AETHLON MEDICAL, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

December 31, 20182019

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

ORGANIZATION

Aethlon Medical, Inc. and its subsidiary (collectively, “Aethlon”, the “Company”, “we” or “us”), is a medical device technology company focused on addressing unmet needs in global healthdeveloping products to diagnose and biodefense.treat life and organ threatening diseases. The Aethlon Hemopurifier® is a clinical-stage immunotherapeutic device designed to combat cancer and life-threatening viral infections. In cancer, the Hemopurifier depletesis 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, (FDA)or FDA, has designated the Hemopurifier as a "Breakthrough Device" related to the following“Breakthrough Device” for two independent indications:

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 objective 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, and Ebola. Additionally,in vitro, the Hemopurifier has been validateddemonstrated to capture Zika virus, Lassa virus, MERS-CoV, cytomegalovirus, Epstein-Barr virus, Herpes simplex virus, Chikungunya virus, Dengue virus, West Nile virus, smallpox-related viruses, H1N1 swine flu virus, H5N1 bird flu virus, and the reconstructed Spanish flu virus of 1918. In several cases, these validationsstudies were conducted in collaboration with leading government or non-government research institutes. Domestically, we are focused on the clinical advancement of the Hemopurifier through investigational device exemptions (IDEs) approved by the FDA. We recently concluded a feasibility study to demonstrate the safety of our device in health-compromised individuals infected with a viral pathogen.

We are also the majority owner of Exosome Sciences, Inc. (ESI), 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 TauSome^TMTauSome™ biomarker candidate to diagnose chronic traumatic encephalopathy, (CTE)or CTE, in the living. ESI previously documented TauSome levels in former NFL players to be nine times higher than same age-group control subjects. Through ESI, we are also developing exosome based biomarkers in patients with, or at risk for, a number of cancers. We consolidate ESI’s activities in our consolidated financial statements.

We also have a cross-licensing and development agreement with SeaStar Medical, Inc., focused on co-development of our Hemopurifier cartridge with SeaStar’s proprietary cartridges and the development of a closed system for the Hemopurifier using the SeaStar pump and cassettes. This collaboration may allow the deployment of the Hemopurifier into settings that lack dialysis infrastructure, such as chemotherapy infusion centers and field operations for life threatening viral epidemics.

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

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 listed 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 nine months ended December 31, 2018,2019, 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, 2018.2019, except as described below.

Leases

At lease commencement, the Company records a lease liability based on the present value of lease payments over the expected lease term. The Company calculates the present value of lease payments using the discount rate implicit in the lease, unless that rate cannot be readily determined. In that case, the Company uses its incremental borrowing rate, which is the rate of interest that the Company would have to pay to borrow on a collateralized basis an amount equal to the lease payments over the expected lease term. The Company records a corresponding right-of-use lease asset based on the lease liability, adjusted for any lease incentives received and any initial direct costs paid to the lessor prior to the lease commencement date.

After lease commencement, the Company measures its leases as follows: (i) the lease liability based on the present value of the remaining lease payments using the discount rate determined at lease commencement; and (ii) the right-of-use lease asset based on the remeasured lease liability, adjusted for any unamortized lease incentives received, any unamortized initial direct costs and the cumulative difference between rent expense and amounts paid under the lease agreement. Rent expense is recorded on a straight-line basis over the expected lease term (See Note 4).

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) for interim financial information and with the instructions to Form 10-Q and Article 8 of the Securities and Exchange Commission (SEC) Regulation S-X. Accordingly, they should be read in conjunction with the audited financial statements and notes thereto for the fiscal year ended March 31, 2018,2019, included in the Company's Annual Report on Form 10-K filed with the SEC on June 8, 2018.July 1, 2019. The accompanying unaudited condensed consolidated financial statements include the accounts of Aethlon Medical, Inc. and its majority-owned subsidiary. All significant inter-company transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly the condensed consolidated financial statements as of and for the three and nine months ended December 31, 2018,2019, and the condensed consolidated statement of cash flows for the nine months ended December 31, 2018.2019. Estimates were made relating to useful lives of fixed assets, impairment of assets, share-based compensation expense and accruals for clinical trial and research and development expenses. Actual results could differ materially from those estimates. The accompanying condensed consolidated balance sheet at March 31, 20182019 has been derived from the audited consolidated balance sheet at March 31, 2018,2019, contained in the above referenced 10-K. The results of operations for the three and nine months ended December 31, 20182019 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.

LIQUIDITY AND GOING CONCERN

Management expects existing cash as of December 31, 20182019, together with cash raised in January 2020 to be sufficient to fund the Company’s operations for at least twelve months from the issuance date of these condensed consolidated financial statements.

2. LOSS PER COMMON SHARE

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period of computation. The weighted average number of common shares outstanding for the three and nine months ended December 31, 2019 and 2018 included common shares underlying 215 and 2017 included 46,1253,075 vested restricted stock units.units, respectively. 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, 2019 and 2018, an aggregate of 3,779,301 and 2017, a total of 6,886,020 and 9,143,480459,068 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, 20182019 and 2017,2018, 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:

4. FUTURE ACCOUNTING PRONOUNCEMENTSRecent Accounting Pronouncements

The Company adopted ASU 2016-02, Leases (Topic 842) changesTopic 842 on April 1, 2019 utilizing the existing accounting standardsalternative transition method allowed for under this guidance. As a result, the Company recorded lease accounting, including requiring lessees toliabilities 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 the Company’s corporate headquarters lease (see Note 13), discounted using the Company’s 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. The Company also elected the short-term lease recognition exemption for its laboratory lease. For the laboratory lease that qualified as short-term, the Company did not recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. EarlyROU assets or lease liabilities at adoption. The adoption of ASU 2016-02 asdid not have a material impact on either the statement of its issuance is permitted. We are evaluatingoperations or statement of cash flows for the impact the adoption of ASU 2016-02 will have on our financial statements and disclosures.nine months ended December 31, 2019.

Topic 842 also allows lessees and lessors to elect certain practical expedients. The Company elected the following practical expedients:

5. CONVERTIBLE NOTES PAYABLE, NET

In July 2019, we paid off our Convertible Notes Payable. We paid the remaining principal balance of $892,591 and accrued interest of $11,352. As a result, we did not incur any interest expense related to the Convertible Notes in the three months ended December 31, 2019.

For the nine months ended December 31, 2019, we recorded interest expense of $23,759 related to the contractual interest rates of our Convertible Notes and interest expense of $30,287 related to the amortization of the note discount for a total interest expense of $54,046 related to our Convertible Notes.

Convertible Notes Payable, Net consisted of the following at DecemberMarch 31, 2018:2019:

During the nine months ended December 31, 2018, we recorded interest expense of $74,445 related to the contractual interest rates of our convertible notesConvertible Notes and interest expense of $90,861 related to the amortization of the note discount for a total interest expense of $165,306 related to our convertible notesConvertible Notes in the nine months ended December 31, 2018. All of the unamortized discount at December 31, 2018 related to the note discount established upon the June 2017 amendment to the November 2014 10% Convertible Notes and to the December 2016 10% Convertible Notes (see below).

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

During the nine months ended December 31, 2017, we recorded interest expense of $87,641 related to the contractual interest rates of our convertible notes and interest expense of $215,376 related to the amortization of the note discount for a total interest expense of $303,017 related to our convertible notes. All of the unamortized discount at December 31, 2017 related to the note discount established upon the June 2017 amendment to both the November 2014 10% Convertible Notes and the December 2016 10% Convertible Notes (see below).

NOVEMBER 2014 10% CONVERTIBLE NOTES

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

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 were originally 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 the 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 was extended from June 1, 2016 to July 1, 2017 and that the conversion price per share of the Notes was reduced from $5.60 per share of common stock to $5.00 per share of common stock. In addition, we reduced the exercise price set forth in the Warrants from $8.40 per share to $5.00 per share of common stock. In connection with these modifications, each of the investors signed a Consent and Waiver providing its consent under certain restrictive provisions, and waiving certain rights, including a right to participate in certain offerings made by us, under a Securities Purchase Agreement dated June 23, 2015 (the “2015 SPA”) to which we, the investors and certain other investors are parties, in order to facilitate an at-the-market equity program.

The Amendments also increased 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 an exercise price of $5.00 per share of common stock. We issued the New Warrants in substantially the same form as the prior Warrants, and the New Warrants will expire on November 6, 2019, the same date on which the prior Warrants will expire.

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 Notes was reduced from $5.00 to $4.00 per share and the maturity date of the 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 Notes to an extension of the maturity dates of the Notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of those Notes from $4.00 per share to $3.00 per share. The modification of the Notes was evaluated under ASC 470-50-40 and the instruments were determined to be substantially different, and the transaction qualified for extinguishment accounting. Under the extinguishment accounting we recorded a loss on debt extinguishment of $178,655 and recalculated a revised debt discount on the notes.

The following table shows the changes to the principal balance of the Notes:

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 December 2016 10% Convertible Notes (December 2016 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 “December 2016 Warrants”).

The December 2016 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 December 2016 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 December 2016 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 December 2016 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 December 2016 Warrant by paying the exercise price in cash or by exercising the December 2016 Warrant on a cashless basis. In the event a Holder exercises a December 2016 Warrant on a cashless basis, we will not receive any proceeds. The exercise price of the December 2016 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 December 2016 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 December 2016 Warrants issued in connection with the December 2016 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 December 2016 Warrants. In addition, as the effective conversion price of the December 2016 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 December 2016 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 Notes to an extension of the expiration dates of the December 2016 Notes from July 1, 2018 to July 1, 2019 in exchange for the reduction of the conversion price of the December 2016 Notes from $4.00 per share to $3.00 per share. The modification of the December 2016 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 December 2016 Notes.

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

6. EQUITY TRANSACTIONS IN THE NINE MONTHS ENDED DECEMBER 31, 20182019

Shares Issued for ServicesDecember 2019 Public Offering

DuringOn December 13, 2019, we entered into an underwriting agreement with H.C. Wainwright and Co., as representative of the nine months ended December 31, 2018, we issued 15,000several underwriters named therein, relating to the public offering, issuance and sale of 3,333,334 shares of restrictedcommon stock (which includes pre-funded warrants to purchase shares of common stock in lieu thereof), and common warrants to purchase up to an aggregate of 3,333,334 shares of common stock at a public offering price of $1.29$1.50 per share (the “December 2019 Public Offering”). Each share of common stock (or pre-funded warrant in lieu thereof) was sold together with a common warrant to purchase one share of common stock. The common warrants have an exercise price of $1.50 per share, were immediately exercisable, and will expire five years from the market price at timedate of issuance,issuance. The offering closed on December 17, 2019.

The gross proceeds of the December 2019 Public Offering were approximately $5 million, prior to deducting underwriting discounts and commissions and estimated offering expenses and excluding the exercise of any common warrants and the underwriter's option to purchase additional securities. The net proceeds from the December 2019 Public Offering were $4,091,437. We intend to use approximately $700,000 of the net proceeds from this offering for the currently planned clinical trials for the Hemopurifier® over the next 12 months, with the remainder for working capital and other general corporate purposes.

Subsequent to the completion of the December 2019 Public Offering and prior to December 31, 2019, all of the holders of pre-funded warrants exercised their pre-funded warrants in paymentfull.

In the event of a Fundamental Transaction (a transfer of ownership of the Company as defined in the common warrants issued in the December 2019 Public Offering) within our control, the holders of the unexercised common stock warrants exercisable for investor relations consulting services. The aggregate value$1.50 per share, are entitled to receive cash consideration equal to a Black-Scholes valuation, as defined in the warrant. If such Fundamental Transaction is not within our control, the warrant holders would only be entitled to receive the same form of this share issuance was $19,350.consideration (and in the same proportion) as the holders of our common stock, hence these warrants are classified as a component of permanent equity.

Common Stock Sales Agreement with H.C. Wainwright

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

On August 6, 2019, we executed Amendment No. 1 to the Agreement with H.C. Wainwright, effective as of August 5, 2019. The amendment provides that references in the Agreement to the registration statement shall refer to the registration statement on Form S-3 (File No. 333-231397), originally filed with the Securities and Exchange Commission on May 10, 2019, declared effective by the Securities and Exchange Commission on August 1, 2019. We terminated the ATM Prospectus Supplement and suspended any sales under the Sales Agreement on January 17, 2020, but the Sales Agreement remains in full force and effect.

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 Shares from time to time, based upon our instructions. We have provided H.C. Wainwright with customary indemnification rights, 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 Share sold. In addition, we agreed to pay certain expenses incurred by H.C. Wainwright in connection with the Agreement, including up to $50,000 of the fees and disbursements of their counsel. The Agreement will terminate upon the sale of all of the Shares under the Agreement, unless terminated earlier by either party as permitted under the Agreement (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, including sales made by means of ordinary brokers’ transactions, including on the Nasdaq Capital Market, at market prices or as otherwise agreed with H.C. Wainwright. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Agreement or terminate the Agreement.

In the nine months ended December 30, 2018,31, 2019, we raised aggregate net proceeds of $749,803$896,031 (net of $23,289$27,896 in commissions to H.C. Wainwright and $2,395$5,929 in other offering expenses) under this agreementAgreement through the sale of 555,000161,149 shares of common stock at an average price of $1.35$5.56 per share of net proceeds.

Warrant ExercisesRestricted Stock Unit Grants

Our Board of Directors established the 2012 Non-Employee Directors Compensation Program, as amended through August 2016, or the Non-Employee Directors Plan, pursuant to which, in addition to cash compensation, directors of the Company who are not also employees may be granted stock-based compensation in the form of restricted stock units, or RSU’s. The RSUs represent the right to be issued on a future date shares of our common stock for RSUs which have then vested.

In April 2019, pursuant to the Non-Employee Directors Plan, we issued RSUs with a value of $35,000 to each of our non-employee directors, as the stock-based compensation element of their overall directors’ compensation, for the fiscal year ending March 31, 2020. Those grants were based on the closing price of our common stock on the one business day prior to the grant date, $14.25 per share. Therefore, 2,456 RSUs were issued to each of our five non-employee directors, for a total of 12,280 RSUs. All of the RSUs are subject to vesting in equal quarterly installments on June 30, 2019, September 30, 2019, December 31, 2019 and March 31, 2020.

In the nine months ended December 30, 2018, three investors that participated in the October 2017 public offering exercised 129,300 warrants for aggregate cash proceeds to us of $142,230 before expenses.

Restricted Stock Unit Grants to Executive Officers and Directors

During the nine months ended December 31, 2018, 250,676 Restricted Stock Units (“RSUs”)April 2019, 2,859 vested RSUs held by our current and former executive officers were exchanged for the same number of shares of our common stock. As these executives elected to net settle a portion of their vested RSUs in exchange for the Company paying the related withholding taxes of $18,318 on the share issuance, 1,512 of the vested RSUs were cancelled and we issued a net 1,347 shares to the executives and former executive.

In June 2019, 3,075 vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. Four of our five non-employee directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in 984 of the vested RSUs being cancelled in exchange for $5,453 in aggregate cash proceeds to those independent directors.

In July 2019, 2,861 vested RSUs held by our current and former executive officers were exchanged for the same number of shares of our common stock. As ourthese executives elected to net settle a portion of their RSU’svested RSUs in exchange for usthe Company paying the related withholding taxes and our non-employee directors elected to receive a cash equivalent of the value of their shares equal to their estimated income taxes$4,979 on the share issuance, 112,3661,510 of the vested RSUs were cancelled and we issued a net 138,3111,351 shares to the executives and former executive.

In September 2019, 3,075 vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. Four of our five non-employee directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in 984 of the vested RSUs being cancelled in exchange for $3,463 in aggregate cash proceeds to those independent directors.

In October 2019, 2,859 vested RSUs held by current and former executive officers were exchanged for the same number of shares of our common stock. As these executives elected to net settle a portion of their vested RSUs in exchange for the Company paying the related withholding taxes of $5,938 on the share issuance, 1,511 of the vested RSUs were cancelled and we issued a net 1,348 shares to the current and former executives.

In December 2019, 3,075 vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. Four of our five non-employee directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in 984 of the vested RSUs being cancelled in exchange for $3,463 in aggregate cash proceeds to those independent directors.

RSUs outstanding that have vested as of, and are expected to vest subsequent to, December 31, 2019 are as follows:

Common Stock for Warrant Cancellation

During the nine months ended December 31, 2019, we agreed with seven accredited investors to issue an aggregate of 3,992 shares of our common stock to these investors in exchange for the cancellation of outstanding warrants then held by the investors to purchase an aggregate of 39,900 shares of our executivescommon stock. We measured the fair value of the shares issued and directors (see Note 9).the fair value of the warrants exchanged for those shares and recorded a gain of $51,190 on those exchanges based on the changes in fair value between the instruments exchanged.

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

7. RELATED PARTY TRANSACTIONS

During the ninethree months ended December 31, 20182019, we accrued unpaid Board fees of $69,750 owed to our non-employee directors as of December 31, 2018.2019. For the nine months ended December 31, 2019, we recorded $209,250 in fees to our non-employee directors.

As a result of entering into a Separation and Consulting Agreement with our former CEO, we paid out accrued vacation of $32,083 to that former executive in December 2018 (see Note 8 and Note 13). That accrued vacation was previously recorded in theAmounts due to related parties account.were comprised of the following items:

8. OTHER CURRENT LIABILITIES

Other current liabilities were comprised of the following items:

9. STOCK COMPENSATION

The following tables summarize share-based compensation expenses relating to 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, 20182019 and 2017:2018:

All of the stock-based compensation expense recorded during the nine months ended December 31, 20182019 and 2017,2018, which totaled $944,512$755,648 and $887,607,$944,512, respectively, is included in payroll and related expense in the accompanying condensed consolidated statements of operations.  Stock-based compensation expense recorded during the nine months ended December 31, 20182019 and 20172018 represented an impact on basic and diluted loss per common share of $(0.05)$(0.41) and $(0.08)$(0.79), respectively.

We review share-based compensation on a quarterly basis for changes to the estimate of expected award forfeitures based on actual forfeiture experience. The cumulative effect of adjusting the forfeiture rate for all expense amortization is recognized in the period the forfeiture estimate is changed. The effect of forfeiture adjustments for the nine months ended December 31, 20182019 was insignificant.

Stock Option Activity

Restricted Stock Unit Grants to Directors and Executive Officers

On August 9, 2016, our Board granted RSUs to certain of our officers and directors. The RSUs representWe did not issue any stock options during the right to be issued on a future date shares of our common stock for vested RSUs. The Board’s Compensation Committee recommended the grants based on a compensation assessment provided by a third-party compensation consulting firm engaged by us that developed a peer group of companies for market assessment and analyzed compensation at such companies.

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

The above noted RSUs were granted under our Amended 2010 Stock Incentive PlanOptions outstanding that have vested as of December 31, 2019 and we recorded expenseoptions that are expected to vest subsequent to December 31, 2019 are as follows:

A summary of $928,762 instock option activity during the nine months ended December 31, 20182019 is presented below:

On December 31, 2019, our stock options had no intrinsic value since the closing price on that date of $0.96 per share was below the weighted average exercise price of our outstanding stock options.

At December 31, 2019, there was approximately $1,418,000 of unrecognized compensation cost related to the RSU grants. share-based payments, which is expected to be recognized over a weighted average period of 3.5 years.

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

During the nine months ended December 31, 2018, 250,676 RSUs held by our executives and directors 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 us paying the related withholding taxes and our non-employee directors elected to receive a cash equivalent of the value of their shares equal to their estimated income taxes on the share issuance, 112,366 of the RSUs were cancelled and we issued a net 138,311 shares of common stock to our executives and directors.

Stock Option Activity10. WARRANTS

During the nine months ended December 31, 2018,2019, we issued pre-funded warrants and common warrants as part of our December 2019 Public Offering (see Footnote 6). All of the pre-funded warrants were fully exercised immediately after the offering. We issued 3,333,334 common warrants in the offering with an option to our new CEO to purchase 552,625 shares of common stock at aexercise price of $1.25$1.50 per share,share. Those common warrants carried a term of five years. We also issued 100,000 warrants to the closingplacement agent in the offering. The placement agent warrants have an exercise price on the date of the option grant.

Options outstanding that$1.875 and have vested and are expected to vest asa term of December 31, 2018 are as follows:five years.

The following outlines the significant weighted average assumptions used to estimate the fair value information presented, with respect to the stock option grantwarrants, utilizing the Binomial Lattice option pricing models, at, andissued during the nine months ended December 31, 2018:2019:

A summary of stock option activity during the nine months ended December 31, 2018 is presented below:

On December 31, 2018, our stock options had no intrinsic value since the closing price on that date of $1.66 per share was below the weighted average exercise price of our outstanding stock options.

At December 31, 2018, there was approximately $1,740,025 of unrecognized compensation cost related to share-based payments, which is expected to be recognized over a weighted average period of 1.3 years.

10. WARRANTS

During the nine months ended December 31, 2018, and 2017, we did not issue any warrants.

During the nine months ended December 31, 2019, we agreed with seven accredited investors to issue an aggregate of 3,992 shares of our common stock to these investors in exchange for the cancellation of outstanding warrants then held by the investors to purchase an aggregate of 39,900 shares of our common stock. We measured the fair value of the shares issued and the fair value of the warrants exchanged for those shares and recorded a gain of $51,190 on those exchanges based on the changes in fair value between the instruments exchanged.

A summary of warrant activity during the nine months ended December 31, 20182019 is presented below:

11. GOVERNMENT CONTRACTS AND RELATED REVENUE RECOGNITION

We have entered into the following twothree contracts/grants with the National Cancer Institute, (NCI),or NCI, part of the National Institutes of Health, (NIH)or NIH, over the past two years:

Phase 2 Melanoma Cancer Contract

On September 12, 2019, the NCI awarded to us an SBIR Phase II Award Contract, for NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma Exosomes for Diagnostics and Treatment Monitoring”, or the Award Contract. The Award Contract amount is $1,860,561 and runs for the period from September 16, 2019 through September 15, 2021.

The work to be performed pursuant to this Award Contract 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 (see Phase 1 Melanoma Cancer Contract below). Following on the Phase I work, the deliverables in the Phase II program will involve the design and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.

Breast Cancer GrantDuring the nine months ended December 31, 2019, we recognized $413,458 in government contract revenue under this contract as a result of the work involved completing the first two milestones in the project as reported in the kick-off presentation to the NCI and first quarterly report. The kick-off presentation covered the Company's organization and project status, recent achievements, the status of the field, the status of commercial and academic competitors, where the proposed project was positioned against the state of the art, the IP landscape, a refresher on the proposed technology, the detailed plan for the first budget period of the contract and technical risks and alternative approaches. The first quarterly report covered a summary of technical objectives, a description of activities accomplished in the quarter, an analysis of experimental data, comments regarding the timeliness of performance, and a brief explanation of activities to be pursued in the following quarter.

In September 2018, the NCI awarded us a government grant (number 1R43CA232977-01). The title of this Small Business Innovation Research (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 runs from September 14, 2018 through August 31, 2019. 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.

As of December 31, 2018, we have not recognized any revenue under the grant.

1 Melanoma Cancer Contract

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

The award from NIH was 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 had 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 were required to perform certain incremental work towardstoward the achievement of specific milestones against which we would invoiceinvoiced the government for fixed payment amounts.

In the nine months ended December 31, 2018, we performed work under the contract covering the remainder of the technical objectives of the contract (AimAim 1: To validate the Hemopurifier as a device for capture and recovery of melanoma exosomes from plasma, and Aim 2: To validate a method of melanoma exosome isolation consisting of the Hemopurifier followed by mab-based immunocapture to select out the tumor-derived exosomes from non-malignant exosomes and Aim 3: To evaluate the functional integrity of melanoma exosomes purified by the Hemopurifier and immunocapture isolation steps).steps. As a result, we invoicedrecognized $149,625 in revenue from NIH for $149,625 during the nine months ended December 31, 2018.

The Phase 1 Melanoma Cancer Contract is now completed.

Breast Cancer Grant

In September 2018, the NCI awarded us a government grant (number 1R43CA232977-01). The title of this 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 extended 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 nine months ended December 31, 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 on expression of CSPG4 and HER2, for triple-negative or HER2-overexpressing cancers, respectively”). We also invoiced the NCI an additional $100,000 in the six month period ended September 30, 2019 in order to pay our subcontractors under the contract. As we did not complete any of the technical objectives beyond Aim 2 noted above during the December period, we recorded this $100,000 as deferred revenue as of December 31, 2019.

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.

The following tables set forth certain information regarding our segments: