ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and
analysis should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this Annual
Report.
Overview
We are a medical technology
company focused on developing products to diagnose and 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 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:
We believe the Hemopurifier
can be a substantial advance in the treatment of patients with advanced and metastatic cancer through the clearance of exosomes that promote
the growth and spread of tumors through multiple mechanisms. We are currently preparing for the initiation of clinical trials in patients
with advanced and metastatic cancers. We are initially focused on the treatment of solid tumors, including head and neck cancer, gastrointestinal
cancers and other cancers. As we advance our clinical trials, we are in close contact with our clinical sites to navigate and assess the
impact of the COVID-19 global pandemic on our clinical trials and current timelines.
On October 4, 2019, the FDA
approved our Investigational Device Exemption, or IDE, application to initiate an Early Feasibility Study, or EFS, of the Hemopurifier
in patients with head and neck cancer in combination with standard of care pembrolizumab (Keytruda). 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 is being conducted at the UPMC Hillman Cancer Center in Pittsburgh,
PA, is in the process of recruiting and treating patients.
We also believe the Hemopurifier
can be part of the broad-spectrum treatment of life-threatening highly glycosylated, or carbohydrate coated, viruses that are not addressed
with an already approved treatment. In small-scale or early feasibility human studies, the Hemopurifier has been used to treat individuals
infected with human immunodeficiency virus, or HIV, hepatitis-C, and Ebola.
Additionally, in-vitro,
the Hemopurifier has been demonstrated to capture Zika virus, Lassa virus, MERS-CoV, cytomegalovirus, Epstein-Barr virus, Herpes simplex
virus, Chikungunya virus, Dengue virus, West Nile virus, smallpox-related viruses, H1N1 swine flu virus, H5N1 bird flu virus, and the
reconstructed Spanish flu virus of 1918. In several cases, these validations were conducted in collaboration with leading government or
non-government research institutes.
On June 17, 2020, the FDA
approved a supplement to our open IDE for the Hemopurifier in viral disease to allow for the testing of the Hemopurifier in patients with
SARS-CoV-2/COVID-19 in a New Feasibility Study. That study’s plan is to enroll up to 40 subjects
at up to 20 centers in the U.S. Subjects will have established laboratory diagnosis of COVID-19, be admitted to an intensive care unit,
or ICU, and will have acute lung injury and/or severe or life threatening disease, among other criteria. Endpoints for this study, in
addition to safety, will include reduction in circulating virus as well as clinical outcomes (NCT # 04595903). The initial sites for this
trial, Hoag Memorial Hospital Presbyterian in Newport Beach, CA and Hoag Hospital – Irvine in Irvine, CA and Loma Linda Hospital
in Loma Linda, CA, have completed clinical trial agreements, and have received IRB approval in the case of the Hoag hospitals, and are
preparing to open for patient enrollment. Under Single Patient Emergency Use regulations, the Company has also treated two patients with
COVID-19 with the Hemopurifier.
We are also the majority owner
of Exosome Sciences, Inc., or ESI, a company focused on the discovery of exosomal biomarkers to diagnose and monitor life-threatening
diseases. Included among ESI’s activities is the advancement of a TauSomeTM biomarker candidate to diagnose chronic traumatic
encephalopathy, or CTE, in the living. ESI previously documented TauSome levels in former NFL players to be nine times higher than same
age-group control subjects. Through ESI, we are also developing exosome based biomarkers in patients with, or at risk for, a number of
cancers. We consolidate ESI’s activities in our consolidated financial statements.
Successful outcomes of human
trials will also be required by the regulatory agencies of certain foreign countries where we plan to sell the Hemopurifier. Some of our
patents may expire before FDA approval or approval in a foreign country, if any, is obtained. However, we believe that certain patent
applications and/or other patents issued more recently will help protect the proprietary nature of the Hemopurifier treatment technology.
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 listed on the Nasdaq Capital
Market under the symbol “AEMD.”
COVID-19 Update
In March 2020, the World Health
Organization declared COVID-19 a global 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.
Fiscal Years Ended March 31, 2021 and 2020
Results of Operations
Government Contract Revenues
We recorded government contract
revenue in the fiscal years ended March 31, 2021 and 2020. This revenue resulted from work performed under our government contracts with
the NIH and our subaward with the University of Pittsburgh as follows:
Fiscal Year Ended 3/31/21 Fiscal Year Ended 3/31/20 Change in Dollars
Subaward with University of Pittsburgh 34,233 – 34,233
We have recognized revenue
under the following three government contracts/grants over the past two years:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the
National Cancer Institute, or NCI, part of the National Institutes of Health, or NIH, awarded to us an SBIR Phase II Award Contract, for
NIH/NCI Topic 359, entitled “A Device Prototype for Isolation of Melanoma Exosomes for Diagnostics and Treatment Monitoring”,
or the Award Contract. The Award Contract amount is $1,860,561 and runs for the period from September 16, 2019 through September 15, 2021.
The work to be performed pursuant
to this Award Contract focuses on melanoma exosomes. This work follows from our completion of a phase I contract for the Topic 359 solicitation
that ran from September 2017 through June 2018. Following on the phase I work, the deliverables in the phase II program involve the design
and testing of a pre-commercial prototype of a more advanced version of the exosome isolation platform.
During the fiscal year ended
March 31, 2021, we completed the milestones relevant to the first nine months of the fiscal year. As a result, we recorded $436,427 of
government contract revenue on the Phase 2 Melanoma Cancer Contract in the fiscal year ended March 31, 2021. Of the total
revenue recognized during the current period relating to this grant, a total of $117,849 was invoiced to the NCI during the three months
ended December 31, 2020 and we recorded $318,578 which had previously been recognized as deferred revenue.
During the three month period
ended March 31, 2021, we did not complete all of the milestones relevant to that time period, as a result, we recorded $114,849 as deferred
revenue related to the Phase 2 Melanoma Cancer Contract.
Breast Cancer Grant
In the fiscal year ended March
31, 2021, we completed and submitted the final reports applicable to this NCI grant (number 1R43CA232977-01). The title of this Small
Business Innovation Research, or SBIR, Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes
from the Blood Circulation,” or the Breast Cancer Grant.
This NCI Phase I grant period
originally ran from September 14, 2018 through August 31, 2019. In August 2019, we applied for and received a no cost, twelve month extension
on this grant; through August 31, 2020. The total amount of the firm grant was $298,444. The grant called for two subcontractors to work
with us. Those subcontractors were University of Pittsburgh and Massachusetts General Hospital.
During the fiscal year ended
March 31, 2021, we recorded the remaining $188,444 of revenue related to the Breast Cancer Grant, as we achieved two of the three milestones
related to the Breast Cancer Grant. We concluded in our final report to the SBIR that our pre-clinical results demonstrated that our work
under the grant provided support that the Hemopurifier has the capacity to clear exosomes from breast cancer patients. That amount previously
was recorded as deferred revenue.
As of March 31, 2021, we received
all of the funds allocated to the Breast Cancer Grant and have submitted the final reports applicable to this grant.
Subaward with University of Pittsburgh
In 2020, we entered into a
cost reimbursable subaward arrangement with the University of Pittsburgh in connection with an NIH contract entitled “Depleting
Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the award is $256,750. We recorded $34,233 of revenue related
to this subaward in the fiscal year ended March 31, 2021.
Operating Costs and Expenses
Consolidated operating expenses
were $8,549,023 for the fiscal year ended March 31, 2021, compared to $6,580,175 for the fiscal year ended March 31, 2020, an increase
of $1,968,848. The $1,968,848 increase was due to increases in payroll and related expenses of $1,152,342 and in general and administrative
expense of $907,867, which were partially offset by a decrease of $91,361 in professional fees.
The $1,152,342 increase in
fiscal year ended March 31, 2021 in our payroll and related expenses was due to an increase in cash-based compensation of $1,216,919,
which was partially offset by a decrease in our stock-based compensation of $64,577. Approximately $444,729 of the increase in cash-based
compensation related to an accrual for severance payments to our former Chief Executive Officer.
The $907,867 increase in fiscal
year ended March 31, 2021 in our general and administrative expenses primarily arose from increases of $460,817 in our clinical trial
expenses and $469,304 in laboratory supplies.
The $91,361 decrease in fiscal
year ended March 31, 2021 in our professional fees primarily arose from decreases of $295,022 in legal fees and $116,536 in accounting
fees, which were partially offset by increases of $179,457 in scientific consulting fees, $94,548 in recruiting fees and $58,966 in contract
labor costs.
Other Expense
In the fiscal year ended March
31, 2021, we recognized other expenses of $1,580, compared to $450,053 of other expense in the fiscal year ended March 31, 2020. The following
table breaks out the various components of our other expense over the fiscal years ended March 31, 2021 and 2020:
Components of Other Expense in Fiscal Year Ended
(Gain) on share for warrant exchanges – (51,190 ) 51,190
Loss on Debt Extinguishment
During the fiscal year ended
March 31, 2020, we reduced the conversion price on our 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. There was no comparable loss on debt extinguishment in the fiscal year ended March 31, 2021.
Gain on Common Stock for Warrant Cancellation
During the fiscal year ended
March 31, 2020, 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. There was no comparable gain on common
stock for warrant cancellation in the fiscal year ended March 31, 2021.
Interest and Other Debt Expenses
Our interest and other debt
expense decreased by $52,652 in the fiscal year ended March 31, 2021, from the fiscal year ended March 31, 2020. The following table breaks
out the various components of our interest expense over the fiscal years ended March 31, 2021 and 2020:
Components of Interest Expense and Other Debt Expenses in Fiscal Year Ended
As noted in the above table,
the factors in the $52,652 overall decrease in fiscal year ended March 21, 2021 in interest and other debt expenses were a $30,287 decrease
in the amortization of note discounts and a $22,365 decrease in interest expense in fiscal year ended March 31, 2021 as the result of
paying off our convertible notes.
As a result of the above factors,
our net loss before noncontrolling interests increased to $7,891,499 for the fiscal year ended March 31, 2021, from $6,380,041 for the
fiscal year ended March 31, 2020.
Liquidity and Capital Resources
At March 31, 2021, we had
a cash balance of $9,861,575 and working capital of $8,976,512. This compares to a cash balance of $9,604,780 and working capital of $8,973,393
at March 31, 2020. We expect our existing cash as of March 31, 2021 to be sufficient to fund the Company’s operations for at least
twelve months from the issuance date of this Form 10-K.
The primary source of our
increase in cash during the fiscal year ended March 31, 2021 resulted from our Common Stock Sales Agreement with H.C. Wainwright &
Co., LLC, or Wainwright, entered into originally in 2016. The cash raised from that activity is described below:
Common Stock Sales Agreement with Wainwright
On June 28, 2016, we entered
into a Common Stock Sales Agreement, or the 2016 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 time to time as set forth in the 2016 Agreement. The 2016 Agreement provided
for the sale of shares of our common stock having an aggregate offering price of up to $12,500,000.
On March 30, 2020, we executed
Amendment No. 2 to the 2016 Agreement with Wainwright, effective as of the same date. The amendment provides that references in the 2016
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 2016 Agreement, Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and sales
practices to sell the shares under the 2016 Agreement from time to time, based upon our instructions. We provided Wainwright with customary
indemnification rights under the 2016 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 2016 Agreement,
including up to $50,000 of the fees and disbursements of their counsel. The 2016 Agreement will terminate upon the sale of all of the
shares under the 2016 Agreement, unless terminated earlier by either party as permitted under the 2016 Agreement.
As of March 31, 2021, no further
sales will be made under the 2016 Agreement.
On March 22, 2021, we entered
into an At the Market Offering Agreement, or the Offering Agreement, with Wainwright as sales agent, pursuant to which we may offer and
sell shares of our common stock, from time to time as set forth in the Offering Agreement.
The
offering was registered under the Securities Act of 1933, as amended, or Securities Act,
pursuant to our shelf registration statement on Form S-3 (Registration Statement No. 333-237269), as previously filed with
the SEC and declared effective on March 30, 2020. We filed a prospectus supplement, dated March 22, 2021, with the SEC in connection with
the offer and sale of the shares of common stock, pursuant to which we may offer and sell shares
of common stock having an aggregate offering price of up to $5,080,000 from time to time.
Subject to the terms and conditions
set forth in the Offering Agreement, Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and
sales practices to sell the shares under the Offering Agreement from time to time, based upon our instructions. We provided Wainwright
with customary indemnification rights under the Offering 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 reimburse Wainwright for certain specified expenses in connection
with entering into the Offering Agreement. The Offering Agreement will terminate upon the written termination by either party as permitted
thereunder.
Sales of the shares, if any,
under the 2016 Agreement and the Offering 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 2016 Agreement and the Offering Agreement or terminate the Agreement.
In the fiscal year ended March
31, 2021, we raised aggregate net proceeds of $7,260,869, net of $224,825 in commissions to Wainwright and $8,472 in other offering expenses,
under the 2016 Agreement through the sale of 2,685,600 shares at an average price of $2.70 per share of net proceeds.
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, 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.
As a result of the COVID-19
pandemic and actions taken to slow its spread, the global credit and financial markets have experienced extreme volatility, including
diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment
rates and uncertainty about economic stability. There can be no assurance that further deterioration in credit and financial markets and
confidence in economic conditions will not occur. If equity and credit markets deteriorate, it may make any necessary debt or equity financing
more difficult to obtain, more costly and/or more dilutive. Any of these actions could materially harm our business, results of operations
and future prospects.
Cash Flows
Cash flows from operating,
investing and financing activities, as reflected in the accompanying Consolidated Statements of Cash Flows, are summarized as follows
(in thousands):
(In thousands) For the year ended
Cash (used in) provided by:
Operating activities $ (6,765 ) $ (5,198 )
Investing activities (60 ) (152 )
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 $6,765,000 in fiscal 2021, compared
to net cash used in operating activities of approximately $5,198,000 in fiscal 2020, an increase of approximately $1,567,000. The primary
factors in this $1,567,000 increase in cash used in operations was a $1,511,000 increase in our net loss.
Net Cash Used in Investing Activities
During the fiscal years ended
March 31, 2121 and 2020, we purchased approximately $60,000 and $152,000 of equipment, respectively.
Net Cash from Financing Activities
Net cash generated from financing
activities decreased from approximately $11,126,000 in the fiscal year ended March 31, 2020 to approximately $7,128,000 in the fiscal
year ended March 31, 2021.
In the fiscal year ended March
31, 2021, we raised approximately $7,261,000 from the issuance of common stock, which was partially offset by the use of approximately
$133,000 to pay for the tax withholding on the issuance of restricted stock units. In the fiscal year ended March 31, 2020, we raised
approximately $12,160,000 from the issuance of common stock. We used approximately $993,000 to pay off our convertible notes in the fiscal
year ended March 31, 2020 and we also used approximately $41,000 to pay for the tax withholding on restricted stock units issued in the
fiscal year ended March 31, 2020.
Recent Events
RSU Grants
On April 1, 2021, pursuant
to the terms of the Company’s 2012 Non-Employee Directors Compensation Program, as amended, or the Directors Plan, the Compensation
Committee of the Board granted RSUs under the Company’s 2020 Equity Incentive Plan, or the 2020 Plan, to each non-employee director
of the Company. The Director’s Plan provides for a grant of $50,000 worth of RSUs at the beginning of each fiscal year, priced at
the average for the closing prices for the five days preceding and including the date of grant, or $2.06 per share as of April 1, 2021.
Each eligible director was granted an RSU in the amount of 24,295 shares under the 2020 Plan. The RSU’s are subject to vesting in
four equal quarterly installments on June 30, September 30, December 31, 2021, and March 31, 2022, subject to the recipient's continued
service with the Company on each such vesting date.
Sales Under ATM Facility
In June 2021, we raised aggregate
net proceeds of $4,947,785, net of $126,922 in commissions to Wainwright and $2,154 in other offering expenses, under the Offering Agreement
described above through the sale of 626,000 shares of our common stock at an average purchase price of $8.11 per share of gross proceeds.
Registered Direct Financing
In June 2021, we sold an aggregate
of 1,380,555 shares of our common stock at a purchase price per share of $9.00, for aggregate gross proceeds to us of approximately $12.425
million, before deducting fees payable to Maxim Group LLC, the placement agent and other offering expenses. These shares were sold pursuant
to a securities purchase agreement entered into by the Company with certain institutional investors, The shares of common stock were issued
in this offering pursuant to an effective shelf registration statement on Form S-3, which was originally filed with the SEC on March 19,
2020, and was declared effective on March 30, 2020 (File No. 333-237269) (the “Registration Statement”) and a prospectus supplement
thereunder.
Warrant Exercises
In June 2021, pursuant to
the exercise of outstanding warrants held by institutional investors, we issued 531,167 shares of our common stock and received proceeds
in the amount of $820,938.
Also in June 2021, pursuant
to the exercise on a cashless, net exercise basis, of 874,664 outstanding warrants, we issued 675,554 shares of our common stock. The
difference of 199,110 outstanding warrants were cancelled in connection with the exercise.
Critical Accounting Policies
Use of Estimates
The preparation of 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. Such 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 estimates relate to revenue recognition,
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 contingencies.
Revenue Recognition
Our revenues consist entirely
of amounts earned under contracts and grants with the National Institutes of Health, or NIH. During the fiscal years ended March 31, 2021
and 2020, we recognized revenues totaling $659,104 and $650,187, respectively, under such contracts. We have concluded that these agreements
are not within the scope of ASC Topic, 606, Revenue from Contracts with Customers, or Topic 606, as the NIH grants and contracts do not
meet the definition of a “customer” as defined by Topic 606. Prior to the effective date of ASC Topic 606, which for the Company
was April 1, 2018, we accounted for our grant/contract revenues under the Milestone Method as prescribed by the legacy guidance of ASC
605-28, Revenue Recognition – Milestone Method, or the Milestone Method. In the absence of other applicable guidance under US GAAP,
effective April 1, 2018, we elected to continue to use the Milestone Method by analogy to recognize revenue under these grants/contracts.
Common Stock Warrants
We often grant warrants to
purchase our common stock in connection with financing transactions. When such warrants are classified as equity, we measure the relative
estimated fair value of such warrants which represents a discount from the face amount of the notes payable. Such discounts are amortized
to interest expense over the term of the notes. We analyze such warrants for classification as either equity or derivative liabilities
and value them based on binomial lattice models.
Share-based Compensation
We account for share-based
compensation awards using the fair-value method and record such expense based on the grant date fair value in the consolidated financial
statements over the requisite service period.
Derivative Instruments
We evaluate free-standing
derivative instruments (or embedded derivatives) to properly classify such instruments within equity or as liabilities in our financial
statements. Our policy is to settle instruments indexed to our common shares on a first-in-first-out basis.
The classification of a derivative
instrument is reassessed at each reporting date. If the classification changes as a result of events during a reporting period, the instrument
is reclassified as of the date of the event that caused the reclassification. There is no limit on the number of times a contract may
be reclassified.
Instruments classified as
derivative liabilities are remeasured each reporting period (or upon reclassification) and the change in fair value is recorded on our
consolidated statement of operations in other expense (income). We had no derivative instruments at March 31, 2021 or March 31, 2020.
Income Taxes
Deferred tax assets are recognized
for the future tax consequences attributable to the difference between the consolidated financial statements and their respective tax
basis. Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts reported for income tax purposes, and (b) tax credit carryforwards. We record a valuation
allowance for deferred tax assets when, based on our best estimate of taxable income (if any) in the foreseeable future, it is more likely
than not that some portion of the deferred tax assets may not be realized.
Off-Balance Sheet Arrangements
We have not entered into any
off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material
to investors.
Convertible Notes Payable and Warrants
In July 2019, we paid off our then outstanding
convertible notes in the amount of $992,591. There were no convertible notes outstanding as of March 31, 2021 or 2020.
Restricted Stock Unit Grants to Non-Employee
Directors
In 2012, as amended through
October 30, 2020, our Board of Directors established the Non-Employee Directors Compensation Program, to provide for cash and equity compensation
for persons serving as non-employee directors of the Company. Under this program, each new director receives either stock options or a
grant of restricted stock units, or RSUs, as well as an annual grant of RSUs at the beginning of each fiscal year. The RSUs are subject
to vesting and represent the right to be issued on a future date shares of our common stock upon vesting.
On April 3, 2020, pursuant
to the terms of the Company’s Non-Employee Directors Compensation Program, the Compensation Committee of the Board of Directors
granted RSUs to each non-employee director of the Company. The Non-Employee Directors Compensation Program provided for a grant of RSUs
with a grant date fair value of $35,000, priced at the average of the closing prices for the five trading days ending on the date of grant,
which was $1.41 per share, so that the total number of RSUs to be granted to each non-employee director for fiscal year 2020 would be
24,822 shares of our common stock. On April 3, 2020, each eligible director was granted an RSU for 23,893 shares under the
Company’s 2010 Stock Plan, or the 2010 Plan, as the number of shares that remained available for grant under the 2010 Plan was not
sufficient for each director’s full RSU grant. The Compensation Committee also granted to each eligible director a contingent grant
under our 2020 Equity Incentive Plan, or the 2020 Plan, for the remaining portion of the annual RSU grants, or 929 RSU’s to each
eligible director, contingent upon stockholder approval of the 2020 Plan at the Company’s 2020 Annual Meeting of Stockholders, or
the Annual Meeting. These grants are subject to vesting as follows: 50% of the RSUs subject to the grants will vest on December 31, 2020
and 50% of the RSUs will vest on March 31, 2021, subject in each case to the continuous service of each director, through such vesting
dates, as well as approval of the 2020 Plan by the stockholders at the Annual Meeting, which was obtained at the Annual Meeting.
In June 2020, 29,866 vested
RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors
elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting
in 11,947 of the vested RSUs being cancelled in exchange for $24,251 in aggregate cash proceeds to those independent directors.
In September 2020, 29,866
vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee
directors elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances,
resulting in 11,947 of the vested RSUs being cancelled in exchange for $16,128 in aggregate cash proceeds to those independent directors.
Also in September 2020, our
stockholders approved the 2020 Plan at the Annual Meeting, at which point the grants of 929 RSUs to each of our eligible independent directors
for a total of 4,645 RSUs were considered effective and no longer contingent as of that date.
In December 2020, 32,189 vested
RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five non-employee directors
elected to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting
in 12,876 of the vested RSUs being cancelled in exchange for $31,802 in aggregate cash proceeds to those independent directors.
In March 2021, 32,189 vested
RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All five directors elected
to return 40% of their vested RSUs in exchange for cash, in order to pay their withholding taxes on the share issuances, resulting in
12,875 of the vested RSUs being cancelled in exchange for $26,136 in aggregate cash proceeds to those independent directors.
There were no vested RSUs outstanding as of March
31, 2021.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a Smaller Reporting Company,
we are not required to furnish information under this Item 7A.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial
statements listed in the accompanying Index to Financial Statements are attached hereto and filed as a part of this Report under Item
15.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain “disclosure
controls and procedures,” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or
the Exchange Act) that are designed to ensure that information required to be disclosed, in our Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to
allow timely decisions regarding required disclosures.
In designing and evaluating
the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives, and we were required to apply our judgment in evaluating
the cost-benefit relationship of possible controls and procedures. We have carried out an evaluation as of the end of the period covered
by this report under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.
Based on such evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our disclosure
controls and procedures were effective.
Internal Control over Financial Reporting
(a) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles.
Under the supervision and
with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal control over financial reporting as of March 31, 2021. According to the guidelines established by
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, one or more
material weaknesses renders a company’s internal control over financial reporting ineffective. Based on this evaluation, we have
concluded that our internal control over financial reporting was effective as of March 31, 2021.
(b) Changes in Internal Control Over Financial Reporting
There was no change in our
internal control over financial reporting during the last fiscal quarter ended March 31, 2021 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
We have no disclosure applicable to this item.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as set forth below,
the information required by this item will be contained in our Definitive Proxy Statement to be filed with the SEC in connection with
our 2021 Annual Meeting of Stockholders, the Proxy Statement, within 120 days after the end of the fiscal year ended March 31, 2021, and
is incorporated herein by reference.
On February 23, 2005, the
Board of Directors approved a “Code of Business Conduct and Ethics,” or the Code, which applies to our principal executive
officer, our principal financial officer, our principal accounting officer and persons performing similar tasks. On February 6, 2020,
the Board of Directors adopted an amended Code, which supersedes the Company’s existing Code previously adopted by the Board of
Directors. Our Code is available on our company website at www.aethlonmedical.com. If we make any substantive amendments to, or grant
any waivers from, the Code of Business Conduct and Ethics for any officer or director, we will disclose the nature of such amendment or
waiver on our website or in a Current Report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained
in our Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information required by this item will be contained
in our Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
The information required by this item will be contained
in our Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item will be contained
in our Proxy Statement and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this report on Form 10-K:
1. Consolidated Financial Statements for the years ended March 31,
2021 and 2020:
Report of Independent Registered Public Accounting
Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Exhibits
Incorporated by Reference
23.1 Consent of Independent Registered Public Accounting Firm X
101.INS XBRL Instance Document X
101.SCH XBRL Schema Document X
101.CAL XBRL Calculation Linkbase Document X
101.DEF XBRL Definition Linkbase Document X
101.LAB XBRL Label Linkbase Document X
101.PRE XBRL Presentation Linkbase Document X
___________________
++ Indicates management contract or compensatory plan.
ITEM 16. FORM 10-K SUMMARY
None.
SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) 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, on the 24th day of June, 2021.
By: /s/ CHARLES J. FISHER, JR., M.D.
Charles J. Fisher, Jr., M.D.
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints James B. Frakes and Timothy C. Rodell, his or her true and lawful attorney-in-fact
and agent, with full power of substitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments to this Annual Report on form 10-K, and to file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents,
or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
Charles J. Fisher, Jr., MD
James B. Frakes
/s/ EDWARD G. BROENNIMAN Chairman and Director June 24, 2021
Edward G. Broenniman
/s/ CHETAN S. SHAH Director June 24, 2021
Chetan S. Shah
/s/ SABRINA MARTUCCI JOHNSON Director June 24, 2021
Sabrina Martucci Johnson
/s/ GUY CIPRIANI SVP and Chief Business Officer and Director June 24, 2021
Guy Cipriani
AETHLON MEDICAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets as of March 31, 2021 and 2020 F-3
Notes to Consolidated Financial Statements F-7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Stockholders and the Board of Directors
of Aethlon Medical, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheets of Aethlon Medical, Inc. and its subsidiary (the Company) as of March 31, 2021 and 2020, the related consolidated statements
of operations, equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively,
the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of
the Company as of March 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity
with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding
of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess
the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond
to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from
the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and
that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. We determined that there are no critical audit matters.
Baker Tilly US, LLP
We have served as the Company's auditor since
2001.
San Diego, California
June 24, 2021
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Lease liability, less current portion – 42,540
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDERS’ EQUITY
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended March 31,
REVENUES:
OPERATING COSTS AND EXPENSES
OTHER EXPENSE
Loss on debt extinguishment – 447,011
(Gain) on share for warrant exchanges – (51,190 )
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS (4,790 ) (6,093 )
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (7,886,709 ) $ (6,373,948 )
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED MARCH 31, 2021 AND 2020
ATTRIBUTABLE TO AETHLON MEDICAL, INC.
COMMON STOCK ADDITIONAL PAID IN ACCUMULATED NON- CONTROLLING TOTAL
SHARES AMOUNT CAPITAL DEFICIT INTERESTS EQUITY
Issuances of common stock upon warrant exchanges 3,992 4 (51,194 ) – – (51,190 )
Par value of DTC roundup of shares following reverse split 3,946 4 (4 ) – – –
Adjustment (298 ) – – – – –
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2021 AND 2020
Cash flows from operating activities: