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 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 conducting a clinical trial in
patients with advanced and metastatic head and neck cancer. We are initially focused on the treatment of solid tumors that are being
treated with checkpoint inhibitors. As we advance our clinical trials, we are in close contact with our clinical sites to navigate
and assess the impact of the global COVID-19 pandemic on our clinical trials and current timelines.
On October 4, 2019, the FDA
approved our IDE application to initiate an 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 is designed to enroll 10 to 12 subjects at a single center,
is 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, Pennsylvania, has treated two patients and 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 HIV, HCV, 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, including Monkeypox virus, 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). Under Single Patient
Emergency Use regulations, the Company has also treated three patients with COVID-19 with the Hemopurifier.
In September 2021, we
entered into an agreement with PPD, a leading global CRO, to oversee our U.S. clinical studies investigating the Hemopurifier for
critically ill COVID-19 patients. We now have nine hospitals fully activated for patient enrollment and they are actively screening
patients for the trial. These sites are LSU Shreveport, Hoag Irvine and Newport Beach, Valley Baptist Medical Center in Texas,
University of California Davis, University of Miami Medical Center, Loma Linda Hospital in Loma Linda, CA, Thomas Jefferson Medical
Center and Cooper Medical. We are in the site activation process with additional U.S. medical centers.
We also obtained ethics review
board approval and entered into a clinical trial agreement with Medanta Medicity Hospital, a multi-specialty hospital in Delhi NCR, India,
for a COVID-19 clinical trial at that location. We have completed all site initiation activities at Medanta Medicity Hospital and this
site is now open for enrollment and is actively screening patients.
We are also the majority owner
of ESI and we consolidate ESI 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, if successfully
developed. 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 11555 Sorrento Valley Road, Suite 203, San Diego, California 92121. Our telephone number is
(619) 941-0360. 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 and inflationary environment 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, political change, and general economic uncertainty, 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 and inflation 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, 2022 and 2021
Results of Operations
Government Contract Revenues
We recorded government contract
revenue in the fiscal years ended March 31, 2022 and 2021. 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 3/31/22 Fiscal Year Ended 3/31/21 Change in Dollars
We have recognized revenue under the following
contracts/grants:
Phase 2 Melanoma Cancer Contract
On September 12, 2019, the
National Cancer Institute, or NCI, part of the 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, as amended, runs for the period from September 16, 2019 through September 15, 2022.
The work performed pursuant
to this Award Contract focused 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 involved 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, 2022, we recorded $229,698 of government contract revenue on the Phase 2 Melanoma Cancer Contract. That revenue related to work
performed in the three months ended March 31, 2021 and June 30, 2021 that had previously been recorded as deferred revenue as a result
of falling short on certain milestones. We then achieved those March period milestones in the June quarter and the June period milestones
in the September quarter and therefore recorded the previously deferred revenue as government contract revenue in the quarter ended September
30, 2021. We recorded the invoices related to the September 30, 2021, December 31, 2021 and March 31, 2022 periods as deferred revenue,
since we fell short of certain milestones related to those periods.
During the fiscal year ended
March 31, 2021, we completed the milestones relevant to the first nine months of the fiscal year and, as a result, we recorded $436,427
of government contract revenue on the Phase 2 Melanoma Cancer Contract in that fiscal year.
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 SBIR,
Phase I grant is “The Hemopurifier Device for Targeted Removal of Breast Cancer Exosomes from the Blood Circulation,” or the
Breast Cancer Grant. We note this grant because it contributed to the year over year change in revenue.
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 $64,467 and $34,233 of
revenue related to this subaward in the fiscal years ended March 31, 2022 and March 31. 2021, respectively.
Operating Costs and Expenses
Consolidated operating expenses
were $10,715,050 for the fiscal year ended March 31, 2022, compared to $8,550,603 for the fiscal year ended March 31, 2021, an increase
of $2,164,447. The $2,164,447 increase in the fiscal year ended March 31, 2022 was due to increases in payroll and related expenses of
$1,170,861 and in general and administrative expense of $997,224, which were partially offset by a decrease of $3,638 in professional
fees.
The $1,170,861 increase in
the fiscal year ended March 31, 2022 in our payroll and related expenses was due to an increase in cash-based compensation of $1,199,661,
which was partially offset by a decrease in our stock-based compensation of $28,800. The $1,199,661 increase in our cash-based compensation
was primarily due to increases of $826,197 and $720,863 in our general and administrative payroll and in our research and development
payroll, respectively, due to headcount increases, and $202,783 in relocation-related compensation to two senior executives that relocated
to San Diego, California as a condition of their employment. Those increases were partially offset by the combination of a $451,933 accrual
in the 2021 period related to the separation agreement with our former CEO, with no comparable expense in the 2022 period, and a net decrease
of $134,950 in cash bonuses.
The $997,224 increase in the
fiscal year ended March 31, 2022 in our general and administrative expenses primarily arose from increases of $453,254 in our clinical
trial expenses, $209,082 in rent expense and $194,572 in insurance expense.
As a result of the above factors,
our net loss before noncontrolling interests increased to $10,420,885 for the fiscal year ended March 31, 2022, from $7,891,499 for the
fiscal year ended March 31, 2021.
Liquidity and Capital Resources
At March 31, 2022, we had
a cash balance of $17,072,419 and working capital of $16,332,958. This compares to a cash balance of $9,861,575 and working capital of
$8,976,512 at March 31, 2021. We expect our existing cash as of March 31, 2022 to be sufficient to fund the Company’s operations
for at least twelve months from the issuance date of this Annual Report.
The primary sources of our
increase in cash during the fiscal year ended March 31, 2022 resulted from our At The Market Offering Agreement with Wainwright dated
March 22, 2021, or the 2021 ATM Agreement, and our registered direct financing through Maxim Group LLC. The cash raised from those activities
is noted below:
At The Market Offering Agreements with H.C.
Wainwright & Co., LLC
2021 ATM Agreement
On March 22, 2021, we entered
into the 2021 ATM Agreement with Wainwright as sales agent, pursuant to which we could offer and sell shares of our common stock, from
time to time as set forth in the 2021 ATM Agreement.
The offering was registered
under the 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 could 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 2021 ATM Agreement, Wainwright agreed to use its commercially reasonable efforts consistent with its normal trading and
sales practices to sell the shares under the 2021 ATM Agreement from time to time, based upon our instructions. We provided Wainwright
with customary indemnification rights under the 2021 ATM Agreement, and Wainwright was entitled to a commission at a fixed rate equal
to up 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 2021 ATM Agreement. The 2021 ATM Agreement provided that it would terminate upon the written termination
by either party as permitted thereunder.
Sales of the shares, under
the 2021 ATM Agreement are 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 could suspend
offers under the 2021 ATM Agreement or terminate the agreement.
In the fiscal year ended March
31, 2022, we raised aggregate net proceeds under the 2021 ATM Agreement described above of $4,947,785, net of $126,922 in commissions
to Wainwright and $2,154 in other offering expense, through the sale of 626,000 shares of our common stock at an average price of $7.90
per share of net proceeds. No further sales may be made under the agreement.
2022 ATM Agreement
On March 24, 2022, we entered
into the 2022 ATM 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 2022 ATM Agreement.
The offering was registered
under the Securities Act pursuant to our shelf registration statement on S-3 (Registration Statement No. 333-259909), as previously filed
with the SEC and declared effective on October 21, 2021. We filed a prospectus supplement, dated March 24, 2022, with the SEC in connection
with the offer and sale of the shares of common stock, pursuant to which the Company may offer and sell shares of common stock having
an aggregate offering price of up to $15,000,000 from time to time.
Subject to the terms and conditions
set forth in the 2022 ATM Agreement, Wainwright has agreed to use its commercially reasonable efforts consistent with its normal trading
and sales practices to sell the shares under the 2022 ATM Agreement from time to time, based upon our instructions. We have provided Wainwright
with customary indemnification rights under the 2022 ATM Agreement, and Wainwright is entitled to a commission at a fixed rate equal to
up 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 2022 ATM Agreement. The 2022 ATM Agreement provides that it will terminate upon the written termination
by either party as permitted thereunder.
Sales of the shares, under
the 2022 ATM 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 could suspend
offers under the 2022 ATM Agreement or terminate the agreement.
In the fiscal year ended March
31, 2022, we did not raise any proceeds under the 2022 ATM Agreement.
In June 2022, we raised net
proceeds of $448,760, net of $11,583 in commissions to Wainwright and $2,994 in other offering expense, through the sale of 411,055 shares
of our common stock at an average price of $1.09 per share under the 2022 ATM Agreement.
Registered Direct Financing
In the fiscal year ended March
31, 2022, we sold an aggregate of 1,380,555 shares of our common stock at a purchase price per share of $9.00, for aggregate net proceeds
to us of $11,659,044, after deducting fees payable to Maxim Group LLC, the placement agent, and other offering expenses. These shares
were sold through a securities purchase agreement with certain institutional investors, The shares were issued 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) and a prospectus supplement thereunder.
Material Cash Requirements
As noted above in the
results of operations, our clinical trial expense increased by $453,254 in the fiscal year ended March 31, 2022. We expect our
clinical trial expenses to continue to increase for the foreseeable future. Those increases in clinical trial expenses include
the cost of manufacturing additional Hemopurifiers for the clinical trials.
In addition, we have
entered into leases for our new headquarters, laboratory and manufacturing facilities. As noted above in the results of operations,
our rent expense increased by $209,082 in the fiscal year ended March 31, 2022. We expect our rent expense to continue to increase
for the foreseeable future.
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. We will continue to need to raise additional
capital either through equity and/or debt financing for the foreseeable future.
As a result of the COVID-19
pandemic and actions taken to slow its spread, global events and political changes, 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 inflation 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):
For the year ended
Cash (used in) provided by:
Operating activities $ (9,767 ) $ (6,765 )
Investing activities (349 ) (60 )
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 $9,767,000 in fiscal 2022, compared
to net cash used in operating activities of approximately $6,765,000 in fiscal 2021, an increase of approximately $3,002,000. The primary
factors in this $3,002,000 increase in cash used in operations in fiscal 2022 was a $2,530,000 increase in our net loss.
Net Cash Used in Investing Activities
During the fiscal years ended
March 31, 2022 and 2021, we purchased approximately $349,000 and $60,000 of equipment, respectively.
Net Cash from Financing Activities
Net cash generated from financing
activities increased from approximately $7,128,000 in the fiscal year ended March 31, 2021 to approximately $17,368,000 in the fiscal
year ended March 31, 2022.
In the fiscal year ended March
31, 2022, we raised approximately $17,456,000 from the issuance of common stock, which was partially offset by the use of approximately
$88,000 to pay for the tax withholding on the issuance of restricted stock units, or RSUs. 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 RSUs.
Recent Events
Sales Under 2022 ATM Agreement
In June 2022, we raised net
proceeds of $448,760 net of $11,583 in commissions to Wainwright and $2,994 in other offering expense, through the sale of 411,055 shares
of our common stock at an average price of $1.09 per share under the 2022 ATM Agreement.
RSU Grants
The Compensation Committee,
or the Compensation Committee, of the Board of Directors of the Company, or Board, approved, effective as of April 1, 2022, pursuant to
the terms of the Company’s Amended and Restated Non-Employee Directors Compensation Policy, which was most recently amended on February
10, 2022, or the Director Compensation Policy, the grant of the annual RSUs under the Director Compensation Policy to each of the two
non-employee directors of the Company then serving on the Board and a new grant for the newly appointed director, with each such grant
subject to stockholder approval of an increase of 1,800,000 shares of common stock in the number of authorized shares of common stock,
or the 2022 Plan Increase, available for issuance under the Company’s 2020 Equity Incentive Plan, or the 2020 Plan, at the Company’s
2022 annual meeting of stockholders, or the 2022 Annual Meeting. The Director Compensation Policy provides for a grant of stock options
or $50,000 worth of RSUs at the beginning of each fiscal year for current directors then serving on the Board and for a grant of stock
options or $75,000 worth of RSUs for a newly elected director, with the RSUs priced at the average for the closing prices for the five
days preceding and including the date of grant, or $1.46 per share as of April 1, 2022. The two then-current eligible directors each was
granted a contingent RSU in the amount of 34,247 shares under the 2020 Plan and the newly appointed director received a contingent RSU
grant for 51,370 shares under the 2020 Plan. The contingent RSUs are subject to vesting in three installments, 50% on September 30,
2022, and 25% on each of December 31, 2022, and March 31, 2023, subject to stockholder approval of the 2022 Plan Increase at the 2022
Annual Meeting and subject to the recipient's continued service with the Company on each such vesting date.
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 NIH. During the fiscal years ended March 31, 2022 and 2021, we recognized revenues
totaling $294,165 and $659,104, 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
In the past, we have granted
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, 2022 or March 31, 2021.
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.
Convertible Notes Payable
There were no convertible
notes outstanding as of March 31, 2022 or 2021.
RSU Grants to Non-Employee Directors
The Company maintains the
Director Compensation Policy which provides for cash and equity compensation for persons serving as non-employee directors of the Company.
Under this policy, each new director receives either stock options or a grant of RSUs upon appointment/election, as well as an annual
grant of stock options or of RSUs at the beginning of each fiscal year. The (i) stock options are subject to vesting and (ii) 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 1, 2021, pursuant
to the terms of the Director Compensation Policy, the Compensation Committee granted RSUs under the 2020 Plan, to each non-employee director
of the Company. The Director Compensation Policy provides for a grant of stock options or $50,000 worth of RSUs at the beginning of each
fiscal year, with the RSUs 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
RSUs were 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.
In June 2021, 18,221 vested
RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All three 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 7,289 of the vested RSUs being cancelled in exchange for $35,786 in aggregate cash proceeds to those independent directors.
In September 2021, 18,221
vested RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All three 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 7,289 of the vested RSUs being cancelled in exchange for $28,134 in aggregate cash proceeds to those independent directors.
In December 2021, 18,221 vested
RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All three 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 7,289 of the vested RSUs being cancelled in exchange for $13,557 in aggregate cash proceeds to those independent directors.
In March 2022, 18,221 vested
RSUs held by our non-employee directors were exchanged into the same number of shares of our common stock. All three 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 7,289 of the vested RSUs being cancelled in exchange for $10,641 in aggregate cash proceeds to those independent directors.
There were no vested RSUs outstanding as of March
31, 2022.
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 Annual 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 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 Annual 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 Annual 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, 2022. 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, 2022.
(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, 2022 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.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT
INSPECTIONS
We have no disclosure applicable to this item.
PART III
Certain information required by Part III is omitted
from this Annual Report and incorporated by reference to our definitive proxy statement for our 2022 Annual Meeting of Stockholders, or
the Proxy Statement, to be filed pursuant to Regulation 14A of the Exchange Act. If our Proxy Statement is not filed within 120 days after
the end of the fiscal year covered by this Annual Report, the omitted information will be included in an amendment to this Annual Report
filed not later than the end of such 120-day period.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as set forth below, the information required
by this item will be contained in the sections titled “Information About our Board of Directors and Executive Officers,” “Information
About our Board of Directors and Executive Officers – Code of Ethics,” “Delinquent Section 16(a) Reports,” “Information
About our Board of Directors and Executive Officers – Information Regarding Committees of the Board of Directors – Nominating
and Corporate Governance Committee,” “Information About our Board of Directors and Executive Officers – Information
Regarding Committees of the Board of Directors – Audit Committee and Audit Committee Financial Expert,” “Information
About our Board of Directors and Executive Officers – Information Regarding Committees of the Board of Directors – Compensation
Committee” and “Executive Compensation and Director Compensation” in our Proxy Statement and is incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be contained
in the sections titled “Executive and Director Compensation” and “Information About our Board of Directors and Executive
Officers – Information Regarding Committees of the Board of Directors – Compensation Committee” 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 the sections titled “Security Ownership of Certain Beneficial Owners and Management” and “Executive and Director
Compensation – Narrative Disclosure to Executive Summary – Equity-Based Incentive Awards” 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 the sections titled “Information About our Board of Directors and Executive Officers – Board of Directors” and “Certain
Relationships and Related Transactions” in our Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item will be contained
in the section titled “Ratification of Appointment of Independent Registered Public Accounting Firm” in our Proxy Statement
and is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Annual Report:
1. Consolidated Financial Statements for the years ended March 31,
2022 and 2021:
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, as amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
June, 2022.
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 Charles J. Fisher, Jr., M.D., 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, as amended, 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 28, 2022
Edward G. Broenniman
/s/ CHETAN S. SHAH Director June 28, 2022
Chetan S. Shah
/s/ ANGELA ROSSETTI Director June 28, 2022
Angela Rossetti
/s/ GUY CIPRIANI SVP and Chief Business Officer and Director June 28, 2022
Guy Cipriani
AETHLON MEDICAL, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID 23) F-2
Consolidated Balance Sheets as of March 31, 2022 and 2021 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, 2022 and 2021, 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, 2022 and 2021, 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 28, 2022
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
CURRENT ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Lease liability, less current portion 602,505 –
COMMITMENTS AND CONTINGENCIES (Note 9)
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
LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS (4,794 ) (4,790 )
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EQUITY
FOR THE YEARS ENDED MARCH 31, 2022 AND 2021
ATTRIBUTABLE TO AETHLON MEDICAL, INC.
COMMON STOCK ADDITIONAL PAID IN ACCUMULATED NON- CONTROLLING TOTAL
SHARES AMOUNT CAPITAL DEFICIT INTERESTS EQUITY
See accompanying notes to the consolidated financial
statements.
AETHLON MEDICAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2022 AND 2021
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of right-of-use lease asset 30,532 (2,491 )
Changes in operating assets and liabilities:
Prepaid expenses and other current assets (636,688 ) (111,477 )
Accounts payable and other current liabilities 97,541 341,858 )
Cash flows from investing activities:
Purchases of property and equipment (349,193 ) (59,881 )
Net cash used in investing activities (349,193 ) (59,881 )
Cash flows from financing activities:
Supplemental information of non-cash investing and financing activities:
Issuances of common stock under cashless warrant exercises $ 676 $ –
See accompanying notes to the