AETHLON MEDICAL, INC. AND SUBSIDIARY
AETHLON MEDICAL, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)
December 31, 2020
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
ORGANIZATION
Aethlon Medical, Inc. and its subsidiary
(collectively, “Aethlon”, the “Company”, “we” or “us”), is a medical technology
company focused on developing products to diagnose and treat life and organ threatening diseases. The Aethlon Hemopurifier®,
or Hemopurifier, is a clinical-stage immunotherapeutic device designed to combat cancer and life-threatening viral infections.
In cancer, the Hemopurifier is designed to deplete the presence of circulating tumor-derived exosomes that promote immune suppression,
seed the spread of metastasis and inhibit the benefit of leading cancer therapies. The U.S. Food and Drug Administration, or FDA,
has designated the Hemopurifier as a “Breakthrough Device” for two independent indications:
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the treatment of individuals with advanced or metastatic cancer who are either unresponsive to or intolerant of standard of care therapy, and with cancer types in which exosomes have been shown to participate in the development or severity of the disease; and
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·
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the treatment of life-threatening viruses that are not addressed with approved therapies.
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We believe the Hemopurifier can be a substantial
advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote the growth
and spread of tumors through multiple mechanisms. We are currently preparing for the initiation of clinical trials in patients
with advanced and metastatic cancers. We are initially focused on the treatment of solid tumors, including head and neck cancer,
gastrointestinal cancers and other cancers. As we advance our clinical trials, we are in close contact with our clinical sites
to navigate and assess the impact of the COVID-19 global pandemic on our clinical trials and current timelines.
On October 4, 2019, the FDA approved our
Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier in patients
with head and neck cancer in combination with standard of care pembrolizumab (Keytruda) (NCT # 04453046). The primary endpoint
for the EFS, which is designed to enroll 10-12 subjects at a single center, will be safety, with secondary endpoints including
measures of exosome clearance and characterization, as well as response and survival rates. This study, which will be conducted
at the UPMC Hillman Cancer Center in Pittsburgh, PA, has been approved by the Institutional Review Board, or IRB, and is now open
for patient enrollment.
We also believe the Hemopurifier can be
a part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not addressed
with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat
individuals infected with human immunodeficiency virus, or HIV, Hepatitis C, and Ebola.
Additionally, in vitro, the Hemopurifier
has been demonstrated to capture Zika virus, Lassa virus, MERS-CoV, cytomegalovirus, Epstein-Barr virus, Herpes simplex virus,
Chikungunya virus, Dengue virus, West Nile virus, smallpox-related viruses, H1N1 swine flu virus, H5N1 bird flu virus, and the
reconstructed Spanish flu virus of 1918. In several cases, these studies were conducted in collaboration with leading government
or non-government research institutes.
On June 17, 2020, the FDA approved a supplement
to the Company’s open IDE for the Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients
with SARS-CoV-2/COVID-19 in a New Feasibility Study. That study’s plan is to enroll
up to 40 subjects at up to 20 centers in the U.S. Subjects will have established laboratory diagnosis of COVID-19, be admitted
to an intensive care unit, or ICU and will have acute lung injury and/or severe or life threatening disease, among other criteria.
Endpoints for this study, in addition to safety, will include reduction in circulating virus as well as clinical outcomes (NCT
# 04595903). The first sites for this trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital –
Irvine in Irvine, CA now have IRB approval and are preparing to open for patient enrollment. Under Single Patient Emergency Use
regulations, the Company has also recently treated a patient with COVID-19 who successfully completed eight daily treatments with
the Hemopurifier.
We are also the majority owner of Exosome
Sciences, Inc., or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases.
Included among ESI’s activities is the advancement of a TauSome™ biomarker candidate to diagnose chronic traumatic
encephalopathy, or CTE, in the living. ESI previously documented TauSome levels in former NFL players to be nine times higher than
same age-group control subjects. Through ESI, we are also developing exosome based biomarkers in patients with, or at risk for,
a number of cancers. We consolidate ESI’s activities in our consolidated financial statements.
Successful outcomes of human trials will
also be required by the regulatory agencies of certain foreign countries where we plan to sell the Hemopurifier. Some of our patents
may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent applications
and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier treatment technology.
In addition to the foregoing, we are monitoring
closely the impact of the COVID-19 global pandemic on our business and have taken steps designed to protect the health and safety
of our employees while continuing our operations. Given the level of uncertainty regarding the duration and impact of the COVID-19
pandemic on capital markets and the U.S. economy, we are unable to assess the impact of the worldwide spread of SARS-CoV-2 and
the resulting COVID-19 pandemic on our timelines and future access to capital. We are continuing to monitor the spread of COVID-19
and its potential impact on our operations. The full extent to which the COVID-19 pandemic will impact our business, results of
operations, financial condition, clinical trials, and preclinical research will depend on future developments that are highly uncertain,
including actions taken to contain or treat COVID-19 and their effectiveness, as well as the economic impact on national and international
markets.
Our executive offices are located at 9635
Granite Ridge Drive, Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. Our website address is www.aethlonmedical.com.
Our common stock is listed on the Nasdaq Capital Market under
the symbol “AEMD.”
REVERSE STOCK SPLIT
Following the approval of a reverse stock
split at our 2019 Annual Meeting of Stockholders’ held on October 14, 2019, our Board of Directors approved a 1-for-15 reverse
stock split. Accordingly, 15 shares of outstanding common stock then held by stockholders were combined into one share of common
stock. Any fractional shares resulting from the reverse split were rounded up to the next whole share. Authorized common stock
remained at 30,000,000 shares. The accompanying unaudited condensed consolidated financial statements and accompanying notes have
been retroactively revised to reflect such reverse stock split as if it had occurred on April 1, 2019. All shares and per share
amounts have been revised accordingly.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
During the nine months ended December 31, 2020, there were no
changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended March 31,
2020.
Basis of Presentation and Use of Estimates
The accompanying unaudited condensed consolidated
financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP,
for interim financial information and with the instructions to Form 10-Q and Article 8 of the Securities and Exchange Commission,
or SEC Regulation S-X. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto
for the fiscal year ended March 31, 2020, included in the Company's Annual Report on Form 10-K filed with the SEC on June 25, 2020.
The accompanying unaudited condensed consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned
subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. The unaudited condensed
consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are
necessary to present fairly the condensed consolidated financial statements as of and for the three and nine months ended December
31, 2020, and the condensed consolidated statement of cash flows for the nine months ended December 31, 2020. Estimates were made
relating to useful lives of fixed assets, impairment of assets, share-based compensation expense and accruals for clinical trial
and research and development expenses. Actual results could differ materially from those estimates. The accompanying condensed
consolidated balance sheet at March 31, 2020 has been derived from the audited consolidated balance sheet at March 31, 2020, contained
in the above referenced 10-K. The results of operations for the three and nine months ended December 31, 2020 are not necessarily
indicative of the results to be expected for the full year or any future interim periods.
Reclassifications
Certain prior year balances within the unaudited condensed consolidated
financial statements have been reclassified to conform to the current year presentation.
Restricted Cash
To comply with the terms of our new laboratory and office lease
(see Note 13), we caused our bank to issue a standby letter of credit, or the L/C, in the amount of $46,726 in favor of the landlord.
The L/C is in lieu of a security deposit. In order to support the L/C, we agreed to have our bank withdraw $46,726 from our operating
accounts and to place that amount in a restricted certificate of deposit. We have classified that amount as restricted cash, a
long-term asset, on our balance sheet.
LIQUIDITY AND GOING CONCERN
Management expects existing cash as of
December 31, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of
these condensed consolidated financial statements.
2. LOSS PER COMMON SHARE
Basic loss per share is computed by dividing
net loss by the weighted average number of common shares outstanding during the period of computation. Diluted loss per share is
computed similar to basic loss per share, except that the denominator is increased to include the number of additional dilutive
common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were
dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential
common shares have been excluded, as their effect would be antidilutive.
As of December 31, 2020, and 2019, an aggregate
of 2,626,485 and 3,779,301 potential common shares, respectively, consisting of shares underlying outstanding stock options, warrants
and unvested restricted stock units, were excluded, as their inclusion would be antidilutive.
3. RESEARCH AND DEVELOPMENT EXPENSES
Our research and development costs are
expensed as incurred. We incurred research and development expenses during the three and nine month periods ended December 31,
2020 and 2019, which are included in various operating expense line items in the accompanying condensed consolidated statements
of operations. Our research and development expenses in those periods were as follows:
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December 31,
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December 31,
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2020
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2019
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Three months ended
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$
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461,176
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$
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218,571
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Nine months ended
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$
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1,367,333
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$
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692,022
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4. Recent Accounting
Pronouncements
We do not expect the adoption of any recent accounting pronouncement
to have a material impact on our financial statements.
5. CONVERTIBLE NOTES PAYABLE, NET
In July 2019, all of our previously outstanding
convertible notes, in the aggregate amount of $992,591, were paid in full.
For the nine months ended December 31,
2019, we recorded interest expense of $23,759 related to the contractual interest rates of our convertible notes and interest expense
of $30,287 related to the amortization of the note discount for a total interest expense of $54,046 related to our convertible
notes.
During the nine months ended December 31,
2019, prior to paying off the notes, we reduced the conversion price on the convertible notes from $45.00 per share to $10.20 per
share. The modification of the convertible notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially
different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss
on debt extinguishment of $447,011.
6. EQUITY TRANSACTIONS IN THE NINE MONTHS ENDED DECEMBER
31, 2020
Common Stock Sales Agreement with H.C. Wainwright & Co.,
LLC
On June 28, 2016, we entered into a Common
Stock Sales Agreement, or the Agreement, with H.C. Wainwright & Co., LLC, or Wainwright, which established an at-the-market
equity program pursuant to which we may offer and sell shares of our common stock from time to time as set forth in the Agreement.
The Agreement provided for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000.
On March 30, 2020, we executed Amendment
No. 2 to the Agreement with Wainwright, effective as of the same date. The amendment provides that references in the Agreement
to the registration statement shall refer to the registration statement on Form S-3 (File No. 333-237269), originally filed with
the SEC on March 19, 2020, declared effective by the SEC on March 30, 2020.
Subject to the terms and conditions set
forth in the Agreement, Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and sales
practices to sell the shares under the Agreement from time to time, based upon our instructions. We provided Wainwright with customary
indemnification rights under the Agreement, and Wainwright is entitled to a commission at a fixed rate equal to three percent of
the gross proceeds per share sold. In addition, we agreed to pay certain expenses incurred by Wainwright in connection with the
Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of
all of the shares under the Agreement, unless terminated earlier by either party as permitted under the Agreement.
Sales of the shares, if any, under the
Agreement will be made in transactions that are deemed to be “at the market offerings” as defined in Rule 415 under
the Securities Act of 1933, as amended, or the Securities Act, including sales made by means of ordinary brokers’ transactions,
including on the Nasdaq Capital Market, at market prices or as otherwise agreed with Wainwright. We have no obligation to sell
any of the shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.
In the three months ended June 30, 2020,
we raised aggregate net proceeds of $7,260,869, net of $224,825 in commissions to Wainwright and $8,472 in other offering expenses,
under the Agreement, through the sale of 2,685,600 shares at an average price of $2.70 per share of net proceeds.
Restricted Stock Unit Grants
In 2012, as amended through July 16, 2020,
our Board of Directors established the Non-Employee Directors Compensation Program, to provide for cash and equity compensation
for persons serving as non-employee directors of the Company. Under this program, each new director receives either stock options
or a grant of restricted stock units, or RSUs, as well as an annual grant of RSUs at the beginning of each fiscal year. The RSUs
are subject to vesting and represent the right to be issued on a future date shares of our common stock upon vesting.
On April 3, 2020, pursuant to the terms
of the Company’s Non-Employee Directors Compensation Program, the Compensation Committee of the Board of Directors granted
RSUs to each non-employee director of the Company. The Non-Employee Directors Compensation Program provided for a grant of RSUs
with a grant date fair value of $35,000, priced at the average of the closing prices for the five trading days ending on the date
of grant, which was $1.41 per share, so that the total number of RSUs to be granted to each non-employee director for fiscal year
2020 would be 24,822 shares of our common stock. On April 3, 2020, each eligible director was granted an RSU for 23,893
shares under the Company’s 2010 Stock Plan, or the 2010 Plan, as the number of shares that remained available for grant under
the 2010 Plan was not sufficient for each director’s full RSU grant. The Compensation Committee also granted to each eligible
director a contingent grant under our 2020 Equity Incentive Plan, or the 2020 Plan, for the remaining portion of the annual RSU
grants, or 929 RSU’s to each eligible director, contingent upon stockholder approval of the 2020 Plan at the Company’s
2020 Annual Meeting of Stockholders, or the Annual Meeting. These grants are subject to vesting as follows: 50% of the RSUs subject
to the grants will vest on December 31, 2020 and 50% of the RSUs will vest on March 31, 2021, subject in each case to the continuous
service of each director, through such vesting dates, as well as approval of the 2020 Plan by the stockholders at the Annual Meeting,
which was obtained at the Annual Meeting.
In June 2020, 29,866 vested RSUs held by
our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors elected
to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting
in 11,947 of the vested RSUs being cancelled in exchange for $24,251 in aggregate cash proceeds to those independent directors.
In September 2020, 29,866 vested RSUs held
by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors
elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances,
resulting in 11,947 of the vested RSUs being cancelled in exchange for $16,128 in aggregate cash proceeds to those independent
directors.
Also in September 2020, our stockholders
approved the 2020 Plan at the Annual Meeting, at which point the grants of 929 RSUs to each of our eligible independent directors
for a total of 4,645 RSUs were considered effective and no longer contingent as of that date (See Note 9).
In December 2020, 32,189 vested RSUs held
by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors
elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances,
resulting in 12,876 of the vested RSUs being cancelled in exchange for $31,802 in aggregate cash proceeds to those independent
directors.
RSUs outstanding that have vested as of,
and are expected to vest subsequent to, December 31, 2020 are as follows:
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Number of RSUs
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Vested
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–
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Expected to vest
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32,189
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Total
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32,189
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7. RELATED PARTY TRANSACTIONS
During the three months ended December
31, 2020, we accrued unpaid fees of $69,292 owed to our non-employee directors as of December 31, 2020.
As a result of entering into a Separation Agreement on October
30, 2020 with our former Chief Executive Officer, or CEO, Timothy Rodell, M.D., or the Separation Agreement, we paid out accrued
vacation of $20,260 to Dr. Rodell in the three months ended December 2020 (see Note 8 and Note 13). That accrued vacation was previously
recorded in the due to related parties account.
Amounts due to related parties were comprised
of the following items:
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December 31,
2020
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March 31,
2020
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Accrued Board fees
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$
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69,292
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$
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69,750
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Accrued vacation to all employees
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62,454
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41,957
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Total due to related parties
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$
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131,746
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$
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111,707
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8. OTHER CURRENT LIABILITIES
Other current liabilities were comprised of the following items:
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December 31,
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March 31,
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2020
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2020
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Accrued separation expenses for former executive
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$
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400,578
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$
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–
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Accrued professional fees
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460,119
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472,420
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Total other current liabilities
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$
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860,697
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$
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472,420
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9. STOCK COMPENSATION
The following tables summarize share-based compensation expenses
relating to RSUs and stock options and the effect on basic and diluted loss per common share during the three and nine month periods
ended December 31, 2020 and 2019:
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Three Months
Ended
December 31,
2020
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Three Months
Ended
December 31,
2019
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Nine Months
Ended
December 31,
2020
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Nine Months
Ended
December 31,
2019
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Vesting of stock options and restricted stock units
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$
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377,958
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$
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102,576
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$
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629,207
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$
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755,648
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Total stock-based compensation expense
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$
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377,958
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$
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102,576
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$
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629,207
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$
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755,648
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Weighted average number of common shares outstanding – basic and diluted
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12,093,361
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2,887,883
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11,265,725
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1,821,557
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Basic and diluted loss per common share attributable to stock-based compensation expense
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$
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(0.03
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)
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$
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(0.04
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)
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$
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(0.06
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)
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$
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(0.41
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)
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All of the stock-based compensation expense
recorded during the nine months ended December 31, 2020 and 2019, which totaled $629,207 and $755,648, respectively, is included
in payroll and related expense in the accompanying condensed consolidated statements of operations. Stock-based compensation
expense recorded during the nine months ended December 31, 2020 and 2019 represented an impact on basic and diluted loss per common
share of $(0.06) and $(0.41), respectively.
We review share-based compensation on a
quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative
effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed.
The effect of forfeiture adjustments for the nine months ended December 31, 2020 was insignificant.
Stock Option Activity and Approval of 2020 Plan
From February 2020 through May 2020, our
compensation committee granted options to purchase 521,476 shares of our common stock that were contingent upon stockholder approval
of the 2020 Plan. Upon approval of the 2020 Plan at the Annual Meeting, these option grants were considered effective and no longer
contingent as of that date.
The 2020 Plan approved by our stockholders
at the Annual Meeting, authorizes up to 1,842,556 shares for issuance pursuant to stock option grants, RSUs or other forms of stock-based
compensation. No future grants will be made under the 2010 Plan.
We issued an option to purchase shares
239,122 shares of our common stock pursuant to the 2020 Plan to our Chief Executive Officer during the three months ended December
31, 2020, in connection with the appointment of Dr. Fisher as our Chief Executive Officer, effective as of October 30, 2020.
In connection with the Separation Agreement
and pursuant to Dr. Rodell’s employment agreement with the Company, the vesting was accelerated on 50% of outstanding and
unvested options to purchase shares of our common stock held by Dr. Rodell as of the Separation Date of October 30, 2020, such
that the accelerated stock options were fully vested and exercisable as of the Separation Date.
In December 2020, Dr. Rodell elected to
net exercise a portion of his stock options. As a result, we issued Dr. Rodell an aggregate of 15,896 shares of our common stock
and we paid the estimated withholding taxes of $34,209 related to the net exercise.
Options outstanding that were vested as
of December 31, 2020 and options that are expected to vest subsequent to December 31, 2020 are as follows:
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Number of
Shares
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|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term in
Years
|
|
Vested
|
|
|
34,509
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|
|
$
|
32.53
|
|
|
|
5.84
|
|
Expected to vest
|
|
|
567,814
|
|
|
$
|
1.51
|
|
|
|
9.67
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|
Total
|
|
|
602,323
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|
|
|
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|
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A summary of stock option activity during the nine months ended
December 31, 2020 is presented below:
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|
Amount
|
|
|
Range of
Exercise Price
|
|
|
Weighted
Average
Exercise
Price
|
|
Stock options outstanding at March 31, 2020
|
|
|
51,124
|
|
|
|
$18.75 - $187.50
|
|
|
$
|
44.12
|
|
Exercised
|
|
|
(15,896
|
)
|
|
|
$1.28
|
|
|
$
|
1.28
|
|
Granted
|
|
|
770,094
|
|
|
|
$1.28 – $2.45
|
|
|
$
|
1.45
|
|
Cancelled/Expired
|
|
|
(202,999
|
)
|
|
|
$1.28 - $187.50
|
|
|
$
|
6.76
|
|
Stock options outstanding at December 31, 2020
|
|
|
602,323
|
|
|
|
$1.28 - $187.50
|
|
|
$
|
3.29
|
|
Stock options exercisable at December 31, 2020
|
|
|
34,509
|
|
|
|
$1.28 - $187.50
|
|
|
$
|
32.53
|
|
On December 31, 2020, our outstanding stock
options had no intrinsic value since the closing price on that date of $2.47 per share was below the weighted average exercise
price of our outstanding stock options.
At December 31, 2020, there was approximately
$2,240,000 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted
average period of 1.48 years.
10. WARRANTS
During the nine months ended December 31, 2020 and 2019, we
did not issue any warrants.
A summary of warrant activity during the nine months ended December
31, 2020 is presented below:
|
|
Amount
|
|
|
Range of
Exercise
Price
|
|
|
Weighted
Average
Exercise
Price
|
|
Warrants outstanding at March 31, 2020
|
|
|
2,021,368
|
|
|
|
$1.50 - $125.25
|
|
|
$
|
5.21
|
|
Cancelled/Expired
|
|
|
(29,395
|
)
|
|
|
$90.75 – $135.00
|
|
|
$
|
97.17
|
|
Warrants outstanding at December 31, 2020
|
|
|
1,991,973
|
|
|
|
$1.50 – $99.00
|
|
|
$
|
5.23
|
|
Warrants exercisable at December 31, 2020
|
|
|
1,991,973
|
|
|
|
$1.50 – $99.00
|
|
|
$
|
5.23
|
|
11. GOVERNMENT CONTRACTS AND RELATED REVENUE RECOGNITION
We have recognized revenue under the following two contracts/grants
with the National Cancer Institute, or NCI, part of the National Institutes of Health, or NIH, over the past two years:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the NCI awarded
to us an SBIR Phase II Award Contract, for NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma Exosomes
for Diagnostics and Treatment Monitoring”, or the Award Contract. The Award Contract amount is $1,860,561 and runs for the
period from September 16, 2019 through September 15, 2021.
The work to be performed pursuant to this
Award Contract focuses on melanoma exosomes. This work follows from our completion of a phase I contract for the Topic 359 solicitation
that ran from September 2017 through June 2018, as described below. Following on the phase I work, the deliverables in the phase
II program involve the design and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.
During the period ended December 31, 2020,
we completed all of the milestones relevant to that time period. As a result, we recorded $436,427 of government contract revenue
on the Phase 2 Melanoma Cancer Contract in the nine months ended December 31, 2020. Of the total revenue recognized
during the current period relating to this grant, a total of $117,849 was invoiced to the NCI during the three months ended December
31, 2020 and we recorded $318,578 which had previously been recognized as deferred revenue.
Breast Cancer Grant
In the nine months ended December 31, 2020,
we completed and submitted the final reports applicable to this NCI grant (number 1R43CA232977-01). The title of this Small Business
Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from
the Blood Circulation,” or the Breast Cancer Grant.
This NCI Phase I grant period originally
ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month extension
on this grant; through August 31, 2020. The total amount of the firm grant was $298,444. The grant called for two subcontractors
to work with us. Those subcontractors were University of Pittsburgh and Massachusetts General Hospital. As of December 31, 2020,
we have received all of the funds allocated to the Breast Cancer Grant.
During the nine months ended December 31,
2020, we recorded the remaining $188,444 of revenue related to the Breast Cancer Grant, as we achieved two of the three milestones
related to the Breast Cancer Grant. We concluded in our final report to the SBIR that our pre-clinical results demonstrated that
our work under the grant provided support that the Hemopurifier has the capacity to clear exosomes from breast cancer patients.
That amount previously was recorded as deferred revenue.
As of December 31, 2020, we received all
of the funds allocated to the Breast Cancer Grant and have submitted the final reports applicable to this grant.
Subaward with University of Pittsburgh
In addition, we are completing the logistical
elements of documentation and billing the University of Pittsburgh in connection with a cost reimbursable subaward arrangement
under an NIH project entitled “Depleting Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the
award is $256,750. We have not recorded any revenues as of December 31, 2020 related to the subaward. We anticipate billing and
recognizing revenue under this subaward in future periods.
12. SEGMENTS
We operate our businesses principally through
two reportable segments: Aethlon, which represents our therapeutic business activities, and ESI, which represents our diagnostic
business activities. Our reportable segments have been determined based on the nature of the potential products being developed.
We record discrete financial information for ESI and our chief operating decision maker reviews ESI’s operating results in
order to make decisions about resources to be allocated to the ESI segment and to assess its performance.
Aethlon’s revenue is generated primarily
from government contracts to date and ESI does not yet have any revenues. We have not included any allocation of corporate overhead
to the ESI segment.
The following tables set forth certain information regarding
our segments:
|
|
Nine Months Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues:
|
|
|
|
|
|
|
Aethlon
|
|
$
|
624,871
|
|
|
$
|
443,458
|
|
ESI
|
|
|
–
|
|
|
|
–
|
|
Total Revenues
|
|
$
|
624,871
|
|
|
$
|
443,458
|
|
|
|
|
|
|
|
|
|
|
Operating Losses:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
(5,609,464
|
)
|
|
$
|
(4,125,758
|
)
|
ESI
|
|
|
(15,931
|
)
|
|
|
(19,039
|
)
|
Total Operating Loss
|
|
$
|
(5,625,395
|
)
|
|
$
|
(4,144,797
|
)
|
|
|
|
|
|
|
|
|
|
Net Losses:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
(5,610,994
|
)
|
|
$
|
(4,575,811
|
)
|
ESI
|
|
|
(15,931
|
)
|
|
|
(19,039
|
)
|
Net Loss Before Non-Controlling Interests
|
|
$
|
(5,626,925
|
)
|
|
$
|
(4,594,850
|
)
|
|
|
|
|
|
|
|
|
|
Cash:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
12,131,396
|
|
|
$
|
4,058,456
|
|
ESI
|
|
|
197
|
|
|
|
197
|
|
Total Cash
|
|
$
|
12,131,593
|
|
|
$
|
4,058,653
|
|
|
|
|
|
|
|
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
12,669,552
|
|
|
$
|
4,682,294
|
|
ESI
|
|
|
197
|
|
|
|
197
|
|
Total Assets
|
|
$
|
12,669,749
|
|
|
$
|
4,682,491
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
54,630
|
|
|
$
|
148,064
|
|
ESI
|
|
|
–
|
|
|
|
–
|
|
Capital Expenditures
|
|
$
|
54,630
|
|
|
$
|
148,064
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
28,775
|
|
|
$
|
15,992
|
|
ESI
|
|
|
–
|
|
|
|
–
|
|
Total Depreciation and Amortization
|
|
$
|
28,775
|
|
|
$
|
15,992
|
|
|
|
|
|
|
|
|
|
|
Interest Expense:
|
|
|
|
|
|
|
|
|
Aethlon
|
|
$
|
(1,530
|
)
|
|
$
|
(54,232
|
)
|
ESI
|
|
|
–
|
|
|
|
–
|
|
Total Interest Expense
|
|
$
|
(1,530
|
)
|
|
$
|
(54,232
|
)
|
13. COMMITMENTS AND CONTINGENCIES
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
There have been no material changes to
our contractual obligations and commitments outside the ordinary course of business from those disclosed under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations and Commitments” as contained
in our Annual Report on Form 10-K for the year ended March 31, 2020, filed by us with the SEC on June 25, 2020.
On October 30, 2020, we entered into a Separation Agreement
with Timothy Rodell, M.D., our former Chief Executive Officer, or the Separation Agreement. Under this agreement, we agreed to
pay Dr. Rodell a total of $444,729 and to cover his medical insurance costs over a twelve-month period that began on November 1,
2020, all in accordance with the terms of his employment agreement with the Company. We also paid Dr. Rodell accrued vacation in
the amount of $20,260 in November 2020.
The total expense accrued at December 31, 2020 relating to the
Separation Agreement, was $400,578 (see Note 7 and Note 8).
On October 30, 2020, we entered into an
Executive Employment Agreement, or Agreement, with Charles J. Fisher Jr., M.D. The Agreement provides Dr. Fisher with (i) an initial
annualized base salary of $430,000 per year; (ii) eligibility for a discretionary annual cash bonus, (iii) eligibility for a one-time
cash bonus and additional equity grant upon attaining a specified performance goal, (iv) eligibility to participate in and receive
additional stock options or equity award grants under the Company’s equity incentive plans from time to time, in the discretion
of the Board or the Compensation Committee, and in accordance with the terms and conditions of such plans; and (iv) severance payments
in the event that Dr. Fisher’s employment is terminated by the Company for any reason other than Cause (as defined in the
Agreement) or if it is terminated by Dr. Fisher for Good Reason (as defined in the Agreement).
LEASE COMMITMENTS
We currently lease approximately 2,600
square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123 under a 39-month
gross plus utilities lease that commenced on December 1, 2014 and expires on August 31, 2021. The current rental rate under the
lease extension is $8,265 per month.
We also rent approximately 1,700 square
feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $6,148 per month
on a one-year lease that originally was to expire on November 30, 2020. In December 2020, we entered into a short-term lease extension
running from December 1, 2020 through the completion date of our construction of our planned new laboratory space which is adjacent
to our current laboratory.
Rent expense, which is included in general
and administrative expenses, approximated $50,000 and $44,000 for the three month periods ended December 31, 2020 and 2019, respectively.
For the nine month periods ended December 31, 2020 and 2019, rent expense approximated $144,000 and $130,000, respectively.
Future minimum lease payments under the Granite Ridge Lease
as of December 31, 2020, are as follows:
January 1, 2021 through March 31, 2021
|
|
$
|
25,663
|
|
April 1, 2021 through August 31, 2021
|
|
|
43,670
|
|
Total future minimum lease payments
|
|
|
69,333
|
|
Less: discount
|
|
|
(1,635
|
)
|
Total lease liability
|
|
$
|
67,698
|
|
During the fiscal year ended March 31,
2020, we adopted ASU Topic 842 on April 1, 2019 utilizing the alternative transition method allowed for under this guidance. As
a result, we recorded lease liabilities and right-of-use lease assets of $228,694 on our balance sheet as of April 1, 2019. The
lease liabilities represent the present value of the remaining lease payments of our corporate headquarters lease, discounted using
our incremental borrowing rate as of April 1, 2019. The corresponding right-of-use lease assets are recorded based on the lease
liabilities and the cumulative difference between rent expense and amounts paid under its corporate headquarters lease. We also
elected the short-term lease recognition exemption for its laboratory lease. For the laboratory lease that qualified as short-term,
we did not recognize right-of-use assets or lease liabilities at adoption.
In December 2020, we entered into an agreement
to lease approximately 2,823 square feet of office space and 1,807 square feet of laboratory space. The agreement carries a term
of 63 months and we will commence paying rent when we take occupancy of those spaces, which is expected to occur in the second
quarter of 2021. Upon taking occupancy of the space, we will record lease liabilities and right-of-use lease assets related to
this agreement on our balance sheet. We estimate that the present value of the contractual payments under the lease agreement to
be approximately $806,000.
In addition, the new lease agreement required
us to post a standby letter of credit in favor of the landlord in the amount of $46,726 in lieu of a security deposit. We arranged
for our bank to issue the standby letter of credit in the three months ended December 31, 2020 and transferred a like amount to
a restricted certificate of deposit which secured the bank’s risk in issuing that letter of credit. We have classified that
restricted certificate of deposit on our balance sheet as restricted cash .
LEGAL MATTERS
From time to time, claims are made against
us in the ordinary course of business, which could result in litigation. Claims and associated litigation are subject to inherent
uncertainties and unfavorable outcomes could occur, such as monetary damages, fines, penalties or injunctions prohibiting us from
selling one or more products or engaging in other activities.
The occurrence of an unfavorable outcome
in any specific period could have a material adverse effect on our results of operations for that period or future periods. We
are not presently a party to any pending or threatened legal proceedings.
14. SUBSEQUENT EVENTS
Management has evaluated events subsequent
to December 31, 2020 through the date that the accompanying condensed consolidated financial statements were filed with the SEC
for transactions and other events which may require adjustment of and/or disclosure in such financial statements.
In January 2021, we hired two senior executives,
Guy Cipriani as Senior Vice President, Chief Business Officer, and Steven LaRosa, M.D., as Chief Medical Officer and entered into
employment agreements with each executive. Mr. Cipriani will oversee business development and partnerships, while also contributing
to fundraising and corporate development. Mr. Cipriani’s initial annual base salary is $340,000 and Mr. Cipriani also is
eligible for a discretionary annual cash bonus. Mr. Cipriani also is eligible for reimbursement of relocation expenses in
the aggregate amount of up to $75,000. Dr. LaRosa will be responsible for the clinical development of Aethlon's Hemopurifier®,
including leading clinical operations and regulatory strategy. In addition to a one-time signing bonus of $100,000, subject to
repayment if Dr. LaRosa leaves Aethlon prior to two years with the Company, Dr. LaRosa’s initial annual base salary is $400,000.
Dr. LaRosa also is eligible for a discretionary annual cash bonus and relocation expense reimbursement of up to $50,000.
Upon commencement of employment each of Mr. Cipriani and Dr. LaRosa was granted an option to purchase 120,883 shares of the Company’s
Common Stock, with an exercise price equal to the fair market value on the date of grant, subject to a four-year vesting schedule
and other terms and conditions of the Company’s 2020 Equity Incentive Plan.