our operations.
Corporate Matters
On February 11, 2011, we signed a five-year, cost-plus contract with BARDA for the development of 10150 as a MCM against Lung-ARS (the “BARDA Contract”).  BARDA is the government agency responsible for the advanced development and purchase of medical countermeasures for chemical, biological, radiological and nuclear threats.  The contract fully funds the advanced development of 10150 through approval by the FDA under 21 CFR Part 314 Subpart I and Part 601 Subpart H (the “Animal Rule.”)  The Animal Rule allows for approval of drugs using only animal studies when human clinical trials cannot be conducted ethically.
35

Pursuant to the BARDA Contract, we were awarded approximately $10.4 million for the base period of the contract (from February 2011 to April 2012). On April 16, 2012, we announced that BARDA had exercised two options under the BARDA Contract worth approximately $9.1 million. On September 17, 2013, we announced that BARDA had exercised $6.0 million in additional contract options. On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1.8 million.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.   On June 26, 2015, we announced that BARDA had exercised $3.0 million in additional contract options under its advanced research and development contract for 10150.  On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to determine optimal dose, dose frequency and duration of treatment.  The total contract value exercised as of September 30, 2016 is approximately $30.8 million, of which $30.6 million has been billed.  We may receive up to an additional $87.6 million in options exercisable over the remainder of the BARDA Contract.  Options are exercised based on the progress of the development program, including the completion of clinical trials or manufacturing tasks under previously exercised options.
Research and development activities under the contract to date include animal efficacy studies, animal model development with radiation survival curve studies, dosing studies, bulk drug manufacturing, bulk drug and final drug product manufacturing, validation testing, compliance studies, stability studies and the filing of an orphan drug status application and a fast track designation application with the FDA.  

Among the key deliverables accomplished in the program, we delivered a final report on the survival data from our  efficacy study in non-human primates, prepared a Fast Track filing for AEOL 10150 in Lung-ARS, completed murine extended natural history, duration of treatment and delayed treatment studies,  completed studies to identify biomarkers for use in Lung-ARS studies,  completed additional pharmacokinetic pharmacodynamics work and completed an absorption, distribution, metabolism and excretion (“ADME”) study in the new formulation for AEOL 10150, manufactured pilot scale batches of bulk drug substance and final drug product, and generated stability data on the new bulk drug substance and new final drug product.

 In the event BARDA exercises the remaining options under the contract, we expect to conduct, among other things, bulk drug and final drug product manufacturing, stability studies, animal pivotal efficacy studies, human clinical safety studies and Phase I, Phase II and pre-new drug application (“NDA”) meetings and applications with the FDA.

For additional developments under the BARDA Agreement preceding our 2015 fiscal year, please see Item 1 “Business – BARDA Contract; Background and Recent Developments.”
 
Results of Operations
Fiscal Year Ended September 30, 2016 Compared to Fiscal Year Ended September 30, 2015
We had a net loss of $3,558,000 for the fiscal year ended September 30, 2016, versus a net loss of $2,628,000 for the fiscal year ended September 30, 2015.
Revenue for the fiscal year ended September 30, 2016 was approximately $2,076,000, compared to $3,111,000 revenue for the fiscal year ended September 30, 2015. The revenue is from the collaboration with BARDA announced on February 11, 2011. Since being awarded the BARDA Contract, we generate contract revenue from a cost-plus fee arrangement. Revenues on reimbursable contracts are recognized as costs are incurred, based on allowable costs incurred during the period, plus any recognizable earned fee. We consider fixed fees under cost-plus fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.  Revenue was higher in the prior year primarily due to the timing of work related to the BARDA contract.

Research and Development
Research and development expenses decreased by $628,000, or 18%, to approximately $2,881,000 for the fiscal year ended September 30, 2016 from approximately $3,509,000 for the fiscal year ended September 30, 2015. R&D expenses were lower during the fiscal year ended September 30, 2016 versus September 30, 2015 due to the timing of work related to the BARDA Contract. For the fiscal year ended September 30, 2016, Preclinical fees decreased by $1,087,000 primarily due to costs associated with the BARDA Contract. Consultant expenses increased about $118,000 in 2016 over the comparable period in 2015 due to a $173,000 increase in non-BARDA related work offset by a $55,000 decrease in costs associated with the BARDA contract.  Patent expenses increased about $269,000. We currently have 8 development programs in progress: studies of 10150 as a medical countermeasure against the effects of radiation on the lungs, against the effects of sulfur mustard gas and chlorine gas on the lungs, against the effects of radiation on the lungs, against the effects of nerve gas exposure, as a treatment for cancer, as a treatment for IPF and studies of 11114B, 11203 and 11207 as potential treatments for Parkinson’s disease and epilepsy.
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R&D expenses for our antioxidant program have totaled approximately $65,439,000 from inception through September 30, 2016. Because of the uncertainty of our research and development and clinical studies, we are unable to predict the total level of spending on the program or the program completion date. Future R&D expenses will be determined primarily by the exercise of options under the BARDA contract and the possible initiation of human clinical studies in oncology.  We anticipate that much of the R&D expense, except for the possible oncology studies, will be reimbursed by the BARDA Contract.
General and Administrative
General and administrative (“G&A”) expenses include corporate costs required to support Aeolus, our employees and consultants and our stockholders. These costs include personnel and outside costs in the areas of legal, human resources, investor relations and finance. Additionally, we include in general and administrative expenses such costs as rent, repair and maintenance of equipment, utilities, information technology and procurement costs that we need to support the corporate functions listed above.
G&A expenses increased approximately $240,000, or 11%, to approximately $2,468,000 for the fiscal year ended September 30, 2016 from about $2,228,000 for the fiscal year ended September 30, 2015. Legal expense increased by about $102,000 as a result of higher SEC filing and financing costs. Board of Director fees increased by about $56,000.
Other Income or Expense
Other Expense increased approximately $283,000 to approximately $285,000 for the fiscal year ended September 30, 2016, from $2,000 for the fiscal year ended September 30, 2015 as a result of amortization of discount on note payable to shareholders.
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Liquidity and Capital Resources
As of September 30, 2016, we had approximately $3,155,000 of cash and cash equivalents, an increase of $3,061,000 from September 30, 2015. The increase in cash was primarily due to our 2015 capital raise, which was offset by cash used in operations.  In order to fund on-going operating cash requirements, or to accelerate or expand our oncology and other programs, we may need to raise significant additional funds.
We had a net loss of $3,558,000 for the fiscal year ended September 30, 2016, compared to a net loss of $2,628,000 for the fiscal year ended September 30, 2015. For the same periods, we had cash outflows from operations of approximately $3,109,000 and $2,443,000, respectively, with the outflows increasing in 2016 due to lower revenue from BARDA.
Our ongoing future cash requirements will depend on numerous factors, particularly the progress of our development programs, clinical trials and our ability to negotiate and complete collaborative agreements or out-licensing arrangements. In order to help fund our on-going operating cash requirements, we intend to seek new collaborations for our antioxidant research program that include initial cash payments and on-going research support. In addition, we might sell additional shares of our stock and/or convertible debentures and explore other strategic and financial alternatives, including a merger with another company, the sale of stock and/or debt, the establishment of new collaborations for current research programs that include initial cash payments and ongoing research support and the out-licensing of our compounds for development by a third party. We expect to incur additional losses and negative cash flow from operations for several more years.
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Under the BARDA Contract, substantially all of the costs of the development of 10150 as a medical countermeasure for pulmonary injuries resulting from an acute exposure to radiation from a radiological/nuclear accident or attack, particularly injuries associated with ARS or DEARE could be paid for by the U.S. government through BARDA funding. We recognized approximately $2,076,000 in revenue during the fiscal year ended September 30, 2016 related to the BARDA Contract.

We do not have any revenues from product sales and, therefore, we rely on investors, grants and collaborations to finance our operations. We generate limited revenue from reimbursable, cost-plus fee R&D contracts and grants. Revenues on reimbursable contracts are recognized as costs are incurred, generally based on allowable costs incurred during the period, plus any recognizable earned fee. We consider fixed fees under cost-plus fee contracts to be earned in proportion to the allowable costs incurred in performance of the contract.
 
Since the terms of the BARDA Contract include provisions to cover some general corporate overhead as well as a small provision for profit, the result on our liquidity is that our cash burn is related to the level of non-BARDA contract activities that we pursue. In order to fund on-going operating cash requirements, or to further accelerate or expand our programs, we expect to need to raise significant additional funds in order to pursue non-BARDA contract programs, including our oncology program.

There are significant uncertainties as to our ability to access potential sources of capital. We may not be able to enter into any collaboration on terms acceptable to us, or at all, due to conditions in the pharmaceutical industry or in the economy in general or based on the prospects of our catalytic antioxidant program. Even if we are successful in obtaining collaboration for our antioxidant program, we may have to relinquish rights to technologies, product candidates or markets that we might otherwise develop ourselves. These same risks apply to any attempt to out-license our compounds.
 
Similarly, due to market conditions, the illiquid nature of our stock and other possible limitations on equity offerings, we may not be able to sell additional securities or raise other funds on terms acceptable to us, if at all. Any additional equity financing, if available, could result in substantial dilution to existing stockholders.
 
Our forecast of the period of time through which our financial resources will be adequate to support our operations is forward-looking information, and actual results could vary.

2015 Capital Raise

On December 10, 2015, we completed the 2015 Securities Placement by entering into securities purchase agreements with certain accredited investors to sell and issue (i) an aggregate of 10,215,275 common units issued at a purchase price of $0.22 per unit, and (ii) 4,500 preferred stock units issued to existing investors, Biotechnology Value Fund, L.P. and other affiliates of BVF Partners, L.P., for an aggregate purchase price of $4.5 million, resulting in aggregate gross proceeds to the Company of approximately $6.75 million.  Each common unit consists of one share of the Company’s common stock and a five year warrant to purchase one share of the Company’s common stock, subject to adjustment. The preferred units collectively consist of (i) 4,500 shares of Series C Convertible Preferred Stock of the Company that are collectively convertible into an aggregate of 20,454,546 common shares and (ii) warrants to purchase an aggregate of 20,454,546 Common Shares, in each case subject to adjustment.  The warrants have an initial exercise price of $0.22 per share.  On September 29, 2015, the Company received funding in the form of the BVF Notes.   On December 11, 2015, following the completion of the 2015 Securities Placement, the principal and accrued interest amounts under the BVF Notes were converted into 5,414,402 shares of the Company’s common stock and warrants to purchase an additional 5,414,402 shares of the Company’s common stock at an exercise price per share of $0.22 subject to adjustment. As a result, the BVF Notes were no longer outstanding as of December 11, 2015.  Although the foregoing transactions provide us with additional liquidity, there can be no assurance that such funds will be sufficient to enable us to advance our development objectives.  See “Risk Factors -- We may need substantial additional funding to continue our operations and may be unable to raise capital when needed, or at all, which would force us to delay, curtail or eliminate our clinical programs and our product development programs.”
 
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Off Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as defined under the rules of SEC Release No. FR-67. We do not have any capital leases.
Relationship with Goodnow Capital, LLC and Xmark Opportunity Partners, LLC
In July 2003, we initiated a series of transactions that led to our corporate reorganization and recapitalization. We obtained an aggregate of $8,000,000 in secured bridge financing in the form of convertible promissory notes we issued to Goodnow Capital, LLC (“Goodnow”). A portion of this financing allowed us to pay our past due payables and become current. We used the remainder for our operations, including a toxicology study for our catalytic antioxidant compounds under development as a treatment for ALS.
We completed our corporate reorganization on November 20, 2003. The reorganization involved the merger of our former parent company into one of our wholly owned subsidiaries. Subsequent to our 2003 reorganization, we completed a number of equity and debt financings, the majority of which included Xmark as investors. As of September 30, 2016, Xmark Opportunity Partners, LLC, through its management of Goodnow and the Xmark Funds, and through the Xmark Voting Trust and options held by David Cavalier, an affiliate of Xmark and the Chairperson of our Board of Directors, had voting power over 64.0% of our outstanding common stock and had beneficial ownership, calculated based on SEC requirements, of approximately 64.1% of our common stock. As a result of this significant ownership, Xmark Opportunity Partners, LLC and its affiliates is able to control future actions voted on by our stockholders.
In addition, under the terms of the warrants to purchase up to 61,822,749 shares of our common stock issued to Xmark on October 6, 2009 as well as subsequent warrant issuances on July 30, 2010, August 11, 2010 and December 28, 2010 (collectively, the “Xmark Warrants”), if we were to pay a dividend on our common stock the exercise price of these warrants would be reset from $0.28 per share or $0.50 per share, as applicable, to $0.01 per share and the warrant holders would also receive any such dividend paid. The Xmark Warrants also contain a provision that provides for the reduction of the exercise price to $0.01 upon a change of control and anti-dilution provisions in the event of a stock dividend or split, dividend payment or other issuance, reorganization, recapitalization or similar event. In addition, the Xmark Warrants, among other restrictions, prohibit the sale of Aeolus to an entity other than one that is publicly traded.
Effective February 19, 2013, the Company and each of Xmark JV Investment Partners, LLC, Xmark Opportunity Fund, Ltd. and Xmark Opportunity Fund, L.P. (collectively, the “Xmark Entities”) entered into a Warrant Repricing, Exercise and Lockup Agreement (the “Xmark Warrant Agreement”) pursuant to which the Company agreed to reduce the exercise price of outstanding warrants to purchase an aggregate of up to 59,149,999 shares of Common Stock held by the Xmark Entities (the “Xmark Warrants”) to $0.01 per share. In consideration for the reduction of the exercise price of the Xmark Warrants, each of the Xmark Entities agreed to immediately exercise all of the Xmark Warrants by cashless exercise. The Xmark Warrant Agreement also provides that the Xmark Entities will not transfer the shares issuable upon exercise of the Xmark Warrants (the “Xmark Warrant Shares”) until the Company either (i) declares a cash dividend on its common stock or otherwise makes a cash distribution or (ii) effects a Change of Control, subject in each case to the terms of the Xmark Warrant Agreement.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates, judgments and the policies underlying these estimates on a periodic basis as the situation changes, and regularly discuss financial events, policies, and issues with our independent registered public accounting firm and members of our audit committee. We routinely evaluate our estimates and policies regarding revenue recognition; clinical trial, preclinical, manufacturing and patent related liabilities; license obligations; inventory; intangible assets; share-based payments; and deferred tax assets.
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We generally enter into contractual agreements with third-party vendors to provide clinical, preclinical and manufacturing services in the ordinary course of business. Many of these contracts are subject to milestone-based invoicing and the contract could extend over several years. We record liabilities under these contractual commitments when we determine an obligation has been incurred, regardless of the timing of the invoice. Patent-related liabilities are recorded based upon various assumptions or events that we believe are the most reasonable to each individual circumstance, as well as based upon historical experience. License milestone liabilities and the related expense are recorded when the milestone criterion achievement is probable. We have not recognized any assets for inventory, intangible items or deferred taxes as we have yet to receive regulatory approval for any of our compounds. Any potential asset that could be recorded in regards to any of these items is fully reserved. In all cases, actual results may differ from our estimates under different assumptions or conditions.
Revenue Recognition
We do not currently generate revenue from product sales, but do generate revenue from the BARDA Contract. We recognize revenue from the BARDA Contract in accordance with the authoritative guidance for revenue recognition. Revenue is recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple deliverables.
The BARDA Contract is classified as a “cost-plus-fixed-fee” contract. We recognize government contract revenue in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contracts. Reimbursable costs under the contract primarily include direct labor, subcontract costs, materials, equipment, travel, and indirect costs. In addition, we receive a fixed fee under the BARDA Contract, which is unconditionally earned as allowable costs are incurred and is not contingent on success factors. Reimbursable costs under this BARDA Contract, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable. We receive regular updates from our subcontractors regarding estimated completion of individual projects. Management evaluates the status of each project with respect to budgeted work completed, actual work completed, and cost of actual work completed. We are required to provide BARDA with monthly reports in addition to our bi-weekly conference calls with BARDA regarding the progress of each project.
Convertible Instruments
 The Company accounts for hybrid contracts that feature conversion options in accordance with applicable generally accepted accounting principles ("GAAP").  Accounting Standards Codification 815 "Derivatives and Hedging Activities," ("ASC 815") requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Conversion options that contain variable settlement features such as provisions to adjust the conversion price upon subsequent issuances of equity or equity linked securities at exercise prices more favorable than that featured in the hybrid contract may result in their bifurcation from the host instrument.
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The Company accounts for convertible instruments, when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, in accordance with ASC 470-20 "Debt with Conversion and Other Options" ("ASC 470-20"). Under ASC 470-20 the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should be bifurcated from their host instruments) in accordance with ASC 815.  Under ASC 815, a portion of the proceeds received upon the issuance of the hybrid contract are allocated to the fair value of the derivative. The derivative is subsequently marked to market at each reporting date based on current fair value, with the changes in fair value reported in results of operations.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-14, which deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers (ASC 606), which updates the principles for recognizing revenue. ASU 2014-09 also amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The Company is evaluating the potential impacts of the new standard on its existing revenue recognition policies and procedures.
In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. ASU 2014-15 requires that an entity's management evaluate whether there are conditions or events that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and for interim periods thereafter. The Company is evaluating the potential impacts of this new standard on its reporting process.

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BUSINESS
General

Overview
Aeolus Pharmaceuticals, Inc. (“we,” “us” or “Aeolus”) is a Southern California-based biopharmaceutical company leveraging significant U.S. Government funding to develop a platform of novel compounds for use in biodefense, fibrosis, oncology, infectious disease and diseases of the central nervous system.  The platform consists of approximately 180 compounds licensed from the University of Colorado (“UC”), Duke University (“Duke”) and National Jewish Health (“NJH”).
Our lead compound, AEOL 10150 (“10150”), is being developed under contract with the Biomedical Advanced Research and Development Authority (“BARDA” and the “BARDA Contract”), a division of the U.S. Department of Health and Human Services (“HHS”), as a medical countermeasure (“MCM”) against the pulmonary sub-syndrome of acute radiation syndrome (“Pulmonary Acute Radiation Syndrome” or “Lung-ARS”) and the delayed effects of acute radiation exposure (“DEARE”). Lung-ARS is caused by acute exposure to high levels of radiation due to a nuclear detonation or radiological event. On January 23, 2014, we announced that 10150 was granted Orphan Drug Designation by the U.S Food and Drug Administration (“FDA”) for the Lung-ARS indication.
We are also developing 10150 for the treatment of lung fibrosis, including idiopathic pulmonary fibrosis (”IPF”) and other fibrotic diseases.  This new development program was created based upon lung protection data generated from animal studies in Lung-ARS and chemical gas lung exposure under the BARDA Contract and National Institutes of Health (“NIH”) grants, as well as a company-funded study in a bleomycin lung fibrosis model.  On March 17, 2015, we announced that 10150 was granted Orphan Drug Designation by the U.S Food and Drug Administration (“FDA”) for the IPF indication. The Company plans to initiate a Phase I safety study in patients with IPF in 2017. After we have completed safety studies, we plan to initiate efficacy studies in patients with fibrosis.   AEOL 10150 has previously been tested in two Phase I human clinical trials with no drug-related serious adverse events reported.
We are also developing 10150 for use in combination with radiation therapy for cancer as a treatment to reduce side effects caused by radiation toxicity and improve local tumor control.  Pre-clinical studies at Duke, the University of Maryland and Loma Linda University have demonstrated that 10150 protects healthy, normal tissue, while not interfering with the benefit of radiation therapy or chemotherapy in prostate and lung cancer.  Additional studies have demonstrated that 10150 enhances the anti-tumor activity of chemotherapy and radiation. A significant portion of the development work funded by the BARDA contract is applicable to the development program for radiation oncology, including safety, toxicology, pharmacokinetics and Chemistry, Manufacturing and Controls (“CMC”).   After we have completed safety studies, we plan to initiate studies to demonstrate efficacy in protecting against the toxic side effects related to radiation therapy.
We are also developing 10150 as a MCM for exposure to chemical vesicants (e.g., chlorine gas, sulfur mustard gas and phosgene gas) and nerve agents (e.g., sarin gas and soman gas) with grant money from the NIH Countermeasures Against Chemical Threats (“NIH-CounterACT”) program. 10150 has consistently demonstrated safety and efficacy in animal studies of chemical gas exposure and nerve gas exposure.
The Company is developing a second compound, AEOL 11114B (“11114”), as a treatment for Parkinson’s disease.  Research funded by the Michael J Fox Foundation for Parkinson’s disease (“MJFF”) demonstrated the neuro-protective activity of 11114 in mouse and rat models of Parkinson’s disease. The compounds were invented by Brian J. Day, PhD at NJH and Manisha Patel, PhD at UC in collaboration with the Company.  We have obtained worldwide, exclusive licenses to develop the compounds from NJH and the UC.  Optimization of the manufacturing and formulation of the compound were finished in 2016, and we plan to complete the remaining work to file an Investigational New Drug (“IND”) application with the FDA during 2017.
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In April 2015, we announced the discovery of a new compound, AEOL 20415 (“20415”), which has demonstrated anti-inflammatory and anti-infective properties, and could be effective in treating cystic fibrosis and combatting anti-biotic resistant bacteria.    The compound was developed under collaboration between Brian J. Day, PhD at NJH and Aeolus Pharmaceuticals. We have obtained a worldwide, exclusive license to develop the rights to the compound from NJH. Animal efficacy studies are underway to confirm the efficacy seen in in-vitro testing against anti-biotic resistant bacteria, and, assuming confirmation, we plan to initiate the work to file an IND application with the FDA during the first half of 2017.

Finally, we have a pipeline of approximately 180 additional compounds. We expect that the development of additional compounds in our portfolio is dependent on our finding non-dilutive capital sources to fund such pipeline opportunities.
We were incorporated in the State of Delaware in 1994. Our common stock trades on the OTCQB under the symbol “AOLS.” Our principal executive offices are located at 26361 Crown Valley Parkway, Suite 150 Mission Viejo, California 92691, and our phone number at that address is (949) 481-9825. Our website address is www.aolsrx.com. However, the information on, or that can be accessed through our website is not part of this report. We also make available, free of charge through our website, our most recent annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC.
Strategy
Our strategy is to pursue the development of our promising platform of anti-fibrotic, anti-inflammatory, anti-infective and anti-oxidant compounds that address important unmet medical indications of clinical and national strategic importance.  Our objective is to use non-dilutive capital whenever possible.
To date, we, and/or our research collaborators, have been awarded more than $149 million in non-dilutive U.S. government funding in the form of grants and contracts from federal agencies, such as BARDA, NIH-NIAID and NIH-CounterACT.  Additional research has been conducted on our compounds with funding from private foundations, such as the MJFF and Citizens United for Research in Epilepsy (“CURE”).
The expected benefit of this strategy is threefold.  First, safety, toxicology, pharmacokinetic and CMC work funded by the government and foundations is applicable to our traditional commercial development programs.  As an example, significant work funded under the BARDA contract for Lung-ARS has generated data that can be used to support our New Drug Applications (“NDA”) for pulmonary fibrosis and/or radiation therapy for cancer.
Second, cost-plus development contracts, like our contract with BARDA, include funds for overhead and profit.  These overhead and profit streams have significantly reduced our cash burn rate, which reduces our need to raise capital and incur dilution.
Third, some government contracts, such as the Lung-ARS contract with BARDA are designed to lead to the acquisition of the product under development by the US Government for use as a MCM in the Strategic National Stockpile (“SNS” or the “Stockpile”).  Government procurement could result in significant revenue to the Company, which could be used to further the development of the product in other indications or for the development of other promising products.  Procurements may be made if either the drug meets the requirements for approval by the U.S. FDA under the “Animal Rule” or prior to Animal Rule approval following the filing of a pre-Emergency Use Authorization (“EUA”) application.  Most of BARDA’s procurements to date have been following the filing of a pre-EUA application.
The amount of any potential procurement is undisclosed by BARDA at this time and is unknown to us. Based on publicly available information, as well as other procurements made by the agency after pre-EUA applications, we believe the agency may purchase sufficient courses of therapy to treat a minimum of one hundred thousand people, with options to purchase an additional two hundred thousand courses of treatment.  If purchases of such volumes occurred, the revenue to the Company could provide funding to advance numerous clinical studies, including potentially large Phase III programs in lung fibrosis and radiation therapy for cancer.  This funding could allow us to fund studies with less dependence on collaborative partnering arrangements and future equity offerings, which is consistent with our strategy to deploy non-dilutive capital wherever possible to develop our compounds for unmet medical indications and thereby generate value for our stockholders.  In addition, purchases of such volumes of drug could make the Company profitable.
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Business Overview
We are developing a platform of compounds with anti-fibrotic, anti-inflammatory, anti-infective and anti-oxidant activity based on technology discovered and researched at Duke, UC and NJH, developed by Drs. Irwin Fridovich, Brian Day and others. Dr. Day is our Chief Scientific Officer.
Our lead compound, 10150, protects sensitive tissue from damage by inhibiting NADPH Oxidase 4 (“NOX4”) and thus acting to mitigate and/or prevent cell death, inflammation and fibrosis through downstream effects on PTEN, TGF-β1 and HIF-1α.  NOX4 and TGF-β1 have been identified as primary drivers of lung damage, including fibrosis, after exposure to radiation, toxic chemicals, disease and trauma (for scientific definitions, see Glossary under “AEOL 10150 in Idiopathic Pulmonary Fibrosis”).  10150 is an extremely potent catalytic anti-oxidant that has been shown in scores of animal studies to reduce oxidative stress by neutralizing reactive oxygen and nitrogen species. The neutralization of these species impacts the inflammatory and fibrotic response to insults and reduces or eliminates subsequent tissue damage-signaling cascades that typically result.  We are developing 10150 as a MCM for national defense and for use in oncology and treating lung fibrosis.
Our most extensive development program to date is the advanced development of 10150 for Lung-ARS and DEARE.  On February 11, 2011, we signed a cost-plus contract with BARDA for the development of 10150 as a MCM against Lung-ARS.  BARDA is the government agency responsible for the advanced development and purchase of medical countermeasures for chemical, biological, radiological and nuclear threats.  The contract contemplates the advanced development of 10150 through approval by the FDA under 21 CFR Part 314 Subpart I and Part 601 Subpart H (the “Animal Rule.”)  The Animal Rule allows for approval of drugs using only animal studies when human clinical trials cannot be conducted ethically.  The ultimate goal of the BARDA Contract is to complete all of the work necessary to obtain FDA approval for 10150 as a MCM for Lung-ARS.  In addition, the BARDA Contract is designed to generate the data that would allow for acquisition of the drug by BARDA prior to FDA approval under a pre-EUA application.
Pursuant to the BARDA Contract, we were awarded approximately $10.4 million for the base period of the contract (from February 2011 to April 2012). On April 16, 2012, we announced that BARDA had exercised two options under the BARDA Contract worth approximately $9.1 million. On September 17, 2013, we announced that BARDA had exercised $6.0 million in additional contract options. On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1.8 million.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.   On June 26, 2015, we announced that BARDA had exercised $3.0 million in additional contract options under its advanced research and development contract for 10150. On February 8, 2016, BARDA exercised a Contract Modification worth approximately $0.1 million. On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Contract Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to determine optimal dose, dose frequency and duration of treatment.  The total contract value exercised as of September 30, 2016 is approximately $30.8 million, of which $30.6 million has been billed.  We may receive up to an additional $87.6 million in options exercisable over the remainder of the BARDA Contract.  Options are exercised based on the progress of the development program, including the completion of clinical trials or manufacturing tasks under previously exercised options.
The final goal of the contract is to achieve FDA approval for 10150 and the development of commercial manufacturing capability.  In order to achieve these goals, we believe it will be necessary for BARDA to exercise the majority of the options in the contract. We also believe that BARDA is likely to continue to exercise options as long as 10150 continues to demonstrate efficacy in animal testing and safety in humans for Lung-ARS.  In the event we begin sales to the U.S. government following the filing of a pre-EUA application, we believe that BARDA is likely to exercise the majority of the remaining options under the contract.  One of the requirements of an EUA is that the development program continue towards the goal of FDA approval. If all of the options are exercised by BARDA, the total value of the contract would be approximately $118.4 million.

There are no existing treatments for Lung-ARS or DEARE and we are not aware of any compounds in development that have shown efficacy in increasing survival when administered after exposure to radiation.  10150 has demonstrated efficacy in two animal models (mouse and non-human primate) when administered after exposure to radiation.  The U.S. government’s planning scenario for a radiation incident is a 10 kiloton detonation of a nuclear device in a major American city.  It is estimated that several hundred thousand civilians would be exposed to high doses of radiation in this scenario.
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The BARDA contract is also designed to complete the work necessary for 10150 to be purchased for the Stockpile. BARDA currently acquires drugs for the SNS through a Special Reserve Fund (the “SRF”) created under Project BioShield and reauthorized at $2.8 billion under the Pandemic All-Hazards Preparedness Reauthorization Act of 2013.   Although the final goal of the contract is full FDA approval under the Animal Rule, BARDA may purchase product prior to FDA approval following the filing of a pre-EUA application.  BARDA has made numerous acquisitions of compounds that were not approved by the FDA, but were the subject of a pre-EUA filing.  Procurements from BARDA following a pre-EUA application could result in a significant increase in revenues for Aeolus and potential profitability.
In August 2014, we filed an Investigational New Drug (“IND”) application with the Division of Medical Imaging Products of the U.S. Food & Drug Administration (“FDA”) for 10150 as a treatment for Lung-ARS.  On September 4, 2014, the Company announced positive results from a study in non-human primates (“NHP”) exposed to lethal radiation and treated with 10150. The study demonstrated that administration of 10150 24 hours after exposure to lethal radiation impacted survival at six months post-exposure as follows: survival in the 60 day treatment group was 50%, compared to 25% survival in the radiation only untreated control group. The data from this study, combined with development work completed in manufacturing and human safety data, will form the basis for a pre-EUA application.
On September 22, 2014, we received a letter from the FDA placing our proposed Phase I study in healthy normal volunteers for 10150 as a treatment for Lung-ARS on clinical hold. On February 19, 2016, we received notice from the FDA that the clinical hold had been lifted, and granting us permission to proceed with a Phase I single dose study of 10150 in healthy normal volunteers.
We also benefit from research funded by grants from the NIH CounterACT program for the development of 10150 as a MCM for the effects chemical vesicant gasses (e.g., mustard gas, phosgene gas and chlorine gas) exposure. Funding for this indication is provided directly to the research institution and does not flow through our financial statements.  Continued funding is generally dependent on continuing evidence of efficacy in animal trials.  In October 2011,  NJH was awarded a $12.5 million grant from NIH CounterACT to continue the development of 10150 as a MCM against sulfur mustard and chlorine gas exposure. Also included in the grant was support for research looking at tissue plasminogen activator (“TPA”) and Silabilin, which are not Aeolus assets, as MCMs against sulfur mustard gas exposure. Work under this grant was completed in September 2016, and NJH reported in September 2016 that final studies under the grant demonstrated that 10150 treatment significantly improved acute (2 to 3 days post-exposure) and longer term (28 days post-exposure) in a rodent model of sulfur mustard gas lung exposure.  Development of a large animal model is currently being funded by the US Government, independent of Aeolus, and once that model is completed, the Company plans to enter into a Material Transfer Agreement with the US Government to test 10150 and confirm the efficacy seen in the rodent model.  Aeolus plans to meet with the FDA during the first half of 2017 to discuss filing an IND for the sulfur mustard indication and to discuss what human safety data would be required for making a pre-EUA filing and ultimately for approval under the Animal Rule.
We are also funded by grant money from the NIH CounterACT program and the National Institute of Neurological Disorders and Stroke (“NINDS”) for the development of 10150 as a MCM for the effects of nerve gas (e.g., sarin and soman) exposure. NIH-CounterACT awarded a contract on September 24, 2011 worth approximately $735,000, to UC to develop 10150 as a MCM against nerve agents. Work performed with this initial funding demonstrated that 10150 significantly improved survival when administered with current treatment in a pilocarpine model for nerve gas exposure. In September 2013, we announced that Dr. Manisha Patel at UC had been awarded a $4.3 million grant from NINDS to further develop as a MCM for exposure to sarin gas and other nerve agents.  Efficacy studies in a mouse model of soman gas are ongoing, and results are expected during 2017.
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Substantially all of the past costs for the Lung-ARS program have been funded by the BARDA Contract.  We may use our own capital to fund any future costs of the Lung-ARS program that are not funded by the BARDA Contract.  To date, the chlorine, phosgene, mustard gas and nerve agent programs have been funded by NIH-CounterACT and NINDS through programs at NJH, UC, and the United States Army Medical Research Institute for Chemical Defense (“USAMRICD”).
We are also developing 10150 for the treatment of lung fibrosis, including idiopathic pulmonary fibrosis (”IPF”) and other fibrotic diseases. Data demonstrating efficacy of 10150 in IPF was initially generated from animal studies in Lung-ARS and chemical gas lung exposure under the BARDA Contract and NIH grants.  Additionally, 10150 demonstrated efficacy in the bleomycin model of IPF, in a study funded by Aeolus.  On March 17, 2015, we announced that 10150 was granted Orphan Drug Designation by the U.S Food and Drug Administration (“FDA”). The Company plans to initiate a Phase I safety study in patients with IPF in 2017. After we have completed safety studies, we plan to initiate efficacy studies in patients with IPF. Although we believe that BARDA may fund a portion of the IPF development work, we may need use our own capital to fund a portion of the future costs of work associated with IPF and other fibrotic diseases.
We are also developing 10150 for use in combination with radiation therapy for cancer as a treatment to reduce side effects caused by radiation toxicity and to improve local tumor control.  Pre-clinical studies at Duke and Loma Linda University have demonstrated that 10150 does not interfere with the benefit of radiation therapy or chemotherapy in prostate and lung cancer.  Additional studies have shown that 10150 enhances the anti-tumor activity of radiation and chemotherapy.  A significant portion of the development work funded by the BARDA contract is applicable to the development program for radiation oncology, including safety, toxicology, pharmacokinetics and Chemistry, Manufacturing and Controls (“CMC”).   After we have completed safety studies, we plan to initiate studies to demonstrate efficacy in toxic side effects related to radiation therapy. We expect to fund a portion of the future costs of work related to radiation therapy opportunities from our own capital.
10150 has been tested in two human Phase I safety studies where it was well-tolerated and no adverse events were observed.  Efficacy has been demonstrated in animal models for Lung-ARS, chlorine gas exposure, phosgene gas exposure, sulfur mustard gas exposure (lungs and skin) and nerve gas exposure. In both mouse and NHP studies for Lung-ARS, 10150 treated groups showed significantly reduced weight loss, inflammation, oxidative stress, lung damage, and most importantly, mortality. Therapeutic efficacy has been demonstrated when 10150 is administered 24 hours after exposure to radiation, a requirement for consideration as a radiation MCM for the SNS.
Following the events at the Fukushima nuclear plant in Japan in 2011, we performed radiation exposure studies in mice at the request of Japanese researchers to determine how the administration of 10150 would impact the use of leukocyte growth factors (“LGF”) used to treat the hematopoietic or bone marrow syndrome of ARS (“H-ARS”).  Data showed that 10150 does not interfere with the efficacy of LGF (in this case Amgen’s Neupogen®).  Additionally, the study demonstrated that administration of Neupogen®, the current standard of care for H-ARS, increased damage to the lungs.  When 10150 was administered with Neupogen® this damage was significantly reduced.  We believe that this finding may have important implications for the potential procurement of 10150 for the SNS.  In September 2013, BARDA announced that it had entered into a procurement and inventory management agreement with Amgen to provide Neupogen® for the SNS. On March 30, 2015, the FDA approved Neupogen® for the treatment of H-ARS.
 In addition to our active IND for Lung-ARS, we have an active IND on file with the FDA for 10150 as a potential treatment for amyotrophic lateral sclerosis (“ALS”).  At this time, we do not have any plans to continue development of 10150 for ALS.
We have already completed two Phase I safety studies in 52 humans (39 receiving drug and 13 control) demonstrating that 10150 is safe and well tolerated. CMC work has been completed, pilot lots have been prepared and production is being scaled up under the BARDA Contract.
The Company is developing a second compound, 11114, as a treatment for Parkinson’s disease.  Research funded by MJFF demonstrated the neuro-protective activity of 11114 in mouse and rat models of Parkinson’s disease. The compounds were invented by Brian J. Day, PhD at NJH and Manisha Patel, PhD at UC in collaboration with the Company.  We have obtained worldwide, exclusive licenses to develop the compounds from NJH and UC.  We plan to complete the remaining work to file an IND application with the FDA during 2017.
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In April 2015, we announced the discovery of a new compound, 20415, that has demonstrated anti-inflammatory and anti-infective properties and could be effective in treating cystic fibrosis and combatting anti-biotic resistant bacteria.    The compound was developed under a collaboration between Brian J. Day, PhD at NJH and Aeolus Pharmaceuticals. We have obtained a worldwide, exclusive license to develop the rights to the compound from NJH. We plan to initiate the work to file an Investigational New Drug (“IND”) application with the FDA during 2017.
 
Aeolus’ Drug Research and Development Program
The focus of our  research and development program is to explore and exploit the therapeutic potential of small molecules with anti-fibrotic, anti-inflammatory, anti-infective and neuro-protective properties.   We have achieved our initial research objectives and have begun to extend our preclinical accomplishments into IND enabling non-clinical studies, clinical trials and drug development programs, as well as into the exploration of novel approaches to address the urgent need for novel drugs to combat antibiotic resistant bacteria.
Our lead compound, 10150, protects tissue from damage and increases survival in animal models of lung damage after exposure to radiation toxic chemicals, disease and trauma by mitigating and/or preventing cell death, inflammation and fibrosis through its action on oxidative stress (Reactive Oxygen Species, or “ROS”) and regulation of growth factors and chemokines including PTEN, TGF-β1, HIF-1α, TNF-α and IL-6, as well as impacting subsequent signaling pathways of ROS production, apoptosis and fibrosis such as NOX4, PTEN, PI3K/p-Akt and p53/Bax.  10150 is an extremely potent catalytic anti-oxidant that has been shown in scores of animal studies to reduce oxidative stress by neutralizing reactive oxygen and nitrogen species. The neutralization of these species impacts the inflammatory and fibrotic response to insults and reduces or eliminates subsequent tissue damage-signaling cascades that typically result.
Figure 1
AEOL 10150 Overview
Product Type
√ NADPH (NOX4) Inhibitor
Broad spectrum anti-fibrotic
Catalytic antioxidant
 
Administration Route
√ Subcutaneous administration;   self-injection possible
√ Alternative formulation in development
Indications in Development
√ Radiation Oncology
√ Idiopathic Pulmonary Fibrosis
√ Pulmonary ARS/DEARE
√ Sulfur Mustard; Chlorine Gas; Nerve Gas
Technical Readiness Level (TRL)
√ TRL 7/8 for Pulmonary Effects
   of ARS/DEARE
Regulatory Status
√ Active IND for ALS
   Phase I (3 studies, 50 patients)
 
√ Active IND for Lung-ARS
Orphan status for ALS, Lung-ARS and IPF
 
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10150 has shown efficacy in a variety of animal models as a protectant against pulmonary damage and diseases including: lung fibrosis, radiation injury, sulfur mustard gas exposure, chlorine gas exposure and phosgene gas exposure, as well as against neurological damage and diseases including: nerve gas exposure, epilepsy, ALS, and stroke and against diabetes. We filed an IND for 10150 in April 2004, under which human safety trials in ALS patients were conducted as more fully described below under the heading “10150 Clinical Program to Date.” In February 2016, the FDA Division of Medical Imaging Products (“DMIP”) removed the clinical hold on 10150. As a result, we now have an active IND for Lung-ARS. 10150 has been granted orphan drug designation for ALS, Lung-ARS and Idiopathic Pulmonary Fibrosis by the Office of Orphan Products at the FDA. An overview of the activity of 10150 and its potential as a treatment for a variety of traditional medical needs as well for use as a medical countermeasure against radiological and chemical insults follows:
In “Reactive Oxygen Species and Fibrosis: Further Evidence of a Significant Liason”, published in Tissue Research; June 2016,  Richter, et. al. stated:
There is a common pathway to fibrosis from insults to the lung and other tissue, whether the insult is radiation, chemical, disease or trauma. Lost parenchyma after tissue injury is usually replaced, because of the ability of parenchymal cells to regenerate. However, the opportunity to regenerate usually becomes unavailable upon repetitive insults associated with chronic inflammation, the secretion of chemokines and the release of profibrotic metabolites, among them, ROS. Further, the production of ROS and the concomitant oxidative stress also contribute to the synthesis and activation of various cytokines and growth factors.  ROS contribute to fibrosis via feed forward and feedback loops.  As the figure illustrates, Insults induce ROS, which causes inflammation.  Fibrosis and inflammation feed back into the path and further increase ROS driven production of cytokines and growth factors.  Cytokines and growth factors, in turn contribute to additional ROS formation.
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The figure above illustrates how 10150 impacts the common pathways to fibrosis.  Data from animal studies in models of radiation, chemical and disease, show that 10150 improves survival by reducing inflammation and fibrosis through its action on oxidative stress (Reactive Oxygen Species, or “ROS”), regulation of growth factors and chemokines such as TGF-β1, HIF-1α, TNF-α and IL-6, as well as impacting subsequent signaling pathways of ROS production, apoptosis and fibrosis such as NOX4, PTEN, PI3K/p-Akt and p53/Bax (for scientific definitions, see Glossary under “AEOL 10150 in Idiopathic Pulmonary Fibrosis”).  A more detailed discussion of the pathways can be found in the sections entitled: AEOL 10150 in Radiation Therapy and AEOL 10150 in Idiopathic Pulmonary Fibrosis. AEOL 10150 Medical Countermeasure Development Program.
We and our research partners have been awarded in excess of $149 million for the development of 10150 as a dual-use, broad spectrum medical countermeasure.  The table below details the indications currently under development and the major sources of funding from the US Government to date.
Indication
 
Funding Source
 
Amount of Grant/Contract
 
Research Partners
 
Lung-ARS
BARDA
Up to $118.4 million
University of Maryland
Mustard Gas/ Chlorine Gas
 
NIH CounterACT
$20.3 million
National Jewish Health
University of Colorado
Nerve Agents
NIH CounterACT
$5 million
University of Colorado

10150 as a potential medical countermeasure against the effects of Pulmonary Acute Radiation Syndrome (Lung-ARS)
Overview
The U.S Government’s current planning scenario for a nuclear attack is a 10 kiloton detonation in a major American city.  For purposes of comparison, the yield of the bomb dropped on Hiroshima in World War II was approximately 16 kilotons.  Such an attack would potentially expose hundreds of thousands of citizens to acute, high dose, ionizing radiation and the lethal effects of Acute Radiation Syndrome (“ARS”).
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ARS is not a single disease, but rather a series of symptoms and progression of injuries that occur following exposure to ionizing radiation.  BARDA is pursuing separate development plans for the acute effects of radiation (such as hematopoietic and acute gastro-intestinal effects) as well as for the delayed effects of ARS, among which pulmonary effects are a major component and contributor to mortality to patients surviving acute effects.  At present, 10150 is the only compound in advanced development with BARDA for the delayed effects of radiation exposure, and specifically Lung-ARS.
After exposure, the acute syndromes of ARS are the H-ARS and early-onset gastrointestinal ARS (“GI-ARS”), both of which can be lethal. However, depending on the level and location of radiation exposure, the lethal effects of both H-ARS and early-onset GI-ARS may be reduced with proper treatment, including supportive care (fluids and antibiotics) and LGFs like Amgen’s Neupogen® or Neulasta®.
In September 2013, BARDA announced that it had entered into a vendor-managed supply agreement with Amgen to supply its LGF, Neupogen®, to the SNS as a treatment for H-ARS.  Although Neupogen® is an FDA-approved drug for neutropenia, it was not approved for H-ARS at the time and would have been used under a pre-EUA application.  The procurement of Neupogen® for the SNS is significant for 10150 and its potential role in the treatment of ARS.  A 2011 murine study conducted at Indiana University at the request of Japanese researchers confirmed that 10150 does not interfere with the positive effects of Neupogen® in H-ARS and the two products in combination were safe and well-tolerated.  More importantly, this study also demonstrated that treatment of H-ARS with Neupogen® exacerbates radiation damage to the lung, even at sub-lethal doses of radiation. Treatment with Neupogen® in combination with 10150 significantly reduced the lung damage.  We believe that the use of Neupogen® in treating H-ARS makes the use of 10150 crucial in managing the lung effects of acute radiation exposure.  On March 30, 2015, the FDA approved Neupogen® for the treatment of H-ARS.
In radiation incidents, victims who have survived H-ARS and GI-ARS, respiratory failure has been the primary cause of death.   Research has shown that damage associated with the exposure to upper half body irradiation or total body irradiation is an acute, but delayed, onset of radiation pneumonitis (inflammation of lung tissue) followed by lung fibrosis (scarring caused by inflammation).The incidence of radiation pneumonitis rises very steeply at relatively low radiation doses. This is Lung-ARS, the syndrome that 10150 is being developed to treat.
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The figure below illustrates the mechanisms by which radiation exposure damages the lung causing cell death (apoptosis), inflammation and lung fibrosis.  Treatment with AEOL 10150 has improved survival in mouse, rat and NHP models of radiation damage by targeting the overproduction of ROS (oxidative stress) and subsequently impacting the signaling pathways for apoptosis, inflammation and fibrosis.  The animal studies have not only shown improvement in survival, but protection of lung tissue and improved function in addition to a reduction in inflammation and fibrosis.  Analysis of key biomarkers, such as those shown in the figure below, shows that 10150 treatment after radiation exposure returns their levels to, or near baseline levels.
We believe it is in the government’s interest in to provide care not only for survival from the short-term effects of radiation exposure following an event (e.g., H-ARS and GI-ARS), but also to provide care for the delayed effects of radiation exposure, such as Lung-ARS.  There are no current FDA-approved or pre-EUA therapies for Lung-ARS.  We believe 10150 is the only drug in advanced development with BARDA for Lung-ARS.
Animal Efficacy Studies – Dose Response and Safety Analysis
In September 2016 a “Dose Response and Safety Analysis” of the animal efficacy data from all murine and NHP Studies was completed by the University of Maryland, School of Pharmacy’s Center for Translational Medicine.  The objective of this report was to identify the optimal dose and regimen of 10150 to improve overall survival after whole thorax lung irradiation in NHP and C57L/J mouse models. Secondary objectives were to explore the relation between 10150 and radiation-induced lung injury biomarkers.  The key findings from the report are summarized below:
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In the C57L/J mice, 10150 administration 24-hour post-exposure provided maximum prolongation of the 180-day survival independent of treatment duration, with a higher median survival rate compared to treatment initiated at a later time after injury. Using a piecewise parametric survival model in NHP, AEOL 10150 treatment for 60 consecutive days starting at 24 hours post-exposure was found to significantly (p<0.001) decrease mortality from acute radiation pneumonitis compared to the control arm. NHP which received 60 day treatment starting 24 hour post exposure died 40% less frequently per unit time during the pneumonitis phase compared to the untreated arm, which is comparable with the estimated hazard ratio of 0.6 from a cox-proportional hazard model.  A graph highlighting the NHP results follows:
About 1.4 months delay was seen before any death event occurring across all untreated and treated NHP arms. So the time of latency to onset of pneumonitis was fixed to 1.4 months, and the hazard for this phase was assumed to be not affected by 10150 treatment. It was assumed that 10150 treatment mainly affected the hazard of pneumonitis phase. The hazard (hazard 1, latent phase) before 1.4 months was estimated to be 0.0008, which means NHPs almost have no chance to die during this phase. In pneumonitis phase (1.4 - 6 months in observed data), the hazard ratio in the second phase (hazard 2, pneumonitis phase) between treatment arms and control arm was estimated to be 1.12, 0.6, and 1.13 for the 28 days, 60 days and 1-28 & 60-88 days treatment arms using the parametric constant hazard model in comparison with the hazard ratios of 0.89, 0.49 and 1.09 from cox proportional hazard model.  The results show NHPs in 60 days arm may die 40% less frequently per unit time than NHPs in control arm in pneumonitis phase while NHPs in 28 days and 1-28 & 60-88 days arms are 12% and 13% more likely to die compared to Non-Tx arm during pneumonitis phase.
Animal Efficacy studies – Murine Model
In a 2013 study run under the BARDA contract at the University of Maryland at Baltimore, a total of 120, CBA/J mice were exposed to 14.6 Gray of whole thorax irradiation (“WTLI”).  Four cohorts of animals were treated with daily doses of 5mg, 10 mg, 25 mg or 40 mg/kg of 10150 beginning 24 hours after exposure for a total for 28 days.  The results are shown in the table below.  Survival at six months post-exposure in the optimal treatment group of 25mg/kg of 10150 improved to 40 percent, compared to 10 percent survival in the radiation only group.  In addition, animals receiving 10150 showed significant protection of the lungs as measured by differences in wet lung weights and breathing frequency.  This study confirms previous studies in animals that demonstrate 10150’s protection of the lungs from radiation exposure.
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Treatment
 
Survival
 
Number of Animals
 
Radiation Only
 
10%
 
20
 
Radiation + 5 mg/kg AEOL 10150
 
16%
 
19
 
Radiation + 10 mg/kg AEOL 10150
 
16%
 
19
 
Radiation + 25 mg/kg AEOL 10150
 
40%
 
20
 
Radiation + 40 mg/kg AEOL 10150
 
30%
 
20
 

A number of other preclinical studies by researchers at the University of Indiana, the University of Maryland and Duke University have demonstrated the efficacy of 10150 in the protection of healthy, normal tissue from damage due to blast and fractionated radiation exposure.
In 2011, we announced positive results from study of 10150 and Neupogen® as combination therapy for treatment of ARS.  The study was conducted by Christie Orschell, PhD of Indiana University. The primary endpoint of the study was to determine drug-drug interactions between Neupogen® and 10150, as well as to monitor safety and tolerability of the two treatments given simultaneously. Results of the study confirmed that 10150 does not interfere with the positive effects of Neupogen® on H-ARS and the two products in combination were safe and well tolerated.  In 2012, we announced further data from this study, which demonstrated that treatment of H-ARS with Neupogen® exacerbates radiation damage to the lung. The study also confirmed that treatment with 10150 in combination with Neupogen® significantly reduced the lung damage.
The study entitled “Pilot Study to Test the Effects of Aeolus 10150 on Neupogen®-Induced ANC Recovery in Sub-Lethally Irradiated C57Bl/6 Mice” was initiated at the request of Shigetaka Asano, MD of Waseda University and Arinobu Tojo, MD, PhD and Tokiko Nagamura, MD at the Institute of Medical Science at the University of Tokyo to determine whether there would be any interference with the demonstrated efficacy of Neupogen® as a medical countermeasure against the hematopoietic complications of radiation exposure. In previous treatment of radiation accident victims at Tokai-mura, Dr. Asano and others were able to use Granulocyte Colony Stimulating Factor (“G-CSF”) and supportive care to enable victims of 8 to 12 Gy exposure to survive the hematopoietic (“heme”) syndrome. Unfortunately, these patients later died due to lung and multi-organ complications. As 10150 has shown separate efficacy against lung complications in mice and in Lung-ARS in non-human primates, this study was undertaken to evaluate whether the Neupogen® and 10150 would be beneficial if used in tandem.
The use of Neupogen® or other G-CSFs or Neulasta® or other Granulocyte-Macrophage Colony Stimulating Factor (“GM-CSF”) products is recommended by the Radiation Emergency Assistance Center/Training Site (REAC/TS) at radiation exposures greater than 2 to 3 Gy to mitigate damage to the hematopoietic system. REAC/TS is a response asset of the U.S. Department of Energy and provides treatment capabilities and consultation assistance nationally and internationally. In animal studies G-CSF's have been shown to be effective in increasing survival at levels up to 7.5 Gy due to their positive effects on the hematopoietic damage created by radiation exposure.   BARDA began procuring Neupogen® and Sanofi-Aventis’ drug Leukine® for the Strategic National Stockpile in September 2013 following a pre-EUA filing.
LGFs as a class have not demonstrated an effect on the two other major sub-syndromes -- GI and Lung. 10150 has demonstrated efficacy in treating the GI sub-syndrome in pilot studies conducted by NIH-NIAID, by protecting crypt cells and reducing diarrhea. More extensive studies of the drug in treating the pulmonary effects of radiation at Duke University and the University of Maryland have shown improved survival and enhanced lung function and improved histology at exposures up to 15 Gy in mice and 11.5 Gy in non-human primates. These exposure levels caused death in 100 percent of animals that were not treated with 10150. Studies at Duke University have also shown a significant survival advantage for animals treated with 10150 after 15 Gy upper half body irradiation, which causes lethal damage to both the GI tract and the lungs.
In summary, 10150 has consistently shown a survival advantage and protective effect against Lung-ARS and DEARE when administered 24 hours or more after exposure.  Additionally, the current standard of care for the acute ARS syndromes, LGF administration, exacerbates damage to the lungs and 10150 has demonstrated efficacy in reducing that damage.
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Animal Efficacy Studies – NHP In a 2014 study run under the BARDA contract at the University of Maryland at Baltimore, a total of 80 rhesus macaque monkeys were exposed to 10.74 Gray of WTLI. Three cohorts of animals were treated with 25 mg/kg of 10150 beginning 24 hours after exposure.  The three cohorts then received daily doses of 10150 for 28 days, 60 days or 28 days followed by a pause of 32 days and then an additional 28 days of treatment.  As we announced in September 2014, survival at six months post-exposure in the 60 day treatment group was 50%, compared to 25% survival in the radiation-only untreated control group. This study confirms previous studies in non-human primate and mouse models that demonstrate 10150’s protection of the lungs from radiation exposure.  We plan to publish the detailed results of the study with our research collaborators as soon as possible.
In May 2015, we announced secondary endpoints from the study.   The data from these endpoints demonstrated that administration of 10150 for 60 days beginning 24 hours after exposure to 10.74 Gy of radiation:
- Increased mean and median overall survival time
- Increased mean and median survival time in subjects that did not survive to 180 days
- Increased time to onset of increased respiratory rate, a clinical measure of lung injury
- Decreased mortality in subjects with elevated respiratory rate
- Decreased wet lung weight in all animals, suggesting less parenchymal damage and edema
- Increased Sp02, a measure of compensated lung function
- Diminished radiographic evidence of pneumonitis and fibrosis during the later stages of the study (days 90 -180)
In addition, a new approach to investigating lipids, metabolites and proteins in pathophysiological process, matrix-assisted laser desorption/ionization mass spectrometry imaging (MALDI-MSI) was employed in the study to measure potential biomarkers for lung injury in tissue samples from study subject.  Analysis using MALDI-MSI showed that the molecular profile for the naïve (un-irradiated) lung is statistically distinct from irradiated lung and treatment with AEOL 10150 shifts the molecular profile back towards the naïve lung.  Two prospective biomarkers found in irradiated, damaged lung tissue were not detectable in either naïve or 10150-treated samples.
In 2010, we initiated a study to test the efficacy of 10150 as an MCM to nuclear and radiological exposure in non-human primates (“NHPs”). The study was designed to test the efficacy of 10150 as a treatment for Lung-ARS and to begin establishing an animal model that can be validated and could be utilized by the FDA for approval of an MCM for Pulmonary Acute Radiation Syndrome under the “Animal Rule”. The FDA “Animal Rule” enumerates criteria whereby the FDA can rely on animal efficacy data when “evidence is needed to demonstrate efficacy of new drugs against lethal or permanently disabling toxic substances when efficacy studies in humans, ethically cannot be conducted.” The criteria are discussed below.
Results from the study were published in the journal Health Physics, Volume 106, Number 1 (January 2014) under the title “A Pilot Study in Rhesus Macaques to Assess the Treatment Efficacy of A Small Molecular Weight Catalytic Metalloporphyrin Antioxidant (AEOL 10150) in Mitigating Radiation-induced Lung Damage."   The primary objective of the study was to determine if 10150 could mitigate radiation-induced lung injury and enhance survival in rhesus macaques exposed to whole thorax lung irradiation (“WTLI”) and administered supportive care. Two cohorts of NHPs were exposed to 11.5Gy LINAC-derived photon radiation in the WTLI protocol. The control cohort had n=6 and 10150-treated cohort was n=7.This model showed 100% incidence of severe radiation-induced lung damage. 10150 was administered subcutaneously at 5mg/kg beginning at day 1 post WTLI and continued as a single, daily injection for 28 consecutive days. The final results were presented at the 14th International Congress of Radiation Research in Warsaw, Poland in September 2011.  Key findings in the study include:
1.
Exposure of the whole thorax to 11.5 Gy resulted in radiation-induced lung injury in all NHPs in the study and proved 100% fatal in the control animals, despite supportive care including dexamethasone. 11.5 Gy is, therefore, equal to or greater than the LD100/180dose for the WTLI model.
2.
10150, as administered in this pilot study (daily for 28 days at a dose of 5mg/kg subcutaneously), demonstrated potential efficacy in mitigating against fatal radiation-induced lung injury.  Treatment with the drug resulted in 28.6% survival following exposure to a radiation dose that proved to be 100% fatal in the untreated control group.
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3.
Serial CT scans demonstrated less quantitative radiographic injury (pneumonitis, fibrosis, effusions) in the 10150-treated cohort, suggesting that the drug reduces the severity of the radiographically detectable lung injury.
4.
Dexamethasone administration yielded a transient benefit on both clinical and radiographic evidence of pneumonitis.  The 10150 treated cohort required 1/3 less dexamethasone support due to reduced pulmonary injury in the 10150 treated group, resulting in less frequent clinical “triggers” (respiratory rate≥80) to treat with dexamethasone.
5.
The results of this pilot study are encouraging and suggest that treatment with 10150 results in reduced clinical, radiographic and anatomic evidence of radiation-induced lung injury, which also results in improved survival.  10150 merits further study as a post-exposure MCM against radiation-induced lung injury.
In rodents, non-human primates and humans, radiation of the lungs can cause reduced breathing capacity, pneumonitis, fibrosis, weight loss and death and is characterized by oxidative stress, inflammation and elevated macrophage counts. 10150 has proven to be an effective countermeasure to radiation exposure of the lungs in mice and rats in published studies such as Rabbani et al Int J Rad Oncol Biol Phys 67:573-80, 2007, Rabbani et al Free Rad Res 41:1273-82, 2007 and Gridley et al Anticancer Res 27:3101-9, 2007.
Future Development Plans
Our objective is to develop 10150 as an MCM against Lung-ARS via the FDA’s “Animal Rule”. This development pathway requires demonstration of the key study efficacy parameter of 10150 treatment in two animal models relevant to the human radiation response and its treatment, demonstration of safety in humans, demonstration of relevant dosing and administration in humans, and clear identification of the mechanism of radiation-induced damage to the lung and its amelioration by the drug candidate.
10150 has several distinct advantages as an MCM, including the following:
Demonstrated survival increase in animal studies of Lung-ARS when administered 24 hours after exposure,
Demonstrated reduction in lung fibrosis in animal studies when administered up to 24 hours post exposure,
Demonstrated histological improvement in lung tissue post-radiation exposure,
Addresses an unmet medical need as an MCM to Lung-ARS,
Established safety profile in both clinical and pre-clinical studies,
Subcutaneous self-administration possible by exposed individuals during emergency,
Rapid administration, allowing large numbers of patients to be treated quickly,
Original formulation stable for up to 4½ years at 0–8°C and 1 year at room temperature,
New formulation stability tested in bulk drug for 3 years at room temperature (25°C) and refrigerated conditions (2-8°C); stability testing in bulk drug will continue to three years,
New formulation stability tested in final drug product to 24 months under room temperature (25°C), accelerated conditions (40°C) and refrigerated conditions (2-8°C); stability testing in final drug product will continue to 5 years,
Requires no non-standard storage conditions (i.e., not photosensitive),
Currently in development as an adjunct to radiation therapy and lung fibrosis; if approved will provide a pre-existing distribution and stockpile resource at oncology centers in the event of a radiological emergency,
Demonstrated advantage when used in combination with Neupogen®,
Demonstrated potential as both a therapeutic and prophylactic,
Demonstrated efficacy against sulfur mustard gas, phosgene gas, chlorine gas and nerve agent exposures,
Potential dual use as an adjunct treatment for cancer patients receiving radiation therapy and treatment of idiopathic pulmonary fibrosis, subject to separate FDA approvals for these indications.
We believe that in order to receive approval from the FDA for Lung-ARS, we will need to demonstrate efficacy in animal models and demonstrate product safety. We also plan to request Fast Track status for this indication. If the FDA accepts our Fast Track request, a rolling NDA submission process is enabled, a key step in achieving Priority Review. The FDA determines within 45 days of a company’s request, made once the complete NDA is submitted, whether a Priority or Standard Review designation will be assigned.
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In August 2014, the Company filed an IND (IND#112103) for 10150 for Lung-ARS with the Division of Medical Imaging Products (“DMIP”) at FDA. On September 22, 2014, the Company received a letter from FDA placing the proposed Phase I study in healthy normal volunteers on clinical hold.  On February 19, 2016, following the submission of additional data in response to FDA questions, we received notice that the clinical hold had been lifted, allowing us to proceed with a Phase I single-dose study in healthy normal volunteers.
Upon completion of the single dose, Phase I study in healthy, normal volunteers, we plan to initiate studies in patients with cancer and/or idiopathic pulmonary fibrosis, and will use this data together with the existing safety and tolerability data we have in patients with Amyotrophic Lateral Sclerosis (“ALS”) to provide the human safety data required for a potential pre-EUA filing and ultimately an NDA filing for approval under the animal rule.    As discussed above, we also plan to file separate 10150 IND’s with the Respiratory division of the FDA and the Oncology division of the FDA in 2017 and initiate Phase I studies in patients with pulmonary fibrosis and in patients receiving radiation therapy for cancer upon FDA approval of those INDs.
The FDA’s “Animal Rule” enumerates criteria whereby the FDA can rely on animal efficacy data when evidence is needed to demonstrate efficacy of new drugs against lethal or permanently disabling toxic substances when efficacy studies in humans cannot be ethically conducted. The criteria are as follows:
Knowledge of the mechanism of radiation-induced damage to the lung and its amelioration by the candidate drug.
Pharmacokinetic and pharmacodynamic analysis to provide information on relevant dose and administration schedule.
Direct correlation of key study parameters (e.g., survival or major morbidity) with the desired clinical benefit in humans.
Collection of efficacy data in two species relevant to the human radiation response and its treatment unless otherwise justified under GLP-compliant conditions.
A Phase I safety trial using the same product and formulation as used in the pivotal trial(s) is required.

Demonstrate Efficacy in Animal Models
Under the BARDA contract, we have developed and validated mouse and NHP models for Lung-ARS.  We have also presented these models to the FDA and they have concurred with our design and our development plan for demonstrating efficacy. We believe that the efficacy data produced in pivotal studies using validated models will provide the data required to demonstrate efficacy of 10150 at the dose and schedule proposed for licensure.
Demonstrate Product Safety
For product approval under the “Animal Rule”, we will also demonstrate product safety using the same product and formulation used in the animal efficacy trials and proposed for use in humans. Demonstration of safety includes preclinical demonstration of safety via the standard pre-clinical studies and analyses methods and Phase I safety trials sufficient to demonstrate product safety in the target patient population. We believe our proposed safety studies in healthy normal volunteers, planned studies in pulmonary fibrosis and radiation therapy, as well as completed Phase I studies in ALS may be utilized to demonstrate safety for this indication. We believe that BARDA may fund or co-fund safety studies in healthy normal volunteers and other indications to provide the human safety data required for approval under the animal rule.
Competition
Currently there are no FDA-approved drugs for the treatment of Lung-ARS. We are also not aware of any other drug candidates that have demonstrated the ability to protect the lungs from radiation when administered after exposure, which we believe is a critical aspect of the development of an MCM against the effects of acute radiation syndrome.  We are also not aware of any drugs with advanced development funding from BARDA for Lung-ARS.
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However, in general, we face significant competition for U.S. government funding for both development and procurements of an MCM for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures. The U.S. federal government has currently allocated a significant amount of research funding to the development of countermeasures against the effects of radiation exposure. As a result, there are many drug candidates under development as a possible countermeasure against the various effects and sub-syndromes of radiation exposure.
Funding and Funding Options
On February 11, 2011, we signed a five-year, cost-plus contract with BARDA for the development of 10150 as a MCM against Lung-ARS (the “BARDA Contract”).  BARDA is the government agency responsible for the advanced development and purchase of medical countermeasures for chemical, biological, radiological and nuclear threats.  The contract funds the advanced development of 10150 through approval by the United States Food & Drug Administration (“FDA”) under the “Animal Rule.”  The Animal Rule allows for approval of drugs using only efficacy studies in animal models.
Pursuant to the BARDA Contract, we were awarded approximately $10.4 million for the base period of the contract (from February 2011 to April 2012). On April 16, 2012, we announced that BARDA had exercised two options under the BARDA Contract worth approximately $9.1 million. On September 17, 2013, we announced that BARDA had exercised $6.0 million in additional contract options. On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1.8 million.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.   On June 26, 2015, we announced that BARDA had exercised $3.0 million in additional contract options under its advanced research and development contract for 10150. On February 8, 2016, BARDA exercised a Contract Modification worth approximately $0.1 million.  On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Contract Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to determine optimal dose, dose frequency and duration of treatment.  The total contract value exercised as of September 30, 2016 is approximately $30.8 million, of which $30.6 million has been billed.  We may receive up to an additional $87.6 million in options exercisable over the remainder of the BARDA Contract.  Options are exercised based on the progress of the development program, including the completion of clinical trials or manufacturing tasks under previously exercised options.
Since we have been awarded the BARDA Contract, substantially all of the past costs associated with the research and development of 10150 as a MCM for Lung-ARS have been covered by the BARDA Contract and we expect substantially all future costs would be covered by the BARDA Contract; however, our expectation in this regards is primarily dependent on continued positive results with 10150 in animal studies and the general risks of doing business with the government.  See Risk Factors – “Risks Related to Our Dependence on U.S. Government Grants and Contracts.” We may need to use our own capital to fund part of the future costs of the Lung-ARS program that are not funded by the BARDA Contract.

10150 as a potential medical countermeasure against the effects of mustard gas
Overview
Sulfur mustards, of which sulfur mustard gas (“SM”) is a member, are a class of related cytotoxic, vesicant chemical warfare agents with the ability to form large blisters on exposed skin and cause pneumonitis and fibrosis in the lungs. In their pure form most sulfur mustards are colorless, odorless, viscous liquids at room temperature. When used as warfare agents they are usually yellow-brown in color and have an odor resembling mustard plants, garlic or horseradish. Mustard agents, including sulfur mustard, are regulated under the 1993 Chemical Weapons Convention. Three classes of chemicals are monitored under this Convention, with sulfur and nitrogen mustard grouped in the highest risk class, “schedule 1.” However, concerns about its use in a terrorist attack have led to resurgence in research to develop a protectant against exposure.
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Mustard gas is a strong vesicant (blister-causing agent). Due to its alkylating properties, it is also strongly mutagenic (causing damage to the DNA of exposed cells) and carcinogenic (cancer causing). Those exposed usually suffer no immediate symptoms. Within 4 to 24 hours the exposure develops into deep, itching or burning blisters wherever the mustard contacted the skin; the eyes (if exposed) become sore and the eyelids swollen, possibly leading to conjunctivitis and blindness. At very high concentrations, if inhaled, it causes bleeding and blistering within the respiratory system, damaging the mucous membrane and causing pulmonary edema. Blister agent exposure over more than 50% body surface area is usually fatal.
In 2011, the NIH awarded a five-year, $7.8 million Center of Excellence grant to NJH and the UC Health Sciences Center, both in Denver, Colorado. This Center of Excellence was developed to focus on sulfur mustard toxicity in the lung and skin with the long-term goal to develop an effective treatment for mustard gas induced injury in lung and skin. 10150 was identified by the NJH Center of Excellence as a lead compound for its center, and research work there focused on further testing and studies of 10150.
Research in the area of mustard gas-mediated lung injury has provided experimental evidence that the mechanisms of these injuries are directly linked to oxidative stress, inflammation, cell death, DNA damage and airway cast formation.  The ability of superoxide dismutase and catalase to reduce oxidative stress by mitigating the formation of reactive oxygen and nitrogen species initially led to 10150 being tested as an MCM against sulfur mustard exposure to the lungs.    Subsequent work, funded by the NIH CounterACT grants, has shown that 10150 improves survival in animal models of sulfur mustard lung exposure by reducing oxidative stress, inflammation, cell death and airway cast formation while protecting against DNA damage.
Non-clinical studies
In September 2016, we announced data from studies performed by Brian Day, Ph.D., at NJH in collaboration with USAMRICD and funded by the CounterACT Program utilizing a new sustained-release formulation.   28 rats, 14 control and 14 treated daily with 10150 for 28 days, were followed for 28 days after inhaled exposure to a lethal dose of sulfur mustard gas. The primary endpoint in the study was survival at 28 days and the secondary endpoint was median survival. Survival at 28 days in the 10150-treatment animals was 36 percent compared to 14 percent in the control group. Median survival was  4 days in the control group compared to 18 days in the AEOL 10150 treated group. There was also improvement in blood oxygenation in the 10150 treated group. These positive results build on data from prior acute and longer-term studies noted below.

Also in September 2016, we announced data from a series of studies in a rat model of the acute effects of sulfur mustard gas on survival, breathing and a number of biomarkers for inflammation and fibrosis. In the study, performed by Brian Day, Ph.D., rats were exposed to lethal levels of sulfur mustard gas, which resulted in 64 percent of the untreated animals dying from the effects of the sulfur mustard gas within 48 hours of exposure. Survival for rats treated with 10150 improved dramatically in a dose dependent manner. Animals administered 10150 every four hours, beginning one hour after exposure, had a survival rate of 88 percent at 48 hours. Treatment with 10150 also:

Increased blood oxygen saturation by more than 10 percent
Improved clinical scores of lung health by 57 percent
Decreased airway casts by 69 percent
Restored levels of TNF-a, IL-6, KC/GRO (rat analog of human IL-8) and IL-1b, which are elevated significantly after exposure to sulfur mustard gas, to control levels
Restored levels of TGF-β1 to control levels

In July 2013, we announced that four separate studies conducted at USAMRICD using 85 rats and comparing 2 different 10150 dosing regimens conclusively demonstrated that 10150 improves survival against an LD60-70 sulfur mustard gas exposure. 10150 improved sulfur mustard gas survival up to 82% over 48 hours. The improvement in survival seen with 10150 treated animals after sulfur mustard gas exposure correlated with improvements in clinical scores, blood oxygenation and airway obstruction. The best improvements in survival and lung function occurred with the 10150 dosing regimen of 5 mg/kg body weight given every 4 hours by subcutaneous injection (p < 0.0004).
 
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The primary endpoints in these studies were survival and blood oxygen saturation. Secondary endpoints included clinical scores, blood gas and histopathology for cast formations. 10150 or placebo was given to rats one hour after sulfur mustard vapor exposure and repeated every 4 or 8 hours. Forty-eight hours after exposure, lung edema was assessed by changes in the Broncho alveolar lavage (BAL) protein levels. At euthanasia, 48 hours after exposure, 10150 significantly improved (p < 0.0001) pulse oximetry, and 10150 treated rats had improved blood oxygenation throughout the study period. Treatment with 10150 also restored blood gas parameters to near normal levels, including: pO2 (p < 0.001), pCO2 (p < 0.0016) and pH (p < 0.0006). Finally, 10150 treatment reduced airway cast formation by 50% at 24 hours (p < 0.017).
In prior studies 10150 reduced lung edema (p < 0.05), decreased SM-induced increases in macrophages (p < 0.05) and epithelial cells in BAL fluid (p < 0.05). In all three measurements 10150 provided approximately 100 percent protection -- with levels approximating that of the control animals in the study. These results indicate that 10150 significantly improves survival and attenuates lung injury from mustard gas exposure and may provide an effective countermeasure against mustard gas-induced lung injury.
The first whole mustard gas study was completed in October 2009. In June 2010, NJH and Lovelace Respiratory Research Institute reported results from a second whole mustard study confirming that 10150 protects lungs from whole mustard gas exposure in rats. The two studies demonstrated that10150 protects lungs from whole mustard gas exposure in rats. The primary objective of the study was to determine whether administration of 10150, after exposure, reduces the severity of acute lung injury induced by mustard gas. 10150 was given to rats one hour after sulfur mustard exposure and repeated every 6 hours. Twenty-four hours after exposure, lung edema was assessed by changes in the BAL protein levels. 10150 significantly reduced (p<0.05) mustard gas-induced lung edema as measured by BAL protein levels. In addition, 10150 decreased SM-induced increase in the numbers of BAL neutrophils. These results indicate that 10150 can attenuate lung injury from mustard gas exposure and may provide an effective countermeasure against mustard gas-induced lung injury.
Future Development Plans
Development of a large animal model is currently being funded by the US Government, independent of Aeolus, and once that model is completed, the Company plans to enter into a Material Transfer Agreement with the US Government to test 10150 and confirm the efficacy seen in the rodent model.  Aeolus plans to meet with the FDA during the first half of 2017 to discuss filing an IND for the sulfur mustard indication and to discuss what human safety data would be required for making a pre-EUA filing and ultimately for approval under the Animal Rule.  We will also seek to launch the two pivotal efficacy studies required for approval by the FDA under the “Animal Rule” as well as complete the necessary safety studies as further described under the heading “10150 as a potential medical countermeasure against the effects of Pulmonary Acute Radiation Syndrome – Future Development Plans – Demonstrate Product Safety.”
Competition
There are currently no effective treatments for mustard gas exposure.
However, in general, we face significant competition for U.S. government funding for both development and procurements of medical countermeasures for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures. The U.S. federal government has currently allocated a significant amount of research funding to the development of countermeasures against bioterrorism. As a result, there are many drug candidates under development as a possible countermeasure against chemical threat agents.
Funding Options
This development program to date has been funded under the NIH-CounterACT Program and we expect that future efficacy studies necessary for approval by the FDA, including the pivotal rat study and second animal model described above, will be funded by either the Department of Defense or BARDA.
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10150 as a potential medical countermeasure against the effects of chlorine gas
Overview
Chlorine gas is a toxic gas that inflicts airway injury through primary oxidative stress and secondary inflammation. Chlorine inhalation was recently used in terrorist/insurgent attacks on military and civilian populations and has caused numerous industrial, transportation, swimming pool, and household accidents, as well as deaths to members of the U.S. military in the past. Chlorine gas, also known as bertholite, was first used as a weapon in World War I. Chlorine gas was also used against the local population and coalition forces in the first Iraq War in the form of chlorine bombs.
One of the primary goals of the NIH-CounterACT program is to assist in the development of safe and effective medical countermeasures designed to prevent, diagnose, and treat the conditions caused by potential and existing chemical agents of terrorism and which can be added to the SNS. The SNS is maintained by the Centers for Disease Control and Prevention (“CDC”). The SNS now includes CHEMPACKS that are forward-deployed in secure, environmentally controlled areas throughout the United States available for rapid distribution in case of emergency.  CHEMPACKS were developed for threats like chemical and nerve gas where treatment must be administered in less than 24 hours and shipment of MCMs from SNS warehouse locations is not practicable.  The CDC has established a diagnostic response network for the detection of nerve agents, mustard, cyanide and toxic metals.
Worldwide, independent of warfare and chemical terrorism, chlorine is the greatest single cause of major toxic release incidents (16.Davis DS, Dewolf GB, Ferland KA, et al. Accidental Release of Air Toxins. Park Ridge, New Jersey: NDC; 1989:6-9.). In the U.S., there are about 5-6,000 exposures per year resulting in, on average, about one death, 10 major, 400-500 moderate, and 3-4,000 minor adverse outcomes. Chlorine gas causes damage to upper and lower respiratory tracts. While chlorine is an irritant, its intermediate water solubility may delay emergence of upper airway symptoms for several minutes. No specific beneficial therapies are available. 10150 has demonstrated a decrease in airway injury, inflammation, oxidative damage, hyperreactivity and cell proliferation after acute chlorine gas inhalation in mice, and therefore could be a possible beneficial therapy for chlorine gas inhalation injury to the airways.
Pre-clinical studies
Under a grant from NIH CounterACT, researchers from National Jewish Health and McGill University have completed a series of preliminary studies demonstrating that 10150 protects lungs from chlorine gas exposure in mice and rats. The primary objective of these studies was to determine whether administration of 10150, after exposure, reduces the severity of acute lung injury and asthma-like symptoms induced by chlorine gas. In 2010, 10150 was given to mice at a 5 mg/kg subcutaneous dose one hour after chlorine gas exposure (100 ppm for 5 minutes) and repeated every 6 hours. Twenty-four hours after exposure, lung inflammation was assessed by changes in Broncho alveolar lavage (“BAL”) cellularity and neutrophil influx. 10150 significantly reduced (p<0.05, n=6/group) chlorine gas-induced lung inflammation as measured by BAL fluid cellularity levels by 40% that appeared to be due to limiting neutrophil influx. 10150 also significantly attenuated (p<0.05, n=6) the degree of asthma-like airway reactivity induced by chlorine gas exposure by 40%. These results indicate that 10150 can attenuate lung injury and asthma-like symptoms from chlorine gas exposure and may provide an effective countermeasure against chlorine gas-induced lung injury.  The data from this study was published in December 2010 as AEOL10150: A novel therapeutic for rescue treatment after toxic gas lung injury by Toby McGovern, Brian J. Day, Carl W. White, William S. Powell and James G. Martin in the journal Free Radical Biology and Medicine.

National Jewish Health replicated the mice studies previously conducted by McGill University in rats to determine whether 10150 mitigates lung damage due to chlorine gas exposure in multiple studies between 2011 and 2013. In these studies, 10150 significantly reduced protein, white blood cell, red blood cell, macrophage and neutrophil counts in Broncho alveolar lavage fluid.  Additional studies are ongoing at National Jewish Health.
Future Development Plans
Development of animal models is currently being funded by the US Government, independently of Aeolus.   Once those models are completed, the Company plans to enter into a Material Transfer Agreement with the US Government to test 10150 and confirm the efficacy seen in the rodent model.    We believe that the safety and CMC work being done under the BARDA Lung-ARS contract further described under the heading “10150 as a potential medical countermeasure against the effects of Pulmonary Acute Radiation Syndrome – Future Development Plans” will be sufficient to satisfy the safety and CMC requirements for an NDA filing.
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Competition
There are currently no effective treatments for chlorine gas exposure.
However, in general, we face significant competition for U.S. government funding for both development and procurements of MCMs for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures. The U.S. federal government has currently allocated a significant amount of research funding to the development of countermeasures against bioterrorism. As a result, there are many drug candidates under development as a possible countermeasure against chemical threat agents.
Funding Options
This development program to date has been funded under the NIH-CounterACT Program and we expect that future efficacy studies necessary for approval by the FDA will be funded by the NIH-CounterACT program or BARDA.
AEOL 10150 as a potential medical countermeasure against the effects of nerve gas
Overview
Nerve agents, such as sarin gas, have been used in Syria, Iraq and Japan and pose a threat to civilian and military personnel.  Sarin gas exposure can cause pain, weakness, vomiting, diarrhea and changes in heart rate within minutes to 18 hours after exposure.  High levels of exposure can cause convulsions, paralysis, breathing problems and death.  BARDA classifies nerve agents as a priority threat.
10150 is the focus of a sponsored research grant awarded by the National Institutes of Health (NIH), National Institute of Neurological Disorders and Stroke (NINDS) and Office of the Director (OD) to the University of Colorado to test its potential efficacy as a MCM against nerve agents.
Pre-clinical studies
In September 2013, we announced that researchers, led by Dr. Manisha Patel at the University of Colorado, completed a pilot study demonstrating that 10150 provides neuroprotection, decreases oxidative stress, and significantly improves survival in rats exposed to pilocarpine – a surrogate for the nerve agents soman and sarin gas.  These data were presented at the 6th Annual CounterACT Countermeasures Against Chemical Threats Network Research Symposium in Washington, D.C.
The current standard of care for nerve agent exposure is Atropine® and benzodiazepines. In this study 10150 significantly improved the survival of animals exposed to pilocarpine.  Injection of 10150 sixty minutes after pilocarpine in the presence of standard therapy resulted in 100% survival and near complete inhibition of oxidative stress indices in the hippocampus.
Future Development Plans
On September 10th 2013, NIH-NINDS notified Dr. Patel that a total of $4.3 million had been awarded for her project titled “Neuroprotective Effects of AEOL 10150 against organophosphate toxicity.”  The research work is being conducted in Dr. Patel’s lab at the University of Colorado, at National Jewish Health as well as a large Contract Research Organization.  Funding for this research has been awarded under a grant supported by the CounterACT Program, National Institutes of Health Office of the Director (NIH OD), and the NINDS.
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Competition
The current standard of care for nerve agent exposure is Atropine® and benzodiazepines. 10150 would be added to current standard of care to improve outcomes.  We believe that other companies are developing potential treatments for nerve gas, although it is difficult to evaluate their success unless data is announced publicly.
However, in general, we face significant competition for U.S. government funding for both development and procurements of medical countermeasures for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures. The U.S. federal government has currently allocated a significant amount of research funding to the development of countermeasures against bioterrorism. As a result, there are many drug candidates under development as a possible countermeasure against chemical threat agents.
Funding Options
This development program to date has been funded under the NIH-CounterACT Program and NINDS and we expect that future efficacy studies necessary for approval by the FDA will also be funded by the $4.3 million grant to Dr. Patel.
AEOL 10150 in Radiation Therapy
Overview

According to the American Cancer Society, cancer is the second leading cause of death by disease, representing one out of every four deaths in the United States. Approximately 572,000 Americans were expected to die of cancer in 2011. In 2012, about 1.6 million new cancer cases were expected to be diagnosed in the United States.  According to the Radiological Society of North America, about 50 to 60 percent of cancer patients are treated with radiation at some time during their disease.
Combinations of surgery, chemotherapy and radiation treatments are the mainstay of modern cancer therapy. Success is often determined by the ability of patients to tolerate the most aggressive, and most effective, treatment regimens. Radiation therapy-induced toxicity remains a major factor limiting radiation doses. The ability to deliver maximal radiation doses for treatment of tumors without injury to surrounding normal tissue has important implications in oncology therapeutic outcomes because higher doses of radiation therapy may improve both local tumor control and patient survival.
Advances in the tools of molecular and cellular biology have enabled researchers to develop a better understanding of the underlying mechanisms responsible for radiation therapy-induced normal tissue injury. For decades ionizing radiation has been known to increase production of free radicals, which is reflected by the accumulation of oxidative damaged cellular macromolecules.
As one example of radiation-induced damage to adjacent normal tissue, radiation therapy may injure pulmonary tissue either directly via generation of ROS or indirectly via the action on parenchymal and inflammatory cells through biological mediators such as TGF-β and pro-inflammatory cytokines. Since the discovery of SOD, it is apparent that these enzymes provide an essential line of defense against ROS. SODs and SOD mimics, such as 10150, act by catalyzing the degradation of superoxide radicals into oxygen and hydrogen peroxide. SODs are localized intra/extracellularly, are widely expressed throughout the body, and are important in maintenance of redox status (the balance between oxidation and reduction). Previous studies have demonstrated that treating irradiated animal models with SOD delivered by injection of the enzyme through liposome/viral-mediated gene therapy or insertion of human SOD gene can ameliorate radiation therapy-induced damage.
For an illustrative example of the radiation therapy reaction see Figure 2.
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Figure 2



Figure 2 above shows the mechanisms of radiation injury; 10150 protects against this damage by reducing ROS/RNS and subsequently reducing TGF-β1 and NADPH Oxidase (NOX4) activation resulting in reductions of DNA Damage, Apoptosis, Vascular Dysfunction, Hypoxia, Inflammation and Fibrosis.
In vitro studies have demonstrated that 10150 reduces the formation of lipid peroxides, forms of ROS, and that it inactivates biologically important ROS molecules such as superoxide, hydrogen peroxide and peroxynitrite. 10150 inactivates these ROS by one or two electron oxidation or reduction reactions in which the oxidation state of the manganese moiety in 10150 changes. 10150 is not consumed in the reaction and it continues to inactivate such ROS molecules as long as it is present at the target site. Preclinical models and human safety studies suggest 10150 is not metabolized in the body and is excreted in feces and urine.
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Animal studies have demonstrated that 10150 treatment after exposure to radiation (in radiation therapy and blast radiation models) reduces: oxidative stress, apoptosis, vascular damage, hypoxia, inflammation and fibrosis, as well as returning to or near baseline, levels of TGF-β1, NOX4, PTEN, 8OHdG and 4HNE.
Pre-clinical studies
Figure 3


Figure 3: Relative tumor volumes of human prostate tumor implants in nude mice: Implants of well-vascularized PC3 tumors were grown to substantial size prior to receiving fractionated radiation (5 Gy daily for three days).10150 (7.5 mg/kg/bid) was administered subcutaneously commencing on the first day of irradiation and continued for 20 days. Other groups of mice received either no irradiation, irradiation only or 10150 without irradiation.
Due to the common mechanism of action in cancer radiation therapy and radiation exposure from nuclear events, we believe that the pre-clinical studies performed for the development of 10150 as a potential medical countermeasure against the effects of Lung-ARS, as described herein, also provide support for the development of 10150 in oncology, to be used in combination with radiation therapy.
We have performed several additional studies specifically for this indication to ensure the use of 10150 in radioprotection of normal adjacent tissue does not interfere with the efficacy of tumor radiotherapy. A number of preclinical, in vivo studies have addressed this issue and have demonstrated that 10150 does not negatively impact tumor radiotherapy.
In one study (Vujaskovic, et al. of Duke) human prostate tumors (PC3) grown in nude mice to substantial size were irradiated with 5 Gy per day for 3 days for a total of 15 Gy. 10150 at 7.5 mg/kg/bid was administered subcutaneously on the first day of radiation and continued for either of two time courses: when tumor volume reached 5 times the initial volume or for twenty days. The receding tumor volume curves for irradiation only and for irradiation plus 10150 demonstrated no difference.  Therefore 10150 did not interfere with the radiation effect on prostate tumors.
In another study of prostate cancer tumors (Gridley, et al of Loma Linda University), mouse prostate cancer cell line RM-9 was injected subcutaneously into C57/Bl6 mice, followed by up to 16 days of 10150 delivered intraperitoneally at 6 mg/kg/day. On day seven, a single dose of radiation (10 Gy) was delivered. Therefore, the mice received compound for seven days prior to radiation. The results of this study demonstrated that 10150 does not protect the prostate tumor against radiation, however, 10150 showed a trend towards increasing the effectiveness of the radiation treatment. The primary effect appears to be in down-regulation of radiation induced HIF-1 expression and VEGF and up-regulation of IL-4. Thus, 10150, through its down-regulation of VEGF, may inhibit formation of blood vessels (i.e., angiogenesis) required for tumor re-growth and protects normal tissues from damage induced by radiation and chemotherapy.
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In another study (Vujaskovic, et al. of Duke), mice were implanted with human NSCLC tumors and treated with all potential combinations of paclitaxel, radiation and 10150 to determine the impact on tumor growth.  The results showed that 10150 did not impact the effects of either radiation therapy or paclitaxel.  Further, the study indicated that the greatest impact in inhibiting tumor growth was with the regimen that included all three courses of treatment, radiation, paclitaxel and10150.
Figure 4


Figure 4 above measures tumor volume against time after implantation of RM-9 tumor cells and shows that 10150 treatment resulted in inhibition of tumor re-growth in a study performed by Dr. Gridley of Loma Linda University. Daily intraperitoneal injections of 10150 were initiated on day 1. At 12 days, approximately one half of each tumor-bearing group and control mice with no tumor were euthanized for in vitro analyses; remaining mice/group were followed for tumor growth and euthanized individually when maximum allowed tumor volume was attained. Each point represents the mean +/- standard error of the mean. Two-way analysis of the variance for days 8 to 14 revealed that group and time had highly significant main effects (Ps<0.001) and a group x time interaction was noted (P<0.001).
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Figure 5

Figure 5 above shows the HIF-1 Expression in prostate tumors and the impact of the treatment of 10150 in a study by Dr. Gridley of Loma Linda University.
Figure 6
Figure 6 above shows impact on tumor growth in mice that were implanted with human NSCLC tumors and treated with all potential combinations of paclitaxel (P), Radiation (RT) and 10150 (A).
In summary, the data obtained in these preclinical studies suggest that the post-irradiation, long-term delivery of 10150 may be protective against radiation-induced lung injury, as assessed by histopathology and immunohistochemistry. Oxidative stress, inflammation and hypoxia, which play important roles in the pathogenesis of radiation mediated fibrosis, were shown to be reduced in animals treated with higher doses of 10150. Studies have also shown that 10150 does not adversely impact tumor response to radiation therapy. Thus, treatment with 10150 does not significantly protect tumors from the cell killing effects of radiation therapy. This combined with other studies that have shown that 10150 significantly prevents radiation induced normal tissue injury suggests that 10150 has the potential to achieve protection of normal tissue without protection of tumor tissue.  Additionally, it appears the down-regulation of radiation induced HIF-1 expression and VEGF and up-regulation of IL-4 may provide additional anti-tumor effects. Thus, 10150, through its down-regulation of VEGF, may inhibit formation of blood vessels required for tumor re-growth, while protecting normal tissues from damage induced by radiation and chemotherapy.
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Future Development Plans
We are leveraging the significant investment made by U.S. government agencies to develop this promising compound for use in oncology indications, where it would be used in combination with chemotherapy and radiation therapy, and is currently in development for use as both a therapeutic and prophylactic drug. Data has already been published showing that 10150 does not interfere with the therapeutic benefit of radiation therapy in prostate and lung cancer preclinical studies.
 
In 2017, we expect to initiate a safety study in non-small cell lung cancer patients receiving chemotherapy and radiotherapy.  Upon the successful completion of the Phase I study and approval of a protocol by the FDA and the appropriate IRBs, we expect to begin a Phase II study in cancer patients receiving radiation therapy.  A specific indication for the Phase II study has not yet been chosen, however, we are considering esophageal, prostate, head and neck and NSCLC patients.

Competition
There are currently three drugs approved for the treatment of the side effects of radiation therapy. We do not believe that any of these drugs directly competes with 10150 in terms of mechanism of action or targeted therapeutic benefit when used in combination with radiation therapy.
Amifostine (Ethyol®) is approved by the FDA as a radioprotector. Amifostine (Ethyol) is marketed by MedImmune, Inc. for use in reduction of chemotherapy-induced kidney toxicity associated with repeated administration of cisplatin in patients with advanced ovarian cancer and radiation-induced xerostomia (damage to the salivary gland) in patients undergoing post-operative radiation treatment for head and neck cancer. MedImmune, Inc. is studying Amifostine in other indications of radiation therapy. KepivanceTM (palifermin) is marketed by Amgen, Inc. for use in the treatment of severe oral mucositis (mouth sores) in patients with hematologic (blood) cancers who are undergoing high-dose chemotherapy followed by bone transplant. Amgen, Inc. is also studying Kepivance as an antimucositis agent in patients with head and neck cancer, non-small cell lung cancer and colon cancer. Salagen Tablets (pilocarpine hydrochloride) is marketed by Eisai Pharmaceuticals in the United States as a treatment for the symptoms of xerostomia induced by radiation therapy in head and neck cancer patients. In addition, there are many drugs under development to treat the side effects of radiation therapy.
Funding Options
Substantially all of our costs associated with the CMC and toxicology necessary for the oncology indications have been covered by the BARDA Contract. We expect such costs to continue to be covered by the BARDA Contract unless BARDA chooses not to exercise its options under the BARDA Contract.  In such a circumstance, we would need to raise additional capital, or partner with another firm, in order to complete the non-clinical and safety programs related to Lung-ARS noted above. We may need to use our own capital to fund elements of this program that are not funded by the BARDA Contract, including funds for an initial trial in human patients receiving therapeutic radiation for cancer..
10150 Clinical Development Program to Date
10150 has been tested for safety, tolerability and pharmacokinetics with no serious or clinically significant adverse effects observed. To date, 38 patients have received 10150 in three clinical trials designed to test the safety and tolerability of the drug candidate.
In September 2005, we completed a multi-center, double-blind, randomized, placebo-controlled, Phase I clinical trial. This escalating-dose study was conducted to evaluate the safety, tolerability and pharmacokinetics of 10150 administered by twice daily subcutaneous injections in patients with ALS.
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In the Phase Ia study, 4-5 patients diagnosed with ALS were placed in a dosage cohort (3 or 4 receiving 10150 and 1 receiving placebo). Each dose cohort was evaluated at a separate clinical center. In total, seven separate cohorts were evaluated in the study, and 25 ALS patients received 10150. Based upon an analysis of the data, it was concluded that single doses of 10150 ranging from 3 mg to 75 mg were safe and well tolerated. In addition, no serious or clinically significant adverse clinical events were reported, nor were there any significant laboratory abnormalities. Based upon extensive cardiovascular monitoring (i.e., frequent electrocardiograms and continuous Holter recordings for up to 48 hours following dosing), there were no compound-related cardiovascular abnormalities.
The most frequently reported adverse events in this Phase I clinical trial were injection site reactions, followed by dizziness and headache. Adverse events were primarily mild in severity, and approximately one-half of the events were considered to have a possible relationship to the study medication. In addition, no clinically meaningful findings were noted in the safety, laboratory, vital sign, the Unified Parkinson’s disease Rating Scale (“UPDRS”), functional ALS, or electro cardiogram (“ECG”) data. All cohorts exhibited dose-related peak plasma drug concentrations and consistent disappearance half-lives.
In October 2006, we completed a multi-center, double-blind, randomized, placebo-controlled, Phase Ib clinical trial. This multiple dose study was conducted to evaluate the safety, tolerability and pharmacokinetics of 10150 administered by subcutaneous injection and infusion pump in patients with ALS. Under the multiple dose protocol, three groups of six ALS patients (four receiving 10150 and two receiving placebo) were enrolled.
The Phase Ib study was conducted at five academic clinical ALS centers. Male and female ALS patients, 18 to 70 years of age, who were ambulatory (with the use of a walker or cane, if needed) and capable of orthostatic blood pressure assessments were enrolled in the study. Clinical signs/symptoms, laboratory values, cardiac assessments and pharmacokinetics (PK) were performed.
Based upon an analysis of the data, it was concluded that multiple doses of 10150 for a period of six and one half consecutive days in the amount of 40 mg per day, 60 mg per day and 2 mg per kilogram per day were safe and well tolerated. No serious or clinically significant adverse events were reported or observed. The most frequent adverse events related to study compound were injection site observations related to compound delivery. There were no significant laboratory abnormalities. Based upon extensive cardiovascular monitoring (i.e., frequent electrocardiograms and continuous Holter recordings throughout the six and one half days of dosing), there were no compound-related cardiovascular abnormalities.
Pharmacokinetic findings from the Phase Ib study to data are as follows:
Increases in Cmax and AUC (0-8) appear to correlate with increases in dose, but the correlation is not strong.
The mean Cmax for the 40 mg cohort was 1,735 ng/mL; 2,315 ng/mL for the 60 mg cohort and 1,653 ng/mL for the 2 mg/kg cohort.
There were probable linear correlations between both Cmax and AUC(0-8) and dose based on body weight.
The terminal half-life (a measurement of the time period for which a compound stays in the body) as determined from Day 7 data was approximately 8 to 9 hours.
Steady-state occurs within three days of multiple dosing. There was no evidence for a third longer half-life that would be associated with long term accumulation. Thus, compound accumulation is not expected beyond the third day with multiple dosing.
From 48 hours to the end of the infusion, the plasma concentrations of 10150 during the infusion showed little variability, indicating a smoother delivery of the drug than with twice-daily injections.
During 2008, we completed a follow-on Phase I open label compassionate use multiple dose study of 10150 in a patient diagnosed with progressive and debilitating amyotrophic ALS. The study was conducted at the University of California, Los Angeles by Martina Wiedau-Pazos, M.D., and was designed to evaluate the safety and efficacy of 10150 in an ALS patient over an extended period of time. The patient received a subcutaneous injection of 75mg of 10150 two times each day for 34 days. Efficacy and safety data was monitored for the duration of the study. The primary objective of this study was to assess the clinical efficacy of 10150 with respect to the patient’s baseline assessment of functional status. Secondary objectives included the assessments of muscle strength, respiratory function, quality of life and safety. The patent’s baseline efficacy results were an ALS Functional Rating Scale (“ALSFRS-R”) rating of 19, Muscle strength Manual Muscle Testing Scale (“MMTS”) of 68 and a forced vital capacity (“FVC”) of 30%. The patient’s results after 2 months were an ALSFRS-R rating of 22, a MMTS rating of 86 and an FVC of 28%. It should be noted that the subject began using breathing assistance (BiPAP) approximately two weeks after the study started. The patient discontinued treatment due to nausea and moderately increased liver transaminases. Other drug-associated adverse events included mild skin irritation at the injection site and mild urine discoloration.
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AEOL 10150 in Idiopathic Pulmonary Fibrosis
Overview

Idiopathic pulmonary fibrosis (“IPF”) is a progressive, fibrosing interstitial pneumonia of unknown cause characterized by the development of scar tissue that thickens the lining of the lungs and generally leads to death due to inhibition of lung function.  IPF affects approximately 128,000 people in the United States with 48,000 new cases and 40,000 deaths annually.  It usually affects older individuals, those in the sixth to seventh decade, and is a severe disease with a variable clinical course and a high mortality rate. Approximately 2/3 of IPF sufferers will die within 5 years of diagnosis.  The median survival after diagnosis is 3 to 4 years.
Standard of care for IPF is treatment with anti-inflammatory drugs such as corticosteroids although there is no evidence that these treatments are effective in increasing long-term survival.  Supplemental oxygen may improve patient quality of life, but has no effect on the course of the disease.  In some instances, lung transplantation may be considered.  On October 15, 2014, the FDA approved Esbtriet® (pirfenidone), manufactured by Intermune, and Ofev® (nintedanib), manufactured by Boehringer Ingelheim, for the treatment of IPF.  We believe that there is still a significant need for additional and more effective treatments for IPF.

As with lung damage from radiation and chemical insults, the fibrosis in IPF patients is believed to be connected to increased levels of ROS, TGF-β1 and NOX4 and their effects on inflammation and apoptosis and the proliferation and differentiation of fibroblasts into myofibroblasts, which damage lung tissue and lead to Extracellular Matrix (ECM) deposition.  The following figure illustrates the pathway from increased TGF-β levels to ECM/Fibrosis in the lungs:
 
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Source: Keitzmann, T., e.t al.; Redox Biology, 2015
 
As noted in the previous discussion on the common pathway to fibrosis from insults to the lung, lost cells after tissue injury are usually replaced.  However, normal regeneration typically becomes impossible in the presence of  chronic inflammation, TGF-β1 and increased presence ROS levels.  ROS are involved in transforming growth factorβ (TGFβ) mediated fibrosis.

Keitzmann, et. al. describe the role of ROS, TGF-β1 and NOX4 in generating lung fibrosis, as follows:

“Various cell types such as platelets, parenchymal cells and inflammatory cells (e.g., lymphocytes, macrophages) can release TGFβ1.  After conversion of the latent to the active form, TGFβ1 binds to its receptor and induces SMAD2/3 and/or phosphatidyl inositol 3kinase (PI3K) signaling to express various genes, among them that for NOX4.  NOX4 in turn leads to ROS production. Enhanced ROS may activate the proliferation, migration and differentiation of fibroblasts plus epithelial to mesenchymal transition (EMT), apoptosis of epithelial cells and/or excessive extracellular matrix (ECM) deposition. In addition, TGF-ß1 contributes to ROS enhancement by decreasing the expression of antioxidant enzymes like glutaredoxin (Grx), catalase (CTL), glutathione peroxidase (GPX), glutathione S transferase (GST), superoxide dismutase (SOD) and the heavy subunit of gamma-glutamylcysteine synthetase (gamma-GCSh).

Targeting TGF-β, NOX4 and ROS are widely considered to be valid approaches to treating patients with IPF.  AEOL 10150 has demonstrated in animal studies in mice, rates and NHP an ability to reduce the levels of these targets after a variety of lung insults.
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 Glossary of Scientific Terms

BAX
Apoptosis regulator BAX - a protein that is encoded by the BAX gene.  The expression of this gene is regulated by the tumor suppressor P53 and has been shown to be involved in P53-mediated apoptosis.
HIF-1α
Hypoxia-inducible factor 1-alpha - the master transcriptional regulator of cellular and developmental response to hypoxia. The dysregulation and overexpression of HIF-1α by either hypoxia or genetic alternations have been heavily implicated in cancer biology, as well as a number of other pathophysiologies, specifically in areas of vascularization and angiogenesis, energy metabolism, cell survival, and tumor invasion.
IL-6
Interleukin 6 – a pro-inflammatory cytokine and an anti-inflammatory myokine encoded by the IL6 gene.
NOX4
NADPH oxidase 4 - an enzyme that is encoded by the NOX4 gene. The ROS generated by this protein have been implicated in numerous biological functions including signal transduction, cell differentiation and tumor cell growth.
Akt
Protein kinase B  - a protein kinase that plays a key role in multiple cellular processes such as glucose metabolism, apoptosis, cell proliferation, transcription and cell migration.
PTEN
Phosphatase and tensin homolog - a protein encoded by the PTEN gene. This gene has been identified as a tumor suppressor that is mutated in a large number of cancers at high frequency.
p53
Tumor protein p53 – a protein encoded by the TP53 gene in humans.  It prevents cancer formation and functions as a tumor suppressor.
PI3K
Phosphatidylinositol-4,5-bisphosphate 3-kinase - a family of enzymes involved in cellular functions such as cell growth, proliferation, differentiation, motility, survival and intracellular trafficking, which in turn are involved in cancer.
ROS
Reactive oxygen species – chemically reactive chemical species containing oxygen. ROS are formed as a natural byproduct of the normal metabolism of oxygen and have important roles in cell signaling and homeostasis. ROS are also generated by external sources such as ionizing radiation.
TGF-β1
Transforming growth factor beta 1 – a cytokine encoded by the TGFB1 gene that controls proliferation, differentiation, and other functions in many cell types.
TNF-α
Tumor necrosis factor alpha – a cell signaling cytokine involved in systemic inflammation. It is produced chiefly by activated macrophages.

Pre-clinical Studies

Whole Thorax Irradiation (“WTLI”) is a validated model for IPF in animals.  The efficacy studies under the BARDA Contract in monkey and mice were conducted using a WTLI model.  Those studies demonstrated a significant reduction in inflammation and fibrosis in animals treated with AEOL 10150.  Additionally, during 2015, researchers at National Jewish Health conducted efficacy studies of 10150 using a Bleomycin induced fibrosis model.  These studies also demonstrated a significant reduction in fibrosis in animals treated with 10150, and provided further support for the drug’s potential as a therapy for patients with pulmonary fibrosis, including IPF.

Development Plans
In March 2015, the Company received notice from the Office of Orphan Products Development at the U.S. Food & Drug Administration (FDA) granting Orphan Drug Designation for AEOL 10150 “for treatment of idiopathic pulmonary fibrosis.”  Orphan Drug Designation entitles the sponsor to a seven-year marketing exclusivity period, clinical protocol assistance with the FDA, as well as federal grants and tax credits.  In October 2015, the Company announced the formation of a Pulmonary Fibrosis Clinical Advisory Board (“PFCAB”) led by Kevin Brown, MD, Professor and Vice Chair, Department of Medicine, at National Jewish Health.  The Company plans to meet with the Respiratory division of the FDA and file an IND to initiate Phase I studies of 10150 in patients with pulmonary fibrosis.

Competition

Esbriet® and Ofev® were approved by the FDA for the treatment of IPF on October 15, 2014.  Esbriet® and Ofev® are also approved for use in Europe, Canada, Japan, South Korea and other countries.  The effectiveness of Esbriet® and Ofev® are, however, limited and we believe that there is still a significant need for more effective treatments.  There are a number of potential treatments for IPF in advanced development by multiple biotechnology and pharmaceuticals.  Many of these potential treatments are monoclonal antibody therapies.  We believe that 10150 exploits a novel mechanism of action in the treatment for IPF.  In general, however, we believe that there will be substantial, well-funded competition for the development of new IPF treatments.
 
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Funding

Although the initial data supporting a program in IPF was largely generated under the BARDA Contract, we are uncertain as to whether funding for human safety and efficacy studies will be available from that source.  However, as with radiation oncology, manufacturing, toxicology and safety work under the contract can also be used in the development of 10150 for IPF.  We may use our own capital to fund part of the future costs of this program that are not funded by the BARDA Contract, including funds for an initial trial in patients with IPF.   The Company will also seek non-dilutive capital sources and pursue potential partnership opportunities to advance the IPF program.

AEOL 11114B in Parkinsons’ Disease
Overview
We have evaluated three compounds, 11114, AEOL 11203 (“11203”) and AEOL 11207 (“11207”), for the treatment of Parkinsons Disease with funding from MJFF.  From these three candidates, 11114 was selected for further development.  Parkinson’s disease is a common neurodegenerative disorder, second in occurrence among these disorders only to Alzheimer’s disease. According to the National Parkinson Foundation, Parkinson’s affects as many as one million people in the United States, with approximately 60,000 new cases diagnosed in the United States each year.
Parkinson’s specifically involves the progressive destruction of the nerves that secrete dopamine and control the basal ganglia, an area of the brain involved in the regulation of movement. Dopamine turnover has been shown to elevate the levels of ROS in the brain. In addition, a street-drug contaminant has appeared that can cause Parkinsonism in drug abusers. The compound N-methyl-4-phenyl-1, 2, 3, 6tetrahydropyridine (“MPTP”) has been identified in underground laboratory preparations of a potent analog of meperidine (Demerol). MPTP-containing powder, sometimes sold as a new “synthetic heroin,” can be dissolved in water and administered intravenously or taken by the intranasal route. MPTP has been documented to produce irreversible chronic Parkinson symptoms in drug abusers. Agents such as MPTP overproduce ROS in the basal ganglia. Therefore, ROS mediated neuronal dysfunction may play a key role in the development of Parkinson’s disease. Symptoms of this disease include tremors, rigidity and bradykinesia (i.e., slowness of movement).  In the more advanced stages, it can cause fluctuations in motor function, sleep problems and various neuro-psychiatric disorders. A biological hallmark of Parkinson’s disease is a reduction in brain dopamine levels. Preventing or slowing the destruction of brain cells that lead to the depletion of dopamine levels in the brain is an important therapeutic approach for the treatment of this disease.
Pre-clinical studies
Data developed by our scientists and Dr. Manisha Patel at UC and funded by MJFF, established the maximum tolerated dose, pharmacokinetics, dosing paradigm, drug stability, and drug protein binding and efficacy for 11114.   The data from the efficacy work performed show that daily or every other day dosing with the compound protects against oxidative stress, improves performance on behavioral tests, and mitigates dopamine depletion in the 6-hyroxydopamine model of Parkinson’s disease in restorative manner.   These results validate 11114’s efficacy in the MPTP mouse model and suggest that the drug can be given after symptom onset after a 6-hydorydopamine lesion in rats to achieve neuroprotection.   Further, administration of 11114 every other day reduced oxidative stress and protected against behavioral deficits and loss of striatal dopaminergic neurons in the Substantia Nigra Pars Compacta (“SNPc”).  Parkinson’s disease is characterized by the death of neurons in the SNPc.  Currently available treatments for Parkinson’s lessen the symptoms for some time, but there remains a great need for more effective therapies, such as 11114, that have shown the potential to protect against the loss of dopaminergic neurons.  11114 readily crosses the blood brain barrier, and daily or every other day treatment prevents oxidative stress and protects against oxidative stress, neuron loss and behavioral deficits in both a rat and mouse model of Parkinson’s disease.
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Prior to receiving the funding for this program, we filed a new composition of matter and use patent for AEOL11114.  In October 2015, the Company received notice of allowance of a composition of matter patent from the European Patent Office.  In March 2016, we received notice of allowance of a composition of matter patent from the Japanese Patent Office.
Future Development Plans
We plan to complete the necessary pre-clinical work that will allow us to file an IND and initiate Phase I studies in Parkinson’s disease in 2017.
Funding Options
We expect our own capital will be used to fund part of the future costs of this program, including amounts to fund the pre-clinical work necessary to file an IND for 11114. We will also seek non-dilutive capital sources and pursue potential partnership opportunities to fund the human clinical studies of 11114 for Parkinson’s disease.
Contracts and Grants
We seek to advance development of our drug candidates through external funding arrangements. We may slow down development programs or place them on hold during periods that are not covered by external funding. We have received external funding awards for the development of 10150 as an MCM for Lung-ARS, GI-ARS, mustard gas and chlorine gas exposure from the NIH.
BARDA Contract; Background and Recent Developments
In December 2009, we were informed by BARDA that we had been chosen to submit a full proposal for funding of our Lung-ARS program from its current stage through FDA approval, based on a summary “white paper” submitted by us earlier in 2009. We submitted a full proposal in February 2010. We were notified in July 2010 that our proposal had been chosen by BARDA, and then entered into negotiations for a development contract with the agency.
 
On February 11, 2011, we signed a five-year, cost-plus contract with BARDA for the development of 10150 as a MCM against Lung-ARS.  BARDA is the government agency responsible for the advanced development and purchase of medical countermeasures for chemical, biological, radiological and nuclear threats.  The contract fully funds the advanced development of 10150 through approval by the FDA under 21 CFR Part 314 Subpart I and Part 601 Subpart H (the “Animal Rule.”)  The Animal Rule allows for approval of drugs using only animal studies when human clinical trials cannot be conducted ethically.
 
  Pursuant to the BARDA Contract, we were awarded approximately $10.4 million for the base period of the contract (from February 2011 to April 2012). On April 16, 2012, we announced that BARDA had exercised two options under the BARDA Contract worth approximately $9.1 million. On September 17, 2013, we announced that BARDA had exercised $6.0 million in additional contract options. On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1.8 million.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.   On June 26, 2015, we announced that BARDA had exercised $3.0 million in additional contract options under its advanced research and development contract for 10150. On February 8, 2016, BARDA exercised a Contract Modification worth approximately $0.1 million. On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Contract Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to determine optimal dose, dose frequency and duration of treatment.  The total contract value exercised as of September 30, 2016 is approximately $30.8 million, of which $30.6 million has been billed.  We may receive up to an additional $87.6 million in options exercisable over the remainder of the BARDA Contract.  Options are exercised based on the progress of the development program, including the completion of clinical trials or manufacturing tasks under previously exercised options.
 
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Activities under the contract to date include animal efficacy studies, animal model development with radiation survival curve studies, dosing studies, bulk drug manufacturing, bulk drug and final drug product manufacturing, validation testing, compliance studies, stability studies, ADME and metabolic studies, genotoxicity studies and the filing of an orphan drug status application and a fast track designation application with the FDA.  

Following the commencement of the BARDA Contract, we entered into a series of agreements with various parties in furtherance of our efforts under the BARDA Contract, which are described below.

On February 14, 2012, we presented the results and deliverables that had been produced during the first twelve months under the base period of the BARDA Contract at an “In-Progress Review” meeting with BARDA, and requested the exercise of additional contract options, which contain additional key items required in the advanced development of 10150.

On February 15, 2012, we announced that we entered into a contract modification and no-cost extension with BARDA. The modification and extension allowed us to continue operating under the base period of the contract awarded in February 2011, and restructured the timing and components of the options that could be awarded under the remaining four years of the agreement. The changes did not impact the total potential value of the contract, which remains at approximately $118.4 million. The contract restructure was driven by our ability to generate cost savings in the base year contract, and to allow BARDA to better manage contract options to expedite development program.

On April 16, 2012, we announced that BARDA had exercised two contract options worth approximately $9.1 million. BARDA's exercise of the options was in response to the presentation of the deliverables and progress made under the contract at the meeting on February 14, 2012. Among the key items in the options BARDA exercised are animal efficacy studies, mechanism of action research and manufacturing and process validation work. All of these items build off of work successfully completed during the first twelve months of the contract base period. The contract is designed to produce the data necessary for an approval under the FDA “Animal Rule” and for a potential Emergency Use Authorization (EUA). An approval or EUA would allow the federal government to buy 10150 for the Strategic National Stockpile under Project Bioshield. Project Bioshield is designed to accelerate the research, development, purchase and availability of effective medical countermeasures for the Strategic National Stockpile.

On November 7, 2012, we and the Office of Research and Development of the University of Maryland, Baltimore (“UMB”) entered into a Sub-award Agreement, pursuant to which we engaged UMB to, among other things, perform mouse studies supporting the licensure of 10150. Prior to this agreement, our mouse studies had been conducted at Duke University.  In 2012, the research team at Duke responsible for conducting the studies moved to UMB.  The Sub-award Agreement is a fixed fee agreement inclusive of all direct and indirect costs. As a result of the contract modification and no-cost extension with BARDA mentioned above, the term of the Sub-award Agreement will continue through at least December 31, 2016.

On July 29, 2013, we presented the results and deliverables that had been produced during the first 28 months of the contract at an "In-Progress Review" meeting with BARDA, and requested the exercise of additional contract options.

On September 17, 2013 we announced that BARDA had exercised $6.0 million in additional options under the contract. The options that BARDA exercised will fund our IND filing for AEOL-10150 as a treatment for Lung-ARS, additional animal efficacy studies designed to optimize timing and duration of dosing and the continued development of large-scale GMP manufacturing capability to meet potential future demand.  When combined with our ongoing studies in non-human primates and our completed work in GMP manufacturing development, these options will help Aeolus meet the requirements for a pre-EUA filing for AEOL-10150 in 2016.

On May 7, 2014, we announced that BARDA had exercised a Contract Modification worth approximately $1,778,000.  The Contract Modification allowed Aeolus to reconcile actual costs incurred with billings under the original provisional indirect billing rate. It established a new provisional indirect billing rate and placed a cap on the current and future provisional indirect billing rates.
 
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  On September 4, 2014 we announced positive results from a large study in rhesus macaque monkeys funded by the BARDA Contract.  In the study, 10150 was administered beginning 24 hours after exposure to 10.74 Gray of whole thorax radiation. Survival at six months post-exposure in the 60-day treatment group was 50%, compared to 25% survival in the radiation only group. On May 4, 2015, we reported the complete results, including secondary endpoints, from the same study.  The study found that administration of 10150 for 60 days beginning 24 hours after exposure to 10.74 Gy of radiation:

Increased overall survival from 25% in the untreated control group to 50%
Increased mean and median overall survival time
Increased mean and median survival time in subjects that did not survive to 180 days
Increased time to onset of increased respiratory rate, a clinical measure of lung injury
Decreased mortality in subjects with elevated respiratory rate
Decreased wet lung weight in all animals, suggesting less parenchymal damage and edema
Increased Sp02, a measure of compensated lung function
Diminished radiographic evidence of pneumonitis and fibrosis during the later stages of the study (days 90 -180)

In addition, a new approach to investigating lipids, metabolites and proteins in pathophysiological process, matrix-assisted laser desorption/ionization mass spectrometry imaging (MALDI-MSI) was employed in the study to measure potential biomarkers for lung injury in tissue samples from study subject. Analysis using MALDI-MSI showed that the molecular profile for the naïve (un-irradiated) lung is statistically distinct from irradiated lung and treatment with 10150 shifts the molecular profile back towards the naïve lung. Two prospective biomarkers found in irradiated, damaged lung tissue were not detectable in either naïve or 10150-treated samples.

On September 22, 2014, we received notice from the FDA that the Phase I safety study in healthy normal volunteers proposed in its IND for Lung-ARS had been placed on clinical hold. On February 22, 2016, we announced that the FDA had removed the clinical hold and allowing us to proceed with the planned Phase I study.

On April 23, 2015, the Company executed a Modification of Contract (the “Modification”) with BARDA.  The purpose of the Modification is to add funding in the amount of $1,021,000 for the purpose of funding ongoing murine efficacy, pharmacokinetic and ADME studies and project management.

On June 26, 2015 we announced that BARDA had exercised one option under the BARDA Contract worth approximately $1,989,000 for the purpose of funding laboratory work suggested by the FDA . The funds will also support ongoing project management.

On February 8, 2016, BARDA exercised a Contract Modification worth approximately $0.1 million. The purpose of the Contract Modification was to provide additional funding for ongoing drug stability studies.

On May 25, 2016, we announced that BARDA had exercised a Contract Modification worth approximately $0.4 million.  The purpose of the Modification was to provide funding to complete a pharmacometric analysis of data from all completed animal efficacy studies of 10150 to determine optimal dose, dose frequency and duration of treatment.

As of September 30, 2016, the total contract value exercised by BARDA under the BARDA Contract is $30.8 million.

Aeolus’ Anti-Inflammatory/Anti-Infective Program
We established this program to explore to create novel compounds that both reduce inflammation and combat anti-biotic resistant bacteria, with the goal of addressing unmet medical needs in commercial applications, such as cystic fibrosis, while also potentially providing novel approaches to treating major threats to public health from drug resistant bacteria such as burkholderia cepacia (“BC”), pseudomonas aeruginosa (“PA”) and others listed as “Biggest Threats” by the Center for Disease Control and Prevention.   We have achieved our initial research objectives and begun to extend our preclinical accomplishments into non-clinical studies, clinical trials and drug development programs.
 
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Our anti-inflammatory/anti-infective program is designed to:
·
Utilize a selective detoxification pathway that preserves host defense and limits inflammation
·
Create and develop stable, small molecules so that they:
o
Maintain pathogen killing with less off target damage,
o
Provide faster resolution of inflammation,
o
Decrease irreversible injury and oxidative stress, and
o
Produce candidates that are orally available, stable and inexpensive to manufacture.

Our most advanced anti-infective compound, AEOL 20415, is an orally-available, small molecule that has shown the ability to reduce inflammation and to kill bacteria.  A patent application for 20415 was filed in April 2015, and in-vitro studies have been completed to demonstrate 20415’s activity against BC and PA.  A mouse study testing 20415’s anti-infective and anti-inflammatory ability should be completed in the first quarter of 2017.   If the data confirms the positive in-vitro activity, we intend to initiate the pre-clinical work necessary to file an IND for this compound with an initial indication of Cystic Fibrosis.
Collaborative and Licensing Arrangements
Duke Licenses
Pursuant to our license agreements with Duke, we have obtained exclusive worldwide rights from Duke to products using antioxidant technology and compounds developed by Dr. Irwin Fridovich and other scientists at Duke.  The license from Duke covers, among other items, AEOL11203, AEOL11207 and some of the intellectual property related to 10150.  We are obligated under the licenses to pay Duke royalties ranging in the low single digits of net product sales during the term of the Duke licenses, and we must make payments upon the occurrence of certain development milestones in an aggregate amount of up to $2,000,000. In addition, we are obligated under the Duke licenses to pay patent filing, prosecution, maintenance and defense costs. The Duke licenses are terminable by Duke in the event of breach by us and otherwise expire when the last licensed patent expires.

National Jewish Medical and Research Center and National Jewish Health
We have obtained an exclusive worldwide license from the National Jewish Medical and Research Center (“NJMRC”) to develop, make, use and sell products using proprietary information and technology developed under a previous Sponsored Research Agreement within the field of antioxidant compounds and related discoveries.  The license from NJMC covers, among other items, the composition of matter for 10150 and some use patents related to alkylating and vesicant agents.  We must make milestone payments to the NJMRC in an aggregate amount of up to $250,000 upon the occurrence of certain development milestones. Our royalty payment obligations to the NJMRC under this license agreement are in the low single digits of net product sales. We are also obligated to pay patent filing, prosecution, maintenance and defense costs. This NJMRC license agreement is terminable by the NJMRC in the event of breach and otherwise expires when the last licensed patent expires.
 
In 2009, we obtained an additional exclusive worldwide license from National Jewish Health to develop, make, use and sell products using proprietary information and technology developed at NJH related to certain compounds as an MCM against mustard gas exposure. Under this license agreement, we must make milestone payments to NJH in an aggregate amount of up to $500,000 upon the occurrence of certain development milestones. In addition, we must make royalty payments to NJH under this license agreement ranging in the low-single digits as a percentage of all sublicensing fees, milestone payments and sublicense royalties that we receive from sublicenses granted by us pursuant to this license agreement. We are also obligated to pay patent filing, prosecution, maintenance and defense costs. This NJH license agreement is terminable by NJH in the event of breach and otherwise expires when the last licensed patent expires.
In April 2015, we obtained an exclusive worldwide license from National Jewish Health to develop, make, use and sell products using proprietary information and technology developed at NJH with funding from the Company for the treatment of infection caused by bacterial, viral and fungal pathogens.  Under this license agreement, we must make milestone payments to NJH in an aggregate amount of up to $1,000,000 upon the occurrence of certain development milestones. In addition, we must make royalty payments to NJH under this license agreement ranging in the low-single digits as a percentage of all net sales, sublicensing fees, milestone payments and sublicense royalties that we receive from sublicenses granted by us pursuant to this license agreement. We are also obligated to pay patent filing, prosecution, maintenance and defense costs. This NJH license agreement is terminable by NJH in the event of breach and otherwise expires when the last licensed patent expires.
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University of Colorado
In April 2015, we obtained an exclusive worldwide license from UC to develop, make, use and sell products using proprietary information and technology developed at UC for the treatment of Parkinson’s disease or any other indication.  There are no milestone payments under the licensing agreement. In addition, we must make royalty payments to UC under this license agreement ranging in the low-single digits as a percentage of all net sales, sublicensing fees, milestone payments and sublicense royalties that we receive from sublicenses granted by us pursuant to this license agreement. We are also obligated to pay patent filing, prosecution, maintenance and defense costs. This UC license agreement is terminable by UC in the event of breach and otherwise expires when the last licensed patent expires.
Research and Development Expenditures
Expenditures for research and development activities were $2,881,000 and $3,509,000 during the years ended September 30, 2016 and 2015, respectively. Research and development expenses for fiscal 2016 and 2015 related primarily to the advancement of our lead compound, 10150.
Manufacturing
We currently do not have the capability to manufacture any of our drug candidates on a commercial scale. Materials for non-clinical and clinical studies are produced under contract with third parties.  To date, we have partnered with JMPS for the manufacture of our active pharmaceutical ingredients.  JMPS is a 200 year-old company that is a global supplier of active pharmaceutical ingredients, fine chemicals and other specialty chemical products and services to a wide range of chemical and pharmaceutical industry customers and industrial and academic research organizations.  JMPS is a leader in the manufacture of metal-based pharmaceutical products.
Commercialization
If BARDA elects to procure 10150 following a pre-EUA application, as described above, or after FDA approval, it may be possible for us to generate significant sales revenue without the need to raise significant funds to build a commercial organization.  Depending on the size of those procurements, and assuming the successful development and FDA approval of our compounds in other, non-biodefense indications, we may have sufficient financial resources to internally fund the building of a commercial organization.  However, in the event procurements from BARDA are not made, and assuming successful development and FDA approval of one or more of our compounds, to successfully commercialize our catalytic antioxidant programs, we must seek corporate partners with expertise in commercialization or develop this expertise internally. However, we may not be able to successfully commercialize our catalytic antioxidant technology, either internally or through collaboration with others.
Marketing
Our potential products are being developed for large therapeutic markets. We believe these markets are best approached by partnering with established biotechnology or pharmaceutical companies that have broad sales and marketing capabilities. We are pursuing collaborations of this type as part of our search for development partners. However, we may not be able to enter into any marketing arrangements for any of our products on satisfactory terms or at all.
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Biodefense Industry
Market Overview
The market for biodefense countermeasures has grown dramatically as a result of the increased awareness of the threat of global terror activity in the wake of the September 11, 2001 terrorist attacks. The U.S. government is the principal source of worldwide biodefense spending. Most U.S. government spending on biodefense programs is in the form of development funding from NIAID, BARDA and the Department of Defense (“DoD”) and procurements of countermeasures by BARDA, the CDC and the DoD. The U.S. government is now the largest source of development and procurement funding for academic institutions and biotechnology companies conducting biodefense research or developing vaccines and immunotherapies directed at potential agents of bioterror or biowarfare.
We analyze the biodefense market in three segments; the United States civilian market, United States military market and non U.S. markets, with the U.S. government funding representing the vast majority of the worldwide market.
U.S. Civilian: The U.S. civilian market includes funds to protect the U.S. population from biological agents and is largely funded by the Project BioShield Act of 2004 (“Project BioShield”). Project BioShield is the U.S. government’s largest biodefense initiative. Project BioShield was extended through the Pandemic All Hazards and Preparedness Reauthorization Act of 2013, which authorized BARDA to administer a Special Reserve Fund of $2.8 billion for MCM procurement.
U.S. Military: The DoD is responsible for the development and procurements of countermeasures for the military segment, which focuses on providing protection for military personnel and civilians who are on active duty.
Non-U.S. Markets: Non-U.S. markets address protection against biowarfare agents for both civilians and military personnel in foreign countries. We anticipate that foreign countries will want to procure biodefense products as they are developed and validated by procurements by the U.S. government.
Project BioShield and the Pandemic and All-Hazards Preparedness Act
Project BioShield became law in 2004 and authorizes procurements of countermeasures for chemical, biological, radiological and nuclear attacks for the SNS, which is a national repository of medical assets and countermeasures designed to provide federal, state and local public health agencies with medical supplies needed to treat those affected by terrorist attacks, natural disasters, industrial accidents and other public health emergencies. Project BioShield provided appropriations of $5.6 billion to be expended over ten years into a Special Reserve Fund.
The Pandemic and All-Hazards Preparedness Act (“PAHPA”), passed in 2006, established BARDA as the agency responsible for awarding procurement contracts for biomedical countermeasures and providing development funding for advanced research and development in the biodefense arena, and supplements the funding available under Project BioShield for chemical, biological, radiological and nuclear countermeasures, and provides funding for infectious disease pandemics. Funding for BARDA is provided by annual appropriations by Congress. Congress also appropriates annual funding for the CDC for procurements of medical assets and countermeasures for the SNS and for NIAID to conduct biodefense research. This appropriation funding supplements amounts available under Project BioShield.
The Pandemic and All-Hazards Preparedness Reauthorization Act (“PAHPRA”), passed in 2013, extended the programs started under Project BioShield and PAHPA.  PAHPRA authorized a $2.8 billion Special Reserve Fund to be administered by BARDA for the purpose of procuring MCMs for the SNS.  Currently, the U.S. government may, at its discretion, purchase critical biodefense products for the SNS prior to FDA approval after the filing of a pre-EUA application.
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On an ongoing basis we monitor notices for requests for proposal, grants and other potential sources of government funding that could potentially support the development of our drug candidates. Nevertheless, changes in government budgets, priorities and agendas as well as political pressures could result in a reduction in overall government financial support for the biodefense sector in general and/or specifically the drug candidates we are developing. At any time, the U.S. government may be forced or choose to reduce or delay spending in the biodefense field, which could decrease the likelihood of future government contract awards, the likelihood that the government will exercise its right to extend any of its existing contracts and/or the likelihood that the government would procure products from us.(For further information, see “Risk Factors — Risks Related to Our Dependence on U.S. Government Grants and Contracts — Most of our immediately foreseeable future revenues are contingent upon grants and contracts from the U.S. government and we may not achieve sufficient, if any, revenues from these agreements to attain profitability.”) As a result, further development of our drug candidates and ultimate product sales to the government, if any, could be delayed or stopped altogether.
Legislation and Regulation Related to Bioterrorism Counteragents
Because some of our drug candidates are intended for the treatment of diseases that may result from acts of bioterrorism, they may be subject to the specific legislation and regulation described below.
Project BioShield
Project BioShield provides expedited procedures for bioterrorism related procurements and awarding of research grants, making it easier for HHS to quickly commit funds to countermeasure projects. Project BioShield relaxes procedures under the Federal Acquisition Regulation for procuring property or services used in performing, administering or supporting biomedical countermeasure research and development. In addition, if the Secretary of HHS deems that there is a pressing need, Project BioShield authorizes the Secretary to use an expedited award process, rather than the normal peer review process, for grants, contracts and cooperative agreements related to biomedical countermeasure research and development activity.
Under Project BioShield, the Secretary of HHS, with the concurrence of the Secretary of the Department of Homeland Security (“DHS”), and upon the approval of the President, can contract to purchase unapproved countermeasures for the SNS in specified circumstances. Congress is notified of a recommendation for a stockpile purchase after Presidential approval. Project BioShield specifies that a company supplying the countermeasure to the SNS is paid on delivery of a substantial portion of the countermeasure. To be eligible for purchase under these provisions, the Secretary of HHS must determine that there are sufficient and satisfactory clinical results or research data, including data, if available, from preclinical and clinical trials, to support a reasonable conclusion that the countermeasure will qualify for approval or licensing within eight years. Project BioShield also allows the Secretary of HHS to authorize the emergency use of medical products that have not yet been approved by the FDA. To exercise this authority, the Secretary of HHS must conclude that:
the agent for which the countermeasure is designed can cause serious or life-threatening disease;
the product may reasonably be believed to be effective in detecting, diagnosing, treating or preventing the disease;
the known and potential benefits of the product outweigh its known and potential risks; and
there is no adequate alternative to the product that is approved and available.
Although this provision permits the Secretary of HHS to circumvent the FDA approval process, its use would be limited to emergency circumstances.
Safety Act
The Support Anti-Terrorism by Fostering Effective Technologies Act enacted by the U.S. Congress in 2002 (the “Safety Act”) creates product liability limitations for qualifying anti-terrorism technologies for claims arising from or related to an act of terrorism. In addition, the Safety Act provides a process by which an anti-terrorism technology may be certified as an “approved product” by the DHS and therefore entitled to a rebuttable presumption that the government contractor defense applies to sales of the product. The government contractor defense, under specified circumstances, extends the sovereign immunity of the United States to government contractors who manufacture a product for the government. Specifically, for the government contractor defense to apply, the government must approve reasonably precise specifications, the product must conform to those specifications and the supplier must warn the government about known dangers arising from the use of the product.
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Public Readiness and Emergency Preparedness Act
The Public Readiness and Emergency Preparedness Act enacted by Congress in 2005 (the “PREP Act”) provides immunity for manufacturers from all claims under state or federal law for “loss” arising out of the administration or use of a “covered countermeasure.” However, injured persons may still bring a suit for “willful misconduct” against the manufacturer under some circumstances. “Covered countermeasures” include security countermeasures and “qualified pandemic or epidemic products.” For these immunities to apply, the Secretary of HHS must issue a declaration in cases of public health emergency or “credible risk” of a future public health emergency. We cannot predict whether Congress will fund the relevant PREP Act compensation programs; or whether the necessary prerequisites for immunity would be triggered with respect to our drug candidates.
Competition
General
Competition in the pharmaceutical industry is intense and we expect it to increase. Technological developments in our field of research and development occur at a rapid rate and we expect competition to intensify as advances in this field are made. We will be required to continue to devote substantial resources and efforts to research and development activities. Our most significant competitors, among others, are fully integrated pharmaceutical companies and more established biotechnology companies, which have substantially greater financial, technical, sales, marketing and human resources than we do. These companies may succeed in developing and obtaining regulatory approval for competitive products more rapidly than we can for our drug candidates. In addition, competitors may develop technologies and products that are, or are perceived as being, cheaper, safer or more effective than those being developed by us or that would render our technology obsolete.
In addition, we face significant competition for U.S. government funding for both development and procurements of medical countermeasures for biological, chemical and nuclear threats, diagnostic testing systems and other emergency preparedness countermeasures. The U.S. federal government has currently allocated a significant amount of research funding to the development of countermeasures against the effects of radiation exposure. As a result, there are many drug candidates and products under development as a possible countermeasure against the effects of radiation exposure.
We expect that important competitive factors in our potential product markets will be the relative speed with which we and other companies can develop products, complete the clinical testing and approval processes, and supply commercial quantities of a competitive product to the market. With respect to clinical testing, competition might result in a scarcity of clinical investigators and patients available to test our potential products, which could delay development.
Antioxidants
Several companies have explored the therapeutic potential of antioxidant compounds in numerous indications. Historically, most of these companies have focused on engineered versions of naturally occurring antioxidant enzymes, but with limited success, perhaps because the large size of these molecules makes delivery into the cells difficult. Antioxidant drug research continues at a rapid pace despite previous clinical setbacks.
Patents and Proprietary Rights
We currently license rights to our potential products from third parties. We generally seek patent protection in the United States and other jurisdictions for the potential products and proprietary technology licensed from these third parties. The process for preparing and prosecuting patents is lengthy, uncertain and costly. Patents may not issue on any of the pending patent applications owned by us or licensed by us from third parties. Even if patents issue, the claims allowed might not be sufficiently broad to protect our technology or provide us protection against competitive products or otherwise be commercially valuable. Patents issued to or licensed by us could be challenged, invalidated, infringed, circumvented or held unenforceable. Even if we successfully defend our patents for our products, the costs of defense can be significant.
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As of December 20, 2013, our catalytic antioxidant small molecule technology base is described in 12 issued United States patents and five United States pending patent applications. These patents and patent applications belong in whole or in part to Duke or the NJH and are licensed to us. These patents and patent applications cover soluble manganic porphyrins as antioxidant molecules as well as targeted compounds obtained by coupling such antioxidant compounds to molecules that bind to specific extracellular elements. The pending U.S. patent applications and issued U.S. patents include composition of matter claims and method claims for several series of compounds. Corresponding international patent applications have been filed, 88 of which have issued, and one of which has been allowed as of December 20, 2013.  Our 12 issued U.S. patents will expire between 2015 and 2023.
On November 22, 2013, we filed a provisional patent application with the United States Patent and Trademark Office entitled “Synthesis and Formulation of Porphyrin Compounds.”  The filing was for brand new patents for synthesis, formulation and pharmaceutical composition of 10150 and other porphyrin compounds.  If granted, these new patents could substantially extend the term of patent protection for 10150 beyond the current composition of matter claims.
On November 21, 2014, a patent application was filed under the Patent Cooperation Treaty (PCT) with the United States Receiving Office (US/RO), thereby preserving the right to seek patent protection in all PCT contracting States.
On April 15, 2015, we announced that we had filed a provisional patent application with the United States Patent Office for a new series of compounds demonstrating anti-microbial and anti-inflammatory action. The compounds were developed by Brian J. Day, PhD at NJH as a result of an Aeolus-sponsored research grant. We also announced that we have obtained a worldwide, exclusive license to develop the compounds from NJH.
On November 2, 2015 we announced that we had received notice of allowance of a composition of matter patent for 11114 from the European Patent Office. On April 18, 2016 we announced that the European Patent Office had issued the composition of matter patent for 11114.  On the same date, we announced that we had received a notice of allowance from the Japanese Patent Office for 11114.  This new compound has demonstrated neuro-protective activity in models of Parkinson’s disease and other indications. The compounds were invented by Brian J. Day, PhD at NJH and Manisha Patel, PhD at UC in collaboration with Aeolus Pharmaceuticals, and have been tested and developed by Dr. Patel under two research grants from MJFF.  Aeolus has obtained worldwide, exclusive licenses to develop the compounds from NJH and UC.
In addition to patent protection, we rely upon trade secrets, proprietary know-how and technological advances that we seek to protect, in part, through confidentiality agreements with our collaborative partners, employees and consultants. Our employees and consultants are required to enter into agreements providing for confidentiality and the assignment of rights to inventions made by them while in our service. We also enter into non-disclosure agreements to protect our confidential information furnished to third parties for research and other purposes.
Government Regulation
Our research and development activities and the manufacturing and marketing of our future products are subject to regulation by numerous governmental agencies in the United States and in other countries. The FDA and comparable agencies in other countries impose mandatory procedures and standards for the conduct of clinical trials and the production and marketing of products for diagnostic and human therapeutic use. Before obtaining regulatory approvals for the commercial sale of any of our products under development, we must demonstrate through preclinical studies and clinical trials that the product is safe and efficacious for use in each target indication. The results from preclinical studies and early clinical trials might not be predictive of results that will be obtained in large-scale testing. Our clinical trials might not successfully demonstrate the safety and efficacy of any products or result in marketable products.
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The United States system of drug approvals is considered to be the most rigorous in the world. It takes an over ten years for a drug candidate to move through the clinical and approval phases in the United States according to a November 2014 study by the Tufts Center for the Study of Drug Development. Only five in 5,000 drug candidates that enter preclinical testing make it to human testing and only one of those five is approved for commercialization. On average, it costs a company $1.4 billion in out of pocket costs to get one new drug candidate from the laboratory to United States patients according to the report.  In addition, time costs, expected returns that investors forego while the drug is in development, averaged $1.2 billion.
The steps required by the FDA before new drug products may be marketed in the United States include:
completion of preclinical studies;
the submission to the FDA of a request for authorization to conduct clinical trials on an IND, which must become effective before clinical trials may commence;
adequate and well-controlled Phase I clinical trials, which typically involves normal, healthy volunteers. The tests study a drug candidate’s safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted as well as the duration of its action;
adequate and well-controlled Phase II clinical trials which typically involve treating patients with the targeted disease with the drug candidate to assess a drug’s effectiveness;
adequate and well-controlled Phase III clinical trials involving a larger population of patients with the targeted disease are treated with the drug candidate to confirm efficacy of the drug candidate in the treatment of the targeted indication and to identify adverse events;
submission to the FDA of an NDA; and
review and approval of the NDA by the FDA before the product may be shipped or sold commercially.
In addition to obtaining FDA approval for each product, each product manufacturing establishment must be registered with the FDA and undergo an inspection prior to the approval of an NDA. Each manufacturing facility and its quality control and manufacturing procedures must also conform and adhere at all times to the FDA’s current good manufacturing practices (“cGMP”) regulations. In addition to preapproval inspections, the FDA and other government agencies regularly inspect manufacturing facilities for compliance with these requirements. Manufacturers must expend substantial time, money and effort in the area of production and quality control to ensure full technical compliance with these standards.
Preclinical testing includes laboratory evaluation and characterization of the safety and efficacy of a drug and its formulation. Preclinical testing results are submitted to the FDA as a part of an IND, which must become effective prior to commencement of clinical trials. Clinical trials are typically conducted in three sequential phases following submission of an IND. Phase I represents the initial administration of the drug to a small group of humans, either patients or healthy volunteers, typically to test for safety (adverse effects), dosage tolerance, absorption, distribution, metabolism, excretion and clinical pharmacology, and, if possible, to gain early evidence of effectiveness. Phase II involves studies in a small sample of the actual intended patient population to assess the efficacy of the drug for a specific indication, to determine dose tolerance and the optimal dose range and to gather additional information relating to safety and potential adverse effects. Once an investigational drug is found to have some efficacy and an acceptable safety profile in the targeted patient population, Phase III studies are initiated to further establish clinical safety and efficacy of the therapy in a broader sample of the general patient population, in order to determine the overall risk-benefit ratio of the drug and to provide an adequate basis for any physician labeling. During all clinical studies, we must adhere to good clinical practices (“GCPs”) standards. The results of the research and product development, manufacturing, preclinical studies, clinical studies and related information are submitted in an NDA to the FDA.
The process of completing clinical testing and obtaining FDA approval for a new drug is likely to take a number of years and require the expenditure of substantial resources. If an application is submitted, there can be no assurance that the FDA will review and approve the NDA. Even after initial FDA approval has been obtained, further studies, including post-market studies, might be required to provide additional data on safety and will be required to gain approval for the use of a product as a treatment for clinical indications other than those for which the product was initially tested and approved. Also, the FDA will require post-market reporting and might require surveillance programs to monitor the side effects of the drug. Results of post-marketing programs might limit or expand the further marketing of the products. Further, if there are any modifications to the drug, including changes in indication, manufacturing process, labeling or a change in manufacturing facility, an NDA supplement might be required to be submitted to the FDA.
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The rate of completion of any clinical trials will be dependent upon, among other factors, the rate of patient enrollment. Patient enrollment is a function of many factors, including the size of the patient population, the nature of the trial, the availability of alternative therapies and drugs, the proximity of patients to clinical sites and the eligibility criteria for the study. Delays in planned patient enrollment might result in increased costs and delays, which could have a material adverse effect on us.
Failure to comply with applicable FDA requirements may result in a number of consequences that could materially and adversely affect us. Failure to adhere to approved trial standards and GCPs in conducting clinical trials could cause the FDA to place a clinical hold on one or more studies which would delay research and data collection necessary for product approval. Noncompliance with GCPs could also have a negative impact on the FDA’s evaluation of an NDA. Failure to adhere to GMPs and other applicable requirements could result in FDA enforcement action and in civil and criminal sanctions, including but not limited to fines, seizure of product, refusal of the FDA to approve product approval applications, withdrawal of approved applications, and prosecution.
Whether or not FDA approval has been obtained, approval of a product by regulatory authorities in foreign countries must be obtained prior to the commencement of marketing of the product in those countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for approval might be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for some European countries, in general, each country at this time has its own procedures and requirements. There can be no assurance that any foreign approvals would be obtained.
In addition to the regulatory framework for product approvals, we and our collaborative partners must comply with laws and regulations regarding occupational safety, laboratory practices, the use, handling and disposition of radioactive materials, environmental protection and hazardous substance control, and other local, state, federal and foreign regulation. The impact of such regulation upon us cannot be predicted and could be material and adverse.
In addition, because some of our drug candidates are intended for the treatment of diseases that may result from acts of bioterrorism, they may be subject to the specific legislation and regulation described above under “Project BioShield and the Pandemic and All-Hazards Preparedness Act” and “Legislation and Regulation Related to Bioterrorism Counteragents.”
Regulations Regarding Government Contracting
We are a government contractor in the United States and we may become a government contractor elsewhere which would mean that we would be subject to various statutes and regulations that govern procurements of goods and services by agencies of the United States and other countries, including the Federal Acquisition Regulation. These governing statutes and regulations can impose stricter penalties than those normally applicable to commercial contracts, such as criminal and civil damages liability and suspension and debarment from future government contracting. In addition, pursuant to various statutes and regulations, our government contracts may be subject to unilateral termination or modification by the government for convenience in the United States and elsewhere, detailed auditing requirements and accounting systems, statutorily controlled pricing, sourcing and subcontracting restrictions and statutorily mandated processes for adjudicating contract disputes.
Hazardous Materials and Select Agents
Our development and manufacturing processes involve the use of hazardous materials, including chemicals and radioactive materials, and produce waste products. Accordingly, we are subject to federal, state and local laws and regulations governing the use, manufacturing, storage, handling and disposal of these materials. In addition to complying with environmental and occupational health and safety laws, we must comply with special regulations relating to biosafety administered by the CDC, HHS and the DoD.
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Other Regulations
In the United States and elsewhere, the research, manufacturing, distribution, sale and promotion of drug and biological products are subject to regulation by various federal, state and local authorities in addition to the FDA, including the Centers for Medicare and Medicaid Services; other divisions of HHS, such as the Office of Inspector General: the U.S. Department of Justice and individual U.S. Attorney offices within the Department of Justice and state and local governments. For example, sales, marketing and scientific and educational grant programs must comply with the anti-kickback and fraud and abuse provisions of the Social Security Act, the False Claims Act, the privacy provisions of the Health Insurance Portability and Accountability Act and similar state laws. Pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990 and the Veterans Health Care Act of 1992. All of these activities are also potentially subject to federal and state consumer protection and unfair competition laws.
CPEC, LLC
We were previously developing bucindolol for the treatment of heart failure, but development was discontinued in 1999. Commercial rights to bucindolol are owned by CPEC, LLC, a limited liability company (“CPEC”), of which we own 35% and Endo Pharmaceuticals (formerly Indevus Pharmaceuticals), Inc. owns 65%.
ARCA biopharma, Inc. is developing bucindolol under the trade name Gencaro as a beta-blocker and mild vasodilator for the treatment of atrial fibrillation in patients with heart failure and left ventricular dysfunction. ARCA biopharma, Inc. is headquartered in Broomfield, Colorado.  The future development of Gencaro is uncertain.  In the event that Gencaro is approved for sale, however, CPEC may be owed royalties on sales.  There can be no guarantees, however, that Gencaro will ever be approved or sold or achieve sufficient revenues to generate royalties.
Employees
At September 30, 2016, we had four full-time employees and no part time employees. None of our employees is represented by a labor union. In addition to our employees, we utilize a team of consultants and subcontractors to perform key functions for us.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Aeolus has adopted a policy that all transactions between Aeolus and its executive officers, directors and other affiliates must be approved by a majority of the members of the Board and by a majority of the disinterested members of the Board, and must be on terms no less favorable to Aeolus than could be obtained from unaffiliated third parties.

September 2015 Bridge Loan Financing

On September 29, 2015, we received funding in the form of convertible promissory notes (the “BVF Notes”) from Biotechnology Value Fund, L.P. and other affiliates of BVF Partners, L.P. One of our directors, Mitchell Kaye, is a Managing Director of Biotechnology Value Fund.

The BVF Notes had an aggregate principal balance of $1,000,000, accrue interest at a rate of 6% per annum and have a scheduled maturity date of September 28, 2016 (the “Maturity Date”). The terms of the BVF Notes provided that the outstanding principal and accrued interest on the BVF Notes shall automatically convert into Company equity securities issued in a Qualified Financing (as defined below) at a conversion rate carrying a 15% discount to the lowest price per share (or share equivalent) issued in a Qualified Financing (an “Automatic Conversion”). If, prior to the Maturity Date, the Company enters into an agreement pertaining to a Corporate Transaction (as defined below) and the BVF Notes had not been previously converted pursuant to an Automatic Conversion, then, the outstanding principal balance and unpaid accrued interest of the BVF Notes shall automatically convert in whole into the right of the holder to receive, in lieu of any other payment and in cancellation of the BVF Notes, an amount in cash upon closing of the Corporate Transaction (as defined below) equal to two times the outstanding principal amount of the BVF Notes.

For purposes of the foregoing: “Qualified Financing” means a bona fide new money equity securities financing on or before the Maturity Date with total proceeds to the Company of not less than four million dollars; and “Corporate Transaction” means a sale, lease or other disposition of all or substantially all of the Company’s assets or a consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Company immediately prior to such consolidation, merger or reorganization own less than fifty percent (50%) of the voting power of the surviving entity immediately after such consolidation, merger or reorganization.

In connection with the 2015 Securities Placement, the BVF Notes were converted pursuant to an Automatic Conversion and the holders of the BVF Notes received the securities described below under “BVF Convert.”

2015 Securities Placement

On December 10, 2015, we entered into securities purchase agreements with certain accredited investors to sell and issue (i) an aggregate of 10,215,275 common units issued at a purchase price of $0.22 per unit, and (ii) 4,500 preferred stock units issued to Biotechnology Value Fund, L.P. and certain other affiliates of BVF Partners, L.P., for an aggregate purchase price of $4.5 million, resulting in aggregate gross proceeds to the Company of approximately $6.75 million (the “2015 Securities Placement”).  Each common unit consisted of one share of the Company’s common stock and a five year warrant to purchase one share of the Company’s common stock, subject to adjustment. The preferred stock units collectively consisted of (i) 4,500 shares of our Series C Preferred Stock that are collectively convertible into an aggregate of 20,454,546 shares of the Company’s common stock and (ii) warrants to purchase an aggregate of 20,454,546 shares of our common stock, in each case subject to adjustment.  Each of the foregoing warrants has an initial exercise price of $0.22 per share.

Following the completion of the 2015 Securities Placement, the principal and accrued interest amounts under the BVF Notes were converted into 5,414,402 shares of our common stock and warrants to purchase an additional 5,414,402 shares of our common stock at an exercise price per share of $0.22 subject to adjustment (the “BVF Convert”). As a result, the BVF Notes are no longer outstanding as of the date of this prospectus.  As described above, one of our directors, Mitchell Kaye, is a Managing Director of Biotechnology Value Fund.
 
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2013 Warrant Repricing, Exercise and Lockup Agreement

Effective February 15, 2013, Aeolus and each of Xmark JV Investment Partners (“JV Partners”), Xmark Opportunity Fund, Ltd. (“Opportunity Ltd.”) and Xmark Opportunity Fund, L.P. (“Opportunity LP” and, together with JV Partners and Opportunity Ltd., the “Xmark Entities”) entered into a Warrant Repricing, Exercise and Lockup Agreement (the “Xmark Warrant Agreement”) pursuant to which the Company agreed to reduce the exercise price of outstanding warrants to purchase an aggregate of up to 59,149,000 shares of our common stock held by the Xmark Entities (the “Xmark Warrants”) to $0.01 per share. Prior to the entry into the Xmark Warrant Agreement, the exercise price of the Xmark Warrants covering an aggregate of 55.4 million shares of Aeolus’ common stock was $0.28 per share, and the exercise price covering an aggregate of 3.8 million shares of Aeolus’ common stock was $0.50 per share. In consideration for the reduction of the exercise price of the Xmark Warrants, each of the Xmark Entities agreed to immediately exercise all of the Xmark Warrants by cashless exercise. The Xmark Warrant Agreement also provides that the Xmark Entities will not transfer the shares issuable upon exercise of the Xmark Warrants (the “Xmark Warrant Shares”) until the Company either (i) declares a cash dividend on its common stock or otherwise makes a cash distribution or (ii) effects a Change of Control, subject in each case to the terms of the Xmark Warrant Agreement. Xmark Opportunity Partners, LLC (“Opportunity Partners”) is the investment manager of JV Partners and the sole member of the investment manager of each of Opportunity Ltd. and Opportunity LP, and, as such, possesses the sole power to vote and the sole power to direct the disposition of all securities of the Company held by each of the Xmark Entities. Mitchell Kaye and David C. Cavalier, the Co-Managing Members of Xmark Capital Partners, LLC, a Delaware limited liability company, the Managing Member of Opportunity Partners, share voting and dispositive power with respect to all securities of the Company beneficially owned by Opportunity Partners.  The foregoing description of the Xmark Warrant Agreement (and the transactions effected thereunder) does not purport to be complete and is qualified in its entirety by reference to the Xmark Warrant Agreement, a copy of which is attached as Exhibit 10.4 to Form 8-K filed with the SEC on February 19, 2013.

 Director Independence

After review of all relevant transactions or relationships between each director, or any of his family members, and the Company, our senior management and its independent registered public accounting firm, the Board of Directors has affirmatively determined that all of our directors are independent directors within the meaning of the applicable Nasdaq Stock Market, LLC (“Nasdaq”) listing standards, as currently in effect, excluding Mr. Cavalier.
 
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners and Management23

The following tables set forth certain information regarding the ownership of shares of Aeolus’ Common Stock and Series C Preferred as of the close of business on September 30, 2016, by:

·
each person known by Aeolus to beneficially own more than 5% of the outstanding shares of each class of our stock;
·
each of our directors;
·
each of our Named Executive Officers (as defined under “Executive Compensation” above); and
·
all of our directors and executive officers as a group

 
   
Preferred Stock
   
Common Stock
 
Identity of Owner or Group (1)(2)
 
Beneficially
Owned
   
Percentage
Owned
   
Beneficially
Owned(4)
   
Percentage
Owned(5)
 
                         
Directors:
                       
David C. Cavalier
   
-
     
-
     
97,064,694
(6)    
63.8
%
John M. Farah, Jr., Ph.D. (7)
   
-
     
-
     
607,424
     
*
 
Mitchell D. Kaye, J.D. (8)
   
-
     
-
     
97,081,944
     
63.8
%
Amit Kumar, Ph.D. (7)
   
-
     
-
     
638,583
     
*
 
John M. Clerici (7)
   
-
     
-
     
250,000
     
*
 
Chris A. Rallis (7)
   
-
     
-
     
638,583
     
*
 
Jeffrey A. Scott, M.D. (7)
   
-
     
-
     
250,000
     
*
 
                                 
Named Executive Officers:
                               
John L. McManus (9)
   
-
     
-
     
3,413,713.6
     
2.2
%
David C. Cavalier (6)
   
-
     
-
     
97,064,694
     
*
 
All directors and executive officers as a group (8 persons)
   
-
     
-
     
106,468,751
(10)    
68.0
%
                                 
Greater than 5% Stockholders:
                               
BVF Partners, L.P. and its affiliates
900 N. Michigan Avenue,
Suite 1100
Chicago, IL 60611
   
4,500
     
100.0
%(13)
   
15,205,106
(11)    
9.99
%(12)
 
                               
Xmark Opportunity Partners, LLC and its affiliates
90 Grove Street
Ridgefield, CT 06877
   
-
     
-
     
97,214,694
(13)    
63.8
%
 
                               
 
* Less than one percent

 (1) Unless otherwise indicated, the address of all the owners is: c/o Aeolus Pharmaceuticals, Inc., 26361 Crown Valley Parkway, Suite 150, Mission Viejo, California 92691.

 (2) This table is based upon information supplied by our executive officers, directors and principal stockholders and Schedule 13Ds and 13Gs, as amended, filed with the SEC. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the stockholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned.

 (3) Percent of shares beneficially owned by the person listed above is calculated by dividing the number of shares of each class of preferred stock beneficially owned by that person by the number of shares of each class of preferred stock outstanding. BVF Partners, L.P. and its affiliates own 100% of the outstanding shares of Series C Preferred Stock.

 (4) The number of shares of common stock beneficially owned includes any shares issuable pursuant to stock options or warrants that are currently exercisable or may be exercised within 60 days after December 31, 2016 as well as shares of preferred stock convertible into common stock. Shares issuable pursuant to such options or warrants and shares issuable upon conversion of such preferred stock are deemed outstanding for computing the ownership percentage of the person holding such options but are not deemed to be outstanding for computing the ownership percentage of any other person.
 

2 Note to Aeolus – Please update the Beneficial Ownership Table.
3 Note to Draft – Footnotes to be updated based on revised Beneficial Ownership Table.
88

 
 (5) Applicable percentages are based on 152,085,825 shares outstanding on September 30, 2016, plus the number of shares such stockholder can acquire within 60 days after September 30, 2016.  All percentages are rounded.

 (6) Consists of 132,750 shares of Common Stock issuable upon exercise of options held by David C. Cavalier; 29,095,831 shares of Common Stock beneficially owned by Xmark Opportunity Fund, L.P., a Delaware limited partnership (“Opportunity LP”) (including 957,326 shares held by Goodnow Capital L.L.C. (L.P.)); 63,680,083 shares of Common Stock owned by Xmark Opportunity Fund, Ltd., a Cayman Islands exempted company (“Opportunity Ltd”) (including 2,475,490 shares held by Goodnow Capital L.L.C. (Ltd.)); 1,508,567 shares of Common Stock owned by Xmark JV Investment Partners, LLC, a Delaware limited liability company (“JV Partners”); and another 2,647,463 shares of Common Stock owned by Goodnow Capital, L.L.C. (“Goodnow”), a Delaware limited liability company that are not reflected above. Mr. Cavalier shares voting and dispositive power over the shares listed above (other than shares subject to options) with Mr. Kaye.

 (7) Consists solely of shares of Common Stock issuable upon exercise of options.

 (8) Consists of 150,000 shares of Common Stock issuable upon exercise of options held by Mitchell D. Kaye.  Also consists of shares beneficially owned as referenced in footnote 6 above, including:  29,095,831 shares of Common Stock beneficially owned by Opportunity LP; 63,680,083 shares of Common Stock beneficially owned by Opportunity Ltd; 1,508,567 shares of Common Stock beneficially owned by JV Partners; and 2,647,463 shares of Common Stock owned by Goodnow.  Mr. Kaye shares voting and dispositive power over these shares with Mr. Cavalier.  Mr. Kaye does not possess voting or investment power over Aeolus securities held or beneficially owned by BVF Partners, L.P. and its affiliates, as described below in footnote 12.  Mr. Kaye is a Managing Director of Biotechnology Value Fund, L.P. which is affiliated with BVF Partners, L.P.

 (9) Consists of 70,300 shares owned directly, 10,000 shares owned directly by Mr. McManus’ spouse and 3,333,414 shares issuable upon exercise of options.

 (10) Consists of shares of Common Stock beneficially owned by our directors and the following executive officers: Mr. McManus and Mr. Cavalier. See footnotes (5), (6), (7), and (9) above, the shares held by Opportunity LP, Opportunity Ltd, JV Partners and Goodnow, which are deemed to be beneficially owned by Messrs. Cavalier and Kaye have been counted only once for purposes of this calculation. Consists of 9,456,507 shares subject to options.

 (11) Consists of 14,561,580 shares of issued and outstanding Common Stock owned directly by the entities listed below plus 643,526 shares of Common Stock that may be acquired upon the exercise of certain warrants or Series C Preferred Stock held by such entities up to the exercise and conversion limitations described in footnote 13.  In light of such exercise and conversion limitations, the beneficial ownership of the number of shares of Common Stock listed in the table does not reflect all Common Stock subject to certain warrants and Series C Preferred Stock presented below that are held by affiliates of BVF Partners, L.P. that are listed below. The following beneficial ownership information is presented for informational purposes assuming no such limitation on the exercise of warrants or conversion of Series C Preferred Stock.

As of September 30, 2016, (i) Biotechnology Value Fund, L.P. (“BVF”) beneficially owned 30,354,209 shares of Common Stock, including 14,978,167 shares of Common Stock issuable upon the exercise of certain warrants held by it and 8,677,273 shares of common stock that may be acquired upon conversion of Series C Preferred Stock, (ii) Biotechnology Value Fund II, L.P. (“BVF2”) beneficially owned  17,634,516 shares of Common Stock, including 8,689,565 shares of Common Stock issuable upon the exercise of certain warrants held by it and 5,213,636 shares of common stock that may be acquired upon conversion of Series C Preferred Stock, (iii) BVF Investments, L.L.C. (“BVLLC”) beneficially owned 352,980 shares of Common Stock, (iv) Investment 10, L.L.C. (“ILL10”) beneficially owned 5,537,241 shares of Common Stock, including 2,725,971 shares of Common Stock issuable upon the exercise of certain warrants held by it and 1,186,364 shares of common stock that may be acquired upon conversion of Series C Preferred Stock, (v) MSI BVF SPV, L.L.C. (“MSI BVF”) beneficially owned 8,833,399 shares of Common Stock, including 4,388,495 shares of Common Stock issuable upon the exercise of certain warrants held by it and 2,290,909 shares of common stock that may be acquired upon conversion of Series C Preferred Stock, and (vi) Biotechnology Value Trading Fund OS, L.P. (“Fund OS”) beneficially owned 6,172,728 shares of Common Stock, including 3,086,364 shares of Common Stock issuable upon the exercise of certain warrants held by it and 3,086,364 shares of common stock that may be acquired upon conversion of Series C Preferred Stock.

BVF Partners L.P.  (“Partners”), as the general partner of BVF and BVF2, the manager of BVLLC, the investment adviser of ILL10, the attorney-in-fact of MSI BVF and the investment manager of Fund OS, may be deemed to beneficially own 68,885,074 shares of Common Stock, including 54,323,494 shares of Common Stock currently issuable upon the exercise of certain warrants and conversion of Series C Preferred Stock, beneficially owned in the aggregate by BVF, BVF2, BVLLC, ILL10, MSI BVF, and Fund OS.

BVF Inc., as the general partner of Partners, may be deemed to beneficially own the 68,885,074 shares of Common Stock, including 54,323,494 shares of Common Stock currently issuable upon the exercise of certain warrants and conversion of Series C Preferred Stock, beneficially owned by Partners.

Mark N. Lampert, as a director and officer of BVF Inc., may be deemed to beneficially own the 68,885,074 shares of Common Stock, including 54,323,494 shares of Common Stock currently issuable upon the exercise of certain warrants, beneficially owned by BVF Inc.

The foregoing should not be construed in and of itself as an admission by any of Partners, BVF Inc. or Mark N. Lampert as to beneficial ownership of any shares of Common Stock owned by BVF, BVF2, BVLLC, ILL10, MSI BVF, and Fund OS. Each of Partners, BVF Inc. and Mr. Lampert disclaims beneficial ownership of the shares of Common Stock beneficially owned by BVF, BVF2, BVLLC, ILL10, MSI BVF, and Fund OS and this filing shall not be construed as an admission that any such person or entity is the beneficial owner of any such securities.
 
89


 (12) The terms of the warrants and Series C Preferred Stock held by BVF, BVF2, BVLLC, ILL10, MSI BVF, and Fund OS each contain an issuance limitation prohibiting the holder from exercising such warrants and converting such Series C Preferred Stock to the extent that, after giving effect to such exercise or conversion thereof, the holder, including any of its affiliates, would beneficially own more than 9.99% of the Common Stock of the Company then issued and outstanding.

 (13) Consists of: 132,750 shares of Common Stock issuable upon exercise of options held by David C. Cavalier; 150,000 shares of Common Stock issuable upon exercise of options held by Mitchell D. Kaye; 29,095,831 shares of Common Stock owned by Xmark Opportunity Fund, L.P., a Delaware limited partnership (“Opportunity LP”); 63,680,083 shares of Common Stock owned by Xmark Opportunity Fund, Ltd., a Cayman Islands exempted company (“Opportunity Ltd”); 1,508,567 shares of Common Stock owned by Xmark JV Investment Partners, LLC, a Delaware limited liability company (“JV Partners”); and 2,647,463 shares of Common Stock owned by Goodnow Capital, L.L.C. (“Goodnow”), a Delaware limited liability company. Mr. Cavalier shares voting and dispositive power over these shares with Mr. Kaye.
 
90

 
SELLING STOCKHOLDERS

We are registering the shares of common stock identified in the table below in order to permit the selling stockholders to offer the shares for resale from time to time.  The shares have been registered in accordance with obligations we have under registration rights agreements which relate to securities issued in the 2015 Securities Placement,   as well as securities issued in connection with private placement transactions we completed in 2013, 2012, 2010 and 2009.  We also registered 50,000 shares of our common stock issuable upon the exercise of warrants in 2014.  The shares and warrants were issued in reliance on Section 4(a)(2) of the Securities Act, and Rule 506 promulgated thereunder.  For additional information regarding the shares offered pursuant to this prospectus, please see “Description of the Shares Included in the Prospectus” above.

Each of Laidlaw & Company (UK) Ltd., Newport Coast Securities, Inc., Noble Financial Capital Markets, Ladenburg Thalmann & Co., Inc., Monarch Bay Securities, LLC, Roth Capital Partners, LLC and Roberts Mitani, LLC are broker-dealers registered with the Financial Industry Regulatory Authority or FINRA, and also selling stockholders in this offering.  Other selling stockholders who are broker-dealers or affiliated with broker-dealers received their warrants to purchase common stock as underwriting compensation for their services as placement agents.

The following tables set forth, as of the date of this prospectus: (1) the name of the stockholder for whom we are registering shares under this registration statement; (2) the number of shares of our common stock owned by the stockholder prior to this offering; (3) the remaining number of shares of our common stock being offered pursuant to this prospectus; and (4) the amount and the percentage (if 1% or more) of the class to be owned by such stockholder after completion of the offering. The percentage of outstanding common stock owned upon completion of the offering is calculated based on 152,085,825 shares of common stock issued and outstanding as of September 30, 2016.  We have reflected beneficial ownership and selling stockholder information in the table below without giving effect to issuance limitations set forth within the warrants and the Series C Preferred Stock; these limitations prohibit the holder from exercising or converting such securities in certain circumstances. See “Security Ownership of Certain Beneficial Owners and Management,” (footnote 12) and “Description of the Shares Included in This Prospectus.” We prepared this table based on the information supplied to us by the selling stockholders named in the table and we have not sought to verify such information.

Selling Stockholders from the 2015 Securities Placement
 
Name and Address of Selling Stockholder
Common Stock Owned Prior to Offering(1)
Common Stock
Being Offered
Pursuant to this
Prospectus
Common Stock
Owned Upon
Completion of
Offering (1)(2)
Percentage of
Common Stock
Owned Upon
Completion of
Offering
Albert & Yvonne Tjan Family Trust
8 Woodlawn
Irvine, CA  92620
 
 200,568  (3)
 200,568
0
*
Anna Belle Ambrose
577 Tower Blvd.
Powell, WY  82435
 
181,818 (4)
 
181,818
0
*
K. Tucker Andersen
61 Above All Rd.
Warren, CT  06754
 
909,090 (5)
909,090
0
*
Stephen Ball
2001 Los Amigos St.
La Canada Flintridge, CA  91011
 
181,818 (6)
 
181,818
0
*
91


Biotechnology Value Fund, L.P.
One Sansome Street, 30th Floor San Francisco, CA  94104
 
30,354,209 (7)(55) (56)
26,294,419
4,059,790
2.67%
Biotechnology Value Fund II, L.P.
One Sansome Street, 30th Floor San Francisco, CA  94104
 
17,634,516 (8)(55) (56)
15,422,327
 
2,212,189
 
1.45%
Biotechnology Value Trading Fund OS, L.P.
One Sansome Street, 30th Floor San Francisco, CA  94104
 
6,172,728 (9)(55) (56)
6,172,728
0
*
Linda Bonner
18916 E. Briargate Ln.
Parker, CO  80134
 
90,910 (10)
90,910
0
*
Brio Capital Master Fund LTD.
c/o Brio Capital Management, LLC
100 Merrick Road, Suite 401W
Rockville Centre, NY 11570-4800
 
 4,545,456 (11)
4,545,456
0
*
Bruno J. Casatelli
8862 Bloomfield Blvd
Sarasota, FL 34238
 
409,080 (12)
409,080
0
*
Chase Family Trust
3730 Valley Vista Rd.
Bonita, CA  91902
 
90,910 (13)
90,910
0
*
Timothy L. Dewey
102 Marie Drive
Box 648
Cimarron, KS 67835
 
190,908 (14)
190,908
 
0
*
Eric Figge
4 Lakeridge
Dove Canyon, CA  92679
 
180,000 (15)
180,000
0
*
James Galvin
2 Via Marin
San Clemente, CA  92676
 
90,908 (16)
90,908
0
*
Sally Garcia
3029 Treefern Dr.
Duarte, CA  91010
 
72,728 (17)
72,728
0
*


92

 
Dean Glau
6615 S. Piney Creek Circle
Centennial, CO  80016
 
45,454 (18)
45,454
0
*
Donald E. Goodin
620 Steeple Chase Road
Glasgow, KY 42141
 
100,000
 (19)
100,000
0
*
Michael Halperin
1901 Skycrest Drive #2
Walnut, CA  94595
 
145,454 (20)
145,454
0
*
Kenneth H. Hancock
1831 Hillcrest Lane
Selina, KS 67401
 
454,540 (21)
454,540
0
*
HS Contrarian Investment, LLC
68 Fiesta Way
Fort Lauderdale, FL  33301
 
568,182
568,182 (22)
0
*
Intracoastal Capital, LLC
245 Palm Trail
Delray Beach, FL  33483
 
1,818,182
909,091(23)
0
*
Investment 10, L.L.C.
One Sansome Street, 30th Floor San Francisco, CA  94104
 
5,537,242 (24)(55) (56)
4,395,841
1,141,401
 
*
Iroquois Capital Investment Group LLC
205 E. 42nd St., 20th Floor
New York, NY  10017
 
90,910
45,455 (25)
 
0
*
Iroquois Master Fund LTD.
c/o Iroquois Capital Management LLC
205 E. 42nd St., 20th Floor
New York, NY  10017
 
227,274
113,637 (26)
0
*
Douglas E. Jasek
1515 Old Trail Court
Sugarland Texas 77479
 
727,272 (27)
727,272
0
*
Joseph M. Tosti Revocable Trust U/A 6-15-93
15615 Alton Prwy. #210
Irvine, CA  92618
 
181,818 (28)
181,818
 
0
*
Lee Keyte
3402 Altura Ave.
La Cresenta, CA  91214
 
136,364 (29)
136,364
0
*
93

 
Kingsbrook Opportunities
Master Fund LP
c/o Kingsbrook Partners LP
689 Fifth Avenue, 12th Floor
New York, NY  10022
2,000,000
1,931,808  (30)
0
*
Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
 
986,589 (31)
0(31)
0
*
Lincoln Park Capital Fund, LLC
C/O Lincoln Park Capital
440 N. Wells Street, Suite 410
Chicago, IL 60654
2,272,734
2,054,988 (32)
0
*
Henry Lindenmann
577 Tower Blvd.
Powell, WY  82435
45,454 (33)
45,454
0
*
Gregory McCloskey
138 White Flower
Irvine, CA  92603
 
83,863 (34)
83,863
0
*
James W. Mosich and Carmella Mosich
Living Trust U/A 10/1/84
2 Camino Platino
San Clemente, CA  92673
45,454 (35)
45,454
 
0
*
MSI BVF SPV, L.L.C.
One Sansome Street, 30th Floor San Francisco, CA  94104
 
8,833,399 (36)(55)(56)
7,452,581
 
 
1,380,818
*
Newport Coast Securities, Inc.
 Newport Coast Securities
 180 Maiden Lane, 17th Floor
 New York, NY 10038
56,859 (37)
56,859
 
0
*
Michael A. Parimucha
2621 Oakgrove Ave
St. Augustine, FL 32092
 
227,260 (38)
227,260
 
0
*
Michael Pezzuolo
1332 Cerritos Dr.
Laguna Beach, CA  92651
 
45,454 (39)
45,454
0
*
Jeffery Ploen
6222 S. Blackhawk Ct.
Centennial, CO  80111
 
200,000
100,000  (40)
0
*
Harry Radie
24292 Bellerive Cir
Laguna Niguel, Ca  92677
 
88,945 (41)
88,945
 
0
*
Randall L. Payne Kathy S. Payne JTWROS
445 Janan Ct.
Conway, AR 72034
545,454 (42)
545,454
 
0
*
 
 
94

 
Daniel Rudden
5460 South Quebec St.
Greenwood Village, CO  80111
 
200,000 (43)
200,000
 
0
*
Savoy International Corporation
565 5th Avenue, Floor 30
New York, NY  10017
681,820(44)
681,820
0
*
R. Douglas Shearer
PO Box 515
515 Admirals Circle
Pine Beach, NJ 08741
454,546 (45)
454,546
0
*
Alva Staples
6705 E. Dorado Place
Greenwood Village, CO  80111
 
227,272 (46)
227,272
 
0
*
Ralph Tenebruso
7 High Point Road
Holmdel, NJ 07733
 
56,859 (47)
56,859
 
0
*
James Terwilliger
2014 Oak Springs Drive
Cordova, TN 38016
11,365 (48)
11,365
 
0
*
Thomas Green/Ardell Family Trust
4 Shadeyside
Trabuco Canyon, CA  92679
 
477,273 (49)
477,273
 
0
*
Albert Tjan
8 Woodlawn
Irvine, CA  92620
354,546 (50)
354,546
 
 
0
*
Joseph Tosti
15615 Alton Prwy. #210
Irvine, CA  92618
136,364 (51)
136,364
0
*
Jeff Stockstill
9471 Old Plantation Cove
Germantown, TN 38139
11,365 (52)
11,365
 
 
0
*
Mulhern Family Revocable Trust
1885 Mesa Ridge Ave
Westlake Village, CA 91362
227,272 (53)
227,272
0
*
Dina Lyaskovets
1024 Bayside Drive, #217 Newport Beach, CA 92660
 
50,000 (54)
50,000
 
 
0
*
Buff Trust
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
 
0
157,854 (57)
 
 
0
*
 
 
95

Garnet Trust
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
 
0
157,854 (58)
 
 
0
*
Laidlaw Holdings Ltd
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
 
0
49,882 (59)
 
 
0
*
Kevin R. Wilson
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
52,908 (60)
 
 
0
*
Timmoth C. Behr
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
3,409 (61)
0
*
Christopher Oppito
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
3,409 (62)
 
0
*
Luke Kottke
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
100,000 (63)
0
*
Matthew D Eitner
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
 
0
125,000 (64)
 
 
0
*
James Ahern
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
125,000 (65)
0
*
Hugh Regan
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
41,272 (66)
 
0
*
Patrick Gallagher
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
100,000 (67)
0
*
Francis R. Smith
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
 
0
20,000 (68)
 
 
0
*
Matthew Dormer
c/o Laidlaw & Co.
546 5th Avenue, 5th Floor
New York, NY  10036
0
50,000 (69)
0
*
         
TOTAL
89,658,486.00
 
79,410,166.00
8,794,198.00
 
 
96

 
Selling Stockholders from the 2013 Private Placement
 
Name and Address of Selling
Stockholder
Common Stock Owned
Prior to Offering(1)
Common Stock
Being Offered
Pursuant to this
Prospectus
Common Stock
Owned Upon
Completion of
Offering(1)(2)
Percentage of Common Stock Owned Upon Completion of Offering
Michael S. Barish
1,200,000(70)
1,200,000
0
*
2401 E. 2nd Avenue, #500
       
Denver, CO 80206
       
         
Brio Capital Master Fund, Ltd.
2,400,000
1,200,000 (71)
0
 
c/o Brio Capital Management, LLC
     
*
100 Merrick Road, Suite 401 W
       
Rockville Centre, NY 11570-4800
       
         
Stevan F. Bruehl
60,000
30,000 (72)
0
*
Box 1832
       
Bellingham, WA 98227
       
         
Capital Ventures International
       
c/o Heights Capital Management 101
2,000,000
920,000 (73)
0
*
California Street, Suite 3250
       
San Francisco, CA 94111
       
         
CEOcast, Inc
250,000(74)
250,000
0
*
317 Madison Avenue
       
Suite 1621
       
New York, NY 10017
       
         
Dan Delmonico
50,000(75)
50,000
0
*
31 Bell Canyon
       
Dove Canyon, CA 92679
       
         
Michael Donahue
10,500(76)
10,500
0
*
1100 Glendon Avenue
       
Suite 850
       
Los Angeles, CA 90024
       
         
Gary A. Cross
24,000
12,000 (77)
0
*
212-6631 Minory Blvd.
       
Richmond, British Columbia V6Y-121
       
         
JALAA Equities
800,000
400,000 (78)
0
*
34 Sumner Road
       
Greenwich, CT 06831
       
 
97

JAK Investments LLC
1,653,084
800,000
849,711
*
3 Bucks Mill Lane  (79)      
Holmdel, NJ 07733        
         
Arthur Klausner
248,195
173,920 (80)
74,275
*
136 East 55th Street, Apt. PH-E
       
New York, NY 10022
       
         
Hiroko Komatsu
30,000
20,000 (81)
10,000
*
805 Leavenworth St., #509
       
San Francisco, CA 94109
       
         
Ladenburg Thalmann & Co. Inc.
239,167(82)
239,167
0
*
520 Madison Avenue, 9TH Floor
       
New York, NY 10022
       
         
Edward Larkin
64,350(83)
64,350
0
*
9540 South Maroon Circle
       
Suite 250
       
Englewood, CO 80112
       
         
Lincoln Park Capital Fund, LLC
911,495
200,000 (84)
511,495
*
C/O Lincoln Park Capital
       
440 N. Wells Street, Suite 410
       
Chicago, IL 60654
       
         
Market Pathways
250,000(85)
250,000
0
*
17595 Harvard Ave.
       
Suite C-519
       
Irvine, CA 92614
       
         
Dennis McCarthy
49,000(86)
49,000
0
*
898 N. Sepulveda Blvd.
       
Suite 400
       
El Segundo, CA 90245
       
         
Monarch Bay Securities, LLC
21,000(87)
21,000
0
*
898 N. Sepulveda Blvd.
       
Suite 400
       
El Segundo, CA 90245
       
         
Michael J. Morgan
16,392(88)
16,392
0
*
9540 South Maroon Circle
       
Suite 250
       
Englewood, CO 80112
       
         
Eugene L. Neidiger & Regina L.
18,286(89)
18,286
0
*
Roesener JTWROS        
9540 South Maroon Circle,        
Suite 250        
Englewood, Colorado 80112        
         
Nextview Capital, LP
500,000
500,000 (90)
0
*
180 Crestview Dr.
       
Deerfield, IL 60015
       
 
98

Noble Financial Capital Markets
304,167(91)
304,167
0
*
951 Yamato Road
       
Boca Raton, FL 33431
       
         
Robert L. Parrish
7,430(92)
7,430
0
*
9540 South Maroon Circle
       
Suite 250
       
Englewood, CO 80112
       
         
Anthony B. Petrelli
19,967(93)
19,967
0
*
9540 South Maroon Circle
       
Suite 250
       
Englewood, CO 80112
       
         
Roberts Mitani, LLC
300,000(94)
300,000
0
*
145 West 57th Street
       
21st floor
       
New York, NY 10019
       
         
Regina L. Roesener
3,575(95)
3,575
0
*
9540 South Maroon Circle
       
Suite 250
       
Englewood, CO 80112
       
         
Roth Capital Partners, LLC
4,167(96)
4,167
0
*
888 San Clemente Drive
       
Newport Beach, CA 92660
       
         
H. Leigh Severance
1,200,000(97)
1,200,000
0
*
14282 E. Caley Avenue
       
Aurora, CO 80016
       
         
Alva Terry Staples
240,000 (98)
200,000
40,000
*
6705 E. Dorado Place
       
Greenwood Village, CO 80111
       
         
Stonepine Capital, L.P.
1,600,000
800,000 (99)
0
*
PO Box 250        
Bend, OR 97709        
         
Roger Zickfeld
59,500(100)
59,500
0
*
1100 Glendon Avenue
       
Suite 850
       
Los Angeles, CA 90024
       
         
TOTAL
14,534,275 (102)
9,323,421(102)
1,485,481(102)
 



99

Other Selling Stockholders

Name and Address of Selling Stockholder
 
Common Stock Owned Prior to Offering(1)
 
Common Stock Being Offered Pursuant to this Prospectus
 
Common Stock Owned Upon Completion of Offering (1)(2)
 
Percentage of Common Stock Owned Upon Completion of Offering
James K. Broder
343 Carrel Road
New Canaan, CT06840
 
99,290(103)
99,290
0
*
Christopher Kapsch
492 West Shore Trail
Sparta, NJ 07871
 
175,000(104)
175,000
0
*
FTN Investments, LTD
44081 Pipeline Plaza,
Suite 320
Ashburn, CA 20147
 
250,000(105)
250,000
 
0
*
JJK Partners, LLC
3 Buscks Hill Lane
Holmdel, NJ 07733
 
583,333(106)
583,333
214,438
*
Paola M. Luptak IRRV Trust
2201 N.W. corporate Blvd.,
Suite 100
Boca Raton, FL 33431
 
583,333(107)
583,333
0
*
MAPA, LLC
2201 N.W. corporate Blvd.,
Suite 100
Boca Raton, FL 33431
 
583,333(107)
583,333
0
*
Lincoln Park Capital Fund, LLC
440 N. Wells St.,
Suite 410
Chicago, IL 60654
 
250,000(108)
250,000
0
*
D. Roger B. Liddell Revocable Trust
c/o Clear Harbor Asset Mgt.
420 Lexington Ave.,
Suite 2006
New York, NY 10170
 
583,625(109)
583,625
0
*
Xmark Opportunity Fund, L.P. (112)
c/o Xmark Opportunity Partners, LLC
90 Grove Street
Suite 201
Ridgefield, CT 06877
 
28,138,505(110)
28,138,505
0
*
 
 
100

Xmark Opportunity Fund, Ltd. (112)
c/o Xmark Opportunity Partners, LLC
90 Grove Street
Suite 201
Ridgefield, CT 06877
 
61,204,593(111)
61,204,593
0
*
Xmark JV Investment Partners, LLC (112)
c/o Xmark Opportunity Partners, LLC
90 Grove Street
Suite 201
Ridgefield, CT 06877
 
1,508,567
1,508,567
0
*
Goodnow Capital, L.L.C. (112)
c/o Xmark Opportunity Partners, LLC
90 Grove Street
Suite 201
Ridgefield, CT 06877
 
6,080,279
6,080,279
0
*
 
____________
* Less than one percent

(1) Includes shares of common stock issuable upon exercise of warrants held by any holder hereunder as well as issuable upon the conversion of Series C Preferred Stock. For the purposes hereof, we assume the issuance of all shares issuable upon exercise of warrants or any conversion of Series C Preferred Stock and disregard any limitations on the exercise of warrants or any conversion of Series C Preferred Stock that may otherwise apply. See “Description of the Shares Included in This Prospectus.”

(2) Assumes the sale by the selling stockholders of all of the shares of common stock available for resale under this prospectus and disregards any limitations on the exercise of warrants or any conversion of Series C Preferred Stock that may otherwise apply. See “Description of the Shares Included in This Prospectus.”

(3) Consists of 100,284 shares of common stock held directly by Albert & Yvonne Tjan Family Trust and 100,284 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(4) Consists of 90,909 shares of common stock held directly by Anna Belle Ambrose and 90,909 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(5) Consists of 454,545 shares of common stock held directly by K. Trucker Andersen and 454,545 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(6) Consists of 90,909 shares of common stock held directly by Stephen Ball and 90,909 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(7) Includes 8,677,273 shares of common stock issuable upon conversion of 1,909 shares of Series C Preferred Stock that were issued in the 2015 Securities Placement, and 15,376,042 shares of common stock issuable upon exercise of warrants issued in multiple private placements, and disregards any limitations on the exercise of warrants or any conversion of Series C Preferred Stock that are otherwise applicable.
 
101


(8) Includes 5,213,636 shares of common stock issuable upon conversion of 1,147 shares of Series C Preferred Stock that were issued in the 2015 Securities Placement, and 8,689,951 shares of common stock issuable upon exercise of warrants issued in multiple private placements, and disregards any limitations on the exercise of warrants or any conversion of Series C Preferred Stock that are otherwise applicable.

(9) Includes 3,086,364 shares of common stock issuable to Biotechnology Value Trading Fund OS, L.P. upon conversion of 679 shares of Series C Preferred Stock that were issued in the 2015 Securities Placement, and 3,086,364 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement, and disregards any limitations on the exercise of warrants or any conversion of Series C Preferred Stock.

(10) Consists of 45,455 shares of common stock held directly by Linda Bonner and 45,455 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(11) Consists of 2,466,603 shares of common stock held directly by Brio Capital Master Fund LTD., 2,272,728 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement, and 1,200,000 shares of common stock issuable upon exercise of warrants issued in prior placements.

(12) Consists of 204,540 shares of common stock held directly by Bruno J. Casatelli and 204,540 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(13) Consists of 45,455 shares of common stock held directly by Chase Family Trust and 45,455 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(14) Consists of 95,454 shares of common stock held directly by Timothy L. Dewey and 95,454 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(15) Consists of 90,000 shares of common stock held directly by Eric Figge and 90,000 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(16) Consists of 45,454 shares of common stock held directly by James Galvin and 45,454 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(17) Consists of 36,364 shares of common stock held directly by Sally Garcia and 36,364 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(18) Consists of 22,727 shares of common stock held directly by Dean Glau and 22,727 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(19) Consists of 50,000 shares of common stock held directly by Donald E. Goodin and 50,000 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(20) Consists of 72,727 shares of common stock held directly by Michael Halperin and 72,727 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(21) Consists of 227,270 shares of common stock held directly by Kenneth H. Hancock and 227,270 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(22) Consists of 568,182 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(23) Consists of 909,091 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.  Mitchell P. Kopin (Mr. Kopin) and Daniel B. Asher (Mr. Asher), each of whom are managers of Intracoastal Capital LLC (Intracoastal), have shared voting control and investment discretion over the securities reported herein that are held by Intracoastal.  As a result, each of Mr. Kopin and Mr. Asher may be deemed to have beneficial ownership (as determined under Section 13(d) of the Exchange Act) of the securities reported herein that are held by Intracoastal.  Mr. Asher, who is a manager of Intracoastal, is also a control person of a broker-dealer.  As a result of such common control, Intracoastal may be deemed to be an affiliate of a broker-dealer.  Intracoastal acquired the Common Stock being registered hereunder in the ordinary course of business, and at the time of the acquisition of the Common Stock and warrants described herein Intracoastal did not have any arrangements or understandings with any person to distribute such securities.
 
102


(24) Includes 1,186,364 shares of common stock issuable upon conversion of 261 shares of Series C Preferred Stock that were issued in the 2015 Securities Placement, and 2,725,971 shares of common stock issuable upon exercise of warrants, and disregards any limitations on the exercise of warrants or any conversion of Series C Preferred Stock.

(25) Consists of 45,455 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(26) Consists of 113,637 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(27) Consists of 363,636 shares of common stock held directly by Douglas E. Jasek and 363,636 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(28) Consists of 90,909 shares of common stock held directly by Joseph M. Tosti Revocable Trust and 90,909 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(29) Consists of 68,182 shares of common stock held by Lee Keyte and 68,182 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(30) Consists of 931,808 shares of common stock held by Kingsbrook Opportunities Master Fund LP and 1,000,000 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(31) Consisted of 986,589 shares of common stock issuable upon exercise of warrants issued as 2015 Placement Agent Warrants, prior to the distribution of such warrants to Laidlaw & Co. (UK) Ltd.’s affiliates and representatives as described in footnotes 59-69 below.  Laidlaw & Co. (UK) Ltd. is a FINRA registered broker-dealer and is deemed an underwriter in this offering.

(32) Consists of 718,621 shares of common stock held directly by Lincoln Park Capital Fund, LLC and 1,336,367 shares of common stock issuable upon exercise of warrants.

(33) Consists of 22,727 shares of common stock held directly by Henry Lindenmann and 22,727 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(34) Consists of 40,909 shares of common stock held directly by Gregory McCloskey, 40,909 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement, and 2,045 shares of common stock issuable upon exercise of warrants issued as 2015 Placement Agent Warrants. Mr. McCloskey is an employee of Newport Coast Securities, Inc.

(35) Consists of 22,727 shares of common stock held directly by James W. Mosich and Carmella Mosich
Living Trust U/A 10/1/84 and 22,727 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(36) Consists of 773,177 shares held directly by MSI BVF SPV, L.L.C., 773,177 shares of common stock issuable upon exercise of warrants issued in the BVF Convert, 2,290,909 shares of common stock issuable upon conversion of 504 shares of Series C Preferred Stock that were issued in the 2015 Securities Placement, and 4,388,495 shares of common stock issuable upon exercise of warrants, and disregards any limitations on the exercise of warrants or any conversion of Series C Preferred Stock.
 
103


(37) Consists of 56,859 shares of common stock issuable to Newport Coast Securities, Inc. upon exercise of warrants issued as 2015 Placement Agent Warrants.  Newport Coast Securities, Inc. is a FINRA registered broker-dealer and is deemed an underwriter in this offering.

(38) Consists of 113,630 shares of common stock held directly by Michael A. Parimucha and 113,630 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(39) Consists of 22,727 shares of common stock held directly by Michael Pezzuolo and 22,727 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(40) Consists of 100,000 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(41) Consists of 88,945 shares of common stock issuable to Harry Radie upon exercise of warrants issued as 2015 Placement Agent Warrants. Mr. Radie is an employee of Newport Coast Securities, Inc.

(42) Consists of 272,727 shares of common stock held directly by Randall L. Payne Kathy S. Payne JTWROS and 272,727 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(43) Consists of 100,000 shares of common stock held directly by Daniel Rudder and 100,000 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(44) Consists of 340,910 shares of common stock held directly by Savoy International Corporation and 340,910 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(45) Consists of 227,273 shares of common stock held directly by R. Douglas Shearer and 227,273 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(46) Consists of 113,636 shares of common stock held directly by Alva Staples and 113,636 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(47) Consists of 56,859 shares of common stock issuable to Ralph Tenebruso upon exercise of warrants issued as 2015 Placement Agent Warrants. Mr. Tenebruso is an employee of Newport Coast Securities, Inc.

(48) Consists of 11,365 shares of common stock issuable to James Terwilliger upon exercise of warrants issued as 2015 Placement Agent Warrants. Mr. Terwilliger is an employee of Newport Coast Securities, Inc.

(49) Consists of 238,637 shares of common stock held directly by Thomas Green/Ardell Family Trust and 238,637 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(50) Consists of 177,273 shares of common stock held directly by Albert Tjan and 177,273 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(51) Consists of 68,182 shares of common stock held directly by Joseph Tosti and 68,182 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(52) Consists of 11,365 shares of common stock issuable to Jeff Stockstill upon exercise of warrants issued as 2015 Placement Agent Warrants. Mr. Stockstill is an employee of Newport Coast Securities, Inc.

(53) Consists of 113,636 shares of common stock held directly by Mulhern Family Revocable Trust and 113,636 shares of common stock issuable upon exercise of warrants issued in the 2015 Securities Placement.

(54) Consists of 50,000 shares of our common stock issuable upon exercise of warrants that we issued in 2014. For the avoidance of doubt, the securities owned by Dina Lyaskovets were not issued in the 2015 Securities Placement.
104


(55) The beneficial ownership and selling stockholder information in the table above is presented assuming no limitation on the exercise of warrants and conversion of Series C Preferred Stock described below in footnote 56.  Without giving effect to such limitations, as of September 30, 2016, (i) Biotechnology Value Fund, L.P. (“BVF”) beneficially owned 30,354,209 shares of Common Stock, (ii) Biotechnology Value Fund II, L.P. (“BVF2”) beneficially owned 17,634,516 shares of Common Stock, (iii) BVF Investments, L.L.C. (“BVLLC”) beneficially owned 352,980 shares of Common Stock, (iv) Investment 10, L.L.C. (“ILL10”) beneficially owned 5,537,242 shares of Common Stock, (v) MSI BVF SPV, L.L.C. (“MSI BVF”) beneficially owned 8,833,399 shares of Common Stock  and (vi) Biotechnology Value Trading Fund OS, L.P. (“Fund OS”) beneficially owned 6,172,728 shares of Common Stock.

BVF Partners L.P.  (“Partners”), as the general partner of BVF and BVF2, the manager of BVLLC and the investment adviser of ILL10, may be deemed to beneficially own 68,885,074 shares of Common Stock, including 54,323,494 shares of Common Stock currently issuable upon the exercise of certain warrants and conversion of Series C Preferred Stock, beneficially owned in the aggregate by BVF, BVF2, BVLLC, ILL10, and MSI BVF.

BVF Inc., as the general partner of Partners, may be deemed to beneficially own the 68,885,074 shares of Common Stock, including 54,323,494 shares of Common Stock currently issuable upon the exercise of certain warrants, beneficially owned by Partners.

Mark N. Lampert, as a director and officer of BVF Inc., may be deemed to beneficially own the 68,885,074 shares of Common Stock, including 54,323,494 shares of Common Stock currently issuable upon the exercise of certain warrants, beneficially owned by BVF Inc.

The foregoing should not be construed in and of itself as an admission by any of Partners, BVF Inc. or Mark N. Lampert as to beneficial ownership of any shares of Common Stock owned by BVF, BVF2, BVLLC, ILL10, and MSI BVF. Each of Partners, BVF Inc. and Mr. Lampert disclaims beneficial ownership of the shares of Common Stock beneficially owned by BVF, BVF2, BVLLC, ILL10, and MSI BVF and this filing shall not be construed as an admission that any such person or entity is the beneficial owner of any such securities.

(56) The warrants and Series C Preferred Stock issued in the 2015 Securities Placement each contain an issuance limitation prohibiting the holder from exercising such warrants and converting such Series C Preferred Stock to the extent that, after giving effect to such exercise or conversion thereof, the holder, including any of its affiliates, would beneficially own more than 9.99% of the Common Stock of the Company then issued and outstanding.

(57) Consists of 157,854 shares of common stock issuable to Buff Trust upon exercise of warrants issued as 2015 Placement Agent Warrants.

(58) Consists of 157,854 shares of common stock issuable to Garnet Trust upon exercise of warrants issued as 2015 Placement Agent Warrants.

(59) Consists of 49,882 shares of common stock issuable to Laidlaw Holdings Ltd upon exercise of warrants issued as 2015 Placement Agent Warrants.

(60) Consists of 52,908 shares of common stock issuable to Kevin R. Wilson upon exercise of warrants issued as 2015 Placement Agent Warrants.

(61) Consists of 3,409 shares of common stock issuable to Timmoth C. Behr upon exercise of warrants issued as 2015 Placement Agent Warrants.

(62) Consists of 3,409 shares of common stock issuable to Christopher Oppito upon exercise of warrants issued as 2015 Placement Agent Warrants.

(63) Consists of 100,000 shares of common stock issuable to Luke Kottke upon exercise of warrants issued as 2015 Placement Agent Warrants.
 
105


(64) Consists of 125,000 shares of common stock issuable to Matthew D. Eitner upon exercise of warrants issued as 2015 Placement Agent Warrants.

(65) Consists of 125,000 shares of common stock issuable to James Ahern upon exercise of warrants issued as 2015 Placement Agent Warrants.

(66) Consists of 41,272 shares of common stock issuable to Hugh Regan upon exercise of warrants issued as 2015 Placement Agent Warrants.

(67) Consists of 100,000 shares of common stock issuable to Patrick Gallagher upon exercise of warrants issued as 2015 Placement Agent Warrants.

(68) Consists of 20,000 shares of common stock issuable to Francis R. Smith upon exercise of warrants issued as 2015 Placement Agent Warrants.
(69) Consists of 50,000 shares of common stock issuable to Matthew Dormer upon exercise of warrants issued as 2015 Placement Agent Warrants.
(70) Consists of 1,200,000 shares of common stock and 1,200,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(71) Consists of 1,200,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(72) Consists of 30,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(73) Consists of 2,000,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement. We have been advised that Heights Capital Management, Inc. is the investment manager to Capital Ventures International and, as such, has discretionary authority to vote and dispose of the shares held by Capital Ventures International and may be deemed to be the beneficial owner of these shares. Martin Kobinger, in his capacity as Investment Manager of Heights Capital Management, Inc., may also be deemed to have investment discretion and voting power over the shares held by Capital Ventures International. Mr. Kobinger expressly disclaims beneficial ownership of such securities, except to the extent of his pecuniary interest in such securities. The address for each of Mr. Kobinger and Heights Capital Management, Inc. is 101 California Street, Suite 3250, San Francisco, California 94111, and the address for Capital Ventures International is One Capitol Place, P.O. Box 1787 GT, Grand Cayman, Cayman Islands, British West Indies. Capital Ventures International is affiliated with one or more FINRA members. Capital Ventures International has represented to us that the securities held by it were purchased in the ordinary course of business and that at the time of such purchase, it did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by it.
(74) Consists of 250,000 shares of common stock issuable upon exercise of warrants issued for consulting services.
(75) Consists of 50,000 shares of common stock issuable upon exercise of warrants issued for consulting services.
(76) Consists of 10,500 shares of common stock issuable upon exercise of warrants issued for consulting services. Michael Donahue is an affiliate of a broker- dealer and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him.
(77) Consists of 12,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
106

(78) Consists of 400,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(79) Consists of (1) 269,751 shares of common stock issuable upon exercise of options exercisable within 60 days of December 31, 2013 held by Joseph Krivulka, (2) 333,333 shares of common stock and 250,000 shares of common stock issuable upon exercise of warrants held directly by JJK Partners, LLC and (3) 400,000 shares of common stock and 400,000 shares of common stock issuable upon exercise of warrants purchased by JAK Investments LLC in the 2013 Private Placement. Joseph Krivulka is Managing Director for JJK Partners, LLC and Manager for JAK Investments, LLC and may be deemed to have voting and investment power with respect to such shares.
(80) Includes 73,920 shares of common stock and 100,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(81) Includes 20,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(82) Consists of 235,000 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants and 4,167 shares of common stock issuable upon exercise of warrants issued as 2012 Placement Agent Warrants. Ladenburg Thalmann & Co. Inc. is s FINRA registered broker-dealer, however, all of the shares offered by it were received as underwriting compensation for its services as placement agent in connection with the 2013 Private Placement and 2012 Private Placement.
(83) Consists of 64,350 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants to the selling stockholder, an employee of Neidiger, Tucker, Bruner, Inc., a registered broker-dealer and a co-placement agent in the 2013 Private Placement. Mr. Larkin is an affiliate of a Neidiger, Tucker, Bruner, Inc. and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him.
(84) Consists of (1) 333,334 shares of common stock held directly and 250,001 shares of common stock Issuable upon warrants and (2) 200,000 shares of common stock issuable upon exercise of warrants issued in the 2013 Private Placement. Josh Scheinfeld and Jonathan Cope, the principals of Lincoln Park Capital Fund, LLC, are deemed to be beneficial owners of all of the shares of common stock owned by Lincoln Park Capital Fund, LLC. Messrs. Scheinfeld and Cope have shared voting and disposition power over the shares being offered.
(85) Consists of 250,000 shares of common stock issuable upon exercise of warrants issued for consulting services.
(86) Consists of 49,000 shares of common stock issuable upon exercise of warrants issued for consulting services. Mr. McCarthy is an affiliate of a broker-dealer and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him..
(87) Consists of 21,000 shares of common stock issuable upon exercise of warrants issued for consulting services. Monarch Bay Securities, LLC is a FINRA registered broker-dealer and is deemed an underwriter in this offering.
(88) Consists of 16,392 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants to the selling stockholder, an employee of Neidiger, Tucker, Bruner, Inc., a registered broker-dealer and a co-placement agent in the 2013 Private Placement. Mr. Morgan is an affiliate of a Neidiger, Tucker, Bruner, Inc. and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him.
107

(89) Consists of 18,286 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants to the selling stockholder, a trust controlled by Eugene L. Neidiger and Regina Roesener, each employees of Neidiger, Tucker, Bruner, Inc., a registered broker-dealer and a co-placement agent in the 2013 Private Placement. Each of Mr. Neidiger and Ms. Roesener are affiliates of Neidiger, Tucker, Bruner, Inc. and each has represented to us that the securities held by them were acquired in the ordinary course of business and that at the time of such purchase, they did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by them.
(90) Consists of 500,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(91) Consists of 300,000 shares of common stock issuable upon exercise of warrants issued for consulting services and 4,167 shares of common stock issuable upon exercise of warrants issued as 2012 Placement Agent Warrants. Noble Financial Capital Markets is a FINRA registered broker-dealer and is deemed an underwriter in this offering.
(92) Consists of 7,430 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants to the selling stockholder, an employee of Neidiger, Tucker, Bruner, Inc., a registered broker-dealer and a co-placement agent in the 2013 Private Placement. Mr. Parrish is an affiliate of a Neidiger, Tucker, Bruner, Inc. and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him.
(93) Consists of 19,967 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants to the selling stockholder, an employee of Neidiger, Tucker, Bruner, Inc., a registered broker-dealer and a co-placement agent in the 2013 Private Placement. Mr. Petrelli is an affiliate of a Neidiger, Tucker, Bruner, Inc. and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him.
(94) Consists of 300,000 shares of common stock issuable upon exercise of warrants issued for consulting services. Roberts Mitani, LLC is a FINRA registered broker-dealer and is deemed an underwriter in this offering.
(95) Consists of 3,575 shares of common stock issuable upon exercise of warrants issued as 2013 Placement Agent Warrants to the selling stockholder, an employee of Neidiger, Tucker, Bruner, Inc., a registered broker-dealer and a co-placement agent in the 2013 Private Placement. Ms. Roesener is an affiliate of Neidiger, Tucker, Bruner, Inc. and has represented to us that the securities held by her were acquired in the ordinary course of business and that at the time of such purchase, she did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by her.
(96) Consists of 4,167 shares of common stock issuable upon exercise of warrants issued as 2012 Placement Agent Warrants to Roth Capital Partners, LLC. Roth Capital Partners, LLC. is s FINRA registered broker-dealer, however, all of the shares offered by it were received as underwriting compensation for its services as placement agent in connection with the 2012 Private Placement.
(97) Consists of 1,200,000 shares of common stock and 1,200,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(98) Consists of 40,000 shares held directly by Mr. Staples and 100,000 shares of common stock and 100,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement to Mr. Staples.
(99) Consists of 1,600,000 shares of common stock issuable upon exercise of warrants issued in the 2013 private placement.
(100) Consists of 59,500 shares of common stock issuable upon exercise of warrants issued for consulting services. Mr. Zickfeld is an affiliate of a broker-dealer and has represented to us that the securities held by him were acquired in the ordinary course of business and that at the time of such purchase, he did not have any agreements or understandings, directly or indirectly, with any person to distribute the securities held by him.
108

(101) Intentionally omitted.
(102) The warrants issued in the 2013 private placement each contain an issuance limitation prohibiting the holder from exercising such warrants to the extent that, after giving effect to such exercise of the warrants, the holder would beneficially own more than 9.98% of the Common Stock of the Company then issued and outstanding, which prohibition cannot be modified by the holder before the sixty-first day after such holder’s notice to the Company of its election to modify such prohibition.]
(103) Consists of 24,290 shares of common stock and 75,000 shares of common stock issuable upon exercise of warrants issued in the 2012 private placement.
(104) Consists of 100,000 shares of common stock and 75,000 shares of common stock issuable upon exercise of warrants issued in the 2012 private placement.
(105) Consists of 250,000 shares of common stock issuable upon exercise of warrants issued in the 2012 private placement.
(106) Consists of 333,333 shares of common stock and 250,000 shares of common stock issuable upon exercise of warrants purchased by JJK Partners, LLC in the 2012 private placement. Joseph Krivulka, Managing Director for JJK Partners, LLC, may be deemed to have voting and investment power with respect to such shares.
(107) Consists of 333,333 shares of common stock and 250,000 shares of common stock issuable upon exercise of warrants issued in the 2012 private placement.
(108) Consists of 250,000 shares of common stock Issuable upon warrants issued in the 2012 private placement.  Josh Scheinfeld and Jonathan Cope, the principals of Lincoln Park Capital Fund, LLC, are deemed to be beneficial owners of all of the shares of common stock owned by Lincoln Park Capital Fund, LLC.  Messrs. Scheinfeld and Cope have shared voting and disposition power over the shares being offered.
(109) Consists of (i) 333,500 shares of common stock held directly and 250,125 shares of common stock Issuable upon warrants issued in the 2012 private placeme