Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2017June 30, 2020

 

OR

 

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____to_____

 

COMMISSION FILE NUMBER 001-37487

 

AETHLON MEDICAL, INC.

(Exact name of registrant as specified in its charter)

 

NEVADA 13-3632859
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

9635 GRANITE RIDGE DRIVE, SUITE 100, SAN DIEGO, CA 92123

(Address of principal executive offices)    (Zipoffices, including Zip Code)

 

(858) 459-7800

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading SymbolName of each exchange on which registered
Common StockAEMDThe Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES   ☒ NO  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)Smaller reporting company ☒
 Emerging growth company ☐

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒

 

As of January 31, 2018,August 10, 2020, the registrant had outstanding 16,580,32612,070,393 shares of common stock, $0.001 par value.

 

 

 
 

 

TABLE OF CONTENTS

 

PART I.FINANCIAL INFORMATION3
   
ITEM 1.FINANCIAL STATEMENTS3
   
 CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2017JUNE 30, 2020 (UNAUDITED) AND MARCH 31, 201720203
   
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHMONTHS ENDED JUNE 30, 2020 AND NINE MONTH PERIODS ENDED DECEMBER 31, 2017 AND 20162019 (UNAUDITED)4
   
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY FOR THE NINETHREE  MONTHS ENDED DECEMBER 31, 2017JUNE 30, 2020 AND 20162019 (UNAUDITED)5
   
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED JUNE 30, 2020 AND 2019 (UNAUDITED)6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)67
   
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS18
   
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK2524
   
ITEM 4.CONTROLS AND PROCEDURES25
   
PART II.OTHER INFORMATION26
   
ITEM 1.LEGAL PROCEEDINGS26
   
ITEM 1A.RISK FACTORS26
   
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS26
   
ITEM 3.DEFAULTS UPON SENIOR SECURITIES26
   
ITEM 4.MINE SAFETY DISCLOSURES26
   
ITEM 5.OTHER INFORMATION26
   
ITEM 6.EXHIBITS2627

 

 

 

 

 2 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  December 31,
2017
  March 31,
2017
 
  (Unaudited)    
ASSETS        
Current assets        
Cash $5,610,799  $1,559,701 
Prepaid expenses and other current assets  14,537   37,551 
Total current assets  5,625,336   1,597,252 
         
Property and equipment, net  32,398   29,223 
Patents and patents pending, net  78,123   84,996 
Deposits  14,897   14,897 
Total assets $5,750,754  $1,726,368 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current liabilities        
Accounts payable $211,406  $484,423 
Due to related parties  64,466   57,866 
Other current liabilities  60,534   69,467 
Total current liabilities  336,406   611,756 
         
Convertible notes payable, net  810,866   519,200 
         
Total liabilities  1,147,272   1,130,956 
         
Commitments and Contingencies (Note 13)        
         
         
Stockholders’ Equity        
Common stock, par value $0.001 per share; 30,000,000 shares authorized as of December 31, 2017 and March 31, 2017; 15,367,658 and 8,797,086 shares issued and outstanding as of December 31, 2017 and March 31, 2017, respectively  15,368   8,796 
Additional paid-in capital  102,820,906   94,445,739 
Accumulated deficit  (98,138,853)  (93,778,156)
Total Aethlon Medical, Inc. stockholders’ equity before noncontrolling interests  4,697,421   676,379 
         
Noncontrolling interests  (93,939)  (80,967)
         
Total stockholders’ equity  4,603,482   595,412 
         
Total liabilities and stockholders’ equity $5,750,754  $1,726,368 

  June 30,
2020
  March 31,
2020
 
   (Unaudited)     
ASSETS        
Current assets        
Cash $15,721,616  $9,604,780 
Accounts receivable  206,729   206,729 
Prepaid expenses and other current assets  166,944   229,604 
Total current assets  16,095,289   10,041,113 
         
Property and equipment, net  149,661   140,484 
Right-of-use lease asset  112,779   136,426 
Patents, net  57,366   57,504 
Deposits  12,159   12,159 
Total assets $16,427,254  $10,387,686 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
         
Current liabilities        
Accounts payable $251,194  $285,036 
Due to related parties  131,844   111,707 
Deferred revenue  306,729   100,000 
Lease liability, current portion  100,430   98,557 
Other current liabilities  433,120   472,420 
Total current liabilities  1,223,317   1,067,720 
         
Lease liability, less current portion  16,832   42,540 
Total liabilities  1,240,149   1,110,260 
         
Commitments and Contingencies (Note 13)        
         
Stockholders’ Equity        
Common stock, par value $0.001 per share; 30,000,000 shares authorized; 12,070,393 and 9,366,873 shares issued and outstanding as of June 30, 2020 and March 31, 2020, respectively  12,072   9,368 
Additional paid-in capital  128,744,684   121,426,563 
Accumulated deficit  (113,436,664)  (112,026,381)
Total Aethlon Medical, Inc. stockholders’ equity before noncontrolling interests  15,320,092   9,409,550 
         
Noncontrolling interests  (132,987)  (132,124)
         
Total stockholders’ equity  15,187,105   9,277,426 
         
Total liabilities and stockholders’ equity $16,427,254  $10,387,686 

 

See accompanying notes.

 

 

 

 3 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Nine Month Periods Ended December 31, 2017June 30, 2020 and 20162019

(Unaudited)

 

  Three Months
Ended
December 31,
2017
  Three Months
Ended
December 31,
2016
  Nine Months
Ended
December 31,
2017
  Nine Months
Ended
December 31,
2016
 
             
REVENUES                
                 
Government contract revenue $74,813  $  $74,813  $392,073 
                 
OPERATING EXPENSES                
                 
Professional fees  439,117   416,866   1,165,318   1,495,597 
Payroll and related expenses  663,245   635,698   1,911,553   2,793,888 
General and administrative  136,078   182,982   557,991   696,662 
Total operating expenses  1,238,440   1,235,546   3,634,862   4,986,147 
OPERATING LOSS  (1,163,627)  (1,235,546)  (3,560,049)  (4,594,074)
                 
OTHER EXPENSE (INCOME)                
Interest and other debt expenses  55,912   36,565   306,495   115,308 
Loss on share for warrant exchanges        130,214    
(Gain)/loss on debt extinguishment     (58,691)  376,909   558,198 
Warrant repricing expense           345,841 
Total other expense (income)  55,912   (22,126)  813,618   1,019,347 
NET LOSS BEFORE NONCONTROLLING INTERESTS  (1,219,539)  (1,213,420)  (4,373,667)  (5,613,421)
                 
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS  (4,532)  (7,689)  (12,972)  (23,088)
                 
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,215,007) $(1,205,731) $(4,360,695) $(5,590,333)
                 
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.08) $(0.15) $(0.40) $(0.72)
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED  14,950,701   7,927,031   10,927,106   7,768,682 

  Three Months
Ended
June 30,
2020
  Three Months
Ended
June 30,
2019
 
       
REVENUES        
Government contract revenue $  $30,000 
         
OPERATING EXPENSES        
         
Professional fees  564,284   607,578 
Payroll and related expenses  436,911   605,995 
General and administrative  409,223   382,615 
Total operating expenses  1,410,418   1,596,188 
OPERATING LOSS  (1,410,418)  (1,566,188)
         
OTHER EXPENSE        
Interest and other debt expenses  728   54,085 
Loss on debt extinguishment     447,011 
Total other (income) expense  728   501,096 
NET LOSS  (1,411,146)  (2,067,284)
         
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS  (863)  (860)
         
NET LOSS ATTRIBUTABLE TO AETHLON MEDICAL, INC. $(1,410,283) $(2,066,424)
         
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.15) $(1.63)
         
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING – BASIC AND DILUTED  9,632,977   1,270,484 

 

See accompanying notes.

 

 

 

 4 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Three Months Ended June 30, 2020 and 2019

(Unaudited)

  ATTRIBUTABLE TO AETHLON MEDICAL, INC.       
  COMMON STOCK  ADDITIONAL PAID IN  ACCUMULATED  NON-
CONTROLLING
  TOTAL 
  SHARES  AMOUNT  CAPITAL  DEFICIT  INTERESTS  EQUITY 
                   
BALANCE - MARCH 31, 2020  9,366,873  $9,368  $121,426,563  $(112,026,381) $(132,124) $9,277,426 
                         
Issuances of common stock for cash under at the market program  2,685,600   2,686   7,258,183         7,260,869 
                         
Issuance of common shares upon vesting of restricted stock units  17,920   18   (24,269)        (24,251)
                         
Stock-based compensation expense        84,207         84,207 
                         
Net loss           (1,410,283)  (863)  (1,411,146)
                         
BALANCE - JUNE 30, 2020  12,070,393  $12,072  $128,744,684  $(113,436,664) $(132,987) $15,187,105 

BALANCE - MARCH 31, 2019  1,266,950  $1,267  $108,076,275  $(105,652,433) $(126,031) $2,299,078 
                         
Issuances of common stock for cash under at the market program  3,087   3   36,619         36,622 
                         
Loss on debt extinguishment        447,011         447,011 
                         
Issuance of common shares upon vesting of restricted stock units  3,534   4   (23,775)        (23,771)
                         
Stock-based compensation expense        326,536         326,536 
                         
Net loss           (2,066,424)  (860)  (2,067,284)
                         
BALANCE - JUNE 30, 2019  1,273,571  $1,274  $108,862,666  $(107,718,857) $(126,891) $1,018,192 

Continued on following page

5

AETHLON MEDICAL, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the NineThree Months Ended December 31, 2017June 30, 2020 and 20162019

(Unaudited)

 

 Nine Months
Ended
December 31, 2017
  Nine Months
Ended
December 31, 2016
  Three Months
Ended
June 30, 2020
 Three Months
Ended
June 30, 2019
 
Cash flows from operating activities:        
     
Cash flows used in operating activities:        
Net loss $(4,373,667) $(5,613,421) $(1,411,146) $(2,067,284)
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization  27,402   26,365   8,770   2,868 
Stock based compensation  887,607   1,880,150   84,207   326,536 
Warrant repricing expense     345,841 
Common stock issued for services  33,600    
Loss on share for warrant exchanges  130,214    
Loss on debt extinguishment  376,909   558,198      447,011 
Amortization of debt discount and deferred financing costs  215,376   65,637 
Accretion of right-of-use lease asset  (188)  661 
Amortization of debt discount     30,287 
Changes in operating assets and liabilities:                
Accounts receivable     199,471 
Prepaid expenses and other current assets  23,014   21,522   62,660   58,325 
Accounts payable and other current liabilities  (219,806)  51,053   (73,142)  (56,877)
Deferred revenue  206,729    
Due to related parties  6,600   (86,750)  20,137   10,788 
Net cash used in operating activities  (2,892,751)  (2,551,934)  (1,101,973)  (1,247,685)
                
Cash flows from investing activities:        
Cash flows used in investing activities:        
Purchases of property and equipment  (23,705)  (2,961)  (17,809)  (886)
Net cash used in investing activities  (23,705)  (2,961)  (17,809)  (886)
                
Cash flows from financing activities:        
Cash flows provided by (used in) financing activities:        
Proceeds from the issuance of common stock, net  7,166,081   554,306   7,260,869   36,622 
Proceeds from the issuance of convertible notes payable, net     577,460 
Cash paid for repurchase of restricted stock units  (198,527)  (71,993)
Net cash provided by financing activities  6,967,554   1,059,773 
Principal payments on convertible notes     (100,000)
Tax withholding payments or tax equivalent payments for net share settlement of restricted stock units  (24,251)  (23,771)
Net cash provided by (used in) financing activities  7,236,618   (87,149)
                
Net increase (decrease) in cash  4,051,098   (1,495,122)  6,116,836   (1,335,720)
                
Cash at beginning of period  1,559,701   2,123,737   9,604,780   3,828,074 
                
Cash at end of period $5,610,799  $628,615  $15,721,616  $2,492,354 
                
Supplemental disclosures of cash flow information:        
        
Cash paid during the period for:        
        
Interest $  $71,978 
        
Supplemental disclosures of non-cash investing and financing activities:                
        
Issuance of shares under conversions of convertible notes payable and related accrued interest $362,765  $61,766 
        
Issuance of shares under vested restricted stock units $120  $33 
        
Recorded debt discount on convertible notes $  $863,868 
        
Issuance of shares under cashless warrant exchanges $  $3 
        
Reclassification of accrued interest to convertible notes payable $  $85,031 
Initial recognition of right-of-use lease asset and lease liability $  $228,694 
Par value of shares issued for vested restricted stock units $18  $53 

 

See accompanying notes.

 

 

 56 

 

 

AETHLON MEDICAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 2017

June 30, 2020

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

ORGANIZATION

 

Aethlon Medical, Inc. and its subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”) are, is a medical technology company focused on addressing unmet needs in global healthdeveloping products to diagnose and biodefense.treat life and organ threatening diseases. The Aethlon Hemopurifier®, or Hemopurifier, is an earlya clinical-stage therapeuticimmunotherapeutic 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:

·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

·the treatment of life-threatening viruses that are not addressed with approved therapies.

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 single-use removalinitiation of life-threatening viruses fromclinical trials in patients with advanced and metastatic cancers. We are initially focused on the circulatory systemtreatment of infected individuals. solid tumors, including head and neck cancer, gastrointestinal cancers and other cancers. As we advance our clinical trials, we are in close contact with our clinical sites to navigate and assess the impact of the COVID-19 global pandemic on our clinical trials and current timelines.

On October 4, 2019, the FDA approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda).  The primary endpoint for the EFS, which will enroll 10-12 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 in the process of starting up.

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 countermeasure objectives set forth by the U.S. Government to protect citizens from bioterror and pandemic threats.treatment. In small-scale or early feasibility human studies, the Hemopurifier has been administeredused to treat individuals infected with HIV, Hepatitis-C,hepatitis C, and Ebola.

Additionally,in vitro, the Hemopurifier has been validateddemonstrated to capture Zika virus, Lassa virus, MERS-CoV, Cytomegalovirus,cytomegalovirus, Epstein-Barr virus, Herpes Simplexsimplex virus, Chikungunya virus, Dengue virus, West Nile virus, Smallpox-relatedsmallpox-related viruses, H1N1 Swine Fluswine flu virus, H5N1 Bird Flubird flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these validationsstudies were conducted in collaboration with leading government or non-government research institutes. Domestically, we are focused on

On June 17, 2020, the clinical advancementFDA approved a supplement to the Company’s open IDE for the Company’s Hemopurifier in viral disease to allow for the testing of the Hemopurifier through investigational device exemptions (IDEs) approved by FDA. We recently concludedin patients with SARS-CoV-2/COVID-19 in a feasibilityNew 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 demonstrate the safety, of our devicewill include reduction in health-compromised individuals infected with a viral pathogen.circulating virus as well as clinical outcomes.

7

 

We are also the majority owner of Exosome Sciences, Inc. (ESI), or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening diseases. Included among ESI’s endeavorsactivities is the advancement of a TauSomeTMTauSome™ biomarker candidate to diagnose Chronic Traumatic Encephalopathy (CTE)chronic traumatic encephalopathy, or CTE, in the living. ESI previously documented that TauSome levels in former NFL players to be nine times higher than same age-group control subjects. 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 intendplan to sell this device.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 iswww.aethlonmedical.com. www.aethlonmedical.com.

 

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

 

REVERSE STOCK SPLIT

On October 14, 2019, the Company completed 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 (see Note 14). 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, 2018. All shares and per share amounts have been revised accordingly.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

During the ninethree months ended December 31, 2017,June 30, 2020, there have beenwere no changes to our significant accounting policies as described in our Annual Report on Form 10-K for the fiscal year ended March 31, 2017.2020.

  

BASIS OF PRESENTATION

8

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, (GAAP)or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 8 of the Securities and Exchange Commission, (SEC)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, 2017,2020, included in the Company's Annual Report on Form 10-K filed with the SEC on June 28, 2017.25, 2019. The accompanying unaudited condensed consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned subsidiary. All significant intercompanyinter-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 ninethree months ended December 31, 2017.June 30, 2020, and the condensed consolidated statement of cash flows for the three months ended June 30, 2020. Estimates were made relating to useful lives of fixed assets, valuation allowances, the fair value of warrants, 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. Certain amounts previously reported in the financial statements have been reclassified to conform to the current presentation. Such reclassifications did not affect net loss, equity or cash flows. The accompanying condensed consolidated balance sheet at March 31, 20172020 has been derived from the audited consolidated balance sheet at March 31, 2017,2020, contained in the above referenced 10-K. The results of operations for the ninethree months ended December 31, 2017June 30, 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.

6

 

LIQUIDITY AND GOING CONCERN

 

Management expects existing cash as of December 31, 2017June 30, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these interimcondensed consolidated financial statements.

  

2. LOSS PER COMMON SHARE

 

Basic loss per share is computed by dividing net income available to common stockholdersloss by the weighted average number of common shares outstanding during the period of computation. The weighted average number of common shares outstanding for the three and nine months ended December 31, 2017 includes 46,125 vested restricted stock units. Diluted loss per share is computed similar to basic loss per share, except that the denominator is increased to include the number of additional dilutive common shares that would have been outstanding if potential common shares had been issued, if such additional common shares were dilutive. Since we had net losses for all periods presented, basic and diluted loss per share are the same, and additional potential common shares have been excluded, as their effect would be antidilutive.

 

As of December 31, 2017June 30, 2020 and 2016, a total2019, an aggregate of 9,143,4802,150,690 and 3,810,642502,317 potential common shares, respectively, consisting of shares underlying outstanding stock options, warrants and unvested restricted stock units, and convertible notes payable were excluded, as their inclusion would be antidilutive.

  

3. RESEARCH AND DEVELOPMENT EXPENSES

 

Our research and development costs are expensed as incurred. We incurred research and development expenses during the three and nine month periods ended December 31, 2017June 30, 2020 and 2016,2019, 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:

 

  December 31,  December 31, 
  2017  2016 
Three months ended $129,207  $178,440 
Nine months ended $462,640  $497,075 
   June 30,  June 30, 
   2020  2019 
Three months ended  $377,167  $248,871 

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4. FUTURE ACCOUNTING PRONOUNCEMENTSRecent Accounting Pronouncements

 

ManagementIn June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, or ASU No. 2018-07. ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU No. 2018-07 is evaluating significant recent accounting pronouncements that are not yet effective for us, includinginterim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. Entities must apply the new accounting standard on improvementsguidance retrospectively with a cumulative effect adjustment to employee share based payment accounting,retained earnings as of the beginning of the period of adoption. The adoption of ASU 2016-09 (Topic 718), the new accounting standard related to leases, ASU 2016-02 (Topic 842), the new accounting standard for recognition and measurement of financial assets and financial liabilities, and have not yet concluded whether any such pronouncements will have a significant effect on our future consolidated financial statements.

Regarding the new accounting standard on revenue recognition, ASU 2014-09 (Topic 606), which will be effectiveNo. 2018-07 on April 1, 2018, management believes that as long as its contracts with government entities consist of firm, fixed price arrangements with payments that are triggered by achieving contractually stated milestones that new standard will2019 did not have a significant effectmaterial impact on our futurethe Company's consolidated financial statements.position, results of operations and related disclosures.

 

5. CONVERTIBLE NOTES PAYABLE, NET

 

Convertible Notes Payable, Net consisted of the following at December 31, 2017:We paid off our convertible notes in full in July 2019.

  Principal  Unamortized
Discount
  Net
Amount
  Accrued
Interest
 
Convertible Notes Payable, Net – Non-Current Portion:                
November 2014 10% Convertible Notes $612,811  $(112,194) $500,617  $19,066 
December 2016 10% Convertible Notes  379,780   (69,531)  310,249   11,820 
Total Convertible Notes Payable, Net $992,591  $(181,725) $810,866  $30,886 

7

 

During the ninethree months ended December 31, 2017,June 30, 2019, we recorded interest expense of $87,641$23,759 related to the contractual interest rates of our convertible notes and interest expense of $215,376$30,287 related to the amortization of the note discount for a total interest expense of $303,017$54,046 related to our convertible notes. All ofnotes in the unamortized discount at December 31, 2017 related to the note discount established upon thethree month period ended June 2017 amendment to both the November 2014 10% Convertible Notes and the December 2016 10% Convertible Notes (see below).30, 2019.

 

During the ninethree months ended December 31, 2016,June 30, 2019, we recorded interest expense of $47,730 related to the contractual interest rates of our convertible notes, interest expense of $27,641 related to the amortization of deferred financing costs and interest expense of $37,996 related to the amortization of note discounts for a total interest expense of $113,367 related to our convertible notes.

Convertible Notes Payable, Net consisted of the following at March 31, 2017 (our most recent fiscal year end):

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

NOVEMBER 2014 10% CONVERTIBLE NOTES

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

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

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

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

Initial Amendment of the November 2014 10% Convertible Note Terms

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

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

On June 27, 2016, we and certain investors entered into further Amendments (the “Amendments”) to the Notes and the Warrants. The Amendments provide that the Maturity Date (as defined in the Notes) was extended from June 1, 2016 to July 1, 2017 and that the conversion price per share ofon the Notes was reducedconvertible notes from $5.60 per share of common stock to $5.00 per share of common stock. In addition, we reduced the purchase price (as defined in the Warrants) from $8.40$45.00 per share to $5.00 per share of common stock. In connection with these modifications, each of the investors signed a Consent and Waiver providing its consent under certain restrictive provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a Securities Purchase Agreement dated June 23, 2015, (the “2015 SPA”) to which we, the investors and certain other investors are parties, in order to facilitate an at-the-market equity program (see Note 6).

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

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

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

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

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

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

June 2017 Amendment to the November 2014 10% Convertible Notes

In June 2017, we agreed with the holders of the November 2014 10% Convertible Notes to an extension of the expiration dates of the notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00$10.20 per share. The modification of the Notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $178,655 and recalculated a revised debt discount on the notes.

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

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

DECEMBER 2016 10% CONVERTIBLE NOTES

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

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

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

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

June 2017 Amendment to the December 2016 10% Convertible Notes

In June 2017, we agreed with the holders of the December 2016 10% Convertible Notes to an extension of the expiration dates of the notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share. The modification of the notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $198,254 and recalculated a revised debt discount on the notes.$447,011.

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

Activity in the December 2016 10% Convertible Notes
Initial principal balance $680,400 
Conversions during the nine months ended December 31, 2017  (300,620)
Balance as of December 31, 2017 $379,780 

 

6. EQUITY TRANSACTIONS IN THE NINETHREE MONTHS ENDED DECEMBER 31, 2017

October 2017 Public Offering

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

Warrant Exercises

In December 2017, four investors that participated in the October 2017 Public Offering exercised 218,600 warrants for aggregate cash proceeds to us of $240,460 before expenses.JUNE 30, 2020

 

Common Stock Sales Agreement with H.C. Wainwright & Co., LLC

 

On June 28, 2016, we entered into a Common Stock Sales Agreement, (the “Agreement”)or the Agreement, with H.C. Wainwright & Co., LLC, (“H.C. Wainwright”)or Wainwright, which establishesestablished 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 providesprovided for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000 (the “Shares”).$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.

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Subject to the terms and conditions set forth in the Agreement, H.C. Wainwright willagreed to use its commercially reasonable efforts consistent with its normal trading and sales practices to sell the Sharesshares under the Agreement from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights under the Agreement, and H.C. Wainwright will beis entitled to a commission at a fixed rate equal to three percent (3.0%) of the gross proceeds per Shareshare sold. In addition, we have agreed to pay certain expenses incurred by H.C. Wainwright in connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the Sharesshares under the Agreement, unless terminated earlier by either party as permitted under the Agreement (see Note 14).Agreement.

  

Sales of the Shares, if any, under the Agreement shallwill 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 H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.

  

In July 2016, we commenced sales of common stock under our Common Stock Sales Agreement with H.C. Wainwright. In the sixthree months ended SeptemberJune 30, 2017,2020, we raised aggregate net proceeds of $1,650,314 (net$7,260,869, net of $51,157$224,825 in commissions to H.C. Wainwright and $3,750$8,472 in other offering expenses)expenses, under this agreementthe Agreement, through the sale of 601,5042,685,600 shares at an average price of $2.74$2.70 per share of net proceeds.

 

In connection with our October 2017 Public Offering (see above), we agreed to restrict our ability to use the ATM facility for a 90 day period immediately post-closing.

 

Restricted Shares Issued for Services

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

Share for Warrant Exchanges

During the nine months ended December 31, 2017, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993 warrants and we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in exchange for the cancellation of 77,125 warrants held by those investors. We also agreed with those institutional investors that they would extend the expiration dates of convertible notes held by those investors from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those notes from $4.00 per share to $3.00 per share (see Note 5).

Additionally, we entered into an agreement with a former placement agent to issue 5,500 restricted shares in exchange for the cancellation of 11,000 warrants held by that placement agent. We measured the fair value of the shares issued and the fair value of the warrants exchanged for those shares and recorded losses for each of those exchanges based on the changes in fair value between the instruments exchanged. Based upon the fair value of the shares issued and warrants exchanged, we recorded a loss of $130,214 during the nine months ended December 31, 2017 for all of the above share for warrant exchanges.

Stock Option Issuances

During the nine months ended December 31, 2017, we issued options to four of our employees to purchase 34,500 shares of common stock at an exercise price of $1.68 per share, the closing price on the date of the approval of the option grants by our compensation committee (see Note 9).

Termination of Restricted Share Grant

During the nine months ended December 31, 2017, we terminated a previously recorded but unissued share issuance of 68,000 shares under a fully vested restricted stock grant to our CEO and issued to him 32,674 shares as a net settlement of shares and the Company paid the withholding taxes associated with that share issuance in return for the cancellation of 35,326 shares. The compensation cost of that restricted stock grant had been fully recorded over prior fiscal years, therefore no expense was recorded regarding this net issuance.

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Restricted Stock Unit Grants to Directors and Executive Officers

 

On August 9, 2016,In 2012, as amended through July 16, 2020, our Board of Directors granted RSUs to certain of our officers and directors and effective November 7, 2017, 127,659 additional RSUs were granted to our directors pursuant toestablished the 2012 Non-Employee Directors Compensation Program.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 unites, 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 for vested RSUs.upon vesting.

 

DuringOn April 3, 2020, pursuant to the nine months endedterms of the Company’s Non-Employee Directors Compensation Program, the Compensation Committee of the Board 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 for 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 would in respect of 24,822 shares of our common stock.  Each eligible director was granted an RSU in the amount of only 23,893 shares under 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 contingent grants under our potential 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 contingent grants are subject to vesting as follows: 50% of the RSUs subject to the contingent grants will vest on December 31, 2017, 138,3752020 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.

In June 2020, 29,866 vested RSUs held by our executives were exchanged into the same number of shares of our common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 71,081 of the RSUs were cancelled and we issued a net 67,294 shares to our executives (see Note 9).

During the nine months ended December 31, 2017, 63,829 RSUs held by our outsidenon-employee directors were exchanged into the same number of shares of our common stock. As one of our three outsideAll five non-employee directors elected to return 40% of histheir vested RSUs in exchange for cash, in order to pay histheir withholding taxes on the share issuances, 10,638resulting in 11,947 of the vested RSUs werebeing cancelled in exchange for $24,251 in aggregate cash proceeds to those independent directors.

RSUs outstanding that have vested as of, and we paid $12,127 in cashare expected to that outside director (see Note 9).vest subsequent to, June 30, 2020 are as follows:

Number of RSUs
Vested
Expected to vest89,599
Total89,599

  

7. RELATED PARTY TRANSACTIONS

 

Due to Related Parties

During the three months ended December 31, 2017,June 30, 2020, we accrued unpaid Board fees of $35,350 which are$69,750 owed to our outsidenon-employee directors as of December 31, 2017. On March 31, 2017, we had accrued unpaid board feesJune 30, 2020. Amounts due to related parties were comprised of $28,250 owed to our outside directors.the following items:

  June 30, 2020  March 31, 2020 
Accrued Board fees $69,750  $69,750 
Accrued vacation to all employees  62,094   41,957 
Total due to related parties $131,844  $111,707 

 

8. OTHER CURRENT LIABILITIES

 

Other current liabilities were comprised of the following items:

 

  December 31,  March 31, 
  2017  2017 
Accrued interest $30,886  $5,391 
Other accrued liabilities  29,648   64,076 
Total other current liabilities $60,534  $69,467 
  June 30,  March 31, 
  2020  2020 
Accrued professional fees $433,120  $472,420 
Total other current liabilities $433,120  $472,420 

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9. STOCK COMPENSATION

 

The following tables summarize share-based compensation expenses relating to Restricted Stock Units (“RSU”s)RSUs and stock options granted and the effect on basic and diluted loss per common share during the three and nine month periods ended December 31, 2017June 30, 2020 and 2016:2019:

 

  Three Months
Ended
December 31,
2017
  Three Months
Ended
December 31,
2016
  Nine Months
Ended
December 31,
2017
  Nine Months
Ended
December 31,
2016
 
Vesting of stock options and restricted stock units $323,162  $306,159  $887,607  $1,880,150 
Total stock-based compensation expense $323,162  $306,159  $887,607  $1,880,150 
                 
Weighted average number of common shares outstanding – basic and diluted  14,950,701   7,927,031   10,927,106   7,768,682 
                 
Basic and diluted loss per common share attributable to stock-based compensation expense $(0.02) $(0.04) $(0.08) $(0.24)

  Three Months
Ended
June 30,2020
  Three Months
Ended
June 30, 2019
 
Vesting of stock options and restricted stock units $84,207  $326,536 
Total stock-based compensation expense $84,207  $326,536 
         
Weighted average number of common shares outstanding – basic and diluted  9,632,977   1,270,484 
         
Basic and diluted loss per common share attributable to stock-based compensation expense $(0.01) $(0.26)

 

All of the stock-based compensation expense recorded during the ninethree months ended December 31, 2017June 30, 2020 and 2016,2019, which totaled $887,607$84,207 and $1,880,150,$326,536, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during the ninethree months ended December 31, 2017June 30, 2020 and 20162019 represented an impact on basic and diluted loss per common share of $(0.08)$(0.01) and $(0.24)$(0.26), respectively.

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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 ninethree months ended December 31, 2017June 30, 2020 was insignificant.

Restricted Stock Unit Grants to Directors and Executive Officers

On August 9, 2016, our Board of Directors granted RSUs to certain of our officers and directors and effective November 7, 2017, 127,659 additional RSUs were granted to our directors pursuant to the 2012 Non-Employee Directors Compensation Program. The RSUs represent the right to be issued on a future date shares of our common stock for vested RSUs. Our Compensation Committee recommended the grants based on a compensation assessment provided by a third-party compensation consulting firm engaged by us that developed a peer group of companies for market assessment and analyzed compensation at such companies.

The RSUs were granted under our Amended 2010 Stock Incentive Plan and we recorded expense of $842,095 in the nine months ended December 31, 2017 related to the RSU grants.

RSUs outstanding that have vested and are expected to vest as of December 31, 2017 are as follows:

Number of RSUs
Vested46,125
Expected to vest432,830
Total478,955

During the nine months ended December 31, 2017, 138,375 vested RSUs held by our executives were exchanged into the same number of shares of our common stock. As our executives elected to net settle a portion of their RSU’s in exchange for the Company paying the related withholding taxes on the share issuance, 71,081 of the RSUs were cancelled and we issued a net 67,294 shares to our executives.

During the nine months ended December 31, 2017, 63,829 RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As one of our three outside directors elected to return 40% of his RSUs in exchange for cash in order to pay his withholding taxes on the share issuances, 10,638 of the RSUs were cancelled and we paid $12,127 in cash to that outside director.

   

Stock Option Activity

 

DuringWe did not issue any stock options during the ninethree months ended December 31, 2017, we issued options to four of our employees to purchase 34,500 shares of common stock at a price of $1.68 per share, the closing price on the date of the approval of the option grants by our compensation committee. There were no stock option grants during the nine months ended December 31, 2016.June 30, 2020.

 

Options outstanding that have vested as of June 30, 2020 and options that are expected to vest as of December 31, 2017subsequent to June 30, 2020 are as follows:

 

 Number of
Shares
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term in
Years
 
        Number of
Shares
  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Term in
Years
 
Vested  432,047  $10.98   3.64   28,098  $64.92   5.03 
Expected to vest  27,000  $1.68   9.46   23,026  $18.75   8.00 
Total  459,047           51,124         

  

 

 

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The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to stock option grants utilizing the Binomial Lattice option pricing models at, and during the nine months ended December 31, 2017:

Risk free interest rate2.21%
Average expected life10 years
Expected volatility92.14%
Expected dividendsNone

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

 

A summary of stock option activity during the ninethree months ended December 31, 2017June 30, 2020 is presented below:

 

 Amount Range of
Exercise Price
 Weighted
Average
Exercise
Price
  Amount  Range of
Exercise Price
  Weighted
Average
Exercise
Price
 
Stock options outstanding at March 31, 2017 432,047 $3.80-$20.50   $10.98 
Stock options outstanding at March 31, 2020  51,124  $18.75 - 187.50  $44.12 
Exercised             
Granted 27,000 $1.68  $1.68          
Cancelled/Expired                
Stock options outstanding at December 31, 2017  459,047  $1.68-$20.50  $10.44 
Stock options exercisable at December 31, 2017  432,047  $3.80-$20.50  $10.98 
Stock options outstanding at June 30, 2020  51,124  $18.75 - 187.50  $44.12 
Stock options exercisable at June 30, 2020  28,098  $18.75 - 187.50  $64.92 

 

On December 31, 2017,June 30, 2020, our stock options had no intrinsic value since the closing price on that date of $1.13$2.03 per share was below the weighted average exercise price of our outstanding stock options.

 

At December 31, 2017,June 30, 2020, there was approximately $2.2 million$2,058,000 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 1.726.1 years.

   

10. WARRANTS

 

During the ninethree months ended December 31, 2017,June 30, 2020 and 2019, we issued 5,618,182 warrants, including 163,636 warrants issued to the placement agent, H.C. Wainwight & Co., in connection with our October 2017 Public Offering (see Note 6). Those warrants have a five year term and have an exercise price of $1.10 per share.did not issue any warrants.

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models, issued during the nine months ended December 31, 2017:

Risk free interest rate1.38% - 1.92%
Average expected life5 years
Expected volatility100.2% - 111.1%
Expected dividendsNone

 

A summary of warrant activity during the ninethree months ended December 31, 2017June 30, 2020 is presented below:

 

  Amount  Range of
Exercise
Price
 Weighted
Average
Exercise
Price
Warrants outstanding at March 31, 2017  2,604,096  $2.10 - $12.05 $3.64
Exercised  (218,600) $1.10 $1.10
Issued  5,618,182  $1.10 $1.10
Cancelled/Expired  (139,357) $5.00 –$15.00 $6.52
Warrants outstanding at December 31, 2017  7,864,321  $1.10 - $12.05 $1.38
Warrants exercisable at December 31, 2017  7,864,321  $1.10 - $12.05 $1.38

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The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to warrants utilizing the Binomial Lattice option pricing models issued during the nine months ended December 31, 2016:

Risk free interest rate0.79% – 1.38%
Average expected life3 months – 2.33 years
Expected volatility65.9% – 111.1%
Expected dividendsNone

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

Based on the above assumptions, we valued the warrants that were exchanged for common stock (see Note 6) during the nine months ended December 31, 2017 at $130,214.

  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  (11,401) $90.75 – $94.50  $94.35 
Warrants outstanding at June 30, 2020  2,009,967  $1.50 – $125.25  $6.06 
Warrants exercisable at June 30, 2020  2,009,967  $1.50 – $125.25  $6.06 

    

11. GOVERNMENT CONTRACTS AND RELATED REVENUE RECOGNITION

 

We have entered into the following two contracts/grants with the National Cancer Institute, or NCI, part of the National Institutes of Health, (“NIH”)

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

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

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

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

In October 2017, we completed the first milestone on this contract and invoiced NIH for the $74,812.50 payment associated with that milestone.

The details of that milestone were as follows:

Milestone HHSN261201700022C-01 – Prepare and present the kick-off presentation to NIH. The milestone payment was $74,812.50. Management considers this milestone to be substantive as it was not dependent on the passage of time nor was it based solely on another party's efforts. We prepared and presented the kick-off presentation to NIH. The report was accepted by NIH and the invoice was submitted thereafter.

Defense Advanced Research Projects Agency (“DARPA”)

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

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

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

The DARPA contract concluded on September 30, 2016.

In the nine months ended December 31, 2016, we invoiced the U.S. Government for the finalpast two milestones under our DARPA contract in the aggregate amount of $387,438.years:

 

 

 

 1513 

 

The details of those milestones were as follows:

Phase 2 Melanoma Cancer Contract

 

Milestone 2.6.1.3 - QuantifyOn September 12, 2019, the degreeNCI awarded to whichus 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 MERS virus can be extractedAward Contract. The Award Contract amount is $1,860,561 and runs for the period from circulation in vitro using miniature Hemopurifiers. September 16, 2019 through September 15, 2021.

The milestone payment was $193,719. Management considers this milestonework to be substantiveperformed pursuant to this Award Contract will focus 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 it was not dependentdescribed below. Following on the passagePhase I work, the deliverables in the Phase II program involve the design and testing of time nor was it based solely on another party's efforts. We quantifieda pre-commercial prototype of a more advanced version of the degree to which the MERS virus can be extracted from circulation in vitro using miniature Hemopurifiers. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.exosome isolation platform.

 

Milestone 2.6.1.4 – Prepare and present Final Report for DARPA. The milestone payment was $193,719. Management considers this milestone to be substantive as it wasWe did not dependentrecord any government contract revenue on the passagePhase 2 Melanoma Cancer Contract in the three months ended June 30, 2020.  We did invoice the NCI for $206,729 during the three months ended June 30, 2020, however we have recorded that amount as deferred revenue since we did not achieve the milestones associated with that quarterly billing cycle.

Breast Cancer Grant

In September 2018, the NCI awarded us a government grant (number 1R43CA232977-01). The title of time northis Small Business Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation.”

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, so the expiration date was itextended to August 31, 2020. The total amount of the firm grant is $298,444. The grant calls for two subcontractors to work with us. Those subcontractors are University of Pittsburgh and Massachusetts General Hospital.

During the three months ended June 30, 2019, we recognized $30,000 in government contract revenue under this grant as a result of the work involved in one of the three technical objectives of the contract: Aim 2. “Elution of a population of breast cancer exosomes from Hemopurifier cartridges that bear the signatures of malignancy based solely on another party's efforts. We preparedexpression of CSPG4 and presented the Final ReportHER2, for DARPA. The report was accepted by the contracting officer's representative and the invoice was submitted thereafter.triple-negative or HER2-overexpressing cancers, respectively”.

 

12. SEGMENTS

 

We operate our businesses principally through two reportable segments: Aethlon, which represents our therapeutic business activities, and Exosome Sciences, Inc., or 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.

  

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The following tables set forth certain information regarding our segments:

 

 Nine Months Ended December 31,  Three Months Ended June 30, 
 2017 2016  2020 2019 
Revenues:          
Aethlon $74,813  $392,073  $  $30,000 
ESI            
Total Revenues $74,813  $392,073  $  $30,000 
                
Operating Losses:                
Aethlon $(3,495,189) $(4,478,631) $(1,406,103) $(1,561,885)
ESI  (64,860)  (115,443)  (4,315)  (4,303)
Total Operating Loss $(3,560,049) $(4,594,074) $(1,410,418) $(1,566,188)
                
Net Losses:                
Aethlon $(4,308,807) $(5,497,978) $(1,406,831) $(2,062,981)
ESI  (64,860)  (115,443)  (4,315)  (4,303)
Net Loss Before Non-Controlling Interests $(4,373,667) $(5,613,421) $(1,411,146) $(2,067,284)
                
Cash:                
Aethlon $5,610,061  $625,531  $15,721,419  $2,492,170 
ESI  738   3,084   197   184 
Total Cash $5,610,799  $628,615  $15,721,616  $2,492,354 
                
Total Assets:                
Aethlon $5,745,031  $752,578  $16,427,057  $2,932,721 
ESI  5,723   37,019   197   184 
Total Assets $5,750,754  $789,597  $16,427,254  $2,932,905 
                
Capital Expenditures:                
Aethlon $23,705  $2,961  $17,809  $886 
ESI            
Capital Expenditures $23,705  $2,961  $17,809  $886 
                
Depreciation and Amortization:                
Aethlon $27,402  $16,322  $8,770  $2,868 
ESI     10,043       
Total Depreciation and Amortization $27,402  $26,365  $8,770  $2,868 
                
Interest Expense:                
Aethlon $(306,495) $(115,308) $(728) $(54,085)
ESI            
Total Interest Expense $(306,495) $(115,308) $(728) $(54,085)

 

 

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13. COMMITMENTS AND CONTINGENCIES

 

Lease CommitmentsCONTRACTUAL 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.

LEASE COMMITMENTS

 

We currently rentlease approximately 2,600 square feet of executive office space at 9635 Granite Ridge Drive, Suite 100, San Diego CA, California 92123 at the rate of $6,054 per month onunder a four-year39-month gross plus utilities lease that commenced on December 1, 2014 and expires in May 2018. on August 31, 2021. The current rental rate under the lease extension is $8,265 per month. We believe this leased facility will be satisfactory for our office needs over the term of the lease.

We also rent approximately 1,700 square feet of laboratory space at 11585 Sorrento Valley Road, Suite 109, San Diego, California 92121 at the rate of $4,548$4,700 per month on a one-year lease that originally was extended to an expiration date ofexpire on November 30, 2018.2019. In October 2019, we entered into a lease extension for an additional twelve months running from December 1, 2019 through November 30, 2020, at the rate of $5,961 per month.

 

Rent expense, which is included in general and administrative expenses, approximated $100,000$44,000 and $114,000$40,000 for the ninethree month periods ended December 31, 2017June 30, 2020 and 2016,2019, respectively.

  

Legal MattersFuture minimum lease payments under the Granite Ridge Lease as of June 30, 2020, are as follows:

July 1, 2020 through March 31, 2021 $76,989 
April 1, 2021 through August 31, 2021  43,670 
Total future minimum lease payments  120,659 
Less: discount  (3,397)
Total lease liability $117,262 

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 its 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.

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.

  

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14. SUBSEQUENT EVENTS

 

Management has evaluated events subsequent to December 31, 2017June 30, 2020 through the date that the accompanying condensed consolidated financial statements were filed with the Securities and Exchange CommissionSEC for transactions and other events which may require adjustment of and/or disclosure in such financial statements.

 

Warrant Exercises –Subsequent to December 31, 2017, sixteen investors that participated in the October 2017 public offering exercised 852,700 warrants for aggregate cash proceeds to us of $937,970 before expenses.AMENDMENT TO NON-EMPLOYEE DIRECTORS COMPENSATION PROGRAM

 

ATM Sales-- SubsequentIn July 2020, the Compensation Committee of the Board of Directors of the Company approved an amendment to December 31, 2017, we sold common stockour Non-Employee Directors Compensation Program, or the Amended Plan. Under the Amended Plan, in lieu of per meeting fees, eligible directors will receive an annual board retainer fee of $35,000, as well as the following annual retainer fees: Audit Committee chair- $15,000, Compensation Committee chair- $15,000, Nominating Committee chair- $8,000, Audit Committee member- $7,500, Compensation Committee member- $7,500 and Nominating Committee member- $5,000. Additionally, the Chairman of the Board will receive additional annual compensation under our Common Stock Sales Agreement with H.C. Wainwright (see Note 6)this program of $60,000, which was not a change from the plan prior to this amendment. In addition, pursuant to the Amended Plan, the grant date fair value of the initial equity grant to non-employee directors was increased to $75,000, from $50,000, and the annual non-employee director grant was increased to $50,000, from those sales raised net proceeds$35,000. RSUs granted under the Amended Plan are valued based on the average of $454,654 (after deducting $14,123 in commissions to H.C. Wainwright and $1,998 in other offering expenses), utilizing the sales agreement through the sale of 340,000 shares at an average price of $1.34 per share of net proceeds.

Restricted Stock Unit (“RSU”) Issuances – In January 2018, 46,125 RSUs held by our executives were exchanged into the same number of sharesclosing prices of our common stock. As our executives elected to net settle a portion of their RSUs in exchangestock for the Company paying the related withholding taxesfive trading days ending on the share issuance, 26,157date of grant and will vest at a rate determined by our Board of Directors in its discretion, typically in equal quarterly installments over one year. Options granted under this Amended Plan will have an exercise price equal to the RSUs were cancelled,fair market value on the date of grant. Any such options will have a term of ten years and we issuedwill vest at a net 19,968 shares torate determined by our executives.Board of Directors in its discretion.

 

 

 

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and notes thereto included in Item 1 in this Quarterly Report on Form 10-Q. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.

 

FORWARD LOOKING STATEMENTS

 

All statements, other than statements of historical fact, included in this Form 10-Q are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act"),or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause theour actual results, performance, or achievements of Aethlon Medical, Inc. ("we" or "us") to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements contained in this Form 10-Q. Such potential risks and uncertainties include, without limitation, completion of our capital-raising activities, our ability to maintain our Nasdaq listing, U.S. Food and Drug Administration, or FDA, approval of our products, other regulations, patent protection of our proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological change, and other risk factors detailed herein and in other of our filings with the Securities and Exchange Commission, (the “Commission”).or the Commission. The forward-looking statements are made as of the date of this Form 10-Q, and we assume no obligation to update the forward-looking statements, or to update the reasons actual results could differ from those projected in such forward-looking statements.

 

Overview

 

Aethlon Medical, Inc. and subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”)We are a medical technology company focused on addressing unmet needs in global healthdeveloping products to diagnose and biodefense.treat life and organ threatening diseases. The Aethlon Hemopurifier®, or Hemopurifier, is an earlya clinical-stage therapeuticimmunotherapeutic 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 the single-use removal of life-threatening viruses from the circulatory system of infected individuals. two independent indications:

·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

·the treatment of life-threatening viruses that are not addressed with approved therapies.

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 global COVID-19 pandemic on our clinical trials and current timelines.

On October 4, 2019, the FDA approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda). The primary endpoint for the EFS, which will enroll 10-12 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 in the process of starting up.

We also believe the Hemopurifier can be part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not addressed with an already approved treatment countermeasure objectives set forth by the U.S. Government to protect citizens from bioterror and pandemic threats.treatment. In small-scale or early feasibility human studies, the Hemopurifier has been administeredused to treat individuals infected with HIV, Hepatitis-C,hepatitis-C, and Ebola.

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Additionally,in-vitro, the Hemopurifier has been validateddemonstrated to capture Zika virus, Lassa virus, MERS-CoV, Cytomegalovirus,cytomegalovirus, Epstein-Barr virus, Herpes Simplexsimplex virus, Chikungunya virus, Dengue virus, West Nile virus, Smallpox-relatedsmallpox-related viruses, H1N1 Swine Fluswine flu virus, H5N1 Bird Flubird flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these validations were conducted in collaboration with leading government or non-government research institutes. Domestically, we are focused on

On June 17, 2020, the clinical advancementFDA approved a supplement to the Company’s open IDE for the Company’s Hemopurifier in viral disease to allow for the testing of the Hemopurifier through investigational device exemptions (IDEs) approved by FDA. We recently concludedin patients with SARS-CoV-2/COVID-19 in a feasibilityNew 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 demonstrate the safety, of our devicewill include reduction in health-compromised individuals infected with a viral pathogen.circulating virus as well as clinical outcomes. The Company is currently recruiting sites to conduct this trial.

 

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

 

We were formed on March 10, 1999. Our executive offices are located at 9635 Granite Ridge Drive, Suite 100, San Diego, California 92123. Our telephone number is (858) 459-7800. Our website address is www.aethlonmedical.com.

 

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

COVID-19 Update

In March 2020, the World Health Organization declared COVID-19 a pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets.

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, including clinical trials. 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 future access to capital. Further, while we have not experienced significant disruptions to our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or preclinical research to date, we are unable to assess the potential impact this pandemic could have on our manufacturing supply chain, business, results of operations, financial condition, clinical trials, or preclinical research in the future.

As we continue to actively advance our clinical trials, we remain in close contact with our clinical sites and are assessing the impact of COVID-19 on our trials, expected timelines and costs on an ongoing basis. We will assess any potential delays in our ability to timely ship clinical trial materials, including internationally, due to transportation interruptions. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, impact on our clinical trials, employees and vendors, all of which are uncertain and cannot be predicted. Given these uncertainties, we cannot reasonably estimate the related impact to our business, operating results and financial condition, if any.

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WHERE YOU CAN FIND MORE INFORMATION

 

We are subject to the informational requirements of the Securities Exchange Act, and must file reports, proxy statements and other information with the Commission. The reports, information statements and other information we file with the Commission can be inspected and copied at the Commission Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the Commission at (800) SEC-0330. The Commission also maintains a Webweb site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, like us, which file electronically with the Commission. Our headquarters are located at 9635 Granite Ridge Drive, Suite 100, San Diego, CA 92123. Our phone number at that address is (858) 459-7800. Our Web sitewebsite ishttp://www.aethlonmedical.com.www.aethlonmedical.com.

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RESULTS OF OPERATIONS

  

THREE MONTHS ENDED DECEMBER 31, 2017JUNE 30, 2020 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2016JUNE 30, 2019

 

Government Contract Revenues

 

We recorded any $74,813 of government contract revenue in the three months ended December 31, 2017 and we did not record any government contract revenue in the three months ended December 31, 2016. That revenue arose from work performed under our government contract with the National Institutes of Health, or NIH, as follows:

  Three Months
Ended
12/31/17
  Three Months
Ended
12/31/16
  Change in
Dollars
 
NIH Contract $74,813  $  $74,813 
Total Government Contract Revenue $74,813  $  $74,813 

NIH Contract

June 30, 2020.  We entered into a contract with the NIH on September 15, 2017. This award is under the NIH’s Small Business Innovation Research (SBIR) program which is designed to fund early stage small businesses that are seeking to commercialize innovative biomedical technologies. The title of the award is SBIR Topic 359 Phase 1 Device Strategy for Selective Isolation of Oncosomes and Non-Malignant Exosomes.

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

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

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

In the three months ended December 31, 2017, we completed the first milestone on this contract and invoiced NIH for the $74,812.50 payment associated with that milestone.

Operating Expenses

Consolidated operating expenses for the three months ended December 31, 2017 were $1,238,440 in comparison with $1,235,546 for the comparable period a year ago. This increase of $2,894, or 0.2%, was due to an increase in payroll and related expenses of $27,547, a $22,251 increase in professional fees and a $46,904 decrease in general and administrative expenses.

The $27,547 increase in payroll and related expenses was due to a $17,003 increase in stock-based compensation and to a $10,545 increase in our cash-based payroll and related expenses due to bonuses given to our support and scientific staff.

The $22,251 increase in our professional fees was due to an increase in our professional fees of $37,962, which was partially offset by a decrease in our professional fees at ESI of $15,711. The $37,962 decrease in our professional fees was due to a $62,864 increase in our legal fees, a $22,022 increase in our investor relations fees, a $14,069 increase in our accounting fees, a $7,358 increase in our marketing expenses, and a $6,100 increase in our directors’ fees due to an increase in our Board of Directors, which were partially offset by a $51,548 decrease in our scientific consulting expenses and a $25,000 decrease in business development expenses.

The $46,904 decrease in general and administrative expenses was primarily due to a $34,324 decrease in our clinical trial expenses, a $6,519 decrease in the cost of our lab supplies and a $4,743 refund on previous state franchise tax payments.

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Other Expense

Other expense$206,729 during the three months ended DecemberJune 30, 2020, however we recorded that amount as deferred revenue since we did not achieve the milestones associated with that quarterly billing cycle.

We have entered into the following two contracts/grants with the NCI, part of the 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 will focus 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.

Breast Cancer Grant

In September 2018, the NCI awarded us a government 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.”

This NCI Phase I grant period originally ran from September 14, 2018 through August 31, 20172019. In August 2019, we applied for and 2016 consistedreceived a no cost, twelve month extension on this grant; so the expiration date was extended to August 31, 2020. The total amount of interest expensethe firm grant is $298,444. The grant calls for two subcontractors to work with us. Those subcontractors are University of Pittsburgh and a gain on debt extinguishment. Other expense forMassachusetts General Hospital.

During the three months ended December 31, 2017 was other expense of $55,912June 30, 2019, we recognized $30,000 in comparison with other income of $22,126 for the three months ended December 31, 2016.

The following table breaks out the various components of our other expense (income) for both periods:

  Three Months
Ended
  Three Months
Ended
    
  12/31/17  12/31/16  Change 
Gain on Debt Extinguishment $  $(58,691) $58,691 
Interest Expense  55,912   36,565   19,347 
Total Other Expense (Income) $55,912  $(22,126) $78,038 

Interest Expense

Interest expense was $55,912 for the three months ended December 31, 2017 compared to $36,565 in the corresponding prior period, an increase of $19,347. The various components of our interest expense are shown in the following table:

  Three Months
Ended
  Three Months
Ended
    
  12/31/17  12/31/16  Change 
Interest Expense $25,625  $17,567  $8,058 
Amortization of Note Discounts  30,287   18,998   11,289 
Total Interest Expense $55,912  $36,565  $19,347 

As noted in the above table, the factors in the $19,347 increase in interest expense were the $8,058 increase in our contractual interest expense and the $11,289 increase in the amortization of note discounts, which related to the amortization against the discount on our convertible notes.

Net Loss

Asgovernment contract revenue under this grant as a result of the changeswork involved in revenues and expenses noted above, our net loss before noncontrolling interests increased from approximately $1,213,000 inone of the three month period ended December 31, 2016 to $1,220,000 intechnical objectives of the three month period ended December 31, 2017.

Basiccontract: Aim 2. “Elution of a population of breast cancer exosomes from Hemopurifier cartridges that bear the signatures of malignancy based on expression of CSPG4 and diluted loss attributable to common stockholders were ($0.08)HER2, for the three month period ended December 31, 2017 compared to ($0.15) for the period ended December 31, 2016.

NINE MONTHS ENDED DECEMBER 31, 2017 COMPARED TO THE NINE MONTHS ENDED DECEMBER 31, 2016

Revenues

We recorded government contract revenue of $74,813 in the nine months ended December 31, 2017 and we recorded government contract revenue of $392,073 in the nine months ended December 31, 2016. This revenue arose from work performed under our government contracts with the National Institutes of Health,triple-negative or NIH, with the Defense Advanced Research Projects Agency, or DARPA, and our government subcontract with Battelle Memorial Institute as follows:HER2-overexpressing cancers, respectively”.

  Nine Months
Ended 12/31/17
  Nine Months
Ended 12/31/16
  Change in
Dollars
 
NIH Contract $74,813  $  $74,813 
DARPA Contract     387,438   (387,438)
Battelle Subcontract     4,635   (4,635)
Total Government Contract Revenue $74,813  $392,073  $(317,260)

 

 

 

 20 

 

 

NIH Contract

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

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

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

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

In the nine months ended December 31, 2017, we completed the first milestone on this contract and invoiced NIH for the $74,812.50 payment associated with that milestone.

DARPA Contract & Battelle Subcontract

Previously, we generated contract revenue under a contract with DARPA that we entered into on September 30, 2011. Under the DARPA award, we were engaged to develop a therapeutic device to reduce the incidence of sepsis, a fatal bloodstream infection that often results in the death of combat-injured soldiers. That contract was completed on September 30, 2016 and the related subcontract with Battelle was completed in March 2017. In the nine months ended December 31, 2016, we invoiced the U.S. Government for the final two milestones under our DARPA contract in the aggregate amount of $387,438.

Operating Expenses

 

Consolidated operating expenses for the ninethree months ended December 31, 2017June 30, 2020 were $3,634,862 in comparison with $4,986,148$1,410,418, compared to $1,596,188 for the comparable period a year ago.three months ended June 30, 2019. This decrease of $1,351,286,$185,770, or 27.1%12%, in the 2020 period was due to a decrease in payroll and related expenses of $882,335, a decrease$169,084 and in professional fees of $330,279 and a $138,672 decrease$43,294, which was partially offset by an increase in general and administrative expenses.expenses of $26,608.

 

The $882,335$169,084 decrease in payroll and related expenses was primarily due to the combination of a $992,543 decrease in stock-based compensation. The decrease$242,329 reduction in stock-based compensation expense and a $73,245 increase in our cash-based compensation expense. The cash-based compensation increase was in turn due to the upfront vesting percentage of the RSU grantsadditions to our officersheadcount and directors in August 2016. Our cash-based payroll and related expenses increased by $110,208 due to headcount additions in our scientific staff.salary increases.

 

The $330,279$43,294 decrease in our professional fees was primarily due to decreases in our non-DARPA-related professional fees of $263,328, in our DARPA-related professional fees of $38,928 and in our professional fees at ESI of $28,023. The $263,328a $24,514 decrease in our non-DARPA-related professional fees was due toinvestor relations expense, a $124,941$22,425 decrease in our legal fees and a $123,859$21,628 decrease in scientific consulting expenses, and a $110,000 decrease in business development expensesour accounting fees, which were partially offset by a $64,949$24,250 increase in marketing expenses, a $17,014 increase in website service expense and a $5,732 increase in investor relationsscientific consulting expenses.

  

The $138,672 decrease$26,608 increase in general and administrative expenses was primarily due to decreases of $101,757a $26,183 increase in our DARPA-related general and administrative expenses and $22,224 in the general and administrative expenses at ESI.clinical trial expenses.

 

Other Expense

 

Other expense during the ninethree months ended December 31, 2017 and 2016June 30, 2020 consisted of lossesinterest expense and during the three months ended June 30, 2019, consisted of interest expense and a loss on debt extinguishment, warrant repricing expense, losses on share for warrant exchanges and interest expense.extinguishment. Other expense for the ninethree months ended December 31, 2017June 30, 2020 was $728, compared to other expense of $813,618 in comparison with other expense of $1,019,347$501,096 for the ninethree months ended December 31, 2016.June 30, 2019.

 

The following table breaks out the various components of our other expense for both periods:

  

 Nine Months
Ended
 Nine Months
Ended
    Three Months
Ended
 Three Months
Ended
   
 12/31/17 12/31/16 Change  6/30/20 6/30/19 Change 
Loss on Debt Extinguishment $376,909  $558,198  $(181,289) $  $447,011  $(447,011)
Loss on Warrant Repricing     345,841   (345,841)
Loss on Share for Warrant Exchanges  130,214      130,214 
Interest Expense  306,495   115,308   191,187   728   54,085   (53,357)
Total Other Expense $813,618  $1,019,347  $(205,729) $728  $501,096  $(500,368)

Loss on Debt Extinguishment

During the three months ended June 30, 2019, we reduced the conversion price on our then outstanding 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.

 

 

 

 21 

 

 

Loss on Debt Extinguishment

Our loss on debt extinguishment for the nine months ended December 31, 2017 arose from a $376,909 loss associated with the June 2017 amendments to our convertible notes. This compared to a loss of debt extinguishment of $558,198 for the nine months ended December 31, 2016 - see below for additional information.

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

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

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

Loss on Warrant Repricing

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

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

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

Loss on Share for Warrant Exchanges

During the nine months ended December 31, 2017, we agreed with two individual investors to exchange 11,497 restricted shares for the cancellation of 22,993 warrants and we entered into an Exchange Agreement with two institutional investors under which we issued 57,844 restricted shares in exchange for the cancellation of 77,125 warrants held by those investors. Additionally, we entered into an agreement with a former placement agent to issue 5,500 restricted shares in exchange for the cancellation of 11,000 warrants held by that placement agent. We measured the fair value of the shares issued and the fair value of the warrants exchanged for those shares and recorded losses for each of those exchanges based on the changes in fair value between the instruments exchanged.

22

Interest Expense

 

Interest expense was $306,495$728 for the ninethree months ended December 31, 2017 compared to $115,308 inJune 30, 2020, and $54,085 for the corresponding prior period, an increasethree months ended June 30, 2019, a decrease of $191,187.$53,357. The various components of our interest expense are shown in the following table:

 

 Nine Months
Ended
 Nine Months
Ended
    Three Months
Ended
 Three Months
Ended
   
 12/31/17 12/31/16 Change  6/30/20 6/30/19 Change 
Interest Expense $91,119  $49,671  $41,448  $728  $23,798  $(23,070)
Amortization of Deferred Financing Costs     27,641   (27,641)
Amortization of Note Discounts  215,376   37,996   177,380      30,287   (30,287)
Total Interest Expense $306,495  $115,308  $191,187  $728  $54,085  $(53,357)

 

As notedThe $53,357 decrease in our interest expense in the above table, the most significant factor in the $191,187 increase in interest expensethree months ended June 2020 was the $177,380 increase in the amortization of note discounts, which relateddue to the amortization against the discount onpayment in full of our convertible notes. Other smaller factorsnotes in the change in our total interest were a $27,641 decrease in the amortization of deferred financing costs and a $41,448 increase in our contractual interest expense.July 2019.

 

Net Loss

 

As a result of the changes in revenues and expenses noted above, our net loss before noncontrolling interests decreased fromto approximately $5,613,000$1,411,000 in the ninethree month period ended December 31, 2016 to $4,374,000June 30, 2020, from approximately $2,067,000 in the ninethree month period ended December 31, 2017.June 30, 2019.

  

Basic and diluted loss attributable to common stockholders were ($0.40)0.15) for the ninethree month period ended December 31, 2017June 30, 2020, compared to ($0.72)1.63) for the three month period ended December 31, 2016.June 30, 2019.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At December 31, 2017,As of June 30, 2020, we had a cash balance of $5,610,799$15,721,616 and working capital of $5,288,930.$14,871,972. This compares to a cash balance of $1,559,701$9,604,780 and working capital of $985,496$8,973,393 at March 31, 2017.2020. We expect our existing cash as of June 30, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these financial statements.

 

On October 4, 2017, we consummated a public offeringThe primary source of 5,454,546 shares of common stock and warrants to purchase 5,454,546 shares of common stock, for total gross proceeds of $6.0 million. The offering was priced at $1.10 per unit with each unit comprised of one share of common stock and one common stock purchase warrant. The warrants carry a five-year term with an exercise price of $1.10 per share. The net proceeds ofour increase in cash during the offering were $5,289,735. H.C. Wainwright & Co. acted as exclusive placement agent for the offering. We expect the net proceedsthree months ended June 30, 2020 resulted from that offering coupled with cash on hand will finance our operations for the twelve month period from the date of this report.

In December 2017, four investors in the October 2017 Public Offering exercised 218,600 warrants through the payment of an aggregate of $240,460 before expenses to us.

Subsequent to December 31, 2017, sixteen investors that participated in the October 2017 Public Offering exercised 852,700 warrants for aggregate cash proceeds to us of $937,970 before expenses.

Also subsequent to December 31, 2017, we sold common stock under our Common Stock Sales Agreement with H.C. Wainwright (see Note 6)& Co., LLC, or Wainwright. The cash raised from that activity is noted below:

Common Stock Sales Agreement with Wainwright

On June 28, 2016, we entered into a Common Stock Sales Agreement, or the Agreement, with Wainwright, which established an at-the-market equity program pursuant to which we may offer and sell shares of our common stock from thosetime 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.

22

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, 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 $454,654 (after deducting $14,123$7,260,869, net of $224,825 in commissions to H.C. Wainwright and $1,998$8,472 in other offering expenses) utilizingexpenses, under the sales agreementAgreement through the sale of 340,0002,685,600 shares at an average price of $1.34$2.70 per share of net proceeds.

We will require significant additional financing beyond the 12 month period subsequent to the filing date of this Form 10-Q to fund the expected additional future clinical trials of our product in the U.S., as well as fund all of our continued research and development activities for the Hemopurifier. In addition, as we expand our activities, our overhead costs to support personnel, laboratory materials and infrastructure will increase. Should the financing we require to sustain our working capital needs be unavailable to us on reasonable terms, if at all, when we require it, we may be unable to support our research and FDA clearance activities including our planned clinical trials. The failure to implement our research and clearance activities would have a material adverse effect on our ability to commercialize our products and to remain as a going concern.

23

 

Future capital requirements will depend upon many factors, including progress with pre-clinical testing and clinical trials, the number and breadth of our clinical programs, the time and costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other proprietary rights, the time and costs involved in obtaining regulatory approvals, any continued delays in completing our clinical trials, competing technological and market developments, as well as our ability to establish collaborative arrangements, effective commercialization, marketing activities and other arrangements. We expect to continue to incur increasing negative cash flows and net losses for the foreseeable future.

 

Management expects existing cash as of December 31, 2017 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these interim financial statements.

Cash Flows

 

Cash flows from operating, investing and financing activities, as reflected in the accompanying Condensed Consolidated Statements of Cash Flows, are summarized as follows:

 

 (In thousands)
For the nine months ended
  (In thousands)
For the three months ended
 
 December 31,
2017
 December 31,
2016
  June 30,
2020
 June 30,
2019
 
Cash provided by (used in):        
Cash used in:        
Operating activities $(2,893) $(2,644) $(1,102) $(1,248)
Investing activities  (24)  (3)  (18)  (1)
Financing activities  6,968   1,060   7,237   (87)
Net increase (decrease) in cash $4,051  $(1,587) $6,117  $(1,336)

    

NET CASH USED IN OPERATING ACTIVITIES. We used cash in our operating activities due to our losses from operations. Net cash used in operating activities was approximately $2,893,000$1,102,000 in the nine monthsthree month period ended December 31, 2017June 30, 2020, compared to $2,644,000approximately $1,248,000 in the nine monthsthree month period ended December 31, 2016, an increase of $249,000.June 30, 2019.

23

 

NET CASH USED IN INVESTING ACTIVITIES. We used approximately $24,000$18,000 of cash to purchase laboratory and office equipment in the ninethree months ended December 31, 2017June 30, 2020, compared to approximately $3,000$1,000 in the nine monthsthree month period ended December 31, 2016.June 30, 2019.

 

NET CASH PROVIDED BYBY/(USED IN) FINANCING ACTIVITIES. InDuring the ninethree months ended December 31, 2017June 30, 2020, we generatedraised approximately $6,968,000$7,261,000 from the issuance of common stock. That source of cash from our financing activities primarily throughwas partially offset by the use of approximately $24,000 to pay for the tax withholding on restricted stock units, for an aggregate increase of cash provided by financing activities of approximately $7,237,000. During the three months ended June 30, 2019, we raised approximately $37,000 from the issuance of common stock, an increasewhich was offset by the use of $5,908,000 over$100,000 to partially paydown our then outstanding convertible notes and approximately $24,000 to pay for the $1,060,000 raised in the nine months ended December 31, 2016.tax withholding on restricted stock units.

 

AtAs of the date of this filing, we plan to invest significantly into purchases of our raw materials and intoin our contract manufacturing arrangement, subject to successfully raising additional capital.

  

CRITICAL ACCOUNTING POLICIES

 

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. SuchThese estimates and assumptions affect the reported amounts of expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.

 

We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require the most difficult, subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical accounting policiesestimates relate to revenue recognition, measurement of stock purchase warrants issued with notes payable, beneficial conversion feature of convertible notes payable, impairment of intangible assets and long lived assets, stock compensation, deferred tax asset valuation allowance, and the classification of warrant obligations, and evaluation of contingencies. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations.

24

 

There have been no changes to our critical accounting policies as disclosed in our Form 10-K for the year ended March 31, 2017.2020.

  

OFF-BALANCE SHEET ARRANGEMENTS

 

WeAs of June 30, 2020, we did not have no obligations required to be disclosed herein asany off-balance sheet arrangements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item.

24

 

ITEM 4. CONTROLS AND PROCEDURES.

 

DISCLOSURE CONTROLS AND PROCEDURES

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report.

 

Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

 

There have been no changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

 

 

 

 

 

 

 25 

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

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.

 

ITEM 1A. RISK FACTORS.

 

As a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this item. For a discussion of our potential risks and uncertainties, please see the information listed in the item captioned “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

DuringWe did not issue or sell any unregistered securities during the three months ended December 31, 2017, 63,829 RSUs held by our outside directors were exchanged into the same number of shares of our common stock. As one of our three outside directors elected to return 40% of his RSUs in exchange for cash in order to pay his withholding taxes on the share issuances, 10,638 of the RSUs were cancelled and we paid $12,127 in cash to that outside director.June 30, 2020.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

We have no disclosure applicable to this item.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

We have no disclosure applicable to this item.

 

ITEM 5. OTHER INFORMATION.

 

We have no disclosure applicable to this item.

26

 

ITEM 6. EXHIBITS.

 

(a) Exhibits. The following documents are filed as part of this report:

 

      Incorporated by Reference
Exhibit
Number
 Exhibit Description Form SEC File No. Exhibit
Number
 Date Filed
Herewith
             
 3.1 Articles of Incorporation. S-3 333-211151 3.1 May 5, 2016  
              
 3.2 Amended and Restated Bylaws of the Company. 8-K 001-37487 3.1 September 12, 2019  
              
 4.1 Form of Common Stock Certificate. S-1 333-201334 4.1 December 31, 2014  
              
 4.2 Form of Common Stock Purchase Warrant dated August 29, 2012. 8-K 000-21846 4.1 September 6, 2012  
              
 4.3 Form of Common Stock Purchase Warrant dated October, November and December 2012. 10-Q 000-21846 4.1 February 12, 2013  
              
 4.4 Form of Common Stock Purchase Warrant dated June 14, 2013. 10-Q 000-21846 4.1 August 13, 2013  
              
 4.5 Form of Common Stock Purchase Warrant dated June 24, 2014. 8-K 000-21846 4.1 June 30, 2014  
              
 4.6 Form of Common Stock Purchase Warrant dated July 24, 2014. 8-K 000-21846 4.1 July 28, 2014  
              
 4.7 Form of Common Stock Purchase Warrant dated August and September 2014. 10-Q 000-21846 4.3 November 10, 2014  
              
 4.8 Form of Warrant to Purchase Common Stock dated June 25, 2015. 8-K 000-21846 4.1 June 24, 2015  
              
 4.9 Form of Purchase Agent Warrant dated June 25, 2015. 8-K 000-21846 4.1 June 26, 2015  
              
 4.10 Form of Warrant Agreement dated March 27, 2017. 8-K 001-37487 4.1 March 22, 2017  
              
 4.11 Form of Warrant dated _______, 2017. S-1/A 333-219589 4.29 September 18, 2017  
              
 4.12 Form of Placement Agent Warrant dated _______, 2017. S-1/A 333-219589 4.30 September 22, 2017  
              
 4.13 Form of Warrant to Purchase Common Stock. S-1/A 333-234712 4.14 December 11, 2019  
              
 4.14 Form of Underwriter Warrant. S-1/A 333-234712 4.15 December 11, 2019  
              
 4.15 Form of Common Stock Purchase Warrant. 8-K 001-37487 4.1 January 17, 2020  

27

Incorporated by Reference
Exhibit
Number
Exhibit DescriptionFormSEC File No.Exhibit
Number
DateFiled
Herewith
10.1Amendment No. 2 to Common Stock Sales Agreement, by and between H.C. Wainwright & Co., LLC and Aethlon Medical, Inc., dated March 30, 2020.X
10.2Aethlon Medical, Inc. Amended and Restated Non-Employee Directors Compensation Policy. ++X
31.1Certification of Principalour Chief Executive Officer, pursuant to Securities Exchange Act rules 13a- 14(a)13a-14(a) and 15d-14(a) as adopted pursuant to sectionSection 302 of the Sarbanes-OxleySarbanes Oxley Act of 20022002.X
  
31.2Certification of Principalour Chief Financial Officer, pursuant to Securities Exchange Act rules 13a- 14(a)13a-14(a) and 15d-14(a) as adopted pursuant to sectionSection 302 of the Sarbanes-OxleySarbanes Oxley Act of 20022002.X
  
32.1CertificationStatement of Principalour Chief Executive Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to sectionunder Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).X
  
32.2CertificationStatement of Principalour Chief Financial Officer pursuant to 18 U.S.C. section 1350, as adopted pursuant to sectionunder Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).X
  
101Interactive Data Files
  
 101.INSXBRL Instance DocumentX
 101.SCHXBRL Schema DocumentX
 101.CALXBRL Calculation Linkbase DocumentX
 101.DEFXBRL Definition Linkbase DocumentX
 101.LABXBRL Label Linkbase DocumentX
 101.PREXBRL Presentation Linkbase DocumentX

 ___________________

++Indicates management contract or compensatory plan.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 AETHLON MEDICAL, INC.
 
    
Date: February 1, 2018August 11, 2020By:/s/ JAMES B. FRAKES 
  JAMES B. FRAKES 
  CHIEF FINANCIAL OFFICER 
  CHIEF ACCOUNTING OFFICER 

 

 

 

 

 

 

 


 

 

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