AETHLON MEDICAL INC MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)
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:
· the treatment of individuals with advanced or metastatic cancer who
are either unresponsive to or intolerant of standard of care
therapy, and with cancer types in which exosomes have been shown to
participate in the development or severity of the disease; and
· the treatment of life-threatening viruses that are not addressed
with approved therapies.
We believe the Hemopurifier can be a substantial advance in the treatment of
patients with advanced and metastatic cancer through the clearance of exosomes
that promote the growth and spread of tumors through multiple mechanisms. We are
currently 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
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
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
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
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
to oversee our
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,
Center
Center
and Cooper Medical. We are in the site activation process with additional
medical centers.
48
We also obtained ethics review board approval and entered into a clinical trial
agreement with
NCR,
all site initiation activities at
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
Sorrento Valley Road
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
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
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.
49
Fiscal Years Ended
Results of Operations Government Contract Revenues
We recorded government contract revenue in the fiscal years ended
and 2021. This revenue resulted from work performed under our government
contracts with the
follows:
Fiscal Year Fiscal Year Change in
Ended 3/31/22 Ended 3/31/21 Dollars
Phase 2 Melanoma Cancer Contract $ 229,698 $ 436,427 $ (206,729 )
Breast Cancer Grant - 188,444 188,444
Subaward with University of Pittsburgh 64,467 34,233 30,234
Total Government Contract and Grant Revenue
We have recognized revenue under the following contracts/grants:
Phase 2 Melanoma Cancer Contract
On
awarded to us an SBIR Phase II Award Contract, for
“A Device Prototype for Isolation of Melanoma Exosomes for Diagnostics and
Treatment Monitoring”, or the Award Contract. The Award Contract amount is
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
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
contract revenue on the Phase 2 Melanoma Cancer Contract. That revenue related
to work performed in the three months ended
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
related to the
as deferred revenue, since we fell short of certain milestones related to those
periods.
During the fiscal year ended
relevant to the first nine months of the fiscal year and, as a result, we
recorded
Contract in that fiscal year.
50 Breast Cancer Grant
In the fiscal year ended
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
month extension on this grant; through
firm grant was
us. Those subcontractors were
Hospital
During the fiscal year ended
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
Cancer Grant and have submitted the final reports applicable to this grant.
Subaward with
In 2020, we entered into a cost reimbursable subaward arrangement with the
Exosomes to Improve Responses to Immune Therapy in HNNCC.” Our share of the
award is
subaward in the fiscal years ended
respectively.
Operating Costs and Expenses
Consolidated operating expenses were
31, 2022
increase of
31, 2022
in general and administrative expense of
by a decrease of
The
and related expenses was due to an increase in cash-based compensation of
compensation of
was primarily due to increases of
administrative payroll and in our research and development payroll,
respectively, due to headcount increases, and
compensation to two senior executives that relocated to
a condition of their employment. Those increases were partially offset by the
combination of a
agreement with our former CEO, with no comparable expense in the 2022 period,
and a net decrease of
The
administrative expenses primarily arose from increases of
clinical trial expenses,
expense.
As a result of the above factors, our net loss before noncontrolling interests
increased to
51
Liquidity and Capital Resources
At
of
2022
months from the issuance date of this Annual Report.
The primary sources of our increase in cash during the fiscal year ended
31, 2022
dated
financing through
noted below:
At The Market Offering Agreements with
2021 ATM Agreement
On
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
a prospectus supplement, dated
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
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
the 2021 ATM Agreement described above of
commissions to Wainwright and
of 626,000 shares of our common stock at an average price of
net proceeds. No further sales may be made under the agreement.
52 2022 ATM Agreement
On
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
filed a prospectus supplement, dated
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
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
2022 ATM Agreement.
In
to Wainwright and
shares of our common stock at an average price of
ATM Agreement.
Registered Direct Financing
In the fiscal year ended
shares of our common stock at a purchase price per share of
net proceeds to us of
LLC
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
declared effective on
supplement thereunder.
Material Cash Requirements
As noted above in the results of operations, our clinical trial expense
increased by
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
expect our rent expense to continue to increase for the foreseeable future.
53
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
March 31, March 31,
2022 2021
Cash (used in) provided by:
Operating activities $ (9,767 ) $ (6,765 )
Investing activities (349 ) (60 )
Financing activities 17,368 7,128
Net increase in cash $ 7,252 $ 303
We used cash in our operating activities due to our losses from operations. Net
cash used in operating activities was approximately
compared to net cash used in operating activities of approximately
fiscal 2021, an increase of approximately
this
During the fiscal years ended
approximately
54
Net cash generated from financing activities increased from approximately
in the fiscal year ended
In the fiscal year ended
from the issuance of common stock, which was partially offset by the use of
approximately
restricted stock units, or RSUs. In the fiscal year ended
raised approximately
partially offset by the use of approximately
withholding on the issuance of RSUs.
Recent Events
Sales Under 2022 ATM Agreement
In
to Wainwright and
shares of our common stock at an average price of
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
pursuant to the terms of the Company’s Amended and Restated Non-Employee
Directors Compensation Policy, which was most recently amended on
2022
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
beginning of each fiscal year for current directors then serving on the Board
and for a grant of stock options or
director, with the RSUs priced at the average for the closing prices for the
five days preceding and including the date of grant, or
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
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.
55 Critical Accounting Policies Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in
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
revenues totaling
have concluded that these agreements are not within the scope of ASC Topic, 606,
Revenue from Contracts with Customers, or Topic 606, as the
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
2018
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
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.
56 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
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
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
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
with the RSUs priced at the average for the closing prices for the five days
preceding and including the date of grant, or
2021
under the 2020 Plan. The RSUs were subject to vesting in four equal quarterly
installments on
subject to the recipient’s continued service with the Company on each such
vesting date.
In
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
aggregate cash proceeds to those independent directors.
57
In
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
aggregate cash proceeds to those independent directors.
In
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
aggregate cash proceeds to those independent directors.
In
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
aggregate cash proceeds to those independent directors.
There were no vested RSUs outstanding as of
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